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Cloudy Future For Qualstar?

Three years after taking control of tech manufacturer Qualstar Corp., Chief Executive Steven Bronson has not completely turned the company around but believes it’s headed in the right direction – despite new competition for its customers from the cloud. The Simi Valley producer of data tape storage and power supply products has money in the bank, has cut its expenses and is nearing a breakeven point with revenues of $10 million. It is meeting the challenges of a competitive marketplace in data storage with new products that are relevant to the small and medium-sized businesses in its target market. “The heavy lifting, fixing what was broken is behind us and we are at base level,” Bronson told the Business Journal. Currently, the company employs 22 workers, which includes an engineering team for power supply products in Singapore. The Simi Valley location includes both office and manufacturing in a space much smaller than three years ago, part of Bronson’s pragmatic strategy to reach profitability by prioritizing. But so far, the company hasn’t worked as an investment for Bronson. Its stock trades at less than $3 a share, compared to more than $8 when he took control in June 2013. (That figure has been adjusted to reflect a six-for-one reverse stock split in June.) The 51-year-old Bronson said he is prepared to do whatever is necessary for Qualstar’s future and the benefit of its shareholders, including selling all or parts of the company or even acquiring another company. “It is not limited to one of those; it could be a combination,” he explained. Cloudy market Founded in 1984, Qualstar started out making data tape storage machines for archiving and backing up computer files at enterprises. In 2002, the company acquired N2Power, the maker of converters used to power devices and products in the telecommunications, industrial and broadcast markets. The company’s power supply business accounts for more revenue than data storage. In the third quarter ending Sept. 30, Qualstar reported revenue of $1.6 million from the power supply business while the data tape storage side of the company had revenue of $1.1 million, a decrease of 3 percent from the same period a year earlier. Bronson has worked to expand the power product line to enter new markets. In November, for instance, the company debuted a new power converter series that is ideal for power hungry broadcasters. Historically, the company has served the information technology and gaming industries and is now going after medical markets and industrial clients with high power requirements, Bronson said. On the storage side, pricing pressure comes from competitors who offer more than just tape backup storage products but also software, which is where they make their money, Bronson said. “If one is looking to accelerate growth in that space, you have to have a complimentary product,” Bronson said, adding that this is where acquisitions or strategic deals could make a difference. At a time when “cloud computing,” which utilizes the internet to store and share data from a central server, has become a favorite corporate buzzword, tape storage is not the sexiest story for customers, Bronson conceded. Qualstar focuses its pitch on the cost effectiveness and safety of tape. “If you have data sitting on a tape it is not sitting on a server, so somebody cannot hack into it,” he said. Tape in particular works well for enterprises that have large amounts of data but don’t need to access it in real time. “They can afford to have a little longer period to retrieve that data,” Bronson said. David Russell, a vice president at Gartner Inc., an information technology research company in Stamford, Conn., said a recent survey of his firm’s business clients showed that 7 percent back up data directly on to tape, and 37 percent back up onto disc and then tape. By way of comparison, Russell said the 2005 survey had 63 percent of respondents saying they directly backed up onto tape. Backing up onto the cloud, while expected to be a factor in the future, did not receive high responses in the survey. Only 9 percent of respondents said they backed up data from disc to the cloud, Russell said. “I don’t think anyone is arguing directionally where the industry is headed, it’s just that the amount of tape still in use is probably greater than most organizations might think,” he added. However, backing up to the cloud is beginning to encroach on what had previously been backed up on tape, Russell said, adding, “that cloud is becoming the new tape.” For now, Russell said that tape is perceived as an antiquated technology that often gets blamed for what is actual human error in maintaining archival records. “It is a mechanical (product) and if it has not been well maintained or if it has aged, then it will fail at a greater rate,” he said. Active shareholder Bronson waged a proxy battle for more than a year to gain control of Qualstar. The saga started in 2010 when he started buying shares through the investment management firm BKF Capital Group Inc. in Boca Raton, Fla., where he also serves as chief executive. In February 2012 he grew critical about the underperforming stock and direction of the company and called for a special shareholder meeting in June 2012 to elect a new board of directors. That attempt fell short of obtaining the 6.1 million votes needed to remove the incumbent board. After the election, Bronson laid low until early 2013 when he offered to buy 3 million shares of Qualstar stock for $5.1 million. The board responded with a poison pill provision to create a second, preferred class of stock and flood the market with additional shares, diluting individual stakes such as Bronson’s. Bronson withdrew his offer and instead put up a slate of directors at the Qualstar annual meeting in June. That time, he received the necessary number of votes. Since taking on the chief executive role, Bronson said he has a learned a lot, starting with having an infrastructure that is aligned with the company’s revenue base and gaining knowledge about the company’s products. “You can do some research on the outside but until you are in the trenches you can’t fully pick up everything,” he said. Russell at Gartner called Qualstar a “survivor” in an industry that has seen a lot of consolidation. Having longevity in the market is quite an accomplishment, he added. “Given where they have been at now year after year, the fact that they are still operational shows there must be something to the technology and it is still resonating,” Russell said. Previous experience gave Bronson familiarity with the turnarounds. In 1996 he and other investors bought out the co-founder of Mikron Infrared Inc., a New Jersey manufacturer, and put in place a management team that realigned and grew the company. It was sold in 2007. The best local example of Bronson’s turnaround technique is Interlink Electronics Inc. in Westlake Village, a manufacturer of touch sensor technology where he also holds the title of chief executive. Prior to Bronson becoming majority shareholder in 2010, shares in the company traded at less than a $1 on the over-the-counter market. Now, the share price is $7 and trades on the Nasdaq. “The performance at Interlink has been phenomenal,” Bronson said. While running Qualstar may be a part-time gig for Bronson, his hours are anything but. There was one day just before the Christmas holiday when he said he put in 22 hours, adding that “my part-time for Qualstar is equal to other people’s full-time.” As long as the company’s board is satisfied that he is able to accomplish specific goals, there is no problem with him splitting his time with Interlink, he added. A year ago, Bronson added the title of president to his duties at Qualstar with the departure of Daniel Jan, who had served in that position for about six months. Jan had previously been executive vice president and was knowledgeable about the data storage products but lacked an operational background that was needed in a situation where decisions need to made quickly, Bronson said. “In a turnaround, time is not your friend,” he added. “You do not have the luxury of unlimited time and unlimited dollars.” One step Bronson has taken to keep Qualstar vibrant is the six-for-one reverse stock split in June to avoid a delisting from the Nasdaq. In November, the company’s board authorized $750,000 to go toward a stock buyback program. “It still gives ample cash to support business needs and at the same time was a prudent investment,” Bronson said.

Mark Madler
Mark Madler
Mark R. Madler covers aviation & aerospace, manufacturing, technology, automotive & transportation, media & entertainment and the Antelope Valley. He joined the company in February 2006. Madler previously worked as a reporter for the Burbank Leader. Before that, he was a reporter for the City News Bureau of Chicago and several daily newspapers in the suburban Chicago area. He has a bachelor’s of science degree in journalism from the University of Illinois, Urbana-Champaign.
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