Channel Issues Trim Some Storage Vendors' Earnings, But Sales Are Up

Adaptec said its revenue was up for its fiscal 2005 first quarter ended June 30, but the Milpitas, Calif.-based company attributed an earnings decline, in part, to soft sales through the channel.

CFO Marshall Mohr said demand from the channel in the quarter was inconsistent because of Intel's delays in releasing certain server products, which caused customers to put off purchases. President and CEO Robert Stephens echoed that view, noting that channel sales were slow until the end of the first quarter and into the second quarter.

"It was frustrating to see two weeks of intensive channel sales in the first two weeks of this quarter," Stephens said.

For its first quarter, Adaptec reported revenue of $115.5 million, up from $107.3 million a year ago. Earnings totaled only $10,000, or 0 cents per share, compared with $40.8 million, or 33 cents per share, a year earlier. Excluding certain expenses, including those related to Adaptec's July acquisition of Snap Appliance and its June purchase of IBM RAID intellectual property and manufacturing rights, the company would have had earnings of $6.4 million, or 6 cents per share.

Stephens said he expects the Snap acquisition to generate $40 million in revenue over the next four quarters. He also reiterated comments made earlier this month that the Snap acquisition will help Adaptec grow its channel. Snap has about 1,200 U.S. channel partners, but only 10 percent to 20 percent overlap with Adaptec's 6,000 partners, he said.

"Together, Adaptec and Snap will provide a single source of storage products to our channel partners," Stephens said.

For its fiscal second quarter, Adaptec projects sales to rise to between $124 million and $127 million, including $8.5 million from Snap and $5 million from the IBM RAID acquisition, Mohr said.And for fiscal year 2005, the company expects revenue of between $545 million and $555 million, including $28 million to $31 million from Snap and $21 million to $24 million from IBM. Overall, Adaptec's core revenue will probably dip because its ramp-up of storage systems for the channel hasn't been as fast as expected, Mohr said.

Hard-drive vendor Western Digital also attributed a profit decline to channel issues. For its fiscal 2004 fourth quarter ended July 2, the Lake Forest, Calif.-based company reported earnings of $29.6 million, or 14 cents per share, down from $31 million, or 15 cents per share, a year ago.

Company executives said aggressive pricing in the distribution channel and a higher mix of business from OEM customers cut total gross margins.

On the sales side, Western Digital posted revenue of $749 million in its fourth quarter, up from $680 million a year earlier. The company said it shipped 12.5 million hard drives in the quarter, up 19 percent from10.5 million units a year ago.

Western Digital's fiscal year 2004 revenue came in at $3 billion, compared with $2.7 billion in 2003. Its 2004 earnings totaled $151.3 million, or 70 cents per share, down from $182.1 million, or 89 cents per share, the previous year.

In other storage financial news:

&#149 FalconStor Software reported revenue of $6.5 million for the second quarter, a 58 percent year-over-year gain. The Mellville, N.Y.-based company, which develops software for building iSCSI storage networks and virtual tape devices, lost $1.7 million, or 4 cents per share, in the quarter, which included $600,000 in legal fees related to a patent lawsuit. A year ago, FalconStor posted a loss of $1.6 million, or 3 cents per share.

&#149 Second-quarter sales for Exabyte totaled $26.6 million, up from $22.7 million a year earlier. The Boulder, Colo.-based tape backup and archival systems vendor lost $456,000 during the quarter, down from a $5 million loss a year ago. Company executives said OEM customers accounted for 22.2 percent of revenue during the quarter, up from the 17.4 percent in the first quarter.

&#149 LSI Logic posted second-quarter revenue of $448 million, a 10 percent year-over-year gain. The Milpitas, Calif.-based storage components and subsystems maker earned $7 million, or 2 cents per share, during the quarter, rebounding from a loss of $162 million, or 43 cents a share, a year earlier. LSI Logic is preparing to spin off its storage subsystems business, which is responsible for building storage arrays such as Hewlett-Packard's FAStT series, as well as arrays for the channel. The spin-off company, dubbed Engenio, is slated to go public.