Quantum

For the time being, Quantum Corp.'s (NYSE: DSS) tape-related businesses are a steady cash cow. But the company knows it needs to add more networking smarts to its product line to get its stunted stock price growing.

A leader in tape drives and tape-automation systems, Quantum says it will look for new opportunities in the network-attached storage and storage-area networking spaces, and will buy its way into these markets if necessary. However, Wall Street analysts covering the firm say such moves may not come quickly.

Many storage-related companies are getting more investor attention in the wake of last week's terrorist attacks (see Late Rally Features Brocade). However, the continued overall IT spending slump -- especially for big-ticket items like tape systems -- is likely to keep Quantum in the Hold or Market Perform section of your local analyst's storage-stock shopping aisle for an indefinite period.

In a report issued in late July, J.P. Morgan & Co. analysts William Lewis and Kerry Rice said they planned to keep their Market Performer rating on Quantum, preferring to "remain on the sidelines until key growth drivers emerge and economic conditions improve." Quantum's stock now trades at around $8 per share, continuing its steady slide from a 52-week high of just above $16 per share, which peaked last November.

While the company can't singlehandedly revive the economy, it does plan to seek new technological areas of revenue, according to Kevin Daly, president of Quantum's enterprise solutions group."We're going to leverage our strong cash generation from tape, and invest in storage solutions businesses," said Daly, in a company presentation at a recent Wells Fargo Van Kasper conference in San Francisco.

Right now, Quantum has a healthy war chest. For its first fiscal quarter of 2002, which ended on July 31, Quantum recorded $279 million in revenue, giving it earnings per share of 11 cents, a figure in line with previously reduced estimates. Quantum closed the quarter with $370 million in cash and has already used $11 million of that to snap up NAS appliance vendor Connex Inc. (see Quantum Buys NAS Startup).

According to Daly, the Connex acquisition brings Quantum "significant value in terms of intellectual property," specifically in its engineers and its Linux-based systems. He says Quantum will lean more toward using Linux going forward, as the OS makes it easier to add functionality to NAS devices. Currently, the company's Snap servers use a proprietary operating system.

"Using Linux will let us bring new features to the table much more quickly than we could with a proprietary, highly tuned OS," Daly says. To better compete with NAS heavyweights like Network Appliance Inc. (Nasdaq: NTAP), Quantum needs to add capabilities, like mirroring, into its NAS devices. This is crucial, Daly believes, since users are looking to use NAS devices for purposes "beyond just backup."

Daly says that Quantum is also trying to "put teams together" to build up its nascent SAN-services business. While he claims that Quantum has already installed SAN implementations for big-name customers like Intel Corp. (Nasdaq: INTC), Motorola Inc. (NYSE: MOT) and Nortel Networks Corp. (NYSE/Toronto: NT), he says the company is just at the beginning of the consulting curve."It's humbling, how difficult integration is, in today's [network] environment," says Daly, who adds that it's "not out of the question" that Quantum might look to purchase a SAN-savvy integrator, like Datalink Corp. (Nasdaq: DTLK) (see Datalink).

"We're looking for other solution-type businesses. We might [buy into] some other niches. It's a matter of great internal debate."

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