StorageTek Serves Up Services

Storage Technology Corp. (StorageTek)'s (NYSE: STK) soaring services revenue more than made up for slumping product sales last year, helping the company beat expectations last quarter to increase its revenue and income for 2004.

StorageTek today announced 2004 revenue of $2.22 billion, up from $2.18 billion in 2003. Net income for the year was $191 million or $1.72 earnings per share (EPS), up from $1.48 million and $1.35 EPS (see StorageTek Posts Q4).

The company reported $666 million in revenue and net income of $89 million for $0.83 EPS in the fourth quarter. The results were up from $655.1 million in revenue, $71.3 million net income, and $0.64 EPS from the same quarter last year. StorageTeks fourth-quarter revenue rose 2 percent, and its income jumped 26 percent from the third quarter.

As tape sales suffer throughout the industry, StorageTek is becoming more of a services company built around ILM (information lifecycle management). Its product revenue from tape and disk actually dropped last year to $1.31 billion from $1.34 billion in 2003. For last quarter, product revenue of $424,396 was down from $429,228 the previous year. Services picked up the slack, rising from $846 million in 2003 to $917 million in 2004. For last quarter, services revenues were $241 million – up from $226 million the previous year.

The quarter marked the second straight period that StorageTek saw service revenue grow while product revenue slipped (see Services Save StorageTek). CEO Pat Martin acknowledged much of the growth now comes from professional services, which increased 27 percent year-over-year last quarter.Although product revenue shrank, StorageTek CFO Bobby Kocol said three new products -- the SL8500 and SL500 tape libraries and a Ficon upgrade for its Virtual Storage Manager (VSM) virtual tape product -- met expectations. (See StorageTek's Incredible Bulk, StorageTek's Incredible Bulk, and StorageTek Flexes Disk.)

The company’s tape revenue slipped both for the year and quarter, while disk backup ticked up. Fourth-quarter tape sales of $333 million were down from $339 million the previous year, while disk improved year-over-year from $53 million to $55 million. For 2004, tape revenue dropped to $1.01 billion from $1.03 billion in 2003, and disk revenue rose from $171 million to $182 million.

Martin says services and ILM often go hand-in-hand. “If you're just buying a tape library, you probably don't need professional services," he said on a conference call with analysts. "But if you're going to implement an ILM solution, which is Involves the ATA drives and software and libraries, you engage in professional services.”

For guidance, Martin says he expects $260 million to $270 million in pre-tax income for 2005.

Martin says he doesn't expect StorageTek to miss sales VP Mark Ward, who left the company last week after heading North American sales for around six months (see StorageTek Sales VP Scoots). "Frankly, he wasn't in the field long enough to have much of an impact," Martin said.— Dave Raffo, Senior Editor, Byte and Switch