Data Domain dedupes its way to profit

With data deduplication/nearline storage sales picking up alongside its traditional backup and recovery market, Data Domain execs say they expect more 2008 revenue than previously expected.

After recording its first profitable quarter, Data Domain Inc. painted a rosier forecast for the rest of the year despite economic uncertainty and increasing competition for its data deduplication-based backup and archiving products.

Data Domain, which became a public company last June, reported last quarter earnings Thursday night and said it had a net income of $2.7 million or 4 cents per share after losing $76,000 in the previous quarter. Its revenue of $52.6 million increased 17% from the previous quarter and 160% from last year. Data Domain executives raised their forecast for this quarter by $5 million and bumped up their guidance for the year by $20 million. They now expect to record revenues of $57 million to $59 million this quarter and $225 million and $235 million for 2008.

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CEO Frank Slootman said Data Domain added 285 customers last quarter, raising its total to more than 1,800. While Data Domain's deduplication appliances have been used for disk-based backup from the start, Slootman said many new customers are using them for archiving – or what he calls nearline storage.

"Beyond data protection and disaster recovery, we are seeing an uptick in our storage for nearline applications," he said. "Data Domain's ability to apply data deduplicaton to nearline applications continues to be a differentiator for us. We continue to position deduplication as a new tier of data center storage for data that customers do not want on tape for performance reasons and do not want on primary storage for cost reasons."

Slootman said Data Domain would soon add more nearline features to its products. He didn't give details, but he has talked about adding encryption to the product line, as well as higher capacity boxes.

Still, Data Domain has challenges ahead. Although Slootman said the company hasn't been hurt by any economic slowdown, Data Domain is starting to sell more products to financial services companies that are among the hardest hit by current economic conditions.

And, financial analysts on the Thursday conference call were interested in Data Domain's take on fierce competition from larger companies that might offer price discounts and are forging new partnerships. For instance, NetApp includes data deduplication in its base operating system for free, IBM acquired Data Domain VTL rival Diligent Technologies last week and EMC is set to sell data deduplication technology from Quantum – and there is talk that EMC may buy Quantum outright.

Slootman said he saw more instances of competitors discounting or giving away deduplication features with other products last quarter. "We clearly resist following the competition down that path," he said.

But the competition is following Data Domain into adding data deduplication to backup products, especially VTLs. It remains to be seen how much of Data Domain's competitive edge will slip away as more deduplication products appear. Financial analyst Aaron Rakers of Wachovia wrote in a note to clients Friday that increased competition "has remained one of the most significant concerns [for Data Domain], given current competitive dynamics from NetApp, EMC/Quantum and most recently, IBM/Diligent." Rakers added that he expects an EMC-Quantum announcement next month during EMC World.

Slootman said he was not worried about IBM because IBM tends to sell products to its own customer base, and Data Domain has stayed away from large IBM shops. He said he has seen evidence of the EMC-Quantum relationships in terms of "saber-rattling" by EMC and its resellers, but there hasn't been an impact on Data Domain sales yet.

"This is a hot market, and customers are active, asking their suppliers what they have, and the suppliers need to come up with answers," he said.

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