Qualstar Seeks SAN-Friendly Future

Hewing to the new reality in the automated tape-library business,Qualstar Corp. (Nasdaq: QBAK) is now seeking to add networking smarts to its product repertoire, to better compete in the large-enterprise, storage-area networking market.

Though the company is profitable, has $27 million in cash on hand, and no debt, it trails some of its competitors in the market-wide scramble to add SAN capabilities to the previously generic tape libraries (see ADIC). Perhaps that's why Wall Street analysts covering the company are cautiously optimistic about Qualstar's potential, and waiting to see product results before heartily recommending the stock.

"I think they're a little bit behind what the other guys are doing," says Brion Tanous, senior research analyst with Wells Fargo Van Kasper, explaining in part his Market Perform rating on Qualstar. Though two other Wall Street firms covering Qualstar still rate the stock a Buy, investors have sent the share price into a recent tumble to below $5 per share, after several months of hovering in the $7 per-share range.

Speaking at a Wells Fargo Van Kasper conference in San Francisco this week, Qualstar CEO William Gervais says his company will take a big step forward in the SAN-ready direction when it introduces its first rack-mountable tape library unit, a product the company plans to demonstrate at the Comdex show in November.

While its current line of tape libraries -- which support a wide mix of tape formats -- have earned the company a profitable niche in the small- to mid-range server market, Qualstar is a chubby-chaser -- looking to build bigger libraries for larger enterprises, where Gervais says the profit margins are better.To better play in that market, Gervais says that Qualstar's products need to be more easily adaptable into SAN implementations and must add more networking features to challenge competitors in the network-attached storage field.

"We need a Web [management] interface, true hot-swap capabilities, and rendundant power supplies to provide more of a true NAS solution," Gervais says. Wells Fargo Van Kasper's Tanous is closely watching the rollout of the rack-mount product, which he says could help Qualstar win important OEM contracts with larger system vendors, like IBM Corp. (NYSE: IBM) or Hewlett-Packard Co. (NYSE: HWP).

"SAN implementations need total compatibility," says Tanous. "And customers are going more and more to the system houses for [SAN] equipment."

"With our previous table-top units, we haven't been that OEM-friendly," says Gervais. "With the rack-mount unit, we are."

For connecting to Fibre Channel networks, Qualstar currently offers a bundled router from Chaparral Network Storage Inc. While Gervais says Qualstar has no current plans to develop its own Fibre Channel technologies, he says the uncertain future of Chaparral may force his hand.In its most recent financial quarter, Qualstar wrote off a million-dollar investment in Chaparral, a Longmont, Colorado-based company that earlier this year pulled a planned IPO and has gone through some recent management upheavals.

Greg Mangold, vice president of marketing at Chaparral, says the company is in the midst of trying to close a Series E round of funding "that will be enough to last us 14 months." Mangold says the almost 4-year-old Chaparral is not yet profitable, though it expects to record close to $20 million in revenue for its current fiscal year.

"We like their 2-Gbit/s product," says Gervais of Chaparral's newest router, a product already embraced by Overland Data Inc. (Nasdaq: OVRL), a Qualstar competitor. "We think they're going to be around," says Gervais of Chaparral. "We're just not sure in what form."

Even with the writedown, Qualstar still reported earnings of six cents per share for the three months ending June 30, also the end of the company's 2001 fiscal year. For the year, Qualstar recorded earnings of 53 cents per share, on revenues of $51.6 million.

- Paul Kapustka, Editor at Large, Byte and Switch http://www.byteandswitch.com