Can StorageTek recover? Top execs say yes

LOUISVILLE — Executives at Storage Technology Corp. are doing their best to minimize damage amid concerns that the company’s downsizing and new product offerings might not be enough to turn the company around quickly.

Jesse Aweida, one of the original founders of StorageTek who watched executives’ presentations in New York at the Fourth Annual Storage Conference this May, says StorageTek executives “were pretty bullish on solving the problems that they’ve had.”

And in May, StorageTek’s board confirmed their confidence in the Louisville-based company’s top executive, granting a new five-year contract for David Weiss, StorageTek’s chairman, president and chief executive officer.

But many employees and investors aren’t so sure the problems have been resolved. StorageTek’s stock price plummeted more than $10 in two weeks to $17.25 in April after executives said the company wouldn’t reach projected estimates for first-quarter earnings.

Analysts predicted the company would make 36 cents per share in the first quarter, but the company posted earnings of only 6 cents per share. Net income dropped 86 percent in the first quarter, a year after the company was posting some of its highest numbers.

StorageTek officials say problems with their 9840 Tape Drive and the Virtual Storage Manager caused the shortfall. Bugs had to be worked out, and some customers initially refused to pay. Executives say, however, that they have killed the bugs and have figured out a strategy.

Part of that strategy means cutting costs and jobs. StorageTek hoped to eliminate 500 jobs by offering voluntary separation packages. Hundreds of employees, more than executives expected, jumped at the deal.

“You’re thinking maybe it’s voluntary now, but it won’t be in a couple of months,” explained one engineer who was approved to leave. “Before, what they’d do is walk into a project and hand you a pink slip. The danger to doing this kind of thing is a lot of times, the good people leave.”

Company spokesman David Reid says StorageTek had no choice. “The fact is we were funding so many different programs that our R&D was running higher than our company could accept,” he says. “Some of those programs aren’t going to be finished. They’re just going to be ended.”

Gary Helmig, an analyst with Soundview Technology Group, says cutting costs could help. But he adds that solving the problems with the 9840 Tape Drive and the first VSM “just gets them back where they were supposed to be.

“They can cut costs, but cutting costs is not going to solve the long-term issue, which is how do they get revenue performance up?” Helmig says. “The real issue here is (StorageTek CEO) David Weiss set a goal of growing revenue 20 percent, and he’s way off that mark.

“And there are things that are going against him now. He’s lost (market) share, IBM’s going away, and he has not executed on getting products out on time.”

Some analysts seem to have written off last quarter’s earnings as a fluke. Their predictions for StorageTek’s earnings in the second quarter range from 25 to 35 cents per share.

Now that StorageTek is cutting costs, Shebly Seyrafi, an analyst with A.G. Edwards, believes the company will fare better in later quarters. “I feel confident that they can achieve their revenue goals,” he says.

But competition is fierce, and the cuts come at a critical time, according to analysts, because an agreement between StorageTek and IBM will end this year. IBM was reselling the Iceberg, StorageTek’s mainframe disk-storage system, and contributed about 20 percent toward StorageTek’s revenues.

Reid says the agreement with IBM was to last through 2000, but IBM is rumored to be developing a mainframe storage system of its own. IBM also has paired with EMC Corp. (parent of Broomfield-based McData), a rival that will surpass StorageTek in revenues this year, to work on other products.

Reid believes some StorageTek employees who have been approved to leave might change their minds when it comes down to it. Those deemed “too critical” to the company must wait until September, October or even December to get the benefits of voluntarily separating. They could resign immediately, but they would lose separation package benefits.

That concerns those who must wait. Jobs at other local companies

might be filled with engineers who’ve been approved to leave at the end of June, worries one employee who asked not to be named.

And if StorageTek recovers, are employees walking away from a good thing in the future?

In an effort to recover, StorageTek spent millions on an image campaign, built up its sales team and created a new position to bring in James Bartlett Jr. as corporate vice president and chief marketing officer. Bartlett, 46, was responsible for worldwide market development at IBM and was credited for growing revenues for IBM’s ThinkPad mobile PCS to $5 billion.

StorageTek in May released the VSM System 2.0, which promises reduced backup and restore time, improved tape utilization and a reduced cost of management. “The significance of that is it more than doubles the market opportunity for VSM because it’s now attachable to more systems,” Reid says.

But Seymour Licht, a Storagetek investor and self-described shareholder activist who lives in Phoenix, says marketing isn’t the problem, and he doesn’t believe the hype about new systems.

Licht also points the finger at Weiss and questions why Weiss didn’t know ahead of time that StorageTek would not reach first-quarter projections. About this time last year, StorageTek was “strapped with cash,” and company officials were just as excited as they are now about their new products, Licht says.

Then came the bugs.

“There’s a difference between reality and wishful thinking,” he says. “Because you hope, or you assume, or you’re planning that this system is going to be the greatest invention since sex doesn’t mean it’s going to be.”

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