Nice honor. A contrary view from a Red Herring columnist:
redherring.com
IPO Critic: Storagenetworks's IPO goal raises eyebrows
By Tom Davey, Reporter
Redherring.com, May 08, 2000
IPO-hungry tech companies are prone to pumping up their prospectuses with selected stats and third-party projections that imply huge market opportunities. For example, Storagenetworks (proposed Nasdaq symbol: STOR), which outsources corporate data storage, quotes Dataquest on the "overall storage utility market" growing from less than $10 million in 1999 to $8 billion in 2003.
Storagenetworks also quotes Forrester Research (Nasdaq: FORR) that "online storage for Global 2,500 companies will grow at a compound annual rate of 78.8 percent from 1999 to 2003." That's a 10-fold increase from 15 terabytes in 1999 to 153 terabytes in 2003.
Storagenetworks accidentally understated that point. The Forrester report actually expects that each of the world's 2,500 largest companies' online storage on average will grow to that amount. To put it in perspective, that's the equivalent of 4 billion pages of text per company in 2003. If it were a pile of paper, it would reach 253 miles into space. Laid end-to-end, those pages would circle the earth five times.
Dataquest's and Forrester's projections may be right on target. But unfortunately, these have little to do with whether Storagenetworks will ever make money. A key issue for potential customers of this service is security. Analysts at these research firms say few, if any, big companies will hand over their sensitive corporate data to an outside firm -- particularly one that is not well-known and has a short operating history. Most of these large companies also have grown very sophisticated about storage and are developing internal storage networks.
EXPONENTIAL GROWTH
Storagenetworks was founded in late 1998 with eight employees and has now grown to 500 workers. The company opened its first data center a year ago and hopes to go public in late May with a $162 million public offering led by Goldman Sachs (NYSE: GS). It plans to sell 9 million shares, or around 10 percent of its stock, at about $18 apiece. That would give Storagenetworks a post-offering value of nearly $1.6 billion before the stock begins trading.
But the company's short operating history and big losses may raise the eyebrows of investors as well as potential customers. For the quarter ending March 31, Storagenetworks lost $26.6 million on $4.6 million revenues. It had already accumulated a $48.8 million deficit in its short history. And the worst is yet to come.
Due to the high cost of its build-out, the company expects to continue its large losses in the near future, figuring that it will take more than a year for each of its data centers to become profitable. The majority of its current 35 centers opened during the first quarter of this year. Storagenetworks says it will need more funding after the IPO because it plans to spend $700 million in network infrastructure over the next five years.
Most Fortune 500 companies have their business-to-business (B2B) applications hosted by outside parties, says Dataquest analyst Adam Couture. But B2B apps are a relatively small part of the demand for storage. He notes that these companies will be reluctant to outsource the storage of their corporate data centers, which house the vast majority of a company's information.
But to a limited degree, they will likely purchase some services from outsourcers such as Storagenetworks. These will include backing up data to safeguard it against natural disasters and "mirroring" data to allow better access for applications such as data mining, adds Mr. Couture.
BIG RIVALS LOOM
Mr. Couture notes that Qwest Communications (NYSE: Q) is already competing with Storagenetworks on several fronts. He says several more widely recognized major companies plan to enter the market later this year. Citing nondisclosure agreements, he declines to reveal their identities.
Jim Porter, publisher of Disktrend, agrees that Storagenetworks should have opportunities in site-mirroring and providing services to branch offices and smaller companies. But he also agrees that larger potential customers, which internally house a large portion of overall corporate data, are not likely to outsource much of that business.
Storagenetworks says the majority of its current customers are emerging Internet-based businesses, some of which have unproven business models. The company acknowledges that some of these customers may encounter financial problems and fail to pay for the storage services.
If Storagenetworks wants a big piece of the storage business for larger companies, it will have to develop some brand-name recognition. Dell USA, the investment arm of Dell Computer (Nasdaq: DELL), and telecommunications firm Global Crossing (Nasdaq: GBLX) each own 5.3 million shares of Storagenetworks, or about 6 percent of the company after the offering. Exodus (Nasdaq: EXDS) also holds a small stake.
If Storagenetworks can capitalize on these names and relationships, it will be in a much better position to grab market share. |
