Procom's Prospects Dim

Procom Technology, which reported earnings today, is learning that competing in the network attached storage (NAS) market can be downright nasty.

The company's disappointing financials mirror its difficult transition from a focus on disk drive and tape backup products to NAS appliances. Analysts say the company competes well on price with some products but has had little success penetrating key accounts.

For the fiscal fourth quarter ending July 31, Procom lost $9.4 million, or 64 cents per share, on $8.9 million revenues. That compares with a $1.2 million loss, or 11 cents a share, on $14 million revenues for the quarter a year ago.

Sales were up slightly on a sequential quarterly basis, but the overall trend is down. For the year just ended, Procom lost $19 million, or $1.54 a share, on $42 million revenues. During the prior year, Procom lost $8 million, or 70 cents a share, on $63 million revenues.

The future looks cloudy. When pressed by analysts, company officials on a conference call today said they expect Procom to be profitable during its third quarter, ending April 2002. Yet, they cite market uncertainty as their reason to decline revenue guidance for the current quarter, which will close in a month.Why did Procom forego the world of legacy storage for the SAN market? Perhaps its the golddigger mentality. As researchers forecasted triple-digit growth for the network attached storage (NAS) market, numerous companies hoping to cash in began developing storage appliances in hopes of staking a claim.

Procom, however, is caught between a rock and a hard place. “Quantum Devices Inc. and Maxtor make life really difficult for Procom at the low end,” says Tony Prigmore, an analyst with The Enterprise Storage Group Inc.

. “They’re caught in the middle and can’t compete with high functionality products from EMC Corp. (NYSE: EMC) and Network Appliance Inc. (Nasdaq: NTAP).”

Analysts say that even in a recession, demand for NAS products should grow solidly as corporate IT departments learn that installing attached storage can save them considerable sums in labor and administrative costs over the long haul. The small NAS vendors who fail to stay cutting edge or who don’t have cozy relationships with large system integrators are not likely to hit pay dirt though.

Procom’s NAS sales are increasing -- but not nearly fast enough to supplant the loss of other revenues. NAS sales for the year just ended were $28 million, or 68 percent of total revenue, up from $17 million, or 28 percent of total revenue, the prior year.

Procom does appear, though, to have financial savvy in lieu of marketing or technology expertise. The company sold 3.8 million shares at $9 a share in a follow-on offering in June, just before financing of public technology companies crawled to a virtual halt. Merrill Lynch & Co. Inc. (NYSE: MER)acted as placement agent on the timely $34 million fund raiser.The stock offering helped beef up the cash position on Procom’s balance sheet to $25 million, up from $16 million a year ago. The company may need all the money it can get if customers don’t pay their bills though. Despite the year’s sluggish sales, Procom’s accounts receivable ballooned to $12 million, up from $6.7 million a year ago.

On Wednesday, Procom’s stock plunged 20 percent to $2.90 a share. Other than the pending earnings report, there was no apparent news to account for the freefall. By midday today, the stock had made a modest comeback to $3.10. The only two analysts listed by First Call

who follow Procom both rate the stock a “hold.”

Despite Procom’s relatively strong balance sheet, the company appears to have dim prospects going forward and little room to retreat. “Can it capture market share from others?” Prigmore rhetorically asks. “The answer is no. As the name lingers but the business does not move forward, they could be relegated to the status of the living dead.”

— Tom Davey, special to Byte and Switch, http://www.byteandswitch.com