Finding Its Tape Niche, Qualstar Is Able to Succeed

William Gervais, president of Qualstar Corp., counts himself and his company among the few lucky survivors of the boom-and-bust that built the San Fernando Valley into a center of data storage equipment in the 1980s, only to see most of it go away.

Former stalwart companies such as Pertec Computer, Tandon, Computer Memories and Micropolis were once scattered around the west Valley like a mini version of Northern California’s Silicon Valley. In a few years, however, they were all gone, victims of plummeting prices, overseas competition and fast-changing technologies.

Qualstar, founded in 1984 as a maker of magnetic tape drives for computers, has survived by finding new niches for itself in a cutthroat market. Now, after years of percolating as a tiny, but profitable company, it is beginning to reap the benefits of living into the Internet Age.

In June, the Canoga Park-based company launched its first public stock on Nasdaq. Starting at $7, its shares have been on the rise, closing at $11 Friday. That’s a respectable showing in a market that over the same period has seen the Nasdaq index lose more than 500 points, or 14%. Gervais, 57, owns a quarter of the company--a stake worth about $35 million.

Qualstar’s revenue jumped 65% this year, growing from $29.7 million in 1999 to $49.4 million for the fiscal year ending June 30. The company’s profit grew at an even faster pace in the same period, increasing $4 million last year to $7.8 million--a 95% increase.

The company makes automated systems, known as magnetic tape libraries, that back up and store critical computer data on tape cassettes. The backup process has become a routine part of computing for most businesses to protect themselves from losing information due to viruses, human error, machine failure or hacking attacks. Many companies also archive their records on a regular schedule, resulting in trillions of bytes of information that need to be stored in a safe and cheap way.

It is admittedly an unglamorous product in an industry that even Gervais describes as the “U.S. Steel of high technology.”

But the growth of the Internet in the last few years has sparked an explosion in the amount of computer information that needs to be stored, archived and cataloged.

Qualstar focuses only on the backup and archiving piece of the puzzle, and has found itself with about 2% to 5% of a quickly expanding market, according to the research firm IDC. “It’s a rising tide, and all the boats are going up,” Gervais said.

The boom in information is largely due to the proliferation of Web sites, e-mail, Internet video and e-commerce transactions since the mid-1990s.

All those pieces of information are stored on large arrays of disk drives, leading to a demand for disk storage that is growing 80% a year, according to IDC.

Eventually, backup copies of that information are made onto magnetic tape, which is the cheapest method of storage.

The tapes are stored in racks that are accessed by robotic arms programmed to find the right tape, record the right information on it, and then return it to its proper slot. The total magnetic tape library industry now stands at about $3.1 billion in sales, according to Robert C. Abraham, president of the Freeman Reports, an Ojai-based research firm focused on magnetic tape storage.

Even though the demand for data storage is growing quickly, revenue from magnetic tape library sales will grow at a more modest 15% a year because the price of equipment is constantly dropping, Abraham said.

But he added that by 2004, tape libraries should be a $4.2-billion industry--enough to support good growth for small companies such as Qualstar. “Qualstar is definitely a viable player,” Abraham said.

Qualstar was founded by Gervais, a mechanical engineer by training, and Richard Nelson, an electrical engineer who was Gervais’ roommate at Cal Poly Pomona in the 1960s. Nelson is now vice president of engineering at the company.

Both men found themselves at Pertec in the late 1960s just as the minicomputer industry was beginning to boom. Before then, the computer world was dominated by large mainframe computers--usually made by IBM. IBM had developed a system to store information using a type of 9-track magnetic tape held on large reels, just like on an old tape-recording machine.

Pertec realized that the new minicomputers from rival companies would also need 9-track tape drives. Pertec found a niche for itself below the radar of IBM and thrived.

It was a lesson that Gervais and Nelson took to heart.

Learning From Pertec’s Example

Fifteen years after joining Pertec, the two men launched Qualstar with the idea of making 9-track tape drives for the newly created world of personal computers. “We saw an opportunity to do exactly what Pertec did when the minicomputer came out,” Gervais said.

At the time, the computer industry was moving away from using 9-track magnetic tape for storage, but companies still needed the drives to transfer the gigabytes of information stored in that old format to the new generation of personal computers.

After a few years, the company realized that the 9-track market would not last forever and it needed what Gervais called “a second act.”

It settled on developing robotic backup equipment that used tiny 8-millimeter magnetic tapes--small cassettes that look the same as those used in consumer video cameras.

The 8mm tape system was not as fast as the bigger tape systems by IBM and Storage Technology Corp. favored by large companies. But the 8mm systems were cheaper and smaller, making them attractive to mid-size businesses.

Their first product, which could hold 10 tape cassettes, shipped in 1995--just at the beginning of the boom in the Internet’s popularity.

Gervais said the company made a key decision then not to hire its own sales staff, relying instead on thousands of small technology consulting firms to sell its products.

Gervais said the strategy has paid off for Qualstar, allowing it to grow without having to build up its own sales staff. It has a total of 95 employees and is preparing to move soon into a new 56,000-square-foot headquarters and manufacturing plant in Simi Valley.

Qualstar’s latest products hold up to 600 cassettes, enough to store about 30 trillion bytes of information. Its tape libraries, which range in price from $3,000 to $80,000, are now being used by Microsoft’s Hotmail e-mail service, Disney.com and America Online.

Gervais said Qualstar is now in a position to move out of its niche into bigger markets, particularly with half-inch backup systems. That move will begin to put the company into more direct competition with heavyweights such as IBM, Storage Technology, ATL Products Inc. and Advanced Digital Information Corp.

But because Qualstar is now public and has a small market capitalization of about $150 million, it could be easily bought up by a variety of companies seeking to gain a quick share of the tape library business.

Scott Sutherland, an analyst at Wedbush Morgan Securities in Los Angeles, said his concern is whether Qualstar can handle the enormous growth it has seen in the past year. But Qualstar’s financial results indicate that it is having no problems scaling up its production and sales.

Abraham, of the Freeman Reports, said the recent introduction of a new half-inch tape format, called Linear Tape Open (LTO), gives Qualstar a chance to enter a fresh market that is not yet filled with dominating competitors.

“They can be an early player [here] too,” Abraham said. “It’s much more of an even playing field.”