Original URL: http://www.theregister.co.uk/2010/11/09/bakbone_in_a_mess/

Quest gets some Bakbone for $55m

Upright data protection

By Chris Mellor

Posted in Storage, 9th November 2010 20:00 GMT

Quest Software is buying Bakbone Software for $55m, getting the data-protection-software maker out of the hole it had dug itself into.

Quest makes application-specific data protection software, such as LiteSpeed for MIcrosoft SQL Server and Oracle. Bakbone makes general data protection software under its NetVault brand. The two product sets barely overlap.

Competition in the backup software market is fierce. Bakbone's main competitors are Symantec, EMC, IBM (Tivoli), CA, and CommVault, along with newer VMware-focussed players like Veeam. I guess we can say, without being unkind, that Bakbone is just another middle-rank backup company, and one that doesn't have a stand-out advantage in any particular product area. It's too large to focus on or excel in any niche, too small to build a groundbreaking product set covering all the data protection bases, hasn't been able to retain strong OEM partners, and is not large enough to fund all the technology developments it needs to prosper and survive as the world and its brother moves to cloud computing. This is a bleak picture. How did it get into this state?

Bakbone was founded as a Canadian company in 2000 but its history goes back further, to 1993 and AT&T. Its NetVault product was originally located in AT&T's CommVault department. Various events led to the NetVault technology ending up owned by Bakbone and then redesigned and re-written. The company progressed but encountered troubles in 2006 when it was de-listed from the Toronto stock exchange for filing lapses. It did get its listing back though.

The financial picture at BakBone is poor. Its fiscal 2010 revenues were $61.9m with a net loss of $9.8m. This contrasted with the previous year's revenues of $56.0m and $5.5m net loss. A picture of greater revenues and a larger loss is not good. The fiscal 2011 first quarter, which ended on June 30, did not bring any respite either. Revenues of $14m were down on the year-ago quarter's $16.6m in which a profit of $691,000 was made comparing badly to the first quarter 2011 net loss of $3,000. The only direction we can discern from these results is down.

In its fiscal 2009 year, several of Bakbone's OEM arrangements terminated, resulting in a significant decline in OEM bookings for fiscal 2010. OEM revenues in North America fell 21 per cent from fiscal 2009 to fiscal 2010, and declined 23 per cent in EMEA geographies as well.

OEM channel fails

The existing OEM plus distributor/reseller sales model is broken, and Steve Martin, Bakbone's CFO and interim CEO, has been looking to the channel to bring in revenues to replace those that have leaked away. As the OEM business started shrinking Bakbone took its eye off the ball and tried diversifying into messaging to bulk up its business instead of bringing its core NetVault backup software business into profitability.

Bakbone, then led by CEO JIm Johnson, had bought the assets of crashed continuous data protection vendor Assempra in May 2009. During the Johnson years, the NetVault product set had embraced backup to disk, deduplication and replication as well as virtualised servers and Assempra-based continuous data protection. So we can't say BakBone ignored NetVault development. But we can say that the development effort wasn't enough, regrettably, to build a must-have product.

Bakbone also bought Cold Spark and its messaging business for $15.9m as well that May. It was his death warrant in retrospect because, in April 2010, Jim Johnson was let go. CFO Steve Martin became interim CEO and the board announced a search for a new CEO. Martin closed down the Cold Spark messaging division in May and the financial results for that quarter, with the $3,000 loss show why Johnson had to go. That was $15.9m wasted in a year the company made a $5.5m net loss. Talk about a desperate throw of the dice; it might as well have gone to Las Vegas and put the $15.9m on a roulette wheel.

Channel push

When announcing these results, Martin said: "Our first quarter bookings reflect strong demand from Asia, especially Japan, offset by reduced bookings in Europe and North America as compared to the prior year. Japan was especially strong for BakBone. During the recent quarter, we received a commitment for approximately $2 million from a large financial services company in Japan. Approximately 25 per cent of the order is included in our bookings for the first fiscal quarter with the remaining amounts expected over future quarters including the next fiscal year.

"We continue to move aggressively toward an enhanced channel-centric sales model in our North American operations, similar to the one we use for our successful sales efforts in Japan. We are working closely with our resellers and distributors to drive additional sales of our NetVault storage offerings in the marketplace. … For the remainder of fiscal 2011, we will be focused on strengthening our channel-centric sales model and on expanding our presence in the growing markets of the Asia-Pacific region, while maintaining good control of operating expenses. We remain committed to increasing revenues and improving profitability."

This picture was all too clear to investors. They were looking at a share price of $0.45 in January this year and 0.16 on Monday November 8th, following a low point of $0.12 in September. Now, with the acquisition news out there, the shares are $0.315. Recent buyers will be well pleased.

VantagePoint Venture Partners, a venture capital company, owns a chunk of BakBone's Series A Preferred Shares and has two directors on Bakbone's board. These two may have been driving events, especially as preferred shareholders get $1.29 a share instead of the $0.33 the common shareholders get in the acquisition.

Contracting but a working company in there

Bakbone has been contracting its business, backtracking from messaging and finding its OEM business shrinking. It does not have must-have, leading technology in any data protection area. What it does have are 130-plus loyal employees and many, many customers around the globe.

Vanessa Gamlin, its world-wide director of field marketing, said immediately before news of the acquisition broke: "BakBone’s financial position remains strong and we are generating positive cash flows. We are working on new technologies and developing new products and have a solid customer base worldwide." That's what made it a good purchase for Quest Software.

Doug Garn, CEO and president of Quest Software, said: "Our respective products are highly complementary, with minimal overlap. The value received from BakBone's employees, technologies, partners and customers is expected to be a key benefit as we seek to expand our market share in the data protection market by building upon our core portfolio."

Martin said: "We are pleased that we have been able to enter into this definitive agreement on behalf of BakBone's shareholders." You bet; those shareholders owe Martin a great debt of thanks. It doesn't look too much like a distress sale but it must have been pretty close.

The deal is expected to close in the first quarter of 2011. Hopefully the majority of jobs at Bakbone will be safe, although there have to be the traditional back-office area rationalisations and maybe some sales overlaps to sort out. The engineers should have fun converging the two base technologies. One job casualty might be Martin himself; two CEOs being one too many. ®