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CORPORATE FOCUS—Qualstar Corp.

Sixteen years ago, William Gervais started Qualstar to develop and sell a product that now sounds downright quaint: data-recording technology involving nine-track tape drives. But things change. Last year, Qualstar Corp. posted revenue of nearly $50 million, most of it from its core business of tape libraries, providing the data backup that many companies now believe is crucial. “These days, everyone sees that (data backup) as mission critical,” said Scott Sutherland, an analyst with Wedbush Morgan Securities. “If everything collapses, they (Qualstar) are the final backup.” And while Gervais, Qualstar’s president and CEO, may not wish an earthquake, flood or computer meltdown on anybody, disasters can be very good for the tape library business. “Every time there’s another computer virus, our business goes up a little,” he said. Qualstar, now based in Canoga Park but headed shortly to Simi Valley, puts everything on tape. Its tape library data storage systems, tape drives and utility software can be used with a number of operating systems to manage large quantities of data in computer networks. The Boeing Co., for example, uses Qualstar tape libraries to store data about space shuttle engines. Gambling casinos use the company’s equipment for the videotape they must keep of activity on their gaming floors. “In fact, their primary growth driver looks to be in the security market,” Sutherland said. That includes the security systems in railroad stations and retail stores. Internet service providers that need plenty of space for online storage also use Qualstar equipment. Gervais said the company moved from being primarily the manufacturer of tape drives to the developer of tape libraries in the mid-1990s, just as the Internet’s popularity was taking off, and demand for data storage started ramping up accordingly. “We always knew this was going to be a big business,” Gervais said. For Gervais and his 100 or so employees, it has been a phenomenal business. In the last decade, revenues have gone from about $8 million a year to $49 million last year. “And we’ve been in 26,000 to 28,000 square feet of space for the last 10 years,” Gervais said. (Qualstar moved to its current facility in Canoga Park when its previous plant in Chatsworth was damaged in the Northridge earthquake.) All that is changing though. By February, Qualstar expects to be ensconced in a new location it is building in Simi Valley, which is twice the size of its current space. That pending move and other expansion plans were fueled by the company’s initial public offering in June. “We raised about $20 million,” Gervais said. “That should give us a few years of growth.” The IPO did not come off without a hitch, however. It had to be postponed because of the Nasdaq’s big drop last spring. “The very day the market crashed was the day we were going to set the price,” Gervais said. Qualstar officials had been looking to move the company for some time, and they say the decision to go to Simi Valley was an easy one to make. “The city of Simi Valley wanted us and the city of Los Angeles didn’t,” Gervais said. Qualstar’s net income for the quarter ended Sept. 30 was $2.3 million (18 cents per diluted share), compared with net income of $1.9 million (20 cents per diluted share) for the same quarter a year ago. Revenues were $13.8 million vs. $11.4 million for the same period the year before. Despite the increase in net income over the same period last year, “The last quarter’s earnings per share did go down,” Gervais acknowledged. “But that’s because there’s 2.9 million more shares out there now (due to a secondary offering).” The announcement of that dilution of earnings per share, explanations notwithstanding, may also account for a recent drop in share price from a high of $16 on Oct. 19 to $8.06 at the close on Nov. 24. That is the assessment of Brion Tanous of First Security Van Kasper, who added that another reason for the Qualstar’s stock selloff was the general downturn in high-tech stocks. “I think it was the volatility of the market,” Tanous said. Nevertheless, Tanous said, “this is a highly profitable company. They grew their business just as they said they would, and they’ve done quite well.”

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