StorageTek's Holding Pattern

Editor's note: In the original version of this article, StorageTek's revenues were incorrectly given as $289 million in this year's second quarter, and $313 million in the prior year's second quarter. Those numbers reflect only StorageTek's product revenues, not its total revenues. The correct figures are now included in the article below. We regret and apologize for the mistake.

Data storage company Storage Technology (NYSE: STK  ) , better known as StorageTek, reported second-quarter earnings last week that met previously lowered guidance. Revenue dipped to $516.6 million vs. $527.3 million a year earlier. But earnings came in 18% higher at $35.6 million ($0.32 per share), compared with $30.1 million ($0.27 per share) a year earlier.

StorageTek achieved revenue growth of 9% through the first half of the year, and it managed to produce both higher gross and net margins. On its cash flow statement (bravo to the firm for releasing one!), StorageTek generated $115.3 million in free cash flow for the first two quarters of this year, ahead of last year's $112 million in the same time frame and substantially ahead of its $59 million in six-month net income.

The balance sheet reveals that accounts receivable dropped compared with last year's second quarter, as did inventories. Long-term debt (including the current portion of long-term debt) declined on a comparable basis. And StorageTek's cash and cash equivalents rose to nearly $1.1 billion. The firm also announced at least one way it intends to use that cash balance, with a $500 million stock repurchase program planned.

As I wrote in April, future growth for this company, as well as competitors such as EMC (NYSE: EMC  ) , is going to be largely dependent on corporate upgrades to new electronic data storage equipment and upsizing tape libraries. The company offers modern disk systems that hold up to 150 TB (that's 150,000 gigabytes to the laymen) and modular tape libraries that can handle 300,000 cartridges. So StorageTek's got even the largest data archive covered.

StorageTek is hopeful that the orders will start to roll in as the economy picks up steam. But unfortunately, that hasn't happened yet, and earlier this month, the company said it had "...experienced an unexpected but definite decline in order flow during the last two weeks of the quarter." That seems to be the case for many tech companies heading into the part of the year that is oft referred to as the summer doldrums.

I have faith that corporate tech spending will gradually improve with the larger business cycle and economy over the next six months to a year. Until that happens, though, StorageTek has enough cash to wait for a larger turnaround to take place.

Fool contributor Mark Mahorney doesn't own shares of any companies mentioned.


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