On Friday the 13th, OverlandStorage's (NASDAQ:OVRL) shareholders got spooked. One of the company's marquee customers, Dell (NASDAQ:DELL), decided to terminate its agreement with Overland for the company's storage services, and the stock plunged 17% to $5.53. Unfortunately, this probably isn't the end of Overland's problems.
Founded in 1980, Overland is now a provider of data protection technologies for backup and recovery. The company is distinguished by its modular approach, making it easy for customers to add storage when needed.
While the market for storage is growing nicely -- especially in light of new regulations and precautions against future disasters like Hurricane Katrina -- it's also fiercely competitive. Overland must contend with biggies like IBM (NYSE:IBM), EMC (NYSE:EMC), Sun's (NASDAQ:SUNW) Storage Tek, Network Appliance (NASDAQ:NTAP), and a variety of scrappy start-ups.
Overland's significant customer concentration is also troubling. According to its 10-K filing, the company is "highly dependent on sales to large OEM customers and [is] currently experiencing a customer transition." As seen with the Dell announcement, that "customer transition" thing can be treacherous.
Hewlett-Packard (NYSE:HPQ) is Overland's biggest customer, accounting for more than 40% of revenues -- and last year, HP selected an alternate supplier for next-generation storage products. Investors seem rather nervous about all this, assigning Overland a market cap of roughly $70 million, even though its full-year revenues are more than $200 million.
Overland's weakness also shows up in its financial statements. In the last quarter, revenues fell from $55.4 million to $41.7 million, and the company posted a $5.7 million net loss ($0.43 per share). For the full year, revenues fell from $235.7 million to $209 million, with a net loss of $18.3 million, or $1.33 per share.
The problem? Overland has had difficulties outsourcing its manufacturing, creating inventory shortages in the past quarter, which in turn created a steep falloff in sales. To better ensure quality control, Overland is now moving its manufacturing in-house.
Such problems can be damaging for a small company like Overland. Would you trust your mission-critical needs to a firm with quality issues?
According to the company, Dell terminated the agreement because Overland could not "meet its intended delivery schedule." True, Dell liked its technology, and the company said the write-off will be "relatively small." However, in the fiercely competitive storage market, customers want more than just a good product.
This year, Overland's management has indicated to Wall Street that the company is poised for growth and profitability. But given its problems with manufacturing and its loss of a key contract, this company remains a work in progress.
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Fool contributor Tom Taulli does not own shares mentioned in this article. The Fool has a disclosure policy.
