Analysis: Adaptec

This is an ongoing series of posts looking at storage companies and their investment potential.

** DISCLAIMER: This and related blog entries are for fun only and do not represent investment advice. You should make your own opinions on investments or consult a financial adviser **

Background

Adaptec has a well known history for the manufacture of server and PC interface cards to connect SCSI hard drives and tape devices. More recently, the company has produced a range of NAS appliances under the brand name of SnapServer, athough it continues to produce SCSI, SAS and SATA adaptors.

Market Details

Adaptec is quoted on the the NASDAQ market with the code ADPT. Current price is $3.25.

Shares outstanding: 121,073,000
Market Capitalisation: $393,729,396
Earnings Per Share: -$0.13
P/E Ratio: n/a
Yield: n/a

* figures from http://www.nasdaq.com on 26 November 2007.

Adaptec is running at a loss. Looking at the company financials, net income for the last financial year was just under $31,000,000 on falling sales of $255,000,000. Sales have dropped steadily over the last 3 years. Net income over the last 3 quarters has also run at a loss. However in the announcement of results for the first quarter 2008. Adaptec signalled their intention to restructure and cut losses, reducing the workforce by 20%.

Competitors

The NAS market is a competitive one; there are huge number of NAS appliance manufacturers in the current market, from small scale to enterprise class. For HBAs, the parallel SCSI market has gradually reduced, with many manufacturers deploying integrated solutions within their server products.

Outlook

The outlook for Adaptec looks tough. This is clearly spelled out in the 1Q2008 announcement. SCSI and SAS adaptors have become commodity items, reducing the revenue from these products, despite the need for continuous investment. Adaptec lost out on an OEM deal and significantly affected their business. The NAS market will be tough and require innovative product features.

At this stage, I think Adaptec shares are not worth investing in. I would rate them as a SELL. To change this position, I would expect to see a significant uptake in the SnapServer products before they are a worthwhile purchase.

Using Windows Shrink

I've been messing about recently with the "shrink" option which is now available on Windows Vista under Disk Management. This allows a partition to be reduced in size, subject to there being sufficient free space available.

I wanted to reduce the size of my "C:" drive as the standard installation for my laptop didn't come with any spare disk space or a separate partition for data. I always prefer to have a separate partition for data in case I have to re-install the O/S at any time.

So, my C: drive has plenty of spare space, at around 67GB. Right-clicking the partition in Disk Management and clicking the "shrink volume" option presents the option box as shown below.

Unfortunately, despite the fact that plenty of space is free (and in fact is also free contiguously, the shrink command fails to release the 40GB I'm trying to reclaim.

Vista accepts the command however spends about 2 minutes churning over the hard disk to eventually fail.

Clearly the layout of the disk is a problem, although Vista doesn't give me any clues to what's happening. On another track, I've been looking at HDD fragmentation and I now have PerfectDisk 8.0 installed on my laptop. (**Disclaimer** I paid for this software!).

Performing a defragmentation analysis shows me the layout in the next picture.

There's an unmovable file at the end of the C:\ drive, indicated by the red areas. Unfortunately PerfectDisk doesn't identify what specific file this is, although I know it is likely to be the page/swap file, the hibernation file or other control areas for NTFS.

I performed an offline defrag to tidy the NTFS areas however this didn't resolve the problem. I then removed completely the swap file and this turned out to be the file holding this space. I could then run shrink and reclaim my 40GB of space, which I've allocated to a swap volume and a data volume.

The shrink command is helpful, but it would be more helpful if the results were consistent and the command didn't simply fail when the free space isn't at the end of the volume. It also rather annoying that Microsoft has removed the graphic representation of a fragmented volume from their built-in defrag tool. Defrag can be run from the command line; try defrag c: -a -v from a command window. The output is not particularly helpful

Analysis report for volume C: OS
Volume size = 103 GB
Cluster size = 4 KB
Used space = 85.75 GB
Free space = 17.57 GB
Percent free space = 17 %
File fragmentation
Percent file fragmentation = 1 %
Total movable files = 121,296
Average file size = 633 KB
Total fragmented files = 659
Total excess fragments = 4,104
Average fragments per file = 1.03
Total unmovable files = 21,926
Free space fragmentation
Free space = 17.57 GB
Total free space extent = 86
Average free space per extent = 209 MB
Largest free space extent = 11.10 GB
Folder fragmentation
Total folders = 17,206
Fragmented folders = 38
Excess folder fragments = 772
Master File Table (MFT) fragmentation
Total MFT size = 141 MB
MFT record count = 144,197
Percent MFT in use = 99
Total MFT fragments = 2

...and is certainly not graphical.

I suggest finding a good defragmentation tool - I don't care which one, but one that can (a) move/reorganise system files (b) display a graphical representation of the volume, including identifying individual files and (c) will consolidate freespace.

Revenue and Customs in records blunder

The Revenue and Customs (IRS equivalent) in the UK have managed to lose two CDs containing the details of 25 million UK citizens (adults and children) who claim child benefit. For those who don't know, Child Benefit is an allowance paid to all children in the UK irrespective of their parents' income. This means the data lost effectively covers every child in the UK and their parents who are responsible for them.

There have been lots of data loss issues reported in the last year, mostly within large corporations. What amazes me is that systems are designed to allow a single individual to export so much sensitive data in one download and to be able to put this data onto a CD. Even if a "Junior Official" had broken the rules, its about time systems were designed to prevent data exports like this to happen in the first place.

Systems must be designed to be "closed loops" with data being exported only to other secure systems across secure links, rather than relying on sending CDs in the post. Our own government should be setting the standard for industry. Unfortunately this will just become another reason to mistrust the tax man.

Brocade Update

Since I wrote about Brocade shares on 7th November, the share price has dropped from $9.28 to $7.74, or 16.6%. That changes the P/E ratio from 17.19 to 14.33. Does that make them more investable? Perhaps. In August the shares dropped as low as $6. In the last 52 weeks, the lowest price has been $4.79. I think if the price gets to $5 then I'll invest. That seems to me like a reasonable price. I'm not sure what is driving the negative sentiment against Brocade (other than perhaps the general market downturn).

Bear in mind, those of us in the UK that the $/£ is still at 2.05, making US investments even more attractive.

On another investment note, 3Par are back to their IPO price of $14 after their 2nd day of trading....

3Par float

3Par finally floated on Friday this week. You can read the official announcement here. 7.5 million shares were released at a target price of $14 (about £7 in real money). In total, there are 60,015,700 shares of common stock now outstanding, valuing the company at a shade over $840 million. This isn't bad for a company with just over $66m in revenues for 2007, with a $15.5m loss.

It's interesting that loss has been running at $15-17m per year from the figures quoted on the SEC filing, despite the rise in revenue. At the end of the first day of trading the shares were up by $1.75 or 12.5%. To be honest, I would have expected the shares to rise higher than this however on reflection, perhaps not.

3Par sell themselves as "utility" storage and have majored on the concept of thin provisioning. Unfortunately this isn't a USP for them any more. HDS have this on their enterprise products, even EMC have announced thin provisioning is coming to DMX. So, what is 3Par, than just another modular storage provider?

Analysis: Brocade

This is the next of a series of posts on storage companies.

** DISCLAIMER: This and related blog entries are for fun only and do not represent investment advice. You should make your own opinions on investments or consult a financial adviser **

Background

Brocade Communication Systems Inc is one of the leading manufacturers of storage networking hardware. As one of the original developers of the fibre channel protocol, Brocade is positioned at the centre of storage networking technology. In addition to storage hardware, Brocade also markets and sells FAN technology, including Wide Area File Services and file virtualisation software.

In January 2007 Brocade purchased (merged with) McDATA Corporation reducing the major players in the fibre channel market from three to two.

Market Details



Brocade is quoted on the NASDAQ market with the ticker code BRCD.

Shares Outstanding: 389,774,000
Market Capitalisation: $ 3,617,102,720
Earnings Per Share: $ 0.54
P/E Ratio: 17.19
Yield: None

Figures from http://www.nasdaq.com/ on 6 November 2007

Brocade does not declare dividends, so all future value in the shares needs to be gained from the increase in value of the shares. With a P/E Ratio of over 17, Brocade's shares are priced to expect future value. Clearly as an investment, the question is whether this is likely to occur.

Competitors

As previously mentioned, Brocade merged with one of their major competitors in January 2007. In the fibre channel switch space, this leaves Cisco Systems as the only major competitor for high end fibre channel switches. In the FAN market there are many competitors, including Acopia, Netapp, EMC/Rainfinity and others.

Outlook

The fibre channel market is maturing and as such, growth in this market is incremental. Port prices (the usual way FC hardware is sold) have reduced from over $2000/port to less than $500 in the current market. Brocade are certainly not bringing anything new to the party in terms of their FC business. In fact, FC is likely to be eroded by iSCSI and potentially FCoE (Fibre Channel over Ethernet) which poses the possibility of relegating expensive fibre channel hardware in favour of standard Ethernet technology.

Consequently I see times being tough for Brocade. The McDATA purchase wasn't an easy one. McDATA were on a slide and I believe Brocade acquired them for market share and their customer base. In the FC space, integrating the McDATA technology with that of Brocade initially proved a nightmare as the roadmap for FC wasn't clear. Brocade now faces a significant challenge against Cisco and so needs the other non-FC markets to grow their business. For a company that currently does not declare dividends that makes the stock purchase a simple one; how quickly will revenue and profit grow to increase the asset value of the shares?

I think slowly and so I'd make Brocade a "hold".

On the subject of Seagate, Stephen posted and asked whether I saw it as a sell, hold or buy. At this stage I think I would like to hold a hard disk manufacturer in my virtual portfolio, however whether that is Seagate or WD (Western Digital) remains to be seen. I'll make the decision once I've evaluated WD.

Equallogic gets Bought

Dell have announced their intention to purchase Equallogic, an iSCSI hardware vendor.

The purchase price is $1.4 billion in cash but the deal doesn't complete for some time, late 2008 or 2009.

Is this an attempt for Dell to move on their storage business? I've never taken them seriously on the storage front, especially as they sell EMC equipment at an effective loss. I could never see the point of that, even if it did gain them some market share.

I wonder how many organisations which would have purchased Equallogic will now not bother?

USP-V does SATA

So the rumours (here and here) are true. Here's the announcement to prove it. HDS are going to support 750GB SATA II drives in the USP.

This is an interesting position HDS are taking as thin provisioning will be able to take use of the enhanced drive capacity making the USP-V even more efficient than the DMX-4 with SATA drives.

However I do wonder whether HDS have been pushed into supporting SATA on the USP-V. I was under the impression that thin provisioning on external drives (the standard HDS line - use External SATA storage rather than configuring it within the USP itself) wasn't going to be available in the initial release. Perhaps HDS had to support SATA in order to get best usage out of the thin provisioning option and to answer customer complaints about using thin provisioning with expensive storage.

What I'd like to see next is how HDS will now position internal versus external storage. At what point do externally connected SATA drives become more cost effective than internal ones? This announcement seems to muddy the waters from that perspective.

I imagine we will get an announcement from Hu explaining how logical it is and how it is all part of the ongoing strategy....

The Case of Decimal v. Binary

We all know that disk drive manufacturers have been conning us for years with their definition of what constitutes a gigabyte. There are two schools of thought; the binary GB, which is 1024x1024x1024 or 1,073,741,824 bytes and the decimal GB which is quoted as 1000x1000x1000 or 1 billion bytes. The difference is significant (7.4%) and something that has annoyed me for years, mainly for having to explain to "management" why the 100TB of storage they bought stores less than 100TB of data (significantly less with some manufacturers).

Seagate have just lost a class action law suit (see here) which means they are forced to give a 5% rebate to customers plus some free backup software.

Unfortunately, those of us who have purchased storage subsystems from vendors will not be able to claim as the case refers to customers who bought stand-alone units:

"You are a member of the settlement class if, between March 22, 2001 and September 26, 2007, you purchased in the United States a new Seagate brand hard disc drive from an authorized Seagate retailer or distributor, separately as a Seagate product that was not pre-installed into and bundled with a personal computer or other electronic device."

So I guess EMC/HDS/IBM can breathe easy at this stage. It does beg the question though, when are our large array vendors going to quote the real figures for the usable storage available on an array? I have various calculators I use to help me work out the usable storage (before and after LUN creation and with varying RAID types) as I need to present real rather than throretical figures when sizing arrays. I think we need some more transparency here.