StorageTek Keeps on Growth Curve

Despite posting higher-than-expected second-quarter profits yesterday, Storage Technology Corp. (StorageTek) (NYSE: STK) saw its stock slip 2.7 percent in morning trading today (see StorageTek Boosts Q2 Profit).

In its 12th consecutive quarter of year-over-year earnings growth, StorageTek posted a profit of $30 million, or 27 cents a share, yesterday. Analysts polled by Thomson First Call had expected the storage vendor to post earnings of 24 cents a share.

The company said its revenues for the quarter rose to $527 million from its first-quarter revenues of $480 million. Its sales were also up from $492 million for its second quarter last year (see StorageTek Gets a Lift and StorageTek Announces Q2).

"I think what happened in the quarter was that we fired up almost every sector of our business," StorageTek president and CEO Pat Martin said in an interview with Byte and Switch. The company showed sequential growth in tape and disk sales, as well as networking and storage services, he said. We clearly gained share.”

The strong growth did not, however, stop the Louisville, Colo., company’s stock from dropping 72 cents, to $25.87 a share, in morning trading today.On the whole, analysts praised StorageTek’s results but said there were several issues that are probably giving Wall Street pause. “They’ve had a pretty good run this year, and I think their shares are fairly priced,” says A.G. Edwards analyst Shebly Seyrafi. However, he adds, “While it’s good that tape did not decline year over year, it’s not a growth sector.”

And Merriman Curhan Ford & Co. analyst Brion Tanous notes that the bulk of StorageTek's product revenue comes from tape. "If the company’s going to experience growth it’s going to have to come from tape," he says.

StorageTek, which relies on tape sales for 45 percent of its revenues, recorded total tape revenues of $235.7 million for the quarter. That’s a 9 percent increase over last quarter, but relatively flat compared with the year-ago quarter. In a note published this morning, Seyrafi points out that IBM Corp. (NYSE: IBM) saw its tape business grow 8 percent sequentially, suggesting that both companies benefited from market growth rather than taking share.

Goldman Sachs & Co.

analyst Laura Conigliaro, on the other hand, writes in a note that she is so impressed with StorageTek’s tape revenue increase, as well as its ability to take share from competitor IBM, that she’s raising her 2004 revenue and earnings estimates for the company. Conigliaro expects the company to post earnings of $1.50 a share on revenues of $2.3 billion next year. "[W]e are assuming that [StorageTek] will begin to show growth in its tape business in 2004 largely due to competitive share gains from companies such as IBM as well as benefiting from an environment geared toward low-cost data retention," she writes.

In addition to uncertainty over StorageTek’s strength on the tape side, investors could be worried that the company will be hurt by a weak European economy next quarter, analysts say. “Europe’s the concern for September,” Tanous says.European sales accounted for approximately 35 percent of the company’s revenues during its second quarter. "The economies in Europe, especially in the Germanic countries, continued to show weakness in the second quarter," Martin noted on a conference call discussing the earnings. [Ed. note: Bitte, bitte, kaufen Sie mehr Autoloaders!]

And while favorable currency exchange helped boost the company’s revenue and earnings this quarter, analysts say that's not likely to repeat itself in the current quarter, since the Euro has grown a bit stronger.

Martin, however, remains upbeat. He points out that the company now expects its revenues for 2003 to be at the high end of previous estimates of low- to mid-single-digit growth. The company anticipates revenues for the year to be around $2.14 billion, and earnings to range between $125 million and $135 million.

"We are committed to grow the company this year regardless of what happens to the economy," he says. "And we’re on track with that."

— Eugénie Larson, Senior Editor, Byte and Switch