With Accounting Troubles in the Past, BakBone Gets Back to Business

7/6/09Follow @bvbigelow

Jim Johnson was named CEO of San Diego’s BakBone Software in late 2004, but he has only recently been focusing his full attention on what he was hired to do: expanding the company’s business and product lines. Embarking on something of a shopping spree in May, Johnson oversaw BakBone’s purchase of the assets of Santa Clara, CA-based Asempra Technologies for more than $2 million, then followed that up with the $15.9 million buyout of Broomfield, CO-based ColdSpark.

BakBone’s expanded business strategy has been a long time coming because the company got mired in accounting issues that were finally resolved in February.

Jim Johnson

Jim Johnson

Johnson told me in a recent interview that when he was hired, BakBone was basically a single-product company that specialized in data storage management software it had acquired from AT&T’s Bell Labs. “I was brought in to try to orchestrate a broader vision, and move the company’s strategy beyond a single product,” Johnson recalled. BakBone’s longtime core product, NetVault, provides data backup and recovery within organizations that use a variety of data storage machines running Unix, Linux, Windows, and even Apple’s operating system, OS X.

Asempra’s technology expands BakBone’s product line by providing real-time data protection for Microsoft Exchange, SQL Server, and Windows file system data. “We feel that technology was a great acquisition,” Johnson says. “It’s a product that we can immediately feed back into our existing clients.” (Those clients include Volvo, AT&T, and Yahoo.) ColdSpark, meanwhile, adds what Johnson calls e-mail management and network traffic management. The ColdSpark system replaces BakBone’s previous technology with a more sophisticated system, “So we’re able to capture an e-mail message, identify and classify it based on categories that the IT administrator can set,” Johnson says. Such capabilities, which makes it easier to search for messages on a particular subject or from a specific customer, have become necessary for many companies in the financial services sector, which BakBone is now targeting as a new market for expansion. Johnson says e-commerce, healthcare, and the pharmaceuticals industry also have a lot of message traffic that needs to be classified, along with “anyone who is doing business with the government.”

“Asempra was a good technology buy for continuous data protection,” says industry analyst Laura DuBois, research director of IDC Storage Software. “ColdSpark will move them into the information management arena, which is the longer-term game in the market.”

With BakBone’s accounting issues behind it, DuBois says the company’s management is now free to concentrate on executing Johnson’s diversification strategy.

Johnson told me he was only on the job about four weeks in 2004 when he learned of an error in calculations related to a special stock sale the company had conducted 16 months earlier. The error required BakBone to restate its financial results for the fiscal year that ended in March 2004, which in turn delayed the release of the company’s pending financial results. Within a few weeks, U.S. and Canadian securities regulators issued cease-trade orders for BakBone’s stock, which had been trading on both the Toronto Stock Exchange and the U.S. OTC, or Over-The-Counter market.

BakBone’s accounting issues quickly became intractable, as the company’s review expanded to examine how BakBone certain software sales were counted. The way CEO Johnson tells the story, BakBone basically has been focused since then on the massive job of bringing its financial reports up to date, and on getting its accounting practices into compliance with generally accepted accounting principles (and elements of the Sarbanes-Oxley Act that require an assessment of the adequacy of a company’s internal financial controls). BakBone finally became current in its financial reporting in February, when it filed annual reports for fiscal years 2007 and 2008, and the first three quarters of fiscal 2009. On June 23, the company filed its financial results for the fourth quarter and entire fiscal year 2009, which ended March 31.

As a result, Canadian securities regulators lifted their cease-trading order on BakBone in April. The company announced its acquisition of Asempra the following month. By the end of May, Bakbone shares also were trading again on the U.S. OTC market.

BakBone has emerged from its accounting imbroglio at a time when some tech analysts are beginning to see a stabilization in corporate spending on information technologies, which has been contracting since last year. Some researchers are even forecasting an increase in global IT spending by 2010. While BakBone is a global player, with 300 employees worldwide and key distributors throughout Asia and Europe, IDC’s DuBois estimates the company hold only about 1 percent of the worldwide market for data protection and recovery software.

Johnson says BakBone has about 15,000 customers around the world, and he notes the company’s presence is stronger in certain markets. In Japan, for example, he estimates BakBone has about 72 percent of the Linux-based market for data backup and recovery. IDC’s DuBois says that sounds about right, although the market for data backup in Japan is small and growth is “very moderate.” Nevertheless, DuBois told me in a recent e-mail, “They have made some acquisitions and have a new strategy. With the financial issues behind them, they are in a good position.”

Still, it remains unclear how well the relatively small company, which reported a net loss of $5.5 million on fiscal 2009 revenue of $56 million, can compete against EMC, IBM, Hewlett-Packard, and other major players in the global data storage and recovery market. According to IDC data, worldwide spending is now expected to be almost 2 percent negative in 2009. That would be commensurate to the downturn the IT industry saw in 2001-2002.

So is Johnson looking for other technologies to acquire?

His answer is a cautious yes. “We kind of look at our day-to-day business as integrating these technologies we’ve acquired,” Johnson says. “Our night job is really staying abreast of what’s out there.” While he’s not ready to announce any more buyouts, Johnson says, “We continue to look ahead to see what might be available.”

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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