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| March 09, 2009 | Investor's Business Daily |
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| Compellent Makes Small Area Networks For Midsize Businesses |
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| Portfolio Company: Compellent Technologies (NYSE: CML) |
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BY AMY REEVES
Not a lot of firms can say 2008 was a better year for them than 2007, and that this year will be even better.
But Compellent Technologies (CML) has a history of doing well at inauspicious moments.
That history started in 2002, which was not the greatest year to start up a tech company. Co-founder and Chief Executive Phil Soran said that after retiring as head of storage networking firm Xiotech he saw an unmet need in the field.
"Midsize enterprises really couldn't afford high-end storage systems," he said. "They needed some of the high-end features, but they didn't have the staff or the budget."
One type of high-end storage system getting ever more popular was storage area networks, or SANs.
Modeled on the local area network, the SAN stores data on an interconnected set of locations rather than one server. This makes it easier to adjust the capacity, and less vulnerable to disaster.
Cheap And Simple
Soran and Compellent's other co-founders sought a way to make SANs cheap and simple enough that small firms just setting up their IT systems would be willing to buy them.
The main method was to manage data more efficiently, which would lower clients' costs in the long run. A lot of data in your average office is old, redundant or unused. Compellent's software handles it through an automated tiering system.
"Take your e-mail system," said Soran. "What we're able to do is go in and say: How frequently are you accessing some components of your e-mail system? The research report from last summer, you haven't looked at it in a long time. We'll know that it hasn't been looked at and migrate it to disk drives that are lower cost (and) higher capacity."
Managing data in this amount of detail differentiates Compellent from its rivals, say analysts.
"With their architecture, they can get down to a more granular level than anybody else," said analyst Troy Jensen of Piper Jaffray, which has done investment banking with Compellent. "It creates excess capacity in the system by getting rid of untouched data."
Of course, smaller firms also have limited capital, so long-range savings don't help you if you can't put down the upfront costs. Compellent keeps the initial investment fairly low by a process it calls virtual manufacturing.
If a customer places an order, Compellent uses off-the-shelf parts made by other manufacturers. For instance, the controller and the disk enclosure would be made separately and only put together when the system arrives on the customer's doorstep.
Soran boasts that this keeps costs down and improves reliability.
"The more hands touch the disk drive, the more chance there is to insert failure," he said.
The company sold its first product in 2004, and sales ramped quickly. In October 2007 it went public.
This was another case of inauspicious timing, since that was right when the mortgage crisis was rippling into the rest of the market.
Compellent debuted strongly, pricing at 13.50 and topping 26 in its first week. But gravity soon took hold, and it's remained near or below its initial price since then.
Still, in 2008 something else happened: The company became profitable. Sales jumped 78% over the prior year to $91 million. In the fourth quarter, Compellent gained a record 192 new customers for a total of 1,278.
Strong Sector
One important factor in Compellent's success is the relative strength of its sector.
Citing Gartner Group, Soran says storage spending is expected to rise this year even though overall IT hardware spending should drop 8.8%.
RBC Capital Markets analyst Amit Daryanani says he expects storage spending to dip slightly, but either way that sector should do better than the industry average.
"We all communicate more electronically," said Daryanani. "We have more of these legal compliance issues, which implies that in the financial sector they'll probably need more storage at the end of the day. The same goes for the medical industry."
The medical sector provides the biggest chunk of Compellent's revenue at about 10%. But such is the need for data storage that even a small company like Compellent can have a wide range of customers.
Clients include homebuilder Toll Bros. (TOL), golf's PGA Tour SuperStore, New York University and Frontline Insurance Managers.
Virtualization Helps
Analysts expect Compellent to keep thriving, as trends in the data center seem to favor its model.
The server virtualization boom, which barely existed when Compellent was founded, fits nicely with the firm's efficient, decentralized approach, says Soran. The quest to do more with less energy also favors Compellent, he says.
Because of this continued strength in the market, some larger players have gotten more interested in storage lately. NetApp (NTAP) recently announced some price-related incentives to boost its presence in the small-business market.
Dell (DELL) recently acquired its way into the storage market, and Jensen says there's long been speculation that Cisco (CSCO) wants to do the same.
All this may eventually cut into Compellent's territory, but analysts seem to have no immediate worries.
Those polled by Thomson Reuters expect profit to triple this year to 19 cents a share.
They see 74% growth to 33 cents next year. |
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