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The following is excerpted from a recent note to clients:

Data Domain (DDUP) reports tonight. Street expectations are set at $68M/$0.07. Our checks continued to show strong uptake of deduplication products with DDUP on the winning end of some large deals. As such, we would be surprised if Data Domain missed September quarter forecasts.

However, we also continue to believe that future growth expectations are unsustainable with the most recent quarter providing further evidence of increasing competition. As such we are maintaining our cautious stance on the name.

Our conversations with industry sources indicate that deduplication remained the primary new technology of interest in storage. Contacts reported continued strong traction with Data Domain products, including the closing of several large deals. In light of this commentary, we would be surprised if DDUP missed quarterly estimates.

Moving into Q4, we have seen some shift in deal momentum. Specifically we have heard some chatter around data deduplication opportunities slowing as customer focus shifts from increasing ROI towards capital preservation. In light of both this change in focus and an increasingly competitive environment, we are not expecting the typical beat and raise quarter that DDUP has reported since its IPO last year.

Looking specifically at the competitive landscape, during the past quarter we saw evidence of several large deals won by EMC (EMC) and Quantum (QTM). We view the EMC deals in particular as signaling that EMC is managing to use its scale and account control to win competitive engagements regardless of perceived shortcomings with its product. We expect competitive pressure from this relationship will only increase as EMC’s salesforce gets more comfortable with the product offering.

Moreover, we believe that Quantum is closing in on an OEM partnership with Dell. While any such relationship is likely at least 6 months away at this point, we believe an entry by Dell into this market would place further pressure on Data Domain’s sales with Dell’s focus on the small enterprise and commercial segment only augmenting the pressure EMC is placing at the high end. We believe that Street expectations around Data Domain, particularly for next year, remain too high.

Our view does not reflect any miss execution by DDUP, but rather concerns around signs of increasingly robust competition in a difficult economic environment, with particular additional risk if QTM is successful in its courtship of Dell as a partner. As such, we are retaining our cautious view on the name.

Disclosure: none

Source: Cautious on Data Domain