Data Domain Going Public, Signs Pact With Quantum

Data Domain, a pioneer in the data duplication industry, late Friday disclosed plans to go public and revealed it signed a cross-license agreement with rival Quantum.

The disclosures were made in an S-1 filing with the Securities and Exchange Commission on Friday.

De-duplication, also called "de-dupe," removes duplicate information as data is backed up or archived. It can be done on the file level, where duplicate files are replaced with a marker pointing to one copy of the file, or at the sub-file or byte level, where duplicate bytes of data are removed, resulting in a significant decrease in storage capacity requirements.

The upcoming IPO is the next evolution for the company, said Keith Norbie, director of the storage division of Nexus Information Systems, a Plymouth, Minn.-based solution provider that has been working with Data Domain, Santa Clara, Calif., for the past 18 months.

"They'll have a great upside," Norbie said. "Either they'll get bought and shoot right up, or they'll do well in the long term."

De-dupe has turned into a hot market for developers of the technology, a number of which have already been acquired. EMC last Fall acquired Avamar for an all-cash deal worth $165 million. Quantum, San Jose, Calif., in February started shipping its first virtual tape libraries with de-dupe capability based on technology it received last Summer when it acquired ADIC in a $770 million deal. And Symantec got its PureDisk de-dupe technology in 2005 as a result of Veritas' acquisition of Belgium-based DataCenter Technologies (DCT), a developer of software for compressed backups and long-term archival of data.

Norbie called de-dupe the hottest thing going in storage and said Data Domain should do well. "They have a simple, effective message: Drop it in, and it works," he said. "Data Domain has proven technology and huge momentum."

It should be a profitable company in the long run as well, Norbie said. "Look at their hard costs," he said. "They are just Intel boxes with SATA drives. Not a lot of cost."

Even so, Data Domain has yet to show a profit. In its filing, the company listed 2006 revenue of $46.4 million, compared to $8.1 million in 2005 and $779,000 in 2004. The company lost $4 million in 2006, down from losses of $13.8 million in 2005 and $9.8 million in 2004.

At the end of 2006, Data Domain had cash and cash equivalents of about $11.9 million, according to the S-1.

As part of the filing, Data Domain listed a number of risk factors for investors, including what it called "intense competition" from "potential competitors [that] have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources."

One of the competitors listed in the S-1, Quantum, has signed a cross-license agreement with Data Domain for de-dupe technology. In the filing, Data Domain stated: "Pursuant to a cross-license agreement with Quantum, we have licensed our current, and certain future, patents relating to data storage or data transmission, which could assist Quantum in competing with us."

As a result of that agreement, which gives both companies access to each other's current and future patents related to data transmission and/or data storage, except for claims specific to tape-based storage, Data Domain warned that it may not be able to enforce its intellectual property rights.

Under the terms of the cross-license agreement, which was signed this month but is effective from Jan. 1, Data Domain issued Quantum 390,000 shares of its common stock. A Quantum spokesperson said there are no other payments expected as a result of the agreement. Quantum is free to sell the shares at any time.

Data Domain executives were not available for comment.

The S-1 filing also shed light on other parts of Data Domain's operations. For instance, the company said that its appliances are built by FinePitch Technology, a division of Solectron, the Milpitas, Calif.-based contract manufacturing giant.

Also revealed was that the company has about 100 channel partners, and that the channel accounts for more than 85 percent of the company's revenue. About 32 percent of its revenue came from outside the U.S. in 2006.

About 22 percent of Data Domain's revenue, or $10.4 million, was spent on R&D in 2006.

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