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BakBone SEEKS TO SCALE BUSINESS
By Simon Robinson for the451.com

BakBone Software has set its sights on fleshing out its current storage management portfolio to put it on more of a level footing with industry giants such as Veritas and Computer Associates. The company says its future organic development will take it into areas such as high availability and clustering to augment its current capabilities in backup, restore and nearline storage management.

While these remain longer-term objectives, BakBone is focused on company expansion in the short term as it seeks a transfer from the Toronto Stock Exchange to the Nasdaq. To help achieve this, the company has a target of making its first profits by the end of its current financial year, but there's still plenty to be done.

Impact assessment

The message BakBone is fleshing out its growth strategy on two fronts as part of its bid for profitability and long-term stability. Longer term, it will concentrate on adding specific functionality such as high availability and clustering. In the short term, it is aggressively growing its headcount in Europe and North America. Competitive landscape BakBone admits it has little chance of taking on Veritas in every account and winning, and is focusing its efforts on niche opportunities and players including Legato and CommVault. The451 assessment BakBone's target market in the field of backup and restore is often characterized as saturated and commoditized, but the company says that its growing revenue (plus those of Veritas and others) suggests this is not happening, at least not yet.

That said, organizations want software providers to solve their problems, and this often goes beyond providing point products. This is the long-term direction BakBone should take, though in the interim it is focusing its efforts on scaling up its business. Ultimately, its efforts here will dictate whether it can achieve its longed-for transfer to the Nasdaq.

Context BakBone came to market in early 2000 following the combination of two storage management companies – NetVault and Tracer Technologies. A reverse takeover of a shell company also provided it with a listing on the Toronto Stock Exchange. Headquartered in San Diego, BakBone says it sold roughly 1,000 licenses during its last financial year. The company has about 150 employees, and its CEO is Keith Rickard, who headed up Sterling Software's storage management division before Computer Associates acquired it.

Unusually for a software company, BakBone has its largest concentration of customers in Japan and the UK, since NetVault was initially formed to target those two markets. It wasn't until BakBone was formed that the company began targeting the North American market, and the US is now the fastest-growing region. In fact, BakBone plans to generate over half of its sales in the US by the end of its current financial year.

The company appears to be maintaining its momentum across all regions. It said last week that it expects to post year-on-year worldwide growth of 120% for the first quarter of its 2003 financial year, which it reports next month. It has also been expanding aggressively outside the Asia-Pacific region. It has doubled its European sales team this year, and similar efforts are ongoing in the US.

Products Although the backup and restore market is relatively mature – and is indeed dominated by Veritas today – the company argues that its modular architecture makes its products infinitely more flexible and manageable than those of larger incumbents, whose products it dubs "cumbersome." The company has two families of products. NetVault is a distributed backup and restore product for heterogeneous storage environments and works with most storage topologies, including SAN, NAS, direct-attached and IP storage, as well as all major database applications. The second product family, MagnaVault, is designed for secondary, or nearline, optical storage management for Linux or Unix hosts.

The common theme running through its products is its modular "Lego bricks" architecture. This, the company says, means that support for new or upgraded operating systems, hardware and applications is relatively easy and quick because it can be done by "changing one brick of code at a time." Making changes to corresponding software packages from rivals such as Veritas are, by comparison, "like unraveling a ball of wool – you have to start again," Backbone says.

These products will continue to form the heart of BakBone's proposition over the short term, although the company says it will move into other areas – such as adding high-availability and clustering features – over time. BakBone isn't providing time lines for these effforts, but says it will develop such features organically, rather than via an acquisition. In the short term, BakBone says it expects plenty of growth to come from nearline storage opportunities being driven by initiatives such as EMC's Centera.

Competition Although Veritas is the dominant force in enterprise backup, BakBone says that ultimately it can't compete effectively with them in every situation because it simply doesn't offer a similar breadth of functionality. In fact, BakBone will need to offer advanced features, such as clustering, in the future just to remain on a par with Veritas. However, BakBone says there's no evidence that the backup market is saturated, and insists that customers are usually hooked as soon as they start evaluating its products. This provides BakBone with enough differentiation to pursue opportunities against smaller opponents such as Legato and CommVault, it says.

Strategy BakBone has a paradox to address. While on the one hand it admits that competing against Veritas in every account is ultimately an impossible task, on the other hand it needs to scale up its business to evolve into a sustainable, profitable organization. Fast-growing it may be, but the company is still small and posting heavy losses. For the year to March 31, 2002, its revenue was $9.9m, and its net loss was almost double that, at $18.8m. BakBone has for over a year sought a listing on Nasdaq, but until recently appeared to be making little progress. The advantages of gaining a Nasdaq listing – in terms of boosting its profile, awareness and stature – are central to BakBone's mission of scaling its business, but BakBone simply hasn't been big enough justify a move to the high tech exchange.

However, the company has been fine-tuning its strategy, which it hopes will see its stock price move up to the level it needs to qualify for entry to Nasdaq. The stock needs to be over $4 before it can make such a move, and BakBone's stock hasn't been anywhere near these levels since early 2001; it has been hovering between C$2-3 for the last six months or so.

The first part of the plan is to break even by the end of the current fiscal year, but earlier this month the company engaged with investment bank Salomon Smith Barney (SSB) to advise it on "strategic and financial matters." Although this move is primarily designed to prepare BakBone for a movement to Nasdaq, there has been speculation that SSB may also be working on other strategies, including searching for an acquirer for the company and a complete delisting to put the company back in private hands. The company declines to comment on the options being examined by SSB.

However, BakBone is in a classical small company catch-22 situation. Its business model demands scale for sustained profitability, and to get to that level it needs exposure, something that a Nasdaq listing would provide. But to achieve this it needs to be a bigger company. BakBone will be looking to SSB to provide some answers, and the sooner the better.

Courtesy of the451.com