San Diego-Based Overland Storage’s Shares Skid

Aug. 4–Shares of Overland Storage plunged nearly 20 percent yesterday after the San Diego company announced that its largest customer, Hewlett-Packard, will phase out purchases of Overland’s tape-based data storage libraries.

Overland executives received notice Tuesday that Hewlett-Packard would buy its next generation of tape libraries from another supplier. Sales to HP this year have accounted for 53 percent of Overland’s revenue.

Two analysts cut their ratings of Overland’s stock following the news. Its shares ended yesterday down $1.90 at $7.75.

“The competitive product will eventually replace the majority of purchases from Overland,” said Daniel Renouard, an analyst with Robert W. Baird & Co. “We view this development very negatively given Overland’s dependence on HP and the unlikely prospects for a new major (contract-manufacturing) win.”

Renouard downgraded Overland from “outperform” to “underperform.” Susquehanna Financial analyst Kaushik Roy dropped his rating from “neutral” to “negative.”

For years, Overland has been a manufacturer of tape-based storage libraries for HP. The computer and printer giant put its own brand name on the tape libraries and sold them to businesses.

The systems targeted cost-conscious, medium-size firms because they were inexpensive and allowed for easy expansion as a firm’s data storage needs grew.

Overland has worked for years to diversify so it isn’t so dependent on HP, said Chief Executive Christopher Calisi. Its strategy includes introducing faster, disk-based data storage appliances and focusing on software that boosts productivity of automated data storage systems.

When Calisi joined the company about four years ago, the contract with HP was nearly 80 percent of the company’s revenue, he said. Today, more than $100 million in sales come from storage systems Overland sells under its own brand name.

For its most recent fiscal year, Overland posted sales of $238 million and net income of $10.6 million.

While Calisi declined to predict how fast HP will stop buying Overland’s tape-based libraries, he expects the phase-out to occur slowly. Overland’s contract to produce tape libraries for HP expires in July 2006.

Calisi forecast that the impact on revenue this fiscal year, which ends June 30, will be minimal.

Overland plans to add a third storage product line beyond tape libraries and disk-based appliances. The new product will allow the company to enter the different segment of the data storage market, which is about five times larger than Overland’s current markets, Calisi said.

The company also said it has been evaluating potential software acquisitions and plans to buy a company that will pave the way for it to enter into a different segment of the market by the end of calendar 2005, Calisi said.

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