How the recovery company recovered

By Julian Rogers, Deputy Editor

In an interview with CXO, Rick Belluzzo, Chairman and CEO of data storage specialist Quantum, discusses his plans to reboot the company into the black after a recent wallet-busting US$770 million acquisition.

Rick Belluzzo is a man with a lot on his plate. As well as deflecting criticism from a few disgruntled shareholders over Quantum’s continuing quarterly losses, some voice concerns that he has bitten off more than he can chew after devouring Advanced Digital information Corp. (ADIC) last summer. Investors are deeply concerned that Quantum, a global vendor in data backup, recovery and archive, has saddled itself with such a heavy debt – US$500 million from the banks – to finance the US$770 million deal. Indeed, the interest payments alone are an eye-popping US$50 million. While this deal has done little to stem the red ink, the former President and COO of Microsoft, is confident this acquisition will catapult Quantum’s position in the market and deliver healthy results for shareholders.

“In August, we merged the organisations, and I use the word merge because we really did work to pick the best of both companies and put together a product roadmap,” the 53-year-old tech industry stalwart explains. “We felt that by bringing our companies together we could improve our financial performance, and therefore invest in the areas that would give us the greatest level of return. We are excited because we greatly expand our footprint in terms of dealing with end customers.” Belluzzo highlights that Quantum has become the only large independent company focused on backup, recovery and archive. “We fill a void that exists in the market for a specialist company,” he proclaims. And savings? “On the financial front, we expect to save US$75 million to US$80 million in synergies through eliminating duplication and gaining the advantage of more scale.” If Quantum’s financial chiefs are correct, these savings will at least cover those interest payments.

Bosses at Quantum, headquartered in San Jose, California, believe that the firm is now in a position to challenge the likes of IBM, Hewlett-Packard and Sun Microsystems in the data storage market. Indeed the ADIC deal has elevated Quantum from fifth to third in revenue rankings for the sector. Belluzzo is purring about Quantum’s overnight growth. “This new company has a revenue of around US$1.2 billion, a very broad product line, a strong software development business and the 900 staff in sales, service and marketing, which allows us to connect better with customers,” he enthuses. “This has the ingredients, we believe, to deliver better results and also pursue our mission and vision around being a leading storage company in the back-up, recovery and archive marketplace. We see this as a growing and vibrant segment of the storage industry.”

Man with a plan

With Belluzzo, Quantum has a leader with 30 years of tech industry experience under his belt. In fact, looking at his career on paper he sure has been there, done that, bought the IT-shirt, if you like. He cut his teeth at Hewlett-Packard in 1975, climbing the corporate ladder in finance and marketing before being appointed Executive Vice President of the printer business. It was here that he was dubbed “Rocket Rick” because of his meteoric rise within the company. He then made the switch to Silicon Graphics Inc. (SGI) before joining Microsoft in 1999 where he oversaw Microsoft’s emerging products, including the X-BOX games console, MSN and mobile devices. In 2001 he was elevated to President and COO of the software giant, but departed just 14 months later amid a management reshuffle.

Belluzzo wasn’t off the radar for long though – re-emerging in the summer of 2002 to take up the reigns at Quantum as CEO. It was a move that raised eyebrows, especially as he had offers on the table from Fortune 100 companies. Belluzzo on the other hand, relished the challenge ahead at Quantum, a company founded in 1980. “I began this journey four years ago when I was appointed to the task of really redefining the company,” says Belluzzo. “We were historically a hard drive company but we found ourselves facing a number of tough challenges that reflected the transition that we were going through after selling that business. We really have spent the last four years working to get the company foundation and fundamentals in competitive shape. We have invested in businesses, introduced new products and improved our cost structure.”

Belluzzo says in the initial period of his tenure the company needed some adjustments. “Someone once said to me ‘it is important to be on the right side of gravity’. Early on, we were on he wrong side of gravity in a lot of areas. To get on the right side or, in other words, getting in a position where you are working with trends and with the wind behind you takes a tremendous amount of pressure off you. That is what we have endeavoured to accomplish over the past four years.”

Combined forces

Quantum, which specialises in disk and tape-based storage systems, hopes that ADIC deal will be able to strengthen its disk side of the business. Belluzzo concedes that the tape market, although worth US$8 billion a year, has very little growth potential. He says: “Our primany revenue stream is in tape products but we said we wanted to expand into the adjacent segments that embrace software and disk-based systems. We spent the last four years working on the foundation of the company as well as consolidation and competitive challenges. Once we started to see progress we felt that we needed to move more aggressively and that led us to the acquisition of ADIC.” He continues: “We believe we can collectively bring our technology together and move into the disk-based areas more aggressively than we could have done as individual companies. For example, Quantum’s DXi-Series disk appliances introduced in early December combine data de-duplication as well as other key technologies from both companies.

“Customers are dealing with the challenges of how they manage all of their expanded data – be it for data recovery, disaster recovery or compliance issues. A lot of the spending per customer is in developing the strategy and implementing the architecture for tiered storage solutions. This is storing data in different places with different cost structures and being able to back up remote sites. All of this complexity is what is contributing to the growth rate.”

Quantum also sees the ADIC acquisition as a way of stealing market share from rivals. While Quantum previously was more successful in the high-volume channels, Washington State-based ADIC was stronger in large enterprise sales. It also expands markets for Quantum, especially as ADIC had a more significant foothold in Europe and China. In terms of staff numbers, before the acquisition Quantum employed around 2000 people, while ADIC’s employees numbered just over 1100. As part of the deal around ten percent have been laid off. However. Belluzzo’s executive team now includes CFO John Gacek and Bill Britts, head of sales, marketing and services – both from ADIC.

Sharpened knives

Although Belluzzo and his team have been toasting the purchase, some sections of the shareholders have been quick to vent their anger at the company taking on such a large debt. In August some 20 percent of shares voted at the company’s annual meeting were withheld from the board of directors. On Wall Street a lack of confidence in the deal was borne out by Quantum’s stock falling 13 percent following the announcement in May. Quantum had reached almost US$4 in the spring but nosedived to US$1.90 by July on the NASDAQ. It seems the US$500 loan to finance the purhcase had investors running scared.

Belluzzo is all too aware that he needs to convince the firebrand investors that he can start churning out quarterly profits. “I think a lot shareholders have been looking for more of a short-term improvement in the company,” an unruffled Belluzzo explains. “However, we have developed, built and improved our performance over the last four years. By doing this merger we have, in some ways, changed the landscape. We have opened up new opportunity and created new risk, so some of the shareholders have had to think about whether this is something that is in their best interests.”

Belluzzo suggests that investors are divided, but that ADIC coming on board will strengthen Quantum in the long run. “Some of our shareholders are very pleased, understand what we are doing and are very much onboard. Others see it as a change in our direction. I deeply believe it [the acquisition] is good from a shareholder perspective, I really do. In both the short and the long term shareholders will see the benefit of a company that has more scale, that can drive synergies, be more relevant in the marketplace and get more products out quicker. However, we have to demonstrate and communicate that more clearly.”

Of course the acquisition is not the only bugbear for the shareholders: the poor quarterly results are hitting the company’s performance. In November bosses announced a second-quarter net loss of US$30.7 million, including $23.4 million in one-time charges related to the acquisition, compared with a year-ago loss of US$13.8 million. On the upside, quarterly revenue rose to US$250.4 million from US$203.6 million – mainly due to the ADIC acquisition. Belluzzo and his team are confident that the company is progressing well on the plan to cut quarterly costs by US$20 million.

The Quantum boss is phlegmatic when pressed on the thorny issue of the firm’s losses. “We said from the very beginning that our focus was on building a profitable business model. In this industry, as you look at our competitors, there are a number of companies that operate on a business model that is not effective. You will find companies that have gross margins in the 20 percent range, and as a result lose money by the time they invest in R&D and their own costs. One of our competitors announced a gross margin of 16 percent earlier this year. That is not a business strategy, because it is not viable in the long-term. We are focussed on building a more sustainable long-term position.”

So what about Quantum’s margin? Belluzzo admits there have been pressures. “Our business, which has over 30 percent gross margin, has to respond competitively. The net result of that is we have seen a lot of gross margin pressure in segments of our business, some of which we decided to let go because we felt it was better to move into the segments where we can deliver more value and improve our overall financial results.” He adds: “As a result of that, our revenue levels have fluctuated and not grown, in some cases. Ultimately, we want to be in this billion-dollar plus range and to be there with a business model that can deliver profit and allow us to invest in R&D in order to sustain ourselves long-term. “

Turn the corner

For Belluzzo the honeymoon period at Quantum is just a distant memory – the company is passing through a major transition, a potentially fraught time for any company, large or small. Whether the ADIC deal, which has inflicted a hefty dent in the balance sheet, will indeed boost sales and keep those all-important shareholders off his back remains to be seen. So would Belluzzo have done things differently if he could have his four years over again? No was his reply in a roundabout response. “You always believe that you are moving aggressively and quickly through change. In my experience you almost always look back and say ‘why didn’t I do more, more quickly’? When we were going through all the change I sometimes felt that we could possibly do more. But you come through it all and find that in these environments speed of execution, making the key decisions and getting the company in the right place is really critical.”

Belluzzo says this period of change at Quantum is a tremendous incentive for himself and his team to prove their mettle. “I think there is no larger leadership challenge in business than to lead companies through some of these fundamental transitions,” he explains. “It takes all of your energy, all of your patience, all of your perseverance and creativity to do that. The sense of accomplishment is being able to look back and see that we built something significant and created value for shareholders. We also want our employees to feel they are in the best place to work and contribute – that’s the goal because the work won’t be just down to me but, instead, a lot of people here.”