StorageNetworks replaces CEO, plans to fire about half its staff
By Ross Kerber, Globe Staff, 1/9/2003
boston.com
StorageNetworks Inc., a start-up once seen as a challenger to EMC Corp.'s dominance in data storage, replaced chief executive Peter Bell yesterday and said it plans to eliminate about 110 employees, or roughly half its work force, the deepest in a series of cuts for the Waltham company as it struggles to find a new business model.
StorageNetworks said Bell, the company's cofounder in 1998, was stepping down ''to pursue other personal and business interests.'' In his place the company said it had appointed Paul Flanagan, previously the company's chief financial officer, as chief executive and president. Bell will remain as chairman of the company's board, which Flanagan will also join.
StorageNetworks said it would cut jobs mainly among its sales and marketing organizations while focusing on its ties to partner EDS. In a statement StorageNetworks made no mention of charges that might result from the cuts or details of their timing. Executives didn't return calls or e-mail messages.
Shares in StorageNetworks fell 24 cents to close at $1.10 after yesterday's announcement. Absent more details, analysts said they were left confused about the company's plans following the restructuring. StorageNetworks has been trying to transform itself from a services company to a data-storage software provider, but has reported losses and declining revenue.
''The question is, how much of this strategy change has to do with the maturity of the [storage] market, vs. the acceptance of their software product?'' said Jason Ader of Thomas Weisel Partners. '' It's a little of both,'' Ader guessed.
The cuts are only the latest for StorageNetworks, whose original, radical business model once seemed a threat to data-storage giants like EMC of Hopkinton where Bell himself had worked.
At his new company, Bell aimed to build a national network of data-storage infrastructure for other companies to lease out, saving them the cost of buying expensive and complicated devices. Some investors believed the plan would make StorageNetworks and various competitors more profitable than the data-storage equipment makers, and rushed to participate in two public offerings that left StorageNetworks with $350 million in cash. But the business failed to take off, partly because of the decline in technology spending and partly because some potential customers balked at letting an outsider handle their most sensitive information.
On Jan. 31, 2002, StorageNetworks reported a write-off of $114 million for infrastructure it had built or bought but could no longer lease out. The company still held $227.3 million in cash and investments as of the end of the third quarter, however. For the three months ended Sept. 30 the company reported revenue of $22 million, down from $31.5 million a year earlier and $23.8 million in the second quarter. It lost $5 million, compared with a $27 million loss a year earlier, but was profitable before interest, taxes, depreciation, and other costs.
To cope with the problems, StorageNetworks has steadily reduced its work force from a peak of 660, and has changed its business model. Rather than the broad service network, it began focusing on its new storage-management software, putting it in competition with other storage companies trying to move into the space.
A year ago, StorageNetworks also licensed its software to EDS for use within the Texas company's service-management centers. In its statement StorageNetworks also said it would continue product-development efforts in areas that relate to its work for EDS.
In the statement, Bell said: ''After four years, I feel that it is time for me to step back from the day-to-day management of StorageNetworks. As cofounder of the company, this is a particularly difficult decision for me personally. However, having someone as qualified and committed as Paul to take over as CEO and president certainly makes this decision easier. ''
Said Flanagan: ''I look forward to the challenges inherent with these new responsibilities and to doing my best to help build value for our shareholders, employees, and customers.'' Scott Dussault, previously vice president of finance, was appointed chief financial officer, taking Flanagan's previous post.
Ross Kerber can be reached at kerber@globe.com.
This story ran on page E4 of the Boston Globe on 1/9/2003.
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