Xyratex Has No IPO Regrets

When Xyratex Ltd. (Nasdaq: XRTX) went public in late June, a bunch of storage companies appeared hot to follow (see Xyratex Swims in Public Pool). More than a month later, the U.K.-based subsystem vendor stands alone among storage companies to complete an IPO in 2004. It looks as if it'll remain that way at least until deep into the year.

Engenio Information Technologies Inc., which filed to go public before Xyratex did, last week pulled its IPO (see Engenio Gets Cold Feet). Blade server startup Egenera Inc. has also filed but has not yet priced shares (see Egenera Seeks IPO). At last two other storage companies, SAN systems vendor Xiotech Corp.

and storage backup-and-recovery software vendor CommVault Systems Inc., are believed to be waiting for market conditions to improve before filing IPOs (see CommVault 'Well Positioned' for IPO).

Not only storage companies are saying no to IPOs, though. At least seven other companies have pulled or postponed IPOs over the last two weeks, and Google appears ready to join the club (see Google IPO in Doubt).

Xyratexs IPO could have served as an early warning for those looking to follow. It priced its shares June 24 at $14, below its target of $15 to $17. The stock price has steadily dropped, trading at $8.82 today at midday.

Xyratex CEO Steve Barber says going public has had its benefits. Mainly, the IPO gave the company around $48 million to work with. That could make it easier for Xyratex to make acquisitions, as it did last year when it acquired ZT Automation. It also gives Xyratex more money for product development, which is key to making it competitive with the likes of Adaptec Inc. (Nasdaq: ADPT), Dot Hill Systems Corp. (Nasdaq: HILL), and Engenio for OEM business. Unlike its competitors, Xyratex gets all its revenue by selling to OEMs.“Going public potentially provides a level of credibility,” Barber says. Although he’s not sure how much the IPO has to do with it, he says “we’ve seen a stiff change in the level of interest” from OEM customers. And that change has been upward.

While Xyratex failed to get its price when it went public, the prospects for IPOs have since deteriorated. Engenio, similar to Xyratex in revenue and growth but with a better cash position, would not have even hit its reduced target of $8 to $10. For now, it remains a part of LSI Logic Corp. (NYSE: LSI).

“Xyratex probably IPO'd just at the right time,” says analyst Kaushik Roy of Susquehanna Financial Group.

“They got a good deal. We don't expect market conditions to improve anytime soon. What is making us nervous is that we may not be past the bottom for this year yet. In other words, Xyratex got very lucky.”

Xyratex’s investors weren’t so lucky, as the stock price indicates. It didn’t even help the stock Tuesday when Xyratex announced revenue from last quarter of $108.1 million, an increase of 43 percent from the previous year (see Xyratex Announces Q2 Financials).

Like many others in the industry, Barber was watching closely when Engenio called off its IPO on the night of July 29, hours before it planned to price its shares. “The market is tough right now,” he says. “We felt that Engenio’s standing outside the LSI umbrella would’ve raised the profile of the market.”Engenio and Xyratex vie for many of the same OEM customers, along with public companies Adaptec and Dot Hill. Barber says Xyratex is in the running for several Tier 1 and Tier 2 OEM deals. Xyratex could find itself in small deals with major customers, with the hope of eventually expanding.

“Maybe their view is to let Xyratex take one part of the business, testing us,” he says. That worked for Xyratex with its biggest customer, Network Appliance Inc. (Nasdaq: NTAP). Xyratex first provided NetApp with JBOD arrays in 2001, and then expanded to NetApp's NearStore and fabric-attached storage (FAS) systems. Last year, NetApp accounted for 45 percent of Xyratex’s $333.8 million in revenue.

Barber says one thing Xyratex won’t do is try to raise its profile by branding its own products. “We have non-threatening relationships with our customers. We don’t compete in the channel in any way. Direct end-user sales can only compromise your relationships with OEMs.”

— Dave Raffo, Senior Editor, Byte and Switch