OTG Software: Growing in the Shadows

Storage software firm finds niche in Veritas-dominated segment

October 22, 2001

4 Min Read
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OTG Software Inc. (Nasdaq: OTGS) is carving out a profitable, yet somewhat anonymous, niche in the networked-storage software market. And it's managing to do so in the shadow of industry giant Veritas Software Corp. (Nasdaq: VRTS).

Though its numbers are dwarfed by Veritas's billion-plus yearly revenues, OTG nevertheless is building a strong balance sheet by selling its data-access and management software packages to small and medium-sized businesses, mainly via the reseller channel.

Even though some analysts expect the company to report a small loss when it announces third-quarter earnings (expected on or near October 24), the few Wall Street types covering OTG are bullish on the company's future. They're setting per-share target prices well above the current $5-per-share trading range, where the stock has been most of this year.

In its second quarter, ended June 30, OTG reported a loss of $71,000 (breakeven on a per-share basis) on $15.9 million in revenues. Though revenues for the third quarter, ended September 30, were originally expected to be in the same range, some analysts say the company might post a penny-per-share loss due to the overall business slowdown related to the September 11 terrorist attacks. For the present fourth quarter, the Thomson Financial Securities Data/First Call consensus is for a breakeven performance.

"I think when storage software comes back, OTG could be one of the best performers on a percentage basis," says Amy Feng, research analyst with Jolson Merchant Partners. Feng, who rates OTG a Strong Buy with a target price of $15 per share, says the company doesn't attract much investor attention, partly because of Veritas's dominance in the market segment and partly because there isn't much OTG stock available."Since management owns 50 percent of the stock, it's thinly traded," Feng says, noting that on a typical day, millions of shares of Veritas are bought and sold, while only tens of thousands of OTG shares change hands.

Company executives say that OTG isn't even in the same businesses as Veritas, which is primarily known for backup and data-protection wares. Instead, OTG's line of XtenderSolution software products is more closely tied to end-user applications and is designed to provide access and management of stored data across a wide range of network and storage gear.

"We're not in the backup arena, and we never will be," says William Caple, executive vice president for OTG.

Typical of OTG's product line is its SANXtender package, which the company says allows applications to read data directly from SAN devices, thereby lessening the load on application servers. There are also products that offer "virtual" management of disk space, as well as programs for accessing and managing video-based and optically stored data.

Historically, the company's products have been sold via resellers to small- or medium-sized businesses, which in turn are running servers with Microsoft Corp.'s (Nasdaq: MSFT) Windows NT or 2000 software. But in July, OTG expanded into the Unix and Linux markets by acquiring UniTree Software Inc. for a mix of stock and cash valued at $20 million.Caple says the UniTree acquisition was part of OTG's strategy to "build over time a full platform, from high-end servers on down." While the company could make other strategic acquisitions -- since it has almost $100 million in cash on hand -- Caple says "there's nothing on our radar screens" right now.

Instead, what OTG is focusing on is the expansion of its reseller and OEM base to better market its higher-end Unix products.

"There's a slightly different set of channel partners, ones with Unix expertise," that the company is seeking out, says Jerry Held, vice president for business development at OTG. The company has signed up Compaq Computer Corp. (NYSE: CPQ) and Quantum Corp.'s (NYSE: DSS) Snap Appliances arm as resellers of its Unix products, Caple says.

OTG will also participate in a "SAN-in-a-box" promotion at the Storage Networking World show, joining several other companies in a bundled-SAN product promotion (see SANs Made E-Z). According to Caple, the "loose confederation" of companies will try to take some of the guesswork out of SAN deployment.

"The key for SANs is interoperability of all components, ensuring that everything works together," Caple says. The companies' joint effort is one way to prove the point.- Paul Kapustka, Editor at Large, Byte and Switch http://www.byteandswitch.com

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