How Will Veritas Handle the Competition?
By Olga Kharif
Its name means "truth" in Latin -- and the truth about Veritas Software is that it's a standout in a booming field. The Mountain View (Calif.)-based company builds programs that let its customers link systems used to store and protect disparate forms of data. As networks have multiplied and more corporate data end up stored in bits and bytes, Veritas (VRTS ) finds itself in a sweet spot. Sales of its products grew tenfold from 1997 to 2000, from $121 million to $1.2 billion. Meanwhile, the overall storage market is expected to grow from $5.47 billion in 2000 to $10.7 billion in 2005, according to tech researcher IDC.
Trading at around $43 per share as of Dec. 13, the stock is down about 67% from its 52-week high of $130. But it's still at 64 times 2001 earnings, according to financial service First Call. That's a steep premium and a possible indication that most of the upside is already built into shares. But many analysts still recommend the stock because of the storage market's potential -- and some recommend it strongly.
Investors have one big factor to consider, however: Stand in the sweet spot long enough, and, before you know it, rivals start to swarm in. And Veritas is no exception: Small and big companies alike are looking to take a chunk of its business, and it faces a hard fight to keep growing at the same pace. Perhaps most important, the company's main competitor, storage giant EMC (EMC ), is shifting its focus away from hardware, where margins slid 70% last year, into Veritas' field.
In a major break with its tradition of selling software only for its own hardware devices, on Oct. 29 EMC introduced its first family of software, called Auto IS, that works on other vendors' storage devices -- just like Veritas software does. In late November, analysts including Merrill Lynch came out with glowing reviews of EMC's software. "We are probably at least a couple of years ahead of the competition," says Ken Steinhardt, director of technology analysis at EMC.
EMC is a formidable rival: No. 1 in the overall storage-software market, the company posted $8.87 billion in sales in 2000 with 28.9% market share, although all of that software was bundled with EMC hardware. "It can take a piece out of Veritas' market," says Bill North, an analyst with IDC.
Long-term, EMC's entry into open-storage software could result in slower growth and lower margins for Veritas, says Brent Bracelin, analyst with Pacific Crest Securities. Veritas reported stellar gross margins of 87.7% in the third quarter of 2001, but that's slightly down from 88.7% during 2000, a high watermark that might never be recaptured, Bracelin says. Instead of growing 25% to 35% a year, Veritas could slow down to 20% to 25%, he adds.
The upshot? "I am not entirely convinced this is going to be a $5 billion company," he says. Add to that a moribund IT sector, and Veritas faces a big challenge.
Adding to Veritas' worries is a slowdown at server king Sun Microsystem (SUNW ). As much as 42% of Veritas' revenues comes from the sale of software bundled with Sun's Solaris servers, says A.G. Edwards analyst Shelby Seyrafi. But those sales have been showing weakness of late. On Oct. 18, Sun reported its first-quarter revenues were down 43%, to $2.86 billion, vs. the same period in 2000. While the server slowdown has likely hit bottom, the recovery looks likely to be slow. And that would further impede Veritas.
Meanwhile, many of Veritas' partners have been making noises about building up their own storage-software businesses. If even a modest percentage of Veritas' customers decide to buy their software and hardware from the same vendor, that would also slow Veritas' growth.
The company's hardware partners Hewlett-Packard (HWP ) and Sun are thinking along these lines, says Bracelin. If they follow EMC with a big push into storage software, "even [Veritas' claim that it is] the best of breed might not be enough," says George Symons, vice-president for product management and development at rival storage-software maker Legato Systems (LGTO ).
Still, Veritas holds a solid hand. With an aggressive marketing campaign this year, it likely gained some market share from the likes of Computer Associates (CA ) and Legato. And a recent SoundView Technology/Gartner survey of technology buyers found that a growing number of businesses are interested in purchasing Veritas products.
Meanwhile, as the September 11 terrorist attacks triggered data-safety worries, Veritas saw an uptick in demand, says company CFO Ken Lonchar. As for EMC's software power play, some contend that competitors IBM (IBM ) and Hewlett-Packard might counter EMC's advance by strengthening their ties with Veritas to form a unified front.
Lonchar dismisses the threat from EMC: "They are making a lot of noise about storage software," he says, suggesting that while his rival recognizes the market's potential, EMC's new software product line isn't necessarily all it's cracked up to be.
Considering how pricey Veritas shares are already, most observers don't see this as a stock that's likely to skyrocket. But if you're interested in having a stake in this sector, Veritas may be worth considering. The growth prospects certainly seem to be there. The question is, how much and how fast?
Kharif covers technology for BusinessWeek Online from Portland, Ore.
Edited by Alex Salkever
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