For storage vendors and storage users, recession = retrenchment

In a recession, storage suppliers should be focussing on how they can deliver real savings. Storage users should spend to cut existing costs rather than investing to earn more money in the future.

What will the recession's impact be on IT spending, storage projects and the fortunes of storage vendors?

Because now it's official. The UK is in recession, Mervyn King, Governor of the Bank of England, said this week. Meanwhile, accountancy firm Ernst & Young also predicted the economy will shrink by 1% next year before growing by just 1% in 2010.

We've already seen the global financial services sector take massive hits; Lehman Brothers collapse; the US and UK bank bailouts; and the near bankruptcy of Iceland's banking sector. Now the freeze on lending is starting to translate into a general slowdown in trade in the so-called "real economy." How will all of this manifest itself in business IT spending and the fortunes of storage vendors?

The new server is not happening. I'm conserving cash because less is coming in and it could get worse.
Phil Robson
headRobson Associates
Here's an example. In the property sector, consultancy firms rely on overdrafts to cover late payers. In the current economic climate, late payers are paying later still, projects are being delayed or cancelled and overdraft finance is harder to come by. Robson Associates, a Windsor-based engineering surveying consultancy, has simply put all IT purchases on hold. "That new server is not happening," says Phil Robson, head of the firm. "I'm conserving cash because less is coming in and it could get worse."

However, for certain companies, there may be a silver lining. "If you've got spare money, now's the time to talk deals," says Robson. "You can negotiate some really tight ones," he says.

How are storage vendors being affected? Several storage suppliers have sent up warning signals, and decisions to delay or cancel IT spending, from the smallest of companies to the largest, are trickling through.

NetApp has seen this, with CEO Dan Warmenhoven going public on the likelihood of lower growth. He thinks NetApp will still grow relative to the market. . .but at a lower rate. And still make a profit. . .but not so much as hoped for. Meanwhile:

  • UK systems integrator Morse has lost £500,000 as a result of the collapse of Lehman Brothers and has seen a fall in UK revenue for Q3 2008 to £27.9m from £28.9m a year ago.

  • Imation has issued a warning that its Q3 2008 results will be worse than expected because September saw much lower sales of tape products to the US financial sector.

  • FalconStor has issued a warning that it is likely to make a loss in its Q3 2008, while full-year 2008 revenues are likely to be down $15 million or so on previous expectations. ReiJane Huai, FalconStor CEO and chairman, says, "The difficult economic conditions at the end of the third quarter resulted in many companies freezing or lowering their IT spending, which caused our revenues for the quarter to fall short of our projections."

In turn, the organisations that fund IT vendors are also showing signs of growing caution. Silicon Valley venture capitalist Sequoia Capital has told its funded startups -- via a 56-slide PowerPoint deck opening with an image of a gravestone -- to cut costs, to do more with less, to be prepared for headcount reductions and to save cash.

Storage industry's intensive care ward
While some storage vendors are only issuing warnings, others are in distinctly poorer health. The most vulnerable are those with several loss-making quarters behind them, exposure to the financial sector, and a need for fresh credit or financing. Four companies in the storage hospital's intensive care ward are Overland Storage, Plasmon, Qimonda and Tandberg Data.

Archive and optical storage vendor Plasmon has lapsed into administration in the UK, following poor sales. One US private equity firm buyout at a quarter of a penny a share has failed while another is being pursued by CEO Steve Murphy, who is also signing relationship deals with MoonWalk and IBM.

These partners believe that Plasmon Inc, the US subsidiary, will emerge from the wreckage of Plasmon Ltd as a viable entity, with Plasmon Ltd shareholders losing virtually all their money. Already 60 people have been made redundant from its UK headquarters and peripheral activities like CD and DVD mastering have been closed down.

Tape automation supplier Overland Storage is trying to negotiate new funding sources because its cash will start running out at the end of November. It has already made more than 50 people redundant, cut spending across the board and is preparing for a reverse stock split stock consolidation to avoid being delisted from Nasdaq due to trading for more than 30 days at less than a $1. It is a good company with good products but previous management's failures have left it in a poor state to withstand current economic vicissitudes.

Meanwhile, there is a glimmer of light in DRAM manufacturer Qimonda's loss-making financial nightmare. It is selling its 35.6 percent stake in a DRAM chip joint-venture with Nanya to Micron for $400 million. Even so, Qimonda will have to record a loss of $400 million on the sale and make around 3,000 people redundant. Micron is reportedly in talks to buy Qimonda from its parent Infineon but neither party is saying anything.

Tandberg Data received a fresh injection of shareholders' funds before the current financial crisis broke. The company's RDX removable disk cartridge product manufacturing and selling business is growing strongly and, if it has sufficient finance, it should weather the storm ahead.

Where should vendors and resellers be directing their efforts amid this financial turbulence? According to Hamish Macarthur, CEO and founder at analysts Macarthur Stroud International, they should be proving their worth and that of their products by focussing sharply on those that guarantee to help businesses weather the storm. "Pressure has been building on users to contain and reduce IT budgets," he says. "Suppliers must focus on how they can determine and deliver real savings, demonstrating to their customers that today's technologies have relevance in tough times as well as good times."

Concentrate on storage projects that bring short-term payback
For storage professionals, the best advice would seem to be to concentrate on projects that bring payback within 12 months or less. The business will want to conserve cash and if you can demonstrate a cash saving within a year, that will stand you in the best stead.

Obvious areas to look at are servers that haven't been virtualised and storage that hasn't been consolidated. Deduplication of virtual tape libraries and archiving of unstructured data may not be a good bet unless it is allied to the disposal of no longer-needed primary storage or freedom from budgeted spending for raw data storage that more than pays for the deduplicating storage.

Investing in wide area data services might be a good idea if it involves the disposal of IT kit at remote offices. But if the payback is better service and increased user productivity, that may not be enough to persuade the business to go ahead. In a recession, the only reason for users to spend money is to save more or to make more. . .guaranteed.

When a recession rears its head, spending to cut existing costs is much more certain than investing to hopefully earn more money in the future. Recession equals retrenchment so get your trenching tools ready. Wait for the bottom and then be ready to dig your way out. It won't last for ever. They never do.

Chris Mellor is storage editor with The Register.

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