The markets in late October were unkind to stocks of most computer-storage companies. Spooked by a Securities & Exchange Commission probe into hard-drive maker Seagate Technology (STX), as well as that company's luckluster guidance for its fiscal second quarter, investors left the sector in droves on Oct. 22. Seagate fell 25%, to $22.28, and stocks of its competitors booked double-digit losses.
Do investors have good reason to run away from the industry, or was this an overreaction? Gary Bloom, chairman, president, and CEO of storage-software maker Veritas (VRTS), which reported its third-quarter results on Oct. 22, thinks the latter is the case -- at least for suppliers of storage software.
Veritas, the world's largest independent maker of such software, benefited from government and corporate spending on storage as it produced a record third quarter. Profits for the period more than doubled vs. a year ago, to $77.6 million, while sales jumped 23%, to $450.9 million. What's more, Veritas' estimate for its fourth-quarter results came in at the high end of Wall Street's projections. It expects revenue of $480 million to $490 million and net income of 21 cents to 23 cents per share. Veritas' stock rose 4.8%, to $35.57, on Oct. 23 -- just shy of its 52-week high of $36.96, reached on Sept. 3.
What's Veritas' secret? It has lured customers away from rival Legato (LGTO), Bloom says, after it was recently acquired by storage-hardware maker EMC's (EMC). What's more, corporations and government agencies are discovering that the latest storage software can, in some cases, allow them to delay purchases of storage hardware. On Oct. 22, Bloom talked to BusinessWeek Online reporter Olga Kharif about why Veritas' future looks bright. Here are edited excerpts of their conversation:
Q: Where is your revenue growth coming from?
A: We had solid performance across the board. Geographically, Asia Pacific began rebounding from SARS. But the real strength came from our U.S. enterprise business -- and leading the charge there were government sales.
Q: Why are you seeing so much growth there?
A: During the downturn, we saw government as a huge opportunity and made a big investment in sales-and-service capacity for that market. We've expanded our product offering. We've invested in relationships with key government-systems integrators, which gave us a virtual army of people to help sell into that market.
Everyone else talks about layoffs, but we ended the year 2000 with 4,800 employees -- and we have more than 6,300 today. We invested more for growth during the downturn than virtually any other software company. So as the market starts recovering, that investment is paying off. Plus, the third quarter coincided with the end of the federal fiscal year, and that's the federal government's biggest buying season.
Q: What about corporate IT spending -- are you seeing any signs of a recovery?
A: It's a little bit hard to tell if overall IT spending is improving. But we've seen a continual improvement for several quarters in the buying climate for our products. I don't know if we're a good proxy for the industry. I think we're out-executing the industry and delivering better results.
Q: Why are you doing better than other storage companies?
A: I think customers are getting smarter about their storage. They tend to buy when they need things, vs. forward buying. They tend to be much more discriminating on whether they get a real return on their investment. And they want to buy software that gives them leverage over their hardware purchases, so they don't have to spend a whole lot more money on those.
The fact that we're delivering record results for four quarters in a row is an indicator that we deliver this value. We can help customers reduce the costs of labor and improve hardware performance for less than what it costs to buy more hardware.
Q: You now rely less on sales of software through hardware manufacturers and more on selling it through distributors. How does that benefit Veritas?
A: We preinstall some of our software into boxes shipped by hardware companies, predominantly by server companies like Sun Microsystems (SUNW). As a percentage of revenue, that's now down to 10% of our business, vs. 20% two or three years ago. Because we sell more of our products independently, that gives us better sales predictability than virtually any other software company.
Q: When EMC acquired in July your competitor, Legato, the only other large, hardware-independent storage company, a lot of investors became concerned with the potential effects on Veritas. What has happened so far?
A: It's turning out great. We said all along that EMC's buying Legato would improve our relationships with all of EMC's competitors -- such as Hewlett-Packard (HPQ) -- and it has. We said all along that customer conversions from Legato software to Veritas would increase, and we're already close to 100 conversions. [Analysts say that is happening as customers search for more hardware-independent software products.]
Effectively, EMC has eliminated from the marketplace the only other independent software vendor selling backup and [disaster] recovery software. That leaves us as the only independent market player [not tied to a particular brand of hardware], with a sizable -- 50% -- share of this market.
Q: Storage software, being a hot area, is attracting a lot of competition -- from startups as well as from software giant Microsoft (MSFT). Are you expecting to feel more competitive pressure?
A: We aren't seeing a lot of pressure. The one advantage that we offer that Microsoft can't and won't provide is the ability to provide backup consistently whether you're in the Windows, Unix, or Linux operating system environment. Say a customer has both Windows and Unix hardware. If it decides to use Microsoft's product, Windows Storage Server 2003, it will need to use somebody else's, by default, for Unix. But most companies want to use the same software across both environments, and we give the customer that ability.