By Amey Stone Gary Bloom took the helm of Veritas Software (VRTS), the leading independent-storage software company, in November, 2000, just when the good fortunes of the data-storage industry were starting to roll over. Since then, he has put his stamp on Veritas while fighting headwinds like the toughest tech spending environment in decades and brutal competition among storage vendors.
Bloom has his accomplishments: Veritas increased sales by 24% in 2001 and kept revenues flat in 2002, a time when many rivals' sales have fallen. Through several recent acquisitions, including deals for Precise Software (PRSE) and privately held Jareva Technologies announced on Dec. 19, Bloom has broadened Veritas' product base. He believes he has the company well-positioned for an upturn in the sector, which he hopes will come in the second half of 2003.
Still, Bloom's accomplishments aren't the kind to make investors cheer. The stock, which started 2002 at $46, started 2003 at $16. With a price-earnings ratio of 25 times next year's projected earnings per share of 60 cents, (up only 3% from an expected 58 cents in 2002), many analysts have a neutral opinion on the stock. Steve Berg, of boutique-investment bank Punk, Ziegel & Co., says he thinks Veritas is priced about right. "Its long-term prospects are better than its near-term," he says, "but the risks associated with competition are clearly going up."
Veritas isn't necessarily a stock for investors to jump into right now, but Bloom is a CEO worth watching. He spoke to BusinessWeek Online Associate Editor Amey Stone in mid-December (also available as a video Q&A). Following are edited excerpts from their conversation:
Q: Even though Veritas is one of the largest software companies in the U.S., it doesn't have much name recognition with the average person. Can we start with a quick overview of the company's strategy?
A: We're a $1.5 billion per-year company and one of the top 10 software companies in the world. We specialize in software that does three primary things: data protection and recovery, running high-availability systems -- like for clients such as eBay (EBAY) and others that need systems which are available 24 hours a day and never go down -- and providing technology for companies to manage their storage. The way we see it, our software allows customers to get better use of their people, better use of their technology, and better use of the hardware they've already purchased.
Q: Let's talk for a minute about your financial results. Earnings and revenue have been flat for the past year. You've said you expect sales of $377 million in the current quarter and profit margins of 21% to 23%. That means more nearly flat results.
A: In 2001 you saw most enterprise software companies were pretty flat. We grew sales by 24% that year. In 2002, what you see is a pretty hefty decline for most enterprise software companies, anywhere from 15% to 45% declines in sales, and we're coming out pretty flat. So on a relative basis, we're doing much better than the vast majority of the enterprise software market.
That said, it's hard to sit here and say I'm excited about flat growth. We're in it to win, and we're in it to grow shareholder value and grow revenue. But the economic decline has certainly constrained our ability to do that.
On the positive side, we're generating somewhere around $100 million in cash per quarter. And so now we're sitting on almost $2.1 billion in cash. Also, we've been able to maintain capacity extremely well. We started 2001 with 4,800 employees. We're going to end this year at somewhere right around 5,600 employees. So we're actually a growing entity.... So we're extremely well positioned for the future.
Q: Do you have any forecasts for when the investment-spending environment will improve?
A: I'm glad you asked the question the way you did. There's a lot of confusion now about whether IT budgets are going to be bigger in 2003 than they were in 2002. But whether budgets are going to be bigger or smaller is a little bit irrelevant. The question is, how much are companies going to spend? In 2002 the budgets were bigger than what they actually spent.
My general belief is that we're looking at improving trends in technology spending. I think the vast majority of improvement will come in the later half of next year. I think it's going to continue to be a challenging climate for everybody in the technology sector through the end of the year and into the first couple of quarters, but the worst of it is behind us.
Q: How have you modified your strategy for the tough tech-spending environment of the past two years?
A: In this kind of economy you have to look at the sale from the eyes of the buyers, the eyes of the CEO, the CIO, and the CFO. What's important to them today is return on investment. We tell them that our technology allows people to do more with less. The main way we accomplish that -- which is the uniqueness of our company vs. the hardware companies that are trying to approach this software space -- is we provide heterogeneous capability. We run on a wide variety of hardware systems, from Hewlett-Packard (HPQ), IBM (IBM), Linux, Sun Microsystems (SUNW), and Microsoft's (MSFT) Windows.
When you have a single, standard way of running your operation across multiple environments, then you need less -- you need to train your people on fewer products. You can change between players. You can commoditize your hardware. If you're able to buy from any vendor, all of a sudden, it's up to the hardware guys to negotiate with you.
Q: Veritas has been in the news lately for a couple of issues tied to corporate governance and accounting practices. The first is the Oct. 3 resignation of your former CFO, who incorrectly claimed to have an MBA. Veritas has also been swept up in the Security & Exchange Commission's investigations of possible questionable accounting at several Internet companies, including a transaction that you did with America Online AOL
A: On the first issue, Ken Lonchar was a longtime CFO of the company who came to Veritas with its merger with Open Vision back in 1997. The alteration of educational credentials apparently occurred back in the Open Vision days. It wasn't something that recently started and ultimately he resigned because of it. We felt that was appropriate, given that he was a CFO of one of the largest software companies in the world. Sometimes those announcements are the painful ones, but it was absolutely the right thing to do. We already have a new CFO on board.
Q: Are you doing any back-checks to make sure there weren't any accounting improprieties?
A: One of the things you'll find with someone who modifies educational credentials is that that's all it turns out to be. During the course of the investigation of his educational credentials, there's only one thing that ever came out.
As far as our financials go, obviously they're certified, we certify them again and again. We really believe our financial books are in order. We've disclosed the one thing we know about, which is the America Online transaction that you mentioned.
Q: What is the current state of the AOL issue?
A: What we said in November is that we're reviewing it. We're seriously looking at the transaction. We're asking ourselves with our auditors, "Was it properly accounted for?" It's a $50 million transaction where we sold technology to AOL. Then, in a separate contract, we purchased $20 million of advertising from AOL. And there was a cash exchange in both directions. We sent them $20 million, they sent us $50 million. As soon as we have a final review completed, we'll do another disclosure on it.
Q: With these issues taking up your time, is it a handicap to running the business?
A: I think Andy Grove articulated it really well. He made the comment that the government has got to be very careful about overregulating industry. We're in a down economy, and CEOs need to be spending the bulk of their time building businesses and helping the economy recover. This is a distraction to that.
A change was necessary in corporate governance. But we need to keep it balanced. For a while it looked like it was going to the extreme. There was a lot of confusion, a lot of new legislation passed, and the rules and the guidelines to support that legislation weren't available. So everybody was spending all their time guessing what we're actually supposed to do.
Now as the rules get clarified, we're able to have our teams work on it. CEOs can start focusing more of their energy on building their businesses and growing them and improving the economy. We're moving back to a point that is going to be much healthier for every industry.
Q: Storage-hardware makers are pushing more and more into software. Can you explain why?
A: The reason that you hear a lot of kind of what I'll call noise, for lack of a better term, around competitive pressures of the software sector is that hardware companies are desperate for margin dollars. Over the past two years -- it has been amazingly fast -- raw storage prices have dropped dramatically. As physical storage becomes a commodity, differences between vendors becomes less relevant. So they're all in a state of shock.
What all the hardware companies are doing in response is starting to declare that they are software companies. The problem is they are only a software play for their hardware environment. For customers, the question is: If you're running Hitachi storage, why would you buy EMC software? If you're running EMC hardware, why would you buy Hitachi software? It's very difficult if you own a hardware business to write software that runs independent of the hardware.
Q: Out of the hardware players, which companies are winning out?
A: When you move into the server marketplace, there's clearly a huge battle between HP, IBM, Sun, and the evolving role of Linux. It's a game where if you're an all-Sun shop, you keep buying Sun. If you're all HP, you keep buying HP. If you're a mixture, then the question is who's on top today? And different companies are on top for different reasons.
IBM (IBM) does well because of the services side of the business. HP (HPQ) does well because serviceability of their hardware, their stability. Sun (SUNW) does well because of high performance. And then Linux is out there. And why is it getting attention? Because of economics -- it's cheaper.
Q: What about EMC (EMC), which hopes to make software 30% of its business in the next few years. How is the competition going?
A: When you look at the competitive landscape, not much has really changed other than marketing rhetoric from the hardware companies about becoming software companies. The products I compete with in the marketplace haven't fundamentally changed in the past two years. With EMC there's only overlap in two of about five of my major product lines. It's the same thing with Sun. The actual product competitive landscape hasn't changed at all.
Q: Are there new technical developments you'd care to highlight?
A: The most recent announcements were the delivery of the Linux capability and the IBM capability. The Windows side and HP we've had for some time. So we really just achieved our vision of cross-platform technology.
Q: Is Linux adoption picking up with businesses?
A: Like many things in the technology sector, it gets a lot of attention, and it gets a lot of marketing rhetoric. But as far as its actual adoption into the enterprise, it's slow and steady growth. Right here in your backyard in Wall Street, certainly, the financial institutions are taking a very serious look at it and in many cases are starting to move toward using it in core systems. Stone is an associate editor of BusinessWeek Online and covers the markets as a Street Wise columnist and mutual funds in her Mutual Funds Maven column