San Diego Business Journal nStor Sees What's In Store for Digitized Data

In offices across the nation, it's multiplying at warp speed, growing as if it's an alien life form.

It's digitized data, which must be stored so it won't be lost. That's where data storage companies come in, ones similar to Sorrento Mesa-based nStor Technologies.

The company sells storage solutions, which means it will sell a single storage device with eight disks and capacity for 73 gigabytes of data, or it can provide an entire storage area network with a capacity of up to 10 terabytes, including design, installation and servicing of the same.

For the uninformed, a gigabyte is 1,000 megabytes, and a terabyte is 1,000 gigabytes. The way things are going, most businesses will soon require capacity measured in perabytes, one of which equals 1,000 terabytes.

Larry Hemmerich, nStor's CEO, says data is growing a lot faster than most companies can manage it. The explosive use of the Internet and the need to transmit larger pieces of data associated with graphics, audio and video are the cause.

While storage capacity can be increased by hooking up more disk drives to a single server, there's been a shift to create a more effective system called a storage area network, or SAN.

"A SAN is not a product unto itself. It's a collection of things. It's an infrastructure," Hemmerich said. "We're focused on delivering this infrastructure based upon power storage components."

Burgeoning Business

The world of data storage is looking fairly lucrative these days, especially considering the profusion of data generated by Internet usage. According to IDC, a Framingham, Mass.-based market research firm, the total storage capacity for computer networks is expected to grow 80 percent from 1999 to 2003.

To accommodate that growth, it's going to take more hardware and more sophisticated SANs to manage data storage. Revenues generated in the sales of that hardware are expected to increase to $46 billion by 2003. Today, the amount is about $32 billion.

Hemmerich hopes to get a nice chunk of that business and has set some lofty goals. Last year, the company had sales of $41 million.

"Our strategy is to double that total next year," he said.

In reality, nStor as it exists today is really only a year old. In 1996, nStor Corp., based in Lake Mary, Fla., was spun off from a much larger hard drive manufacturing firm, Seagate Technology.

While nStor was doing fairly well making devices for data storage, it wasn't until 1998 that it developed some innovative products that might give it an edge.

Important Acquisition

The company realized it had a good product but needed a much better channel of reaching customers. Its board decided it needed to buy a company with those direct sales connections. They soon found Andataco, Inc., a $77 million company that also made information storage equipment in San Diego.

In June, nStor acquired most of Andataco for $10.4 million. It completed the purchase later in the year.

Despite the companies' similar business models, the merger didn't go well, said Hemmerich, who came on board in January.

"As with many acquisitions, when you put two companies together, the cultures are different and the products overlapped. My best guess is the two management teams didn't sync together," he said.

Hemmerich, who is trained as an engineer and helped found Cipher Data Products with the late Bill Otterson, said he's spent practically his entire career , some 30 years , in the data storage business.

He previously worked for Hewlett-Packard, and Data General Inc., another large high-tech that was acquired by EMC Corp., a Hopkington, Mass., company Hemmerich says is the biggest provider of data storage equipment in the world.

Hemmerich headed up whole divisions for other companies but this is his first stint as president and CEO. Managing a company with several plants, including one in Taiwan, and a work force of about 160 isn't that different from what he did at Data General, he said.

"The main difference is the fiscal responsibilities to our shareholders."

Looking at nStor's balance sheets or its stock price isn't going to bring smiles to the company's investors.

Huge Loss

Last year, it lost $18.7 million compared with a net loss of $10.4 million in the previous year. During 1997, the company reported a net loss of $7.8 million.

Despite this, nStor stock, traded on the American Stock Exchange as NSR, actually rose to above $6 earlier this year, but has since dropped to just below $2. Its 52-week low was $1.12.

How does the company stay afloat? It borrows.

From late 1997 to the end of 1999, it borrowed some $25 million, primarily from private investors who purchased shares of preferred and common stock.

The company also has an equity line of credit of $15 million, of which it has used $1 million, and another $10 million line of credit for short-term cash purposes from Wells Fargo.

Due mainly to the company's restructuring and the assimilation of Andataco, nStor's combined sales will likely be down 40 percent this year, but Hemmerich said a rollout of new products should reverse that trend.

Previously, a good deal of the equipment manufactured by both nStor and Andataco was termed "legacy products," meaning these were based upon older storage technology that is outmoded today, Hemmerich said. "In this business you almost have to roll your products every 18 months," he said.

Balancing Old And New

The company still produces such older equipment but the main focus is on sale of equipment geared to storing larger measures of data while managing the storage capacities of multiple servers.

Hemmerich said the goal of restructuring, which has been under way for most of this year, is combining the new technology developed by nStor with the enhanced distribution systems of Andataco while revamping a product line to a market looking more for a total solution to data storage needs.

"The strategy was to move the company's basic focus to be a SAN integrator," he said.

Under this model, nStor can sell not only hardware, but consulting and maintenance services to its customers. It now counts some 600 customers as having service contracts.

Among the thousands of customers purchasing nStor equipment are original equipment manufacturers such as Intel and Cisco Systems. The company also sells to systems integrators and value-added resellers.

Although nStor's data storage boxes can run into the tens of thousands of dollars, nStor's strategy runs more along the lines of signing contracts that may yield hundreds of thousands of dollars, Hemmerich said.

The company's total staff is now about 170 employees, with about 100 of those people here, 35 in the firm's research facility in Lake Mary and the other 35 in field offices.

But as the firm gears up its new line of products and sales bounce back, Hemmerich expects to add more people to the payroll, assuming he can find them.

"My biggest problem in growing the company is attracting good people , can I hire people when I need to hire them," he said.

Like many competitors, Hemmerich is resorting to signing bonuses, sometimes as high as $10,000 for an engineer.

No doubt about it, data storage is multiplying and those companies that provide it cheaper and more efficiently could be big winners, said Mark Fackler, chairman of Stellcom, a San Diego-based computer engineering provider.

"As bandwidth continues to increase, whether it is wired or wireless, the thirst for storage has also increased tremendously," Fackler said.

Not only are computers handling larger amounts of data, they are transmitting it at much faster speeds, all of which requires larger systems to store and retrieve this data, he said.

"Where (nStor) is going, everyone will have to go. The question is whether their solution is going to be adopted by the masses."