HP, Procom team to sell server appliances

Under the deal, HP will resell a high-speed file server for managing data storage developed by Procom with some input from HP, Procom chief executive Alex Razmjoo said.

"This is a brand-new relationship for us," he said. "Over the next three or four months, they will be getting shipments from us."

The deal provides Procom with a new revenue stream and a high-profile business partner, while giving HP a product that counters offerings from Dell, and it also dovetails with HP's own server plans.

"HP felt the heat. Everyone else is partnering up and getting these appliance guys," said Piper Jaffray analyst Amir Ahari.

HP representatives were not immediately available for comment.

Procom, a 350-employee company based in Santa Ana, Calif., makes "server appliances," which are essentially networked computers designed for a specific job. Analysts have been praising these machines because the manufacturer can set them up in advance for the task at hand, making them simpler to use, less expensive or faster than their general-purpose cousins.

Increasing numbers of start-ups and established companies sell server appliances for tasks such as email, video streaming, data storage and encrypted network communications. The least expensive models cost less than $1,000, but specialized high-performance machines can cost more than $100,000.

Server appliance makers Cobalt Networks and CacheFlow both had successful IPOs in late 1999. Many server appliances, although not Procom's, also are geared to run Linux, raising the appeal of that open-source operating system for corporate users.

Procom's business is aimed squarely at Network Appliance, one of the pioneers of the server-appliance market. Both companies build a type of server appliance called network-attached storage, or NAS, which is designed to plug into a network quickly and provide space to store files.

"Network-attached storage is going to become huge," said Technology Business Research analyst Joe Ferlazzo. "The Internet is necessitating huge flexible storage farms. I think we've only begun to see the implementation of storage on a massive scale."

But Procom is taking on a formidable competitor in going up against Network Appliance. In the last two months, Network Appliance stock has surged from the low 30s to its current price of 82.13. And the company has signed deals with Dell and Amdahl under which those companies sell Network Appliance servers under their own names.

"Network Appliance is looking to partner with anybody," Ahari said. "They're looking to be a neutral bystander."

Part of Procom's product line provides access to CD-ROM and DVD-ROM disks, but HP was interested in Procom's other line, the NetForce high-speed file servers that compete with Network Appliance's products. At the same time, HP gets a product that can easily be used with both Unix and Windows NT servers from HP, Ahari said.

Current low-end NetForce machines hold between 36 and 150 gigabytes of data, Razmjoo said. The high-end models hold a whopping 5 terabytes. HP will sell a customized version of a new midrange Procom file server due in March that holds between 100 and 500 gigabytes, Razmjoo said.

Procom builds its servers around Seagate and IBM hard disks and Intel chips, Razmjoo said. The machines run a proprietary operating system created by Procom.

Procom's new midrange model will have an average price between $15,000 and $20,000, Razmjoo said. The high-end products cost between $70,000 and $100,000.

Procom's revenue declined from $112 million in 1998 to $101 million in 1999, the company said. At the same time, their 1998 profit of $5.4 million dipped to a net loss of $2.9 million.

Razmjoo declined to disclose terms of the deal with HP.