The storage systems market is broken — here’s why

Storage systems companies are feeling serious pain. Shares of Tintri (NASDAQ: TNTR) traded under $3 today, accelerating a slide that began when the company missed revenue expectations. Tintri’s recent IPO is a cautionary tale, having been forced to cut its IPO price by nearly 40%. As a result, Tintri has less than a year of cash based on its current expense rate and little hope of reaching cash flow positive before time runs out. Tintri is unlikely to raise more capital from the public markets, having hit investors with a 60% decline and with numerous class action lawsuits circling.

Valuation over time
To put this in perspective, storage systems companies once traded at 6-8x forward-looking revenue figures. So, if a company projected $100M in sales over the next 12 months, it was worth $600M-800M. Note that no attention was paid to income or losses. SolidFire perfectly timed its sale to NetApp as the last systems company to get this valuation multiple. Fast-forward to today. Tegile was purchased for less than 1x sales. Tintri, now worth less than $70M excluding cash-on-hand, is trading at 0.5x sales. This represents a 90% reduction in valuation multiples.


Doubling-down on a broken strategy
Tintri’s woes are not unlike Tegile’s woes that led to its fire sale to Western Digital and Nimble Storage’s heavily discounted (2x multiple) sale to HPE. They all share a fundamentally flawed business model. For years, venture capitalists backed what seemed like a winning formula: invest hundreds of millions of dollars into building a massive, multi-tier and global sales and marketing organization. The goal was size, geographic reach, market share and “beachhead” accounts, at any cost. EqualLogic, 3PAR, and Data Domain, none having achieved profitability, parlayed this strategy into $1B+ acquisitions that made investors a lot of money. This “golden era” in storage systems is long gone. Back then, there was no public cloud. There was no software-defined storage. ODMs were weak. Component vendors largely avoided competing in systems. When EMC, the king of storage systems, wanted out via Dell, that was a sure sign of rough waters on the horizon.

More turbulence ahead
How can storage systems companies fail to capitalize on the greatest data expansion in the history of humanity? When companies spend 60% of revenue (a percentage comparable to their gross margin) on sales and marketing, the business is simply not sustainable. Distribution, resellers, account representatives, sales engineers, channel marketing, SPIFs, market development funds, and commissions are extremely expensive. Compare this against the public cloud vendor that has virtually none of these costs by selling online and direct to the end-user. Compare it against an ODM or component vendor that is content to earn a 30% gross margin while operating at a far lower cost structure. Storage systems companies without massive scale that run the unsustainable “golden era” playbook will fail. They will share the same fate of brick-and-mortar retailers in the era of Amazon or traditional taxi companies in the era of Uber.