2004 Top Ten: On the Hot Seat

The good news for the storage companies that stumbled through 2004 is that its all but over. The bad news is there’s no magic wand they can wave to make their troubles vanish in the new year.

The good news for us is that the laggards will make for good spectator sport in 2005 as they try to get on track. And the storage hot seat isn’t reserved only for poor 2004 performers. Some companies that did well this year can feel the temperature rising due to new competitive pressures.

So, we bring you the 10 storage companies most likely to sweat their way through 2005:

No. 10: Symantec Corp. (Nasdaq: SYMC)/ Veritas Software Corp. (Nasdaq: VRTS)

Enquiring storage minds want to know how the merger of the king of backup software with the king of security software will play out (see Symantec & Veritas: It's a Deal). Even if the move benefits Veritas in the long run, its competitors are licking their chops over the chance to cash in on at least a six-month transition period (see Vulnerable Veritas).

No. 9: Emulex Corp. (NYSE: ELX)
The HBA vendor enters 2005 on a two-quarter slump that resulted in disappointing revenues and layoffs (see Why, Max? and Emulex Cuts Guidance, Jobs). There are positive signs: Financial analysts say the current quarter is shaping up well for Emulex and it’s having success with embedded switches. But with rival QLogic Corp. (Nasdaq: QLGC) on the rise on the HBA and low-end switch front, Emulex can’t afford any more slips next year.No. 8: Tacit Networks Inc.

Tacit staffers barely had time to celebrate cracking the Byte and Switch Top Ten Private Companies list when news came that Cisco Systems Inc. (Nasdaq: CSCO) is eyeing the NAS market with technology acquired from Tacit rival Actona Technologies Inc. (see Cisco NAS Options Mulled.) Tacit has similar intentions with its wide-area file service (WAFS) software. Now it must compete for partnerships with NAS vendors against Cisco, an exercise Tacit president Chuck Foley labels as “sparring with a gorilla.”

No. 7: BlueArc Corp.

The NAS vendor didn’t have a bad year in 2004, but it hasn’t met expectations for a private company with $157 million in funding and four years of revenue. Last spring, BlueArc execs talked about going public by the first quarter of 2005. But the company still wasn’t profitable by the third quarter of 2004. Now that BlueArc president Mike Gustafson has six months on the job, we should expect some positive movement towards profitability and an IPO (see Gustafson Leads Exec Carousel).

No. 6: Engenio Information Technologies Inc.
This year didn’t go as planned for Engenio, formerly LSI Logic Corp. (NYSE: LSI) Storage. LSI hoped to spin Engenio off for an IPO in July but pushed back plans because of unfavorable market conditions (see Engenio Gets Cold Feet). Then LSI and Engenio had a rocky third quarter (see LSI Stands By Storage). Engenio can still make it public in 2005, but it must register at least one strong financial quarter and squash doubts about its long-term relationship with primary OEM partner IBM Corp. (NYSE: IBM). (See IBM Still Loves Engenio.)

No. 5: Advanced Digital Information Corp. (Nasdaq: ADIC)
Times are tough for tape library vendors, and ADIC struggled last quarter despite a reseller deal with EMC (see ADIC Sales Down Despite EMC and EMC to Resell ADIC Tape). Guidance for this quarter was also tepid. Now it appears ADIC’s future rests on the success it has with its PathLight VX disk backup system (see ADIC Upgrades Disk Backup).

No. 4:BakBone Software Inc. (Toronto: BKB)

The backup software company will spend 2005 trying to rebound from a series of embarrassing accounting problems. The most recent was a Dec. 23 announcement that it must restate previously audited financial statements because it may have improperly recognized $500,000 in revenues. That news caps a year in which BakBone announced it would restate earnings for 2002 and 2003, abruptly changed auditors and CEOs, and missed the deadline for filing its September earnings report (see BakBone Slapped in Toronto, Bakbone Reports Restated, and BakBone Gets New Head). The problems could prevent BakBone from taking advantage of the transition period Veritas faces after the Symantec merger.No. 3: Sun Microsystems Inc. (Nasdaq: SUNW)
This was a table setting year for Sun. It revamped its storage line with new midrange and enterprise SAN systems, beefed up its software, added NAS, and received a potential boost from the Hitachi Data Systems (HDS) TagmaStore high-end SAN that it resells (see Sun Sings New Storage Song, Megatrends Demos Virtualization, Sun Beefs Up Software Support , and Sun Streamlines Storage ). But it has yet to see positive financial results (see Sun Storage Slumps). Sun’s most recent storage revenue was down 9 percent from last year, and IDC figures show Sun losing SAN market share. If Sun can’t turn its storage fortunes around in 2005, it probably never will.

No. 2: Hewlett-Packard Co. (NYSE: HPQ)

After storage sales bottomed out in mid-2004, HP took steps to correct the problems (see HP Plots Storage Comeback). CEO Carly Fiorina made management changes and beefed up storage staff by 25 percent (see HP Storage Slammed). But even she admits HP faces a long struggle in getting back on track. HP storage revenues increased 16 percent sequentially last quarter but were still down 9 percent from the previous year (see HP Storage Down, But Improving). HP could benefit if the SMB market picks up for storage, because that’s the company’s traditional strong spot and it has new low-end NAS and SAN offerings. And its reseller deal for Hitachi’s TagmaStore should help on the high end. But there’s no indication that sales of HP’s troubled midrange Enterprise Virtual Array (EVA) systems are improving.

No. 1:McData Corp. (Nasdaq: MCDTA)

The biggest storage M&A story of 2004 was one that never happened -- the consolidation of SAN switch companies. If McData struggles next year, you can expect it to be gobbled up. McData spent 2004 integrating technology from its 2003 acquisitions of Nishan Systems and Sanera Systems, and losing market share to Cisco and Brocade Communications Systems Inc. (Nasdaq: BRCD). (See SAN Switch Year-End Summary, McData Merely Mediocre, and McData Goes on Offensive.) Now, it’s ready to roll out new switches across the board, but it may be too late to win back share. If so, McData could be McToast.

— Dave Raffo, Senior Editor, Byte and Switch