Data storage firm StorageTek (NYSE:STK) had a decent first-quarter report, with earnings increasing 41% to $23.3 million and revenue increasing 7% to $515 million. But the company missed revenue expectations slightly and stuck with its previous forecast for modest revenue growth in the single digits this fiscal year.
The less-than-stellar forecast has surprised investors who have assumed that stricter data storage requirements, related to the many corporate scandals uncovered over the past several years, would translate into more business for data storage companies StorageTek and EMC (NYSE:EMC). I thought the same thing until I considered more closely how companies store data.
Much of the additional information that companies are being required to store isn't the kind that they need to recall at a moment's notice. For example, an insurance company frequently needs to pull up old policyholder data to examine a claim. But, believe it or not, quite a bit of this information is still stored on microfiche and in paper file folders in warehouses.
If companies don't need this information readily available in a digital format, what do you think they're going to do with a bunch of old emails? They'll get saved to magnetic tape cartridges, boxed up, and stashed away in long-term storage, likely never to be seen again. The companies will have fulfilled their requirement without spending a dime on StorageTek's mainstay tape libraries, which help companies retrieve data more efficiently.
Growth for StorageTek isn't going to come from companies storing more data. It's going to come from them storing it more efficiently. New companies will want to purchase modern disk storage equipment because it's becoming cheaper to store data digitally than to warehouse it. And existing companies will want to replace magnetic-tape cartridge systems with newer, less labor-intensive equipment.
But, while switching out old tape equipment can save companies money in the long run, they are reluctant to do it. First, they are hesitant to spend money on anything that isn't an immediate need, and second, unless they are willing to convert old tape cartridges, they still have to keep the tape libraries running and staffed.
The data conversion process would be very costly for companies with thousands of tapes stored. So companies will only be willing to convert when their earnings have been strong enough for long enough to make them feel comfortable with investing in high-dollar, long-range projects.
The outlook for StorageTek seems somewhat contradictory to me. On the one hand, the company is expecting little in the way of sales growth and a modest increase in corporate spending of only 3% this year. On the other hand, it expects business to pick up in the latter part of the year and even hired 140 people in the first quarter to have them trained for when corporate spending does heat up. The contradiction stems from the fact that StorageTek is gearing up to convince companies to convert to new products it will have out this summer, but it probably won't start raking in the dough from them until next year. (That's just because the revenues will, in part, be derived from integration services on projects that can go on for many months.)
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Fool contributor Mark Mahorney doesn't own shares of any companies mentioned.
