Imation Bites Off Exabyte's Media Bits

Ailing tape systems vendor Exabyte Corp. (Nasdaq: EXBT) -- looking to stop the bleeding on its balance sheet -- announced a deal today making Imation Corp. (NYSE: IMN) the exclusive distributor of Exabyte's media products.

As part of the agreement, Imation will make an investment in Exabyte representing less than 5 percent of its total equity. The companies say the total dollar value of the transaction, when fully completed, is $20 million, the majority of which is for distribution rights.

For Exabyte, the deal was done primarily to give the Boulder, Colo.-based company an infusion of hot cash, says CEO and president Tom Ward. "This agreement adds $20 million to the balance sheet and puts us in good financial health," he says.

Still, it doesn't erase the fact that Exabyte remains unprofitable -- it posted revenues of $24.5 million and a net loss of $12.6 million for the third quarter of 2003. And by itself, the deal with Imation isn't likely to turn the tide, particularly as the price of tape cartridges continues to drop.

But the cash from the Imation deal does give Exabyte a bit more breathing room: It reported having just $170,000 in cash on hand at the end of the September quarter."What customers have said is that Exabyte's balance sheet isn't very strong -- they don't believe in our long-term viability," says Ward. The deal with Imation "ensures we will be viable for a long time in the future."

And at least one Wall Street analyst believes the agreement enhances Exabytes position in tape market. The deal "brings a new win to Imation’s portfolio and the opportunity to enhance Exabyte’s position in the market via Imation’s vast distribution channel," writes Kevin Hunt, an analyst with Thomas Weisel Partners. "Taking advantage of Imation’s distribution capabilities is a significant step for both companies as Exabyte attempts to gain traction in the SMB [small and medium-size business] market."

Exabyte has historically generated nearly half its sales from VXA tape cartridges. According to Ward, the company's media revenues have been between 40 percent and 48 percent of total revenues. For the nine months ending September 27, 2003, Exabyte reported $32 million in storage media revenues.

Under the terms of the agreement with Imation, Exabyte will sell all of its media products exclusively to Imation, which will manage the Exabyte media brand and provide sales, marketing, and distribution services for Exabyte media products worldwide.

Exabyte's VXA tape format is aimed at small and midsized server markets. OEMs of the VXA tape autoloader include IBM Corp. (NYSE: IBM), which offers VXA-2 Packet Drives for its eServer families.Its competition in the low-cost tape market comes primarily from Quantum Corp. (NYSE: DSS), whose Digital Linear Tape (DLT) format is far more common than Exabyte's format. Quantum, by way of contrast, reported $49 million in total tape media revenue for its September 2003 quarter.

Imation expects to start taking orders from select U.S. distributors for Exabyte media starting next Monday, Nov. 17. It sees the full transition completed by the end of the year.

— Todd Spangler, US Editor, Byte and Switch