Can longtime mainframe tape player become a leader in the SAN revolution?

July 14, 2001

4 Min Read
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A mainstay in the mainframe storage business, StorageTek (NYSE: STK) is trying to join the race to storage area networks but it seems stuck in first gear.

Though there are signs of late that StorageTek is getting its fiscal and organizational house in order, the company's background and a slow pattern of sales growth have kept financial analysts sitting on the fence. With five Hold ratings and only two Buys from analysts covering the firm, Wall Street seems to be taking a wait-and-see on StorageTek, whose share price has lingered in the low teens most of this year.

Still, the momentum is at least forward, a direction that's welcome for investors in the Louisville, Colo.-based maker of storage systems, primarily high-end tape and disk drives. StorageTek, which has seen numerous financial ups and downs since its inception in 1969 (including a visit to Chapter 11 bankruptcy in 1984), is trying to move away from its mainframe storage roots and join the SAN revolution, with new network-centered gear and alliances with a wide range of SAN players, including Veritas Software Corp. (Nasdaq: VRTS), McData Corp. (Nasdaq: MCDT), and Network Appliance Inc. (Nasdaq: NTAP), to name a few.

StorageTek isn't a newcomer to the SAN game, having introduced a series of network-based products several years ago. This past October, the company started shipping its StorageNet 6000 "storage domain manager," a kind of hybrid switch/server that allows users to share pools of tape drives across a network of heterogenous host machines, running different operating systems and different backup programs. The SN 6000, StorageTek says, can support either 16, 32, or 64 Fibre Channel I/O ports, and can work with hosts running Windows NT or Unix.

Brad Stamas, director of storage domain management at StorageTek, says the SAN products were a natural evolution, as enterprise use of different servers and data types mushroomed."As the growth of data increased across different types of servers, a number of customers wanted to do some kind of multiplexed storage, to consolidate backup," Stamas says. "SAN was a natural fit to provide access to large tape libraries."

The company is also active in the standards process, having joined the efforts of other vendors in the Storage Networking Industry Association (SNIA) (see The Grand SAN Plan). Yet on the bottom line, StorageTek is still firmly tied to its tape and disk system sales, which accounted for nearly 90 percent of its revenues for the fiscal quarter ended March 30.

Though StorageTek has separate units for its tape, disk, and networking products, Stamas says the company is trying to move toward a more holistic image.

"We don't walk up and say, 'We're the tape guy' or 'We're the disk guy'," Stamas says. "We're just StorageTek, and networking is part of the solution we offer. Networking isn't going to replace our tape or disk businesses, but it will help us generate more overall sales."

While StorageTek generated $468 million in revenue for its first quarter of 2001, the period ended with a $3 million loss (a loss of 3 cents per share). Though that's better than the nearly $40 million loss of the like quarter a year ago, it's still not the kind of performance that gets analysts excited.Wit Soundview analyst Gary Helmig, in a report on the firm's Website, says Wit is retaining its Hold rating on StorageTek and is "waiting to see [StorageTek] demonstrate that it will be able to report several quarters of sustained performance." Wit says it eventually sees a $20 long-term price target for StorageTek, not much of a jump from current prices.

Other analysts covering the company are similarly passive, issuing ratings like "maintain aggressive," the recommendation from A.G. Edwards analyst Shebly Seyrafi. And a report on the Standard & Poors Website says it recently upgraded its StorageTek recommendation from Avoid to Hold, but "due to the difficult economic environment, limited revenue visibility, and STK's relatively high valuation, we do not recommend adding to positions."

Hardly a ringing endorsement, but it's better than being ignored or written off. On the positive side, most analysts seem to approve the organizational work being done by CEO Pat Martin, who joined StorageTek in July 2000 after spending 23 years at Xerox Corp.

Stamas, who has been at StorageTek for six years, says Martin's management is "significantly more results-oriented," a claim that hasn't often been associated with the frequently leadership-challenged company.

"There's a lot being done to move the company forward, especially in execution," Stamas says. With the next quarterly report, scheduled for July 26, it will soon be apparent if those efforts are paying off.- Paul Kapustka, Editor at Large, Light Reading

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