ADIC: Life After Downgrades

After recently issuing a "reduced sales expectations" warning, storage equipment and software provider Advanced Digital Information Corp. (Nasdaq: ADIC) suffered the predictable fate: analyst downgrades and a stock-price decline.

But even after losing nearly 20 percent of its valuation in the last week, it may not be too long before the storage-systems and software vendor becomes a bargain again. According to analysts who cover the company, ADIC has plenty of cash, good OEM relationships, and is pointed in the right technical directions, albeit at a slower pace and lower valuation – than before.

ADIC – primarily a supplier of automated tape libraries – needs to reap more rewards from its recent moves to add more storage-network capabilities to its product line, if it wants to keep from falling further into disfavor on Wall Street.

"I'm just not comfortable with the [previous] valuation," says Brion Tanous, senior research analyst with Wells Fargo Van Kasper, explaining why he downgraded his recommendations on ADIC after the company issued a warning on July 19 that it would not meet previous growth expectations for its third and fourth fiscal quarters.

But Tanous and others don't expect ADIC to fade away, since the company is still profitable, with more than $350 million in revenues expected this year. With about $150 million in cash on hand, ADIC also has enough resources to last out the current network equipment-purchasing slowdown, which may make the company an attractive purchase for new investors."The previous valuation was a little expensive," says Tanous, who expects ADIC to someday reach $1 billion in yearly sales. "It's getting closer to a reasonable price. And at eight to ten dollars [per share], it's a stock you've got to own."

ADIC sells SAN routers and gateways, as well as several flavors of storage-network management and administration software. But the lion's share of ADIC's business is OEM sales of its tape libraries, with IBM Corp. (NYSE: IBM) and Dell Computer Corp. (Nasdaq: DELL) its largest customers. Most of the SAN technology came via ADIC's $12 million acquisition earlier this year of Pathlight Technology.

The company's Q3 slowdown came hard on the heels of a successful second quarter, ended April 30, when sales reached $94.8 million, up from $64.9 million for the same fiscal period a year ago. ADIC stock rose accordingly, to about $24 per share, near the 52-week high of $28.25 reached in early January.

But since the May peak, ADIC stock slowly slid to around $16, then took a sharp dive toward $12 per share after its public warning. ADIC, which had earlier predicted sales of $100 million for the quarter ended July 31, says it now expects sales of only $81 million to $85 million. The company also revised its Q4 sales estimates down to $85-95 million from a previous estimate of $112 million. ADIC is expected to report formal results for its just-concluded quarter on Aug. 16.

Strategically, Tanous says, the Pathlight acquisition makes sense, since it allows ADIC to add more virtualization capability to its primary moneymaker, the tape libraries. The immediate concern, Tanous says, is a rapid dropoff in Pathlight standalone product sales, which makes the acquisition look "particularly expensive."Jonathon Otis, ADIC's senior vice president for technology, says the company's overall sales slowdown is chiefly market related. Like many others, Otis and ADIC are betting that storage-related sales will pick up, in time. When they do, Otis says, customers will be looking for better-integrated products, rather than standalone parts that need to be cobbled together.

The desire for greater integration, Otis says, has led ADIC to develop new products like its Scalar 10k tape-library system. The Scalar 10k directly incorporates some of the Pathlight SAN technology, putting features like library virtualization, resource management, and a SAN firewall into the cabinet-sized system. It also supports modular capacity upgrades.

When customers start buying storage products again, Otis says, they are going to want more, not less functionality. Whether or not that helps ADIC's fortunes "depends on how fast and how good we are at delivering."

- Paul Kapustka, Editor at Large, Light Reading
http://www.lightreading.com