StorageTek Reports Third-Quarter Earnings of $4.7 Million or $.05 Per Share Excluding Non-Recurring Charges; Expects $150 Million Cost Savings From Restructuring Plan - Company Financial Information

Edge: Work-Group Computing Report, Nov 8, 1999

StorageTek (Storage Technology Corp.)(NYSE:STK) has reported third-quarter revenue of $573.7 million, level with last year's third quarter revenue of $571.1 million.

For the quarter ended September 24, 1999, StorageTek earned $4.7 million excluding non-recurring charges, compared to $50.6 million for the comparable quarter a year ago. Diluted earnings per share excluding non-recurring charges for the third quarter were $.05 against last year's results of $.48.

Separately, StorageTek said its board of directors has approved the first phase of a far-reaching restructuring and concentration of its businesses. The program is intended to enhance operating performance and reduce operating expense through recommitment to tape automation, virtual storage and storage area networks, simplification of the company's sales model, and reorganization of its infrastructure.

Earnings

The company reported a net loss for the quarter of $16.0 million, or $.16 per share, resulting from pretax charges of $32.4 million relating to litigation expense and an employee voluntary separation program.

"While StorageTek's technology, products and services are winning the critical acclaim and respect of customers worldwide, we have not been able to translate this to the bottom line and into value for our shareholders," said David E. Weiss, StorageTek's chairman, president and chief executive officer. "Performance in the third quarter was affected by revenue growth that was below our expectations as well as disappointing margins in our consulting and integration services businesses.

"We did not bring to revenue enough of the products under evaluation at customer sites," said Weiss. "Some of this was due to customers delaying purchase decisions because of their Y2K testing issues. I expect these issues will continue to be felt more in our mainframe market rather than in our growing client-server business into the first quarter of 2000, consistent with the expectations of others in the industry.

"Our 16 percent growth in revenue excluding sales to IBM in the third quarter indicates that customers continue to look to StorageTek and its superior technology for cost-effective solutions for managed storage. We note performance in three key business areas: tape automation, virtual storage, and storage area network solutions. Our 9840 tape drive is fast becoming the de facto standard in a heterogeneous environment, and we reported 70 percent revenue growth in client-server tape products compared to the third quarter of 1998. We recognized for revenue approximately 100 Virtual Storage Manager (VSM) systems in the third quarter, which is equal to the number in the second quarter, despite Y2K pressures. Customers continue to look to StorageTek for storage area networking expertise, as we have almost 250 customer installations."

Storage products revenue of $355.7 million was 7 percent lower than the third quarter of 1998. Tape revenue increased over the third quarter last year due to the strength of client-server tape. Disk revenue was down over the third quarter last year as anticipated with the declining sales to IBM. Networking and other revenue increased from the third quarter of 1998 with an increased contribution of storage area network infrastructure products.

Storage services revenue grew 5 percent over the third quarter of 1998 to $171.6 million, while storage management software revenue grew 71 percent over the third quarter last year to $46.4 million, due to sales of the Virtual Storage Manager (VSM) system.

Restructuring

StorageTek said the first phase of its restructuring should result in annual savings of up to $150 million. The elements of this first phase will start immediately and are scheduled for completion by the end of the second quarter of 2000. This should lead to reductions of 1,500 to 1,750 positions worldwide.

"We are focusing our resources on the businesses where we have done well and see the best opportunity for profitable growth," said Weiss. "Tape automation is our cornerstone, a reliable cash generator with significant areas of growth potential. Storage area networks (SANs) and virtual technology are our two most promising areas for significant future growth, in both tape and disk. Internet computing and e-business are magnifying our customers' needs; they will benefit directly from our sharpened focus and greater dedication to anticipating and meeting their needs."

The company will reduce investment in its solutions business group, which includes consulting and integration services, managed storage services and vertical and horizontal application solutions. Commitments to existing customers will be fulfilled, but new business will not be sought except in the SAN and virtual storage businesses where consulting is integral to the market development process.

The company said its sales model will be simplified, increasing coverage and accountability and eliminating redundancy. StorageTek's corporate infrastructure will be organized to reduce duplication across operating groups, and bring expenses into line with anticipated business volume.