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Ellison's storage Pillar sits at fork in the road

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Comment Larry Ellison founded Pillar Data on the premise it would become the next EMC or NetApp, and go through an IPO or be bought. On its way there it sees a new system that could replace 100 NetApp filers coming by 2012.

This perspective on Pillar was given by its CEO and CFO at a customer summit in Phoenix, Arizona on March 10. CFO Ned Hayes said: "We aspire to go public at some point in time and we look at the IPO market very seriously from quarter to quarter." He also said Pillar faced a fork in the road, with an IPO on one side, and being bought by a large incumbent on the other.

Who? Any one of Dell, EMC, HDS, HP, IBM, Netapp etc with Pillar's Axiom technology and products replacing the existing mainstream product set. A Pillar spokesperson said the firm wasn't actually talking to any incumbent about such an acquisition.

Currently the IPO route is depressed in terms of numbers of IPOs, valuations of companies and the returns for investors after IPOs. It's not a good time right now, but Larry is in this for the long term. Hayes was giving out a message that Ellison does not want to pawn Pillar off to the market at the first opportunity but wait until the market comes to him wanting to buy it at a valuation he agrees with.

Hayes said Larry Ellison has pumped several hundred million dollars into Pillar through Taco Ventures in the past decade. It has not been funded like a standard start-up with four to six sequential rounds of funding from groups of investing organisations en route to a relatively quick IPO flip so they can get their return. Larry wants a proper valuation for Pillar and the funding support is there if the recession proves to be a double-dip one. Hayes said: "We have Larry's capital and can wait."

There is only one investor so board-executive relationships are simple and direct.

Ellison, we heard, did not buy Sun for its storage, the majority of which is OEM'd from HDS and LSI. Larry hates OEM deals and, pretty soon after the acquisition finalised, the HDS USP resale deal was canned. How long has LSI got? Oracle wants to build a great system to run Oracle and its clients, and the 7000 line is the one Oracle seems to be focusing on. Pillar wants to build a great storage system to run applications in general.

We can surmise that several hundred million dollars is north of $200m but not as much as $500m, otherwise 'half a billion dollars' would have been mentioned. Let's settle on $300m as a round number. The target is to get it to become self-sustaining. Cash flow break-even will occur this year or next. A customer asked Hayes how close Pillar was to its target gross margin (GM) - the reply was that "we're on the right trajectory. First sales generally have a lower GM. Later service, upgrade sales and repeat business have a better GM generally. Next-generation platforms are moving away from proprietary hardware to off-the-shelf components. That gets us much closer to our target GM." Pillar recorded its highest GM in 2009.

My thinking here is that Pillar needs the new development project kit to reach its target GM and that's not going to happen until 2012 or so.

The total addressable market for Pillar is said to be $30bn now, composed of hardware (HW), software (SW) and services, and $40bn in a few years time with a near-15 per cent compound annual growth rate, outpacing the storage market. Top line growth in 2010 is set to be 50 per cent upon 2009. Repeat business is said to be 60 per cent a quarter.

The company cut costs in 2008 when the recession struck and went down to a 325-person headcount. It's now up to 340 people and wants to hire more. Hayes said it is developing a new platform with radical, massive improvements in its storage characteristics.

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