Investor's Business Daily, October 3rd, 2007
The reels of tapes that back up and archive companies' most sensitive data aren't going anywhere soon. Companies still need the data. They need to switch seamlessly between those files and more recent stuff on various hard drives.
That is were virtual tape libraries come in.
FalconStor Software FALC develops the coding that powers many of the brand names in the field. It also develops its own data-protection systems and products that make the most efficient use of storage space.
Virtual tape libraries -- VTLs, as they're known -- have been used in mainframes for a decade. Now, they and other software data-management systems are hot sellers to company IT departments. It is in that enterprise-level system where FalconStor cleans up.
Mainframe systems only have to work with one operating system. But enterprise-level, or open system VTLs, need to be able to link different backup devices, which may be running on different operating systems.
"It's not like they can take a mainframe product and throttle it down to serve the open-system market," said Robert Amatruda, an analyst at research firm IDC. "Operationally, they function very differently."
So brand names such as EMC EMC, Sun Microsystems JAVA and IBM IBM turn to the Melville, N.Y.-based FalconStor to power their VTL offerings.
The majority of companies today still use reels of tape to back up and archive sensitive data, according to IDC. But reels can be bulky and clumsy, so businesses are supplementing those systems with disk storage.
Those hybrid systems, and the push to reduce outage recovery time, drive the VTL market.
The overall worldwide market grew to $705 million in 2006, from almost $622 million the year before, according to IDC. The open-system position of the business -- where FalconStor operates -- accounted for 54% of that revenue last year.
IDC expects the market to grow almost 14% per year through 2011, to about $1.3 billion. Open-system VTLs, which work across a range of software platforms, could account for 86% of the market in 2011.
Enterprise-level spending is driving that growth.
"We see FalconStor as uniquely positioned to capitalize on this trend," Morgan Keegan analyst Brian Freed wrote in a client note.
FalconStor formed in 2000. The following year, it executed a reverse takeover of publicly traded Network Peripherals, a maker of computer network switches. The new company took the FalconStor name and dropped Network Peripherals' hardware business. The move brought it public without a public offering.
Chairman ReiJane Huai owns 21% of the company.
FalconStor posted earnings of 12 cents per share in 2006, up from 5 cents the year before. Analysts think it can ride that increased IT spending to 28 cents per share this year.
Its largest customer, EMC, accounted for 26% of revenue in the past quarter. Sun Microsystems followed with 14%. Its No. 3 customer, IBM, contributed just short of 5%, though the company said it expects growth there.
But those large customers also can be big competitors.
EMC delivers network storage software, hardware and services. It had sales of $11.2 billion vs. FalconStor's $55 million.
"The storage market is intensely competitive," Canaccord Adams' analyst Mark Kelleher wrote in a client note. "There are many players, including EMC, and Veritas with significant resources to deeply bolster their competitive positions, from sales, R&D, marketing and price perspective."
But FalconStor says its partners are reporting strong sales. And the company is signing on new second-tier OEM partners.
It also is rolling out new products. The company is delivering a continuous data protection system, or CDP, bundled with the virtualization software of VMware VMW. FalconStor said that allows users to more seamlessly recover lost data across the various platforms that VMware links.
Morgan Keegan's Freed thinks that VMware bundling will get FalconStor's technology deeper into the market.
The company, too, sees a bright future for CDP.
"We think we can leverage our big knowledge of disk, tape and networking to initiate a paradigm shift in the back-up recovery industry," Huai told analysts in a July conference call. Company officials declined to comment for this article.
FalconStor also incorporates so-called "deduplication" technologies, which help reduce redundant information, speeding data recovery times and making efficient use of expensive data center space.
There also is room to grow outside the U.S.
Sales to China came to only 5% in the past quarter, though it is growing faster there thanks to new partnerships.
The company reported second-quarter revenue of $17.8 million, up 40% from a year ago.
It told analysts to expect full-year revenue of between $72 million and $75 million, and EPS of 25 cents to 30 cents.
