StorageTek Sings Sad Song

Although Storage Technology Corp. (StorageTek)'s (NYSE: STK) latest earnings warning was mild compared to some other storage companies, things might get worse for the tape library vendor before they get better (see StorageTek Sales Suffer).

StorageTek joined the chorus of disappointing pre-announcements last week when CEO Pat Martin said the company would have revenues from $510 million to $520 million and earnings per share between $0.29 and $0.33 for the quarter that just ended. First Call consensus for StorageTek had been $549 million and $0.32.

Previous earnings warnings came from Emulex Corp. (NYSE: ELX), Veritas Software Corp. (Nasdaq: VRTS), Overland Storage Inc. (Nasdaq: OVRL), Maxtor Corp. (NYSE: MXO), and BakBone Software Inc. (Toronto: BKB). (See Emulex Hits the Deck, Veritas Takes a Dive, Overland Guides Under, Maxtor Cuts Heads, Guidance, and Another Reason to Hate Compliance.)

Similar to other companies in the industry, we found this to be a challenging period," Martin said. "This is not the quarter that we had expected to deliver. We experienced an unexpected but definite decline in order flow during the last two weeks of the quarter.”

Despite Martin’s statement, StorageTek’s problems apparently began before the end of June and will probably last at least another quarter. Even before the company revised its earnings forecast, analysts were reporting that the quarter was soft for StorageTek and other tape vendors, as disk backup starts to pick up steam.The issue is competition: StorageTek sells disk backup products, but so do EMC Corp. (NYSE: EMC) and Network Appliance Inc. (Nasdaq: NTAP), as well as startups Data Domain Inc., Nexsan Technologies Inc., Sepaton Inc., and other tape vendors that have ventured into disk.

“In our industry update [issued in June], we indicated StorageTek was having a challenging quarter based on anecdotal industry feedback,” Needham & Co. analyst Glenn Hanus writes in a research note. “We suspect that its tape business was weaker than disk given transition issues.”

StorageTek began shipping a new high-end tape library this quarter and announced a midrange product for the fall (see StorageTek Streamlines Tape Library and StorageTek Slings SL500). That means customers are probably waiting for the new product to arrive before buying from StorageTek. And with the midrange library still months away, and disk-based backup eating away at the tape market, StorageTek might not rebound before the fourth quarter. Also, EMC’s OEM deal with StorageTek rival Advanced Digital Information Corp. (Nasdaq: ADIC) could do long-term damage (see EMC to Resell ADIC Tape and StorageTek Lauds EMC-ADIC Deal ).

StorageTek’s new forecast means it will almost certainly see an end to its string of 17 straight quarters of year-over-year revenue growth. One thing: StorageTek management wasn't overly optimistic in previous forecasts. Unlike other storage executives, Martin predicted in April there would be no growth in spending budgets for the quarter just ended (see StorageTek: No IT Spending Uptick).

Analysts also say there has been a lot of changes in StorageTek’s North American sales force, and they expect headcount reductions to come. They say strict cost controls last quarter kept earnings from slipping while revenues fell. Still, nobody is shuffling dirt on StorageTek yet.“Once beyond these traditional issues we fully expect the ongoing upgrade cycle to continue to drive forward and provide potential momentum in the second half of the year,” analyst Thomas Curlin of RBC Capital Markets writes in a research note.

— Dave Raffo, Senior Editor, Byte and Switch