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.