Exclusive Interview With Rick Belluzzo, Quantum’s CEO and COB

  Rick
Belluzzo, 55, chairman and CEO of Quantum, joined the company in September
2002, replacing Mike Brown. Before that, from February 2001, he was president
and COO of Microsoft, a company he joined in September 1999 and where he served
as group VP of the personal services and devices group and group VP for the
consumer group. Prior to Microsoft, Belluzzo was chairman and CEO of Silicon
Graphics. Prior to that, he was executive VP at HP with responsibility for
printer, personal computer, and computer systems and services businesses. In
total, he was at HP for 23 years and held numerous positions in finance and marketing.
His first job at HP was in the accounting department at the Santa Rosa site,
and then, in 1978, he was promoted to accounting manager for the Disk Memory
Division in Boise and then controller for the division.Belluzzo
serves on the board of PMC-Sierra and JDS.Born in
San Francisco on November 26, 1953, he began working at the age of 8, doing odd
jobs from sweeping doctors’ offices to picking prunes at nearby orchards.Belluzzo
holds an accounting degree from Golden Gate University.

Rick Belluzzo [Not waiting for the question]
When we met, when I first joined, at the Hyatt here, six years ago or
whatever, we were mostly a tape drive company, we were mostly a company built
around selling DLT tape drives to OEMs. You know today, we really believe we
have transformed ourselves to a storage systems company, starting with out tape
automation products, but recently with increased focus on disk-based backup
systems, as well as our software products with StorNext. So we really have
positioned the company in a new area, and a lot of that became much more
focused in 2006 when we merged with ADIC. That really began the process of our
focus on de-duplication and using StorNext and the RockSoft technologies there
to build the position that we’re in today. So we feel like that transformation
has been very aggressive, very challenging at times. When we talk about what
we’re doing, all the areas of focus, it really is now about making sure that we
are fully a systems company, storage systems company focused on tape, on disk,
on de-duplication, our StorNext system, and on making Quantum a more valuable
company than what we were several years ago.

StorageNewsletter: What’s your reaction when someone says that Quantum is a tape
company?
I would just say that tape is an important part of our business, but it
is only a piece of the business.

But if you add up tape drives, automation and media account for more
than half of your revenue.
That’s correct. We’re a company that’s focused on what we call, storage
systems that we talk about edge-to-core, from the edge of the network to the
core and its disk, and its tape and software, and its services, and working
with customers – where tape makes sense we deliver tape, where disk makes sense
we deliver disk. We have management software that makes the disk and tape
backup process work effectively together, so we have become a storage systems
company focused on disk and tape and software.

When will disk revenues actually compensate for the decrease in tape revenues
within your company?
Well, we don’t measure it that way, because if you look at our financial
results, you’ll see that our gross margin, our contribution of revenue,
continues to grow. Replacing the sale of tape, OEM tape drives to OEM system
companies like Dell, that had very low margin, we don’t intend to replace that
revenue 1-for-1, because we’re building software and systems that have much
higher value. So the better question is what is the plan to replace the margin?
And in that sense, we have made very good progress.

DATA DOMAIN / DE-DUPE

Currently, you emphasize D2D backup and de-dupe. Why then do EMC or
NetApp prefer to tap Data Domain over Quantum in order to get their hands on
de-dupe technology – especially since EMC ultimately paid more than $2.2
billion, given that the market cap for Quantum was closer to $183 million at
the time? Even more importantly, given that Quantum has received $100 million in financing commitment from EMC?
You’d have to ask EMC that question, but I will give you my opinion. If
you think about the emphasis on the valuation of Data Domain, we first look at
that more positive than negative. The fact is that this is a very hot, exciting
segment of the storage industry. And we have a strong platform of technology
and product, that we believe is in the very early phases. Data Domain was doing
it longer than us, for certain, they were in the market longer, they had a
better installed base and market position than ours, we’re not defensive about
that, the facts are the facts. And I think that NetApp saw Data Domain as a
natural extension to them, they were NAS-focused, much as NetApp was, they made
a move to do an acquisition, EMC must have felt threatened by that, so they
moved to acquire it themselves. That’s the history of what happened. But we
think of it primarily as a positive indication that this industry and market
segment are very exciting. We have no regrets about being in our position and
we feel very good about the potential that we have. And it’s very early for us,
you mentioned market caps, but it’s very early for us. We think that over the
next year with the work that we’ve done, the new products that we’re launching,
with our StorNext file system, all the pieces that we have, I assure you that a
year from now we will sit here and talk about a very different story in terms
of the acceptance of the product and technology.

How would you compare the de-dupe technology of Data Domain and Quantum?
The core de-dupe technology is not that different. What Data Domain has
done well is that they’ve focused on the velocity market, which is NAS-based,
lower-end, easier to implement. Quantum focused on VTL, larger-scaled solutions
that took a lot more attention, in terms of selling and engineering services.
That’s the way the market is defined. And with EMC, Quantum is very successful
in the enterprise space. Data Domain was more successful in the larger volume
part of the business. And that’s been the primary difference. We have always
intended to address the other market segment, and in fact, we said in our last
earnings call that we would introduce a new family of DXI product focused on
that segment, and we will introduce that product this year, and we believe that
will open a whole new segment of the market for us to complement our
VTL-enterprise oriented solution.

How will your revenues will be affected EMC’s acquisition of Data
Domain, since EMC is one of your OEMs for de-dupe?
What we said is that we believe that it will have a minimal impact, we
have an ongoing relationship with EMC, and certainly our growth potential is
impacted, but given the other opportunities we have to grow the business, we
feel it will have a minimal impact, and furthermore, we will find new partners
as well, because the market is still very wide open, and there’s a number of
larger players that do not have good partners. As we said in the last earnings
call, we will have other partners besides EMC, yet to be determined.

Quantum won a patent infringement suit (and received $11 million in damages)
against Riverbed for de-dupe. Do you plan to sue any other companies?
We have not pursued other opportunities, not because of the patent, but
because we wanted to put our focus on winning in the market place. The patent
that was at stake there was a very fundamental patent, I think over time other
companies will have problems with our patents, but we decided we were going to
build the company on winning customers and not winning lawsuits, but we could
win lawsuits, too, if we decided to.

Will you venture into de-dupe for primary storage?
I think that we will, in our next release of StorNext, you will see that
we have more deeply integrated de-dupe into the StorNext technology. Over time,
de-dupe will take a lot of different forms, today it’s focused on backup, it
will increasingly be focused on near-line applications, and at some point in
time, as it becomes more refined and more performance solution-based, it will
have some impact on primary storage also, that’s our expectation.

What about WAFS, as Riverbed has done, with a specialized appliance?
Our focus right now is backup. We will then shift our focus over time to
other near-line storage. But the point is that de-dupe technology is not only a
storage technology, it’s also a data communication technology, so our future
technologies will take into account the importance of efficient communications.
In fact we do that today with replication. We de-dupe and we replicate, which
is in fact another data transmission advantage of de-dupe. And you’ll see all
of that changing over time, where there will be technology at the edge,
technology at the core, and we’ll use the efficiency of de-dupe to have better
communications technology.

Have you had any offers to acquire Quantum? There were rumors about
NetApp, after they lost out on Data Domain.
We’re not focused on that. We have a very exciting product generation
path we’re on now. We would like to get our stock price up through having
better success in the market. And if someone wants to acquire us, that’s
something the shareholders will decide. But we’re not focused on that right
now.

It’s always difficult to get figures concerning the de-dupe ratio. Since
you’ve had this product now for several years, what roughly is the average for
all the users, all applications included?
Typical ratios between 15 and 20 times reduction.

OEMs

Who are your other OEMs for de-dupe products? (OEM and partners of
Quantum: Dell, EMC, Fujitsu-Siemens, HP, IBM, Microsoft and Symantec.
Right now, no. You can look at the market and draw your own conclusions
about who has an effective plan and an effective solution for de-dupe, and
you’ll find there are many gaps with many companies. So we will discuss a wide
range of relationships with companies that include everything from reselling
our product to using our technology in combination with their product. But it
applies broadly, it’s storage systems companies, it’s backup application
companies, and there’s a role for de-dupe in many many places. I read in The
Herald Tribune today a big article on
data center challenges. Size and power. De-dupe technology is just going to
play an important role to create a more efficient storage environment that will
be lower cost, lower total cost of ownership and lower power consumption as
well, and it will apply very broadly in many different products and
applications.

Who are your OEMs for your well-regarded StorNext workflow and archiving
software?
We have partners, more than OEMs. We have partnerships with people like
HP, and we have many resellers.

TAPE

Which tape technology will you continue to enhance: LTO (going to
LTO-5), DLT, DAT/DDS?
Part of the transition of the company is that a few years ago, we were
developing tape drives in a variety of technologies, today, we only have one –
LTO. And we’re partnered with HP even on that. We have solutions with DLT, we
resell products, we have automation products, etc. But all of our advanced
development is in LTO, partnered with HP. We will be in LTO-5 with a series of
products that will be an HP and Quantum product, we’ll have our own product,
yes. But we share a lot of development with HP.

For DATD/DDS, your most recent DAT160 drive comes from HP. Will you
continue with them through the next generation DAT320?
No. We think the low-end tape market is almost vanished. And so we
decided a long time ago not to make that investment.

On your web site, Travan media are still available. Do you still have buyers
for these tape cartridges at 20GB only?
Absolutely. We support our products for a very long time.

What are your sources for LTO, DLT and DDS/DAT media?
We have purchased media from several sources. Maxell is probably our
largest source.

Why
hasn’t Quantum enjoyed the same success as Prostor RDX in removable hard disk
drives with GoVault?
I would
say it’s a matter of focus. We have been focused on being a storage systems
company. And I think that our emphasis on our GoVault removable hard drive, we
just felt the business model for Quantum was more appropriate as a storage
system company than to be a device company. But we’ll continue the product.

The
product doesn’t go beyond 320GB, while today, 2.5-inch HDDs have reached 640GB.
Does that mean that you will not enhance GoVault?
We also bundle with de-dupe software as well, so we’ve just taken a different
approach, but we’re continuing the product.

FINANCIAL

Annual Financial Results of Quantum Since 1998
(Fiscal
year ending in March)

Financial Results of the Quarter Ending September 30, 2009

Since
your arrival as CEO at the company in September 2002, Quantum has accumulated
net losses every year, for a total of $727 million over the last seven fiscal
years. When will the company see a profitable fiscal year?
We feel
we’ve been profitable every year, we just have an accounting disagreement on
how we do that, because we have acquired companies, and as a result, we have a
constant write-off of intangibles. If you look at the way technology companies
account today on this non-GAAP, cash-flow basis, we had our best year last year
that we’ve had in a number of years. I know what you’re asking, but when you’re
transforming the company, if you read analysts reports who track us, they
report non-gap results for us. Last quarter, in fact, we were GAAP-profitable.
Our results are getting much stronger. Next quarter too, perhaps. When you look
at GAAP performance, non-GAAP performance, cash flow, etc., gross margins,
every ratio you look at, as a company we are more successful financially than
we were in previous years.

Similarly,
since you’ve been CEO of Quantum, revenues went down, then increased following
the acquisition of ADIC – in August 2006 – in FY06 and FY07, and since have
decreased for FY08 and FY09. When will Quantum experience yearly growth?
That’s
our objective. I can’t know yet, but our objective is to create a storage
systems company that has growth and high margins. And that’s what we’re doing.
There are legacy parts of our revenue stream that are declining. And we’ve said
through Wall Street and to the investment community that we are changing and
building a revenue stream of a storage systems company that has more profit. If
you look at our numbers, you’ll see how we’ve changed the company. Put it this
way: a $1 billion company with gross margins of 26-27% is not as valuable as an
$800 million company with 42% gross margin. And that’s what we’re doing as a
company. We may be smaller than $800 million, but we’ll have margins that
continue to get better. As you know, a software company with high gross margins
and lower revenues is more valuable than a hardware company with low gross
margins that may be larger

During an
interview with me in 2003, you said: “Our strategy is to be a leader in data
protection.” When do you see that happening?
I think
today we are, with this revolution in de-duplication, we’re positioned to be
more of a leader than we ever were before. But we have to turn that into more
customers, more revenues, in the new field of disk-space backup with
de-duplication, and as we do that, we will be recognize more as a leader

Do you
regret the acquisition of ADIC for the high price of $770 million, in light of
the minimal revenues this operation brought to your sales? (Especially with
Rocksoft and the de-dupe technology you acquired in 2006 for $63 million from
ADIC)
We could
not be doing what we are doing today had we not brought the two together. And
how would you see the alternative? Of continuing to OEM tape drives at 20%
gross margins? I mean, that was not a sustainable business model. Look at other
tape-oriented companies in the industry, they’re all going. StorageTek is going
through multiple owners. Here in Europe, Tandberg has filed for bankruptcy,
Overland Storage is almost out of cash, and that was a path we decided not to
pursue, we decided to take a different path, and we took a risk by bringing
ADIC and Quantum together to take that different path, and I have absolutely

Do you
regret selling off the Snap NAS appliance business?
I don’t know. It has struggled everywhere it’s been. We made that
decision, we had to do something to reduce our losses. And that was a big
investment area. Would I have liked to have had that NAS systems expertise in
the company today? Yeah, I probably would have. If we would have known some of
this, we may have taken a different course, but I don’t know.

PERSONAL QUESTIONS

Do you have any regrets about your strategy at Silicon Graphics?
Oh, probably. I haven’t thought too much about it in a long time. I
think it was a brief flash of my life, and…

Have you seen what Wikipedia has about you? ”Much of his career is
clouded in controversy and many consider him to be responsible for the demise
of SGI. He was a strong advocate at HP to reduce their investments
in HP-UX and PA-RISC in favor of Windows NT and Titanium, as well as getting
SGI to cut their investments in IRIX and MIPS. The effect of these decisions
was to destroy two of the leading platforms in 64-bit computing and greatly
increased the opportunity for Intel and Microsoft to get into high-end
computing.”
I’m very confident about that today. The only company that is focused on
a proprietary Unix, proprietary microprocessor strategy is Sun. And you know,
Sun has died as well. It was very clear that proprietary systems technologies –
 there’s no future in it. You could
not compete. IBM even has lost ground… and it’s a different company, and it
wasn’t SGI or even HP at that time, HP was losing so much money in its
proprietary Unix business, and today it’s a leader of services. So we’re
absolutely stronger and clearer on that today than I was then. I really stand
by those decisions. It’s hard, things transform, things change and companies
have to take risks to make the changes

What’s your opinion of Rackable’s low-cost acquisition of SGI?
I think SGI has always been a good brand, and a company with good
technology, and if Rackable can turn it into something, that would be a good
thing.

Hobbies? I’m comparing your answers from the last time we met…
Are you going to update my Wikipedia page? Somebody ought to. Let’s see,
my hobbies are travel, and I do a lot of things outdoors, exercise, scuba
diving. Was that something I said last time? I don’t get to as much, but I’m
sure I was diving more than.

And skiing?
Skiing. Still like to ski.

Annual salary?
I honestly couldn’t say. I don’t know how they calculate it. Look it up
on Wikipedia.
[According
to Forbes, total
compensation for Rick Belluzzo is $1,994,465 including a salary of $700,000.
Ed.]

What specifically are you doing to avoid being fired by your board?
That’s easy. Let me be clear. We are doing two things, and the board
agrees with me, and our employees understand what we have to do, and if we do
this well as a company, I’m not going to be fired. The first one is to manage
our tape business, to continue to improve our profit margin, not our revenues,
but our profit margins. For us, that means operating income that’s in double
digits. In the past with tape, for both ADIC and Quantum, were only in single
digits, often low single digits. We want to be 10-11-12-13% profitability. And
to manage the tape business to do that, because it’s a mature business. And
secondly it’s to grow our disk systems and software business, every quarter.
Stronger and stronger and stronger. Those are the two things that if we do them
well, the company will be successful, I won’t be fired, and our employees
understand that as well, that this is what’s important for the company as we go
into this next phase.