Adaptec Looking to Adapt

Its traditional controller business in trouble, Adaptec is shopping for software companies that could help beef up revenue.

CEO Sundi Sundaresh said during Adaptec's earnings call Tuesday night the future of the company could depend on its adding new technology and revenue.

"We're actively seeking acquisitions to provide us critical mass in products and revenue," Sundaresh said. "The ability to complete such an acquisition is critical to our success."

Adaptec's latest earnings prove that. (See Adaptec Reports Earnings.) The company lost $5.1 million last quarter on revenues of $60.7 million, down from $86.6 million in revenues from the same quarter last year. The results were no surprise, as Adaptec revealed three weeks ago that it would fall short of its previous guidance because of lower revenues than expected on sales of components for IBM's xServer line. (See Adaptec Lowers Outlook.)

On his call with analysts, Sundaresh emphasized what Adaptec needs to do to turn things around. "We're clearly not satisfied with our current financial model," says Sundaresh, who replaced Bob Stephens as CEO in November of 2005. (See Adaptec Prez Named CEO.)With $572 million in cash on its balance sheets, who might it look at? During the earnings call and during its analyst day in December, Adaptec executives talked about adding replication, snapshots, data classification, and policy-based movement.

Vendors that fit into that category and might be on the block include Arkeia, Arkivio, Atempo, BakBone Software, FilesX, Mendocino Software, Njini, Seven Ten Storage, Scentric, and Signiant.

Sundaresh says Adaptec's future products will enhance its current offerings, such as the Snap NAS platform and OnTarget software for building IP SANs. (See Adaptec Launches Software and Isilon Moves Down, Adaptec Moves Up.) The long-term goal is to build a NAS and iSCSI storage business around small to medium-sized enterprises, he says.

While Adaptec's RAID controller business still makes up 80 percent of its revenue, and it is looking to cash in on the emergence of Serial-Attached SCSI (SAS), its long-term strategy clearly hinges on software acquisitions.

"We like the new management and strategy but 2007 remains an investment year," Needham & Co. analyst Glenn Hanus wrote in a research note today. "Since [parallel] SCSI still represents the majority of business, offsetting its decline with new business in SATA/SAS and Snap to achieve overall revenue growth remains challenging."Another financial analyst suggests Adaptec should look for emerging markets rather than move into the already crowded data protection field. "Adaptec is in a market that is going to shrink," says the analyst who asked to remain anonymous. "The growth segments of storage are already taken. QLogic is taking InfiniBand. Emulex bought SierraLogic for FC-to-SATA bridges." (See InfiniBand Goes Mainstream and Emulex Secures Sierra Logic.)

What does that leave for Adaptec if it wanted to pursue that strategy? "It seems Gear6 may be a good fit," says the analyst, pointing to the caching appliance startup. (See Gear6 Shifts Out of Neutral.) "Or something outside of its core-competency, like [server virtualization startup] XenSource could be nice." (See XenSource.)

Dave Raffo, News Editor, Byte and Switch