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ADIC stays ahead of sagging economy

Advanced Digital Information Corp.'s (ADIC) CEO Peter van Oppen is bullish on storage. ADIC seems to have avoided the symptoms of an ailing economy, reporting higher than expected growth for the first quarter of 2001.

The Redmond, Wash., storage solution provider reported that sales grew 41% to $90.1 million for the first quarter versus sales of $63.9 million for the same period a year ago. Earnings were $8.7 million, or 16 cents per diluted share, for the quarter as compared to $7.2 million, or 13 cents per diluted share, for the first quarter of fiscal 2000.

ADIC experienced a boost in sales from its OEM business mostly due to recent, multi-product OEM relationships with Dell, Fujitsu and most notably IBM. OEM sales grew by nearly $20 million over levels in the fourth quarter reflecting the ramp up of sales to IBM and existing OEM customers. Total OEM revenue was 45% of sales versus 28% of sales in the previous period.

In recent weeks other storage stocks have not faired as well. The apparent downturn has analysts speculating that storage stocks may not be as infallible as once believed.

Last week network component maker Emulex Corp. warned that it may miss Wall Street estimates resulting in a 48% drop in its stock value and created a chain reaction that resonated throughout the storage sector, wreaking havoc on the stock of other key storage vendors.

However, Yankee Group analyst William Hurley said that while January was not a record-breaking month, generally, enterprise and service provider spending is getting back on track. "We anticipate that storage vendors will meet their guidance estimates. ADIC's beating estimates is an indication that there is still a strong upside in storage revenues," said Hurley.

Van Oppen admitted in a conference call Wednesday that, despite its growth, ADIC had a bit of trouble with its supply chain and spent Q1 juggling its capacity and resources.

"We taxed out our resources at a time when we were trying to move our production and release new products. We ran out of energy," he said. To counter the strain on demand from its OEM partners ADIC diverted production and engineering resources to support the OEM demand.

"If we didn't have those constraints our branded business would have grown. We have always felt that our OEM partners and our branded partners are complementary. There's very little overlap," said van Oppen. ADIC expects its OEM business would probably drop to below 40% of total sales once the constraints on the branded business are lifted.

The company said that, as expected, the rapid acceleration of OEM sales caused a significant reduction in gross margin as a percentage of sales. Gross margin for the first period was 29.4% of sales versus an average of 35.2% during fiscal 2000. This reduction in gross margin is generally a result of lower margins to OEM customers that are expected to be offset by lower sales and marketing costs in the long term.

Also of note was a $29 million inventory increase to approximately $77 million. Van Oppen commented that ADIC does not typically operate as a backlog business. "We didn't manage [the excess inventory growth] very well. We were concerned about a lack of supply and preordered drives that we probably shouldn't have." ADIC expects it will see inventory reductions during the current period. "We don't see that there's a problem there and aren't especially worried about it," he said.

ADIC remains bullish on storage spending amid the recent onslaught of missed earnings estimates and layoffs experienced by others in the once impervious storage sector. While ADIC has seen some erosion in some expected business from the dot-com space Van Oppen remained confident. "The general health of the market continues to be robust. Storage isn't affected by the fluctuation."

At the end of January, ADIC announced that it had entered into a merger agreement with storage networking developer Pathlight Technology, Inc. for 10.3 million ADIC shares. The merger is expected to close during ADIC's second quarter if everything goes as planned.

"We're pretty convinced that the future is in storage virtualization, which is why we're spending so much money on the Pathlight technology," said van Oppen. He cautioned that this quarter ending does not reflect any of the research and development and marketing that ADIC expects to spend on the integration of Pathlight. "When Pathlight shows up (in Q2) we may see more expenses."

"Pathlight's revenues are miniscule compared to ADIC's, but they are coming off a year of significant year-over-year growth, and with their opportunities to leverage ADIC's channels I think they will be particularly well-positioned to make a run at the industry leaders with their FibreChannel connectivity devices," said Hurwitz Group storage analyst Mike Karp.

Karp said if the integration of the two corporate cultures is handled well, always a challenge when a large and a small company get together, Hurwitz Group sees PathLight as making a significant, and perhaps near-term contribution.

Looking forward, the company hinted toward pending additions to its list of OEM customers saying only that the companies in consideration are "household names."

For more information:

Advanced Digital Information Corp.'s homepage

ADIC acquires SAN company in $265 million deal

Economy may slow storage spending, report says

Let us know what you think about the story, e-mail Kevin Komiega, assistant news editor

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