From ZDNet:
zdii.com
June 30, 2000 8:00am
The Day Ahead: Despite EMC flap,
StorageNetworks' IPO set to soar
By Larry DignanTDAIN ZDII
StorageNetworks (Nasdaq: STOR) is sitting on one
whopper of an initial public offering. The company is
making its Wall Street debut in a hit-or-miss IPO
market, and is priced above range even though it has
irked EMC, a key supplier and customer.
StorageNetworks, which rents computer storage,
disclosed the EMC (NYSE: EMC) flap in regulatory
filings earlier this week. The company said it received a
letter from EMC June 21 alleging that StorageNetworks
misappropriated EMC's confidential information, violated
an agreement not to hire EMC employees and
misrepresented that EMC is an investor.
The allegations are tough, but EMC hasn't filed a
lawsuit yet. StorageNetworks, however, noted a lawsuit
could be coming. The company said the EMC
complaints are without merit.
That EMC flap would have been enough to derail weaker
IPOs, but StorageNetworks upped its price range and
then priced its 9 million shares above range for trading
Friday. StorageNetworks priced its shares at $27,
above its raised $23 to $25 range. The company
bumped up its range from $15 to $17. Goldman Sachs
is the lead underwriter.
An EMC spokesman said the company had "issues
with a number of business practices." He wouldn't
speculate on the possibility of a lawsuit. Given
StorageNetworks' close ties to EMC -- the
StorageNetworks CEO and two directors are EMC
alumni -- investors may have discounted EMC
concerns.
Simply put, StorageNetworks is one of those no-brainer
IPOs that will make headlines with nice gains. Of
course, few of you will be allowed to buy
StorageNetworks at its IPO price. So you'll have to do
some homework.
The buzz
The buzz about StorageNetworks revolves around its
upcoming fiber optic network that will allow companies
to store a ``virtually unlimited'' amount of data on the
Web, the company said. The company's global network
is a combination of metropolitan storage networks and
long-distance fiber networks.
StorageNetworks boasts that it is the "first company to
focus solely on providing data storage as a service."
StorageNetworks' strategy is clear. Storage is
necessary, but many corporations don't want to build
their own data centers. StorageNetworks cashes in on
the outsourcing movement and allows customers to
"plug in" to the network for their data.
The company could also have a predictable revenue
stream. Managed storage contracts typically last three
to four years, giving StorageNetworks some visibility for
the future. By 2001, the company estimates 66 percent
of its revenue will derive from storage contracts. The
remainder of sales will come from professional services.
Currently, professional services, counsel on
implementing non-StorageNetworks data storage
systems, account for the bulk of revenue.
But the storage services growth could be impressive.
As StorageNetworks' customers need more storage,
they'll have to pay more. Factor in big backers such as
Dell Computer (Nasdaq: DELL), and StorageNetworks
could be a long-term hit.
The risks
Although it's one thing to buy into the buzz around
outsourced storage services, it's quite another to look
at the financials.
For the three months ending March 31,
StorageNetworks reported sales of $4.6 million and a
loss of $27 million. For 1999, the company lost $24
million on sales of $6.25 million. The accumulated
deficit is $51.5 million.
You should also ponder the source of sales. In 1999, 40
percent of StorageNetworks' sales derived from services
provided under a subcontractor pact with EMC. If
StorageNetworks doesn't smooth things over with EMC,
the company will be hurt.
Meanwhile, EMC provides storage hardware and
software to StorageNetworks. The company said it
started buying equipment from other vendors, including
Sun Microsystems (Nasdaq: SUNW) and Compaq
(NYSE: CPQ).
In addition, StorageNetworks' sales depend on
professional services. In the first quarter,
StorageNetworks derived 72 percent of sales from
counseling others on how to implement other
companies' storage systems.
If companies decide not to outsource data services,
StorageNetworks doesn't look like such a phenom.
Some analysts don't think StorageNetworks will
convince customers to outsource their vital data. A
Forrester Research poll found half of large company
information technology managers wouldn't outsource
data services because of the risk. That attitude is
something to consider. StorageNetworks also disclosed
many of its data service customers are dot-coms.
And then there's the competition. StorageNetworks
cited 50 companies (EDS, Intel, Qwest, Sun,
Hewlett-Packard and Veritas Software to name a few)
that it may indirectly or directly compete against. EMC
knows it's a crowded market -- its spokesman said it
had no intention of entering the managed data services
market. EMC wants to provide the equipment as
StorageNetworks and its rivals duke it out.
StorageNetworks said it competes directly against five
companies it declined to name. |
