MTI Technology

At less than $2 a share, is high-end data storage provider MTI Technology (Nasdaq: MTIC) a company with possible upside, or one staggering toward extinction? While evidence exists to support either conclusion, what seems certain is that potential investors may have an extended wait to see how the next chapter of the company's history is written.

Anyone with an interest in MTI matters is not going to get much help from Wall Street analysts. Only two firms (Needham & Co. and Wells Fargo Van Kasper, neither of which could be reached for comment) have issued recent recommendations for MTI. And they are opposed in advice, with Needham saying buy, Wells Fargo sell. Another financial analyst with knowledge of the networking and storage fields suggested the lack of coverage is directly related to the stagnation of MTI's business.

"They are kind of in a tough spot to obtain differentiation," said the analyst, who declined to be identified. "But they're not going out of business anytime soon. If the industry improves, they'll survive."

On the good-news side of the ledger, MTI is selling products and has new ones ready to announce "any day now," according to president and CEO Thomas Raimondi. The company's flagship product is its high-end, fault-tolerant Vivant line of Fibre Channel data-storage servers for SAN and NAS implementations, cabinet-size boxes whose prices run into the hundreds of thousands of dollars.

While MTI also sells tape drives and networking storage software and services, the RAID-based server sales account for more than 60 percent of recent revenues. Though the company lost $36 million in its fiscal year 2001 (which concluded April 7) and suffered a $66 million decline in revenues (to $161 million from $227 million in fiscal 2000), it has little debt and enough cash on hand to last at least until the end of the year, according to Raimondi."We're going through a little bit of a tough time now," says Raimondi, who notes that MTI has plenty of company in that department, due to the overall market slowdown. "We've swallowed some bitter pills, but we have no debt, a reasonable amount of cash, and a blue-chip customer base. As our business gets better, our financials will improve."

Right now, however, there's not much good news on MTI's business. It's still recovering from the collapse of the dotcom economy, which provided most of MTI's growth in 1999 and 2000. By supplying "some of the biggest e-tailers," as Raimondi says, MTI's stock rode to an all-time high of more than $52 per share in early 2000. But since then the stock, along with the company's business, has been in a steady decline, which Raimondi says takes time to reverse.

"We took a pretty massive hit" with the dotcom collapse, he says. "You don't replace that kind of revenue overnight."

The new goal, Raimondi says, is to focus on finding more large-enterprise customers, to join the company's current list of users that includes Alcatel SA (NYSE: ALA; Paris: CGEP:PA), Digex Inc. (Nasdaq: DIGX), and DoubleClick (Nasdaq: DCLK), among others. However, MTI faces increased pricing competition in that arena from large players like EMC Corp. (NYSE: EMC), IBM Corp. (NYSE: IBM), and Network Appliance Inc. (Nasdaq: NTAP).

"MTI is in for some rough times," says Brian Riggs, an analyst with research house Current Analysis. Though Riggs praises MTI for addressing weaknesses in its product lines, he says MTI faces "the stiffest of competition" from the larger storage vendors.Another potential equity event, an acquisition of MTI, will probably not happen quickly either, due to a complex ownership situation. Though public since 1993, MTI is still mostly owned by Ray Noorda, whose investment arm, the Canopy Group, controls 45 percent of MTI's stock. Noorda, the former Novell (Nasdaq: NOVL) CEO, has also saddled MTI with some questionable historical investment baggage -- including a large stake in Caldera (Nasdaq: CALD), another Noorda company -- that guarantees wariness.

A recent shareholder lawsuit, as well as layoffs this past May, are generating a lot of ill will on stock-room chat boards, all warning signs that may drive potential MTI suitors away.

Raimondi says MTI is looking to add some new vertical markets, including the legal and digital cinema arenas, to its customer base. Analysts like Riggs note that MTI needs to find more sales channels and expand its partnerships (like its current agreement with Brocade Communications Systems Inc. [Nasdaq: BRCD], to resell that company's SAN switches) to increase business or acquisition attractiveness.

Given the tough market conditions that are hurting even market leaders like EMC (see EMC Posts Low Q2 Estimates