Data Domain Debuts With Q2 Loss

In its first earnings call as a public company Tuesday evening, Data Domain reported sequential growth of 31 percent for the second quarter 2007. (See Data Domain Reports Q2 Results.)

The de-duplication company that entered the public arena with a $109 million IPO in early July is still a ways off from profitability, reporting a net loss of $1.2 million, or 11 cents per share. Still, that's an improvement on an overall net loss of $1.5 million, or 15 cents per share, last quarter. The firm posted net income of $49,000 in the second quarter of 2006.

Net revenue for the second quarter of 2007 was $26.5 million, up from $9.6 million for last year's second quarter. In SEC filings, the company reported revenues of just over $20 million for the first three months of 2007, up from about $8 million in the same period last year. (See Data Domain Closes IPO, Data Domain Dives In, and Data Domain Goes Public.)

On a call with financial analysts, company executives pointed to increasing operating expenses, product investment, and rapid growth in its sales force to explain the losses.

Product revenue was $23.6 million, compared with $7.1 million in the first quarter of 2006.Data Domain's CFO Michael Scarpelli reported the company is operating at a gross margin of 72 percent, compared with 68 percent in the second quarter of 2006 and 67 percent last quarter.

The Data Domain sales force is also growing at a rapid rate. As of June 30th we had 146 employees in our sales organization, an increase of 30 for the quarter from 64 year-to-date,” said Scarpelli. "We expect to continue to add personnel in the sales organization throughout the balance of 2007 and 2008 at approximately the same rate."

Customer growth has boomed for the company, which now has 973 enterprise customers -- up 174 this quarter alone, Scarpelli said. That’s a sizeable leap from the 750 customers it reported at its IPO.

Company CEO Frank Slootman attributed sales growth partially to the May release of its higher capacity product -- the DD 580 system -- which addresses “the upper strata of the storage market in terms of capacity and performance. In Q2, we closed several transactions in excess of $1 million, [and] the DD580's performance and scale characteristics were important in several of them." (See De-Dupe Deep Dive and Data Domain Unveils DD580.)

Gains aside, Data Domain must prove to investors that the company they've bet on can sustain growth in a market in which players are scrambling to be the shepherds of IT managers from tape to disk-based storage. (See Hugo Patterson, Chief Architect, Data Domain, Data Domain Prices $78M IPO, and Data Domain Intros New Systems.)Analysts participating in the call particularly pressed execs to address the need to deal effectively with competition. Slootman acknowledged major plays by EMC, Network Appliance, and Quantum, but he claimed that Data Domain is not “encumbered by legacy technology,” while many competitors had de-dupe systems simply “tacked onto” existing architecture.

The CEO also noted that heated competition could fuel growth for all competitors. “We see more [competition]... It sometimes does include pricing pressure and lengthening of sales cycles." (See De-Dupe Vendors Shake Hands, EMC Talks Disk & De-Dupe, and NetApp De-Dupes.)

Data Domain says its inline approach to reducing the bulk of stored information is faster than its rivals' tacks. (See Experts Share De-Dupe Insights.)

In early trading today, shares of Data Domain were down 30 cents (1.21 percent) to $24.51.

— Rivka Gewirtz Little, Special to Byte and Switch