Analysts skeptical on StorageTek

LOUISVILLE – The pressure is on.

Earlier this year, Storage Technology Corp. Chief Executive David Weiss predicted in a letter to shareholders that the data storage company’s “story promises to be an exciting one during 1999.”

Instead, shareholders are frustrated, and financial analysts are skeptical.

StorageTek (NYSE: STK) has not experienced the “substantial growth” Weiss believed it would; the company missed Wall Street’s expectations during the third quarter with earnings of 5 cents per share, well below predictions of 30 cents to 33 cents per share. The company also shook financial analysts and shareholders during the first quarter when it failed to meet expectations then.

“I’m not too favorable on the stock right now myself,” says Jim Corridore, an analyst at the New York-based Standard and Poor’s Equity Group. “I don’t think they have a good, firm grasp on what direction they need to go in.”

Restructuring, rebuilding

The company reported a net loss of $16 million for the third quarter due to expenses from a voluntary separation program in the spring, litigation costs and fears about Y2K, which Weiss said slowed customer purchases of StorageTek products.

Industry analyst Bob Abraham of the Ojai, Calif.-based Freeman Reports says he isn’t surprised that Y2K might have impacted the company’s performance. It was predictable, he says, because customers figure they better wait to find out what will happen with their current technology rather than buy new products.

“It does make sense what they said,” Abraham says. “And yet, I ask the same questions — why didn’t they know that ahead of time? Why didn’t they plan all the rest of the business activities accordingly? Slow the production so they didn’t gain so much inventory and try to gain some other kinds of sale opportunities.”

For now, Weiss says StorageTek will focus on virtual network storage, SANs, and tape products. The company will abandon its solutions business group, which was working on products for the banking, medical and video/broadcast industries, a turnaround from year ago when Weiss said in the 1997 Summary Annual Report that those markets were “crucial to our ambition to generate high overall growth for our business.” In January, the company was reported to be looking for 200 people for the solutions business group.

That’s all changed.

Restructuring activities are to begin this quarter and are expected to be complete by the end of the second quarter 2000, according to the company’s quarterly report filed Nov. 5 with the Securities and Exchange Commission. Part of the restructuring effort includes the reduction of the worldwide work force by 1,500 to 1,750 people; the company expects annualized savings of about $150 million. It has been said that layoffs could reach as high as middle management.

“We will work with providing job placement,” Weiss says, adding that he hopes to minimize the reduction among Boulder County’s employees.

County commitment

Goldman, Sachs & Co. and McKinsey & Co. have been brought in to help company officials plan a more efficient operating system. That might include sales, mergers or new partnerships. Iridian Asset Management, a StorageTek investor based in Westport, Conn., frustrated by its return on stock, urged company officials to look for a buyer or partner to help boost shareholder value.

Weiss says there’s “no chance” that StorageTek, one of the county’s largest employers, would leave because of its commitment to the community and because of its proximity to the University of Colorado, valuable for recruitment opportunities.

The announcement that Goldman, Sachs & Co. and McKinsey & Co. is looking at options for StorageTek is essentially a “bulletin board” item alerting others that if they’re interested, they could call StorageTek officials and make an offer, says Jonathan Wu of the Oakland, Calif.-based BASE Consulting Group Inc.

The question is whether there would be any takers.

“Obviously, if StorageTek is bought out by somebody, shareholders of StorageTek will do fine,” says CU finance professor Sanjai Bhagat. “They’ll get a huge premium of 20-40 percent of the current price.”

‘Something must change’

Adds Abraham: “Whenever a company experiences this kind of result, they have to do something. They can’t do nothing. Something must change.”

Some say the change should start with Weiss’ resignation. A former longtime employee of the company who took the voluntary separation package earlier this year says he left because he lost confidence in the company’s management and grew tired of the company’s strategies – or lack thereof. Still, leaving the company, he says, was a difficult decision.

“I let go of incentives, stock options,” he says. “Right now, it looks like a pretty good decision because those stock options are worthless. In 1997, the company made the most money that it’s made in its history. They gave everybody in the company bonuses — the first year they’ve ever done that. That was only two years ago. Last year they made $200 million in profit, and they canceled the bonus plan.

“Weiss took over a very viable company, and in three years he’s almost destroyed it.”

Abraham isn’t quite as grim. He says StorageTek is “a pioneer” and once people see that Y2K doesn’t cause a total meltdown of their systems, they’ll start calling StorageTek to order new products. Next year is predicted to be the year of SANs, and StorageTek, as are all of its competitors, is working on new products in that area.

On Nov. 4, StorageTek officials announced that the company is working with the Mountain View, Calif.-based Veritas Corp., a longtime partner, on a SAN solution. “We’re going to see a steady stream of products coming from companies in the next year,” Corridore predicts.

The latest restructuring plan, however, could impact product developments. Only time will tell.

“When they miss a financial objective, that does hurt everything else,” Abraham says. “That will hurt their launch plan for new products because money will be tighter. They’ll have to reschedule things, rearrange things and reallocate resources.”

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