Adaptec Unveils OEM, Revs Guidance

Adaptec Inc. (Nasdaq: ADPT) has finally revealed its OEM deal with IBM Corp. (NYSE: IBM) after months of suggestive talk (see Adaptec Announces and Adaptec Posts Q4 Profit). The company also made it clear it will count on revenue from the deal to make up for soft channel sales.

Adaptec CEO Bob Stephens first said in April that Adaptec would announce a "Tier 1" OEM later this year. IBM was considered the favorite because of its strong relationship with Adaptec, and Byte and Switch reported last Friday that Adaptec supplied Big Blues new DS300 iSCSI low-end system (see IBM Slips iSCSI Into SAN and Adaptec, IBM Get Cozier).

Today, Adaptec announced it is IBM’s OEM for not only the DS300 but also the DS400 low-end Fibre Channel system, which Adaptec probably won over IBM’s midrange OEM partner Engenio Information Technologies Inc.

The IBM deal solidifies an already strong relationship with Adaptec. In June, Adaptec acquired an IBM business unit and expanded an OEM deal to provide RAID controllers for Big Blue's servers (see IBM RAIDs Adaptec Controllers). Now IBM is rolling out the Adaptec systems as the first two of its DS (formerly FastT) family.

The wait on the IBM deal, however, was longer than Adaptec has let on. Sources say IBM originally wanted to bring out the low-end system last quarter, when EMC Corp. (NYSE: EMC) and Dell Inc. (Nasdaq: DELL) announced their co-branded AX100 entry level systems, but Adaptec was slow on delivering (see Nexagent Hires VP of Sales).Better late than never? Perhaps, especially considering Adaptec’s other news today: While CEO Stephens forecasts Adaptec’s revenue from storage systems will be $200 million for the fiscal year that ends next March 2006 -- up more than 260 percent over a two-year span -- he also admits Adaptec will have trouble meeting previous guidance for this quarter.

Adaptec’s previous forecast for the quarter that ends this month was for revenue of $124 million to $127 million and earnings per share of between break-even and $0.02. Today Adaptec said it expects to fall at the bottom of that range, because of softness in the U.S. distribution channel (see Adaptec Wants Channel Change).

The IBM deal won’t bring in much revenue for this quarter, but it should help Adaptec beginning next quarter. Analyst forecasts say the deal could bring Adaptec $20 million for the fiscal quarter that ends next March and $55 million for the following year. Its revenue stream will also benefit from products acquired when it purchased Snap Appliance for $100 million in July (see Adaptec's $100M Snap Decision).

But the IBM deal underscores the balancing act Adaptec must do between its channel and OEM sales. It already sells iSCSI and low-end SAN systems -- both its earlier products and those it gained from Snap. Those markets are still developing with limited revenue, and Adaptec now finds itself playing in both with its own systems and those that IBM sells.

Adaptec director of external storage, Tim Connolly, says comptition with its parnter is no problem. “We’ve been able to balance channel and OEM sales for many years. We know how to play in both places.”Another question arising from today's news is: Where does IBM's selection of Adaptec leave Engenio? Engenio, which gets most of its income from selling IBM systems, will probably continue to supply IBM with midrange systems (see Engenio Gets Cold Feet). But Engenio, which announced its own low-end products this week, apparently was interested in IBM's low end as well (see Engenio Targets ILM).

To the point, Engenio's announcement this week included a single-controller system. The DS400 IBM is selling from Adaptec is a single-controller system.

Did IBM choose Adaptec over Engenio? Engenio's director of product marketing, Steve Gardner, won’t confirm whispers that Engenio went after IBM’s low-end system deal at all (see OEMs Prop Up Dot Hill, Engenio). But he says the outcome won’t affect Engenio’s relationship with IBM. “We think they’re happy with us,” Gardner says. “They’ve had other storage products from inside and outside their company before. IBM’s a big company, and they have all types of products at every price point.”

— Dave Raffo, Senior Editor, Byte and Switch