The presentation and the story for Nexsan (NASDAQ: NXSN) was a little better than we expected.

Although the storage market seems quite crowded given the likes of EMC, HP, NetApp dominating, the company makes a credible case for a smaller, totally channel-focused player in the space.

We hope to delve deeper and produce a full report that includes valuation, but here are the basic inputs for each our our analysis areas:

Market: Sweet – the storage market is large and robust with dual impressive drivers of increasing network traffic and ever-richer online content. We’re moving to video to 3D to high-res images and all with expectations of interactivity and low-latency.

Products: Semi-Sweet – The company has solid but not overwhelmingly advanced products. They are reliable and incorporate valuable innovations. But it’s an extremely competitive market and most of the players can incorporate equal or better innovations at will.

Business Model: Semi-Sweet – The company relies completely on channel partners for sales and distribution. Management understandably plays this up in a major way as an advantage but it’s one that cuts both ways. For one thing, it is still a very real cost in terms of margin (the company has gross margins of 41%) and channel partners can also shift priorities independently, which can have a negative impact on the business.

Management: Sweet – The team knows the market, operations, and has executed well. Management has prior success in the storage market (BoxHill, later acquired by DotHill, to name one.)

Financials: Semi-Sweet – One downside of channel distribution is that it results in a very high distribution cost. The company is now on “the profit side” of the equation anyway. They have made steady progress in improving their financial performance but this business model results in about 77% of the revenue being absorbed in revenue cost and additional sales and marketing expenses.

Overall: Semi-Sweet pending further research and valuation analysis.

We will also post the roadshow (slides and audio) up in the archive section for subscribers.

Manager: Thomas Weisel Partners
Co-managers: Lazard, Needham, Morgan Keegan

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