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SAN vendor Compellent completes IPO

Compellent goes public at a higher price than expected but still has its work cut out to succeed against established SAN vendors EMC, IBM, HP and NetApp.

SAN vendor Compellent Technologies went public today after pricing shares higher than expected and will use the cash to compete with storage giants EMC Corp., Hewlett-Packard Co. (HP), Hitachi Data Systems (HDS), IBM and Network Appliance Inc. (NetApp).

Compellent priced 6 million shares at $13.50 Tuesday night and began trading today. The price was above the vendor's expected range of $10 to $12. Compellent got a higher than expected price although it has never had a profitable quarter, losing $6.8 million in 2006, $4.1 million in the first half of this year and a total of $45.7 million since it started up in 2002. Compellent closed its initial day with a share price of $24.19, making it one of the most successful first-day IPOs of the year.

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Other storage systems vendors on deck to go public will be encouraged by the result. EqualLogic Inc., 3PARdata Inc. and BlueArc Corp. have already filed forms for their initial public offerings (IPO). Like Compellent, all have a track record of financial losses.

Compellent said it would use the net proceeds of approximately $75.3 million for sales and marketing, R&D and working capital. According to its prospectus, Compellent's strategy is to move beyond the small to medium-sized enterprise market where it started and into large enterprises.

Besides giving it working capital, going public can help a small company compete with market leaders, because many customers will not store mission-critical business data on systems sold by startups.

Compellent's strategy is to sell storage systems that are less expensive and easier to use than those from its larger competitors. Unlike those larger companies, who offer separate platforms for entry level, midrange and enterprise storage, Compellent has one platform, called Storage Center. The company also has thin provisioning and dynamic block architecture software, which Compellent claims can help customers easily scale their storage environments. However, Storage Center's scalability into larger enterprises may be limited by its support for only two controllers.

Compellent supports Fibre Channel and iSCSI on the same system and recently added network attached storage (NAS) support though Microsoft Windows Storage Server 2003 R2.

Compellent is one of the companies major storage vendors refer to as "ankle biters," and the company is small even for an ankle biter. Of the four storage system vendors who have filed for IPOs, Compellent has the least revenue, despite having more than 600 enterprise customers. Compellent had $23.3 million in revenue in 2006, compared to $68 million for EqualLogic, $66 million for 3PAR and $42 million for BlueArc. Compellent disclosed revenue of $20.9 million for the first six months of 2007, far behind EqualLogic's $53.2 million for the same period and even less than 3PAR's $23.1 million for the second quarter of 2007.

Compellent and the other storage system vendors looking to go public will try to avoid the fate of clustered storage vendor Isilon Systems Inc., which had a successful IPO last year despite failing to register a profitable quarter. But after two disappointing quarters, the price of Isolon shares have since plummeted. Isilon's stock price fell from $13 at its IPO last December to $6 at close Tuesday.

Financial analyst Kaushik Roy of Pacific Growth Equities gives Compellent predicts Compellent's market success will be short-lived. Roy says Compellent lacks a strong emerging technology to build its products around, such as data deduplication in the case of Data Domain or iSCSI for SAN builder EqualLogic.

"I don't ever hear about Compellent in the marketplace," Roy said. "I hear about EqualLogic, but not Compellent. Do they do anything that nobody else does with their systems? They might do all right in the seasonally strong fourth quarter, but reality will set in during Q1 and Q2 next year."

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