Forget Amazon.com, Take a Look at Firms That Make Real Money by Sorting Out Our Data Glut
Updated Jan. 11, 1999 12:01 am ET / Original July 19, 2019 10:34 am ET
A ll great reporters are sloppy. When you see files strewn about the floor and stacks of newspapers cascading out an office door, you know you're in the presence of true talent. Some people may dispute these notions, but I believe them totally, in no small part because I've got one of the messiest dens within a 100-mile radius of Wall Street.
To prove my point, let me tell you how I stumbled across my piles of papers and onto one of the most important trends in the world of computers. As I was staring out my window in search of a story idea, last week, I realized that my office was a microcosm of what the networked computer has done to our world. In days of yore, a company's data were stored neatly on mainframe computers, safely guarded by glass walls and men wearing black-rimmed glasses. In short, computers were a lot like the neat-as-a-pin office you might have seen Mr. Drysdale working in, down at the bank on the old Beverly Hillbillies series. As we all know, that era is long gone.
Table: Storage Area Networks
The personal computer has brought a pretty impressive hunk of processing power to our desktops, and lots of information along with it. The problem is, like my office and the stories written there, the world's personal computers have now become a wilderness of data that's unrelated in any coherent way.
The companies that can help us deal with this dog's breakfast of data are going to make a lot of money over the next decade or so -- just as Microsoft made a lot of money by bringing all that computing power out of the glass-walled room and onto our desks. Some savvy investors realize this, and they have pushed Legato Systems and Veritas Software to all-time highs near $70 recently. That compares with year-ago levels of about $20 for Legato and $34 for Veritas. Both companies make software products that help store and retrieve data on networks of computers. And despite the runup in their stock prices, they have plenty of potential to grow in the long term.
Market researchers at International Data Corp. say shipments of disc drives are growing at 91% a year, measured by storage capacity. By 2001, annual shipments are expected to approach one million terabytes of storage; just one terabyte, by the way, equals the data held on the drives of several hundred personal computers.
As businesses increasingly use software from such companies as SAP and PeopleSoft to run critical operations, the value of all that stored data is increasing. And more people want to gain access to it via their corporate networks or the Internet. "Everyone wants everything to be available online," says Peter Levine, vice president at Veritas, in Mountain View, California.
Spending on data storage will continue to grow, even among businesses that are restraining computer budgets to deal with the Year 2000 software problem, says Warburg Dillon Read analyst Gibbs Moody. In 1995, he says, about one-third of the spending on large computer systems went for storage. By next year, the storage sector's share of total system spending may rise to half.
A well-known beneficiary of the data explosion is EMC , a firm that sells its disc-drive arrays for mainframe computers, and in so doing, successfully competes with IBM itself. Shares in EMC nearly tripled last year on the New York Stock Exchange, recently reaching their all-time high of $95, before closing last week above $93. The Hopkinton, Massachusetts, firm's sales roared 37% to $1 billion in the quarter ended last September, with earnings of $201 million, or 38 cents a share.
Last year, the amount of data stored on networked systems of personal computers and related servers surpassed that on mainframes for the first time, boasts Edward Cooper, spokesman for Palo Altobased Legato. Measured in dollars, sales of storage-management products for networks also surpassed sales of the mainframe stuff. EMC, trying to adapt to this shift, is adroitly serving up new disc arrays that can be used with personal-computer networks.
So is Network Appliance , a Santa Clara firm whose shares nearly quadrupled in the last year on Nasdaq, to a current level of $48. Network Appliance's sales in the quarter ended last October rose 71% to $66 million. Operating profit margins were 19%, far above those of any maker of disc-drives for personal computer systems. The company's earnings for the October quarter also rose 71%, to $8.4 million, or 22 cents a share.
Software for managing this storage gear comes from the likes of Veritas and Legato. Storage management is the fastest-growing category of the market for computer systems management products that spawned businesses like IBM's Tivoli Systems, BMC Software and Computer Associates . The latter firm participates in the storage management bonanza through a subsidiary called Cheyenne Software.
Veritas, however, is a pure play. It started some 15 years ago as a computer-hardware vendor, before Chief Executive Mark Leslie steered the firm into disc-drive software for computers running the UNIX operating system. Mainframes had long benefited from software for boosting the performance and reliability of disc drives, but UNIX lacked such stuff. Veritas got Sun Microsystems and Hewlett-Packard to embed Veritas components in the operating software of the UNIX boxes they shipped. It did the same with Compaq Computer and Dell Computer , which were shipping systems based on the Windows NT software, Microsoft 's answer to UNIX.
"We've created a footprint on hundreds of thousands of systems," says Veritas' Levine. His company's sales force has grown the firm's business by offering more complete versions of the Veritas software to folks who've bought UNIX and NT systems. With an October '98 deal to acquire a software business from Seagate Technology , Veritas also gained footholds on tape drives used with Microsoft NT, where Seagate has its software embedded.
Increasing numbers of customers are adopting Veritas software throughout their companies, boosting the dollar size of the company's deals, Levine says. That helped Veritas reach sales of $56 million for the quarter ended in September, up 83% from the year-earlier period. Earnings, meanwhile, doubled to $12.6 million, or 20 cents a share. Because the company has a reserved spot on so many UNIX and NT systems, Warburg Dillon Read analyst Gibbs Moody rates Veritas a "strong buy," and sees it earning $1.10 a share this year and at least $1.60 next. He expects the shares to hit $80 within 12 months, up from a recent $69.
At Legato, sales grew 71% in the quarter ended in September, to $38 million, while earnings grew 86% to $8 million, or 20 cents a share, before some acquisition expenses. Legato spokesman Ed Cooper says his firm is doing more business across entire companies. Legato sees corporate computer managers trying to regain the control they once had over data, before the action moved from mainframes to networked PCs and servers. As a consequence, Legato now sells to chief information officers, instead of departmental computer managers. Analyst Gibbs Moody sees the firm earning 99 cents a share this year, and has a Hold rating on the shares, which closed around $58 last week.
A future opportunity for these storage firms came to Wall Street's attention toward yearend 1998. That's when the computer industry started talking about Storage Area Networks. A SAN would run from network server computers to rings of storage devices, and be based on a high-volume technology called Fiber Channel. The benefit of a SAN would be that it could off-load file transfers from the main network. Otherwise such file transfers can completely hog the line.
At Prisma Networks, a San Diego vendor of Fiber Channel stuff, President Marc Friedmann says he's already been called upon to rig up Storage Area Networks for movie studios. The data files for one computerized special-effect can exceed a terabyte, he says. Without Fiber Channel gear from firms like Prisma, or the publicly-held Q-Logic , it would take hours to transmit the data over a network. "You want to take those hours down to minutes or seconds," says Friedmann, "so it looks like the disc is located right in your office." Analyst Gibbs Moody says it will take several years for SANs to spread into broader markets, but when they do, he foresees billions of dollars in new demand for storage software, hardware and networking gear.
L ast Thursday was opening day for the 1999 International Consumer Electronics Show in Las Vegas. While this is the place to find a greaseproof computer for your kitchen, it's always been harder to find investment ideas at the consumer show than at the comparable computer expo, called Comdex. After all, the recent history of home electronics has been dominated by Japan and Korea, and it's had its share of flops, too.
The U.S. rules the computer business, however, and this weekend's CES allowed American computer firms to reveal their schemes to take over your home. Cisco Systems announced plans to network homes the way it's networked business and government. The firm will work with cable supplier General Instruments to help AT&T and TCI get data, voice and video services to the homes of cable subscribers. Once inside, Cisco will work with firms like chip startup Epigram to transmit all that stuff around a home's existing phone wiring. Cisco, its rival 3Com and a horde of startups are betting that home networks will be a big deal.
Another impressive home team at CES was Diamond Multimedia Systems . Its $200 Rio portable audio gadget is giving the music business conniption fits by allowing folks to download CD-quality recordings off the Internet -- real good, for free. To placate copyright owners, who include every large entertainment firm in your portfolio, San Jose-based Diamond announced technology deals last week with two companies called Liquid Audio and Audible. Liquid Audio's technology adds a layer of copyright protection to online music, while Audible does likewise for such spoken stuff as audio books and lectures. Music pirates may wail, but such controls will keep Paul McCartney and Marilyn Manson from becoming starving artists, and may save the record industry from obsolescence.
Sony can still create products that kick. This CES saw the rollout of high-definition television sets from all makers. Sony showed a $9,000 groove tube, with a 65-inch high-definition screen. Your lawyer may require you to mark the screen with yellow tape, so houseguests don't mistakenly try to get into the picture.
T uesday's financial results from Amazon.com had something for both the bulls and the bears on this truly amazing stock. The good news was that, for the quarter ended December 31, the Internet retailer announced sales of about $250 million, some 20% above Wall Street estimates and triple the sales amount for the year-earlier quarter. The bad news: Amazon warned that its losses would not narrow any time soon.
The bears were in control shortly after Tuesday morning's news, as shares in the Seattle wonder dropped from Monday's close of 118 to a Tuesday morning low of 108. But the bulls quickly recovered the ball and the stock ended the week at 160. (All these prices have been adjusted to reflect a 3-for-1 split that took effect Tuesday.)
The bears complain that Amazon once again is trying to make a virtue out of increasing its losses. Bulls, confident those losses reflect only Amazon's investment in its booming operations, won't budge. According to the bulls' conspiracy theory, the conniving bears put a negative gloss on the Amazon news by misleading reporters into writing that the "whisper" number for Amazon's sales had actually been $300 million -- a number no sane bull ever expected, they say.
It's remarkable how a glass containing $30 billion of stock-market value can look half empty to some and half full to others. For now, the half-full crowd rules.
A ll great reporters are sloppy.