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ADIC: Life After Downgrades: Page 2 of 3

"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."