Overland: Bring On NetApp

After taking its lumps in the tape library business, Overland Storage Inc. (Nasdaq: OVRL) is setting its sights on grabbing a share of the disk storage business from Network Appliance Inc. (Nasdaq: NTAP).

Overland lost money last quarter and is losing its biggest OEM partner, so its no surprise it is shifting gears (see Overland Reports Earnings). But pinning its hopes on beating NetApp could prove as risky as staying in the tape business.

The shift is hardly abrupt. Overland has been trying to build its disk business and deemphasize tape for at least two years (see Overland Underperforms and Overland Captures Okapi). Two recent events accelerated the transition: Hewlett-Packard Co. (NYSE: HPQ) dumped Overland as a tape OEM partner two weeks ago, and Overland purchased continuous data protection (CDP) startup Zetta Systems Inc. last week for $9 million (see Overland Loses HP OEM Deal and Overland Overtakes Zetta ).

Today, Overland announced it lost $924,000 or $0.07 per share last quarter on revenue of $55.4 million. Both numbers fell below analysts' expectations of positive $0.06 earnings per share (EPS) and $59 million, according to Reuters. For fiscal year 2005, Overland's profits shrank to $5.9 million, or $0.41 EPS, from $11.8 million, or $0.82 EPS, the previous year.

Considering HP contributes more than half of Overland's revenues, it’s easy to see why Overland wants to reinvent itself. CEO Chris Calisi envisions Overland providing disk systems for primary and backup storage, and tape for data archiving. Overland is going after the low end and midrange storage market, including iSCSI and NAS.Calisi lists NetApp, EqualLogic Inc., and FalconStor Software Inc. (Nasdaq: FALC) as Overland’s new competition, with NetApp as the primary rival once Overland incorporates Zetta technology into its product line.

“Our main competitor is NetApp,” Calisi declared today on a conference call to discuss earnings. “We believe the product line we will deliver in October will have all the features they [NetApp] offer today and then some, but at price points significantly under what they offer today. We just leapfrogged them with this [Zetta] acquisition.”

NetApp has been one of the fastest growing storage vendors in recent years, despite disappointing revenues for last quarter (see Storage Sales Up, Says Gartner and NetApp Sags in the Middle). NetApp has been either first or second in iSCSI and NAS market share, and it hasn’t been idle in the areas Overland is moving into. It acquired startup Alacritus for $11 million in April, giving it virtual tape library (VTL) and CDP technology that has yet to find its way into product (see NetApp Annexes Alacritus).

A NetApp spokesman scoffed at Calisi’s statement that Overland will deliver more features for less price than NetApp. “That is a bold claim that I don't see much merit in,” NetApp’s PR director Eric Brown said.

Even Calisi isn't expecting results overnight. “I don’t expect anyone to have blind faith in this plan,” he says. Overland’s guidance for fiscal year 2006, which began July 2005, calls for a loss of approximately $0.10 per share. Calisi expects to return to profitability with $0.20 EPS in 2007 and from $0.30 to $0.50 EPS for 2008.Overland will also change its distribution model, going more toward branded products sold through the channel than its current OEM model. Calisi laid out a product roadmap that includes a new version of Overland’s disk backup software, incorporating Zetta technology, to be released in October, followed by upgrades to the REO disk appliance in November and NEO tape automation family in December.

Calisi also said Overland has a letter of intent from a Tier 1 OEM partner to license its software. He says he expects to announce the deal at the end of September.

Though Overland will continue to sell its NEO tape libraries, Calisi talked about tape backup as a subject of nostalgia. “When I got here four years ago, we began planning for this transition,” he said. “Tape used to be the primary target for backup years ago. Today, backup is moving upstream to disk, with tape used for archiving.”

Overland has yet to capitalize on the move to disk. REO revenue last quarter was $2.7 million, down 10 percent from $3 million the previous quarter. Calisi blamed two things: a shortage of LTO 3 drives from its manufacturer (HP) caused Overland to lose deals from customers that wanted tape and disk in tandem; and Overland didn’t add VTL capability to its REO software until the last day of the quarter (see Overland Intros REO Protection OS).

— Dave Raffo, Senior Editor, Byte and Switch0