Back in 1988, Daniel J. Warmenhoven was a midlevel Hewlett-Packard (HPQ) executive with a big plan. He had watched HP transform printers from a slow-growth add-on designed to work with its own computers into a vast stand-alone industry. He wanted to do the same in another fledgling market: networking.
Rather than embed networking features in HP computers, he wanted to create stand-alone devices that would let all kinds of computers communicate -- and do it far more quickly and cheaply. His plan included buying Cisco Systems (CSCO), then a small seven-person outfit that was still building products in one of its founders' homes.
When HP rejected his proposal, Warmenhoven agreed to share what he had learned about the startup with famed venture capitalist Don Valentine of Sequoia Capital, who was also considering taking a stake. "Don turned around and invested in Cisco and made himself gazillion bucks," says Warmenhoven.
SHELF LIFE. But don't cry for Warmenhoven. Six years later, he got another call from Valentine, this time offering him the CEO job at tiny Network Appliance (NTAP). It was an opportunity to recreate the Cisco strategy -- this time in storage.
Just as Cisco's routers took networking out of general-purpose servers and put them into its far more efficient routers, NetApp had a device called a "filer" that let companies create a separate pool of storage capacity, rather than have drives sequestered inside servers, where they could be used for only whatever job that particular server was assigned to do. "I really felt it was another opportunity to go clean [the server makers'] clock," says Warmenhoven. "And we have."
Indeed, NetApp has gone on to dominate the red-hot market for so-called network attach storage (NAS) gear -- and in the process create the only significant new hardware company of the last 15 years. NetApp is not only notching hefty sales (expected to hit $2 billion in fiscal 2006) but it has also managed to maintain sky-high 60%-plus gross margins, despite building its gear with commodity, off-the-shelf parts. And it has done it all while brushing off offensives from far larger companies, such as Microsoft (MSFT) and EMC (EMC), which many felt sure would mark NetApp's doom.
GOOD NUMBERS, BAD HAIR. "They're like the perfect Harvard MBA case study: All of their charts go up and to the right," says market watcher Steve Duplessie, president of Enterprise Storage Group, who in the early 1990s created a company aimed at NetApp. "We went right after him, and he killed us -- and I say that with the utmost respect."
Warmenhoven may be one of the most respected tech CEOs you've never heard of. He has earned the trust of Wall Street, not only for NetApp's 34-fold share appreciation since its 1995 IPO, but for his tell-it-like-it-is credibility (for a Q&A with Warmenhoven, see "'Everyone Was Going to Kill Us'"). He's also a hit with employees, given his good-natured personality and inclusive management style. Even rivals hold him in high regard. "The only negative I can say about Dan is that he's got to quit smoking," says Duplessie. "And he's got bad hair."
In fact, Warmenhoven has become something of an icon to a new generation of hardware entrepreneurs who try to emulate his approach to business (see BW Online, 12/12/05, "A New Breed in the Computer Biz"). That formula starts with finding a particular computing job that can be handled more effectively with a single-purpose appliance than in a general-purpose server. Then, focus R&D on creating top-notch, high-margin software that can run on cheap, off-the-shelf chips and other components.
While Cisco designs many of its own network processors, NetApp's hardware uses chips from Intel and others. "We're state-of-the-shelf, not state-of-the-art," he says.
GROWTH SPURT. NetApp is famous for its aggressive approach to sales. One of Warmenhoven's first moves there was to create a "Kill Auspex" program designed to go after the customers of the market leader at the time. He set a reward for the first salesman that could nab an Auspex customer, and some time later converted an Auspex machine into an aquarium, which is housed to this day in the lobby of NetApp's Sunnyvale (Calif.) headquarters. While Auspex started out three times NetApp's size, it was out of business by 2003 -- when NetApp purchased its remaining patents for $8 million.
Warmenhoven also stands out for growth ambitions that hearken back to the 1990s. With storage the No. 1 spending priority for CIOs, he thinks NetApp is only one-third of the way through a 30-year boom in storage gear -- and that it has the opportunity to lift its market share from around 10% today to 40% in the future.
Normally exuberant and affable, he grows frustrated when confronted with doubts about his 25%-plus revenue growth guidance to Wall St. "People say, 'What makes you think you can grow so fast?'" he notes. "I say: 'What makes you think I can't?"
"DAMAGED GOODS." Warmenhoven says he has always been an ambitious sort. The son of a General Foods middle manager, he decided at 16 that he wanted to be a CEO -- so he could control his own destiny. He had a brief stint as a technologist at IBM (IBM). "I designed one chip and decided, Well, that sucked," he says of that chapter of his career.
He then rifled up the IBM ranks, through 8 jobs in 13 years. After leaving Big Blue, he landed at HP before becoming president of a high-flier of that era called Network Equipment Technologies in 1989.
At that point, his career almost came off the rails. Soon after he arrived, NET had to restate its earnings -- bringing on an Securities & Exchange Commission investigation and lawsuits that caused the CEO to resign. That left Warmenhoven in charge of a fast-sinking ship, made worse by a stalemate on the board about what should be done. He says he resigned on Dec. 31, 1993, after the board shot down his decision to sell the company -- fully aware that he probably would have been fired if he had stayed on. "I was viewed as damaged goods," says Warmenhoven.
NEW BEGINNING. Fortunately for him, NetApp was also struggling through its own boardroom stalemate at the time, and Don Valentine had been brought in to clean up the mess. While most venture firms stayed away from Warmenhoven, given his association with a tainted company, Valentine quickly called. "At Sequoia, we've always taken the position that we would much rather have someone who's coming off a failure than a raging success," says Valentine. "Dan was desperate to win."
Warmenhoven's first months on the job offer good insight into his management style. The day before he officially joined, he called Tom Mendoza, head of NetApp's 10-person sales staff, with a simple message. With the company teetering on the edge of bankruptcy, he decided to put all of its remaining cash into building a salesforce to give its promising technology a chance at survival.
"If it didn't work, there wasn't going to be another round of financing. It was going to be 'fold up the tent,'" says Warmenhoven. He quickly set the tone for the type of culture he wanted. Mendoza, now NetApp's president, recalls that Warmenhoven concluded his first staff meeting by asking all present to grade the level of candor that had been in the room.
"He said 'Let me be clear: We can't achieve greatness until we're candid about what we have to fix. Let's make sure we face our problems in this room, so we don't have to face them later somewhere else."
STAYING IN THE BLACK. The day after NetApp announced its first profitable quarter in late 1994, Warmenhoven set out on a roadshow that concluded with a successful IPO the next October. And he hasn't taken his foot off the accelerator since. He quickly set a "stretch goal" of doubling NetApp's size each year -- a mark it achieved through much of the late 1990s. He also does his part on the sales front, spending 118 out of 250 work days last year on the road.
But Warmenhoven is more than just a good salesman, as he proved with his handling of the downturn. As sales to Net-related companies -- the source of 70% of NetApp's sales -- evaporated, he quickly refocused on more conventional companies with more mundane data storage needs, including government compliance and corporate data back-up systems.
He moved decisively to slash costs, cutting 200 jobs in 2001. During the two-hour internal meeting where the cuts were announced, he was asked whether there would be any more cuts. "I told them I hoped not, but one thing was for sure: This company will never lose money," he says. "And we never did."
BOUNCING BACK. Warmenhoven has persisted in displaying plainspoken ways. When NetApp missed its financial targets for the first time in years this July 31, he took personal blame for the fact that it couldn't ship enough products in the final days of the quarter. "I screwed up -- and I mean it," he says, admitting that he forced his team to try to rush a midrange product to market to parry a new offering from archrival EMC.
"That's Dan," says Valentine. "It's a very straight story if you tell it straight. It's a novel if you try a lot of fancy footwork." True to Warmenhoven's word, NetApp roared back the following quarter, soundly beating earnings estimates as it filled orders for the new product.
Of course, plenty of obstacles remaining in NetApp's way. It and EMC are increasingly heading into each other's turf and face competition from a new generation of startups. NetApp has struggled to show dividends from some pricey acquisitions, such as its $300 million purchase of Spinnaker Networks in late 2003.
It will also have to manage a new partnership, through which IBM has rights to sell its products. That could hurt profits if Big Blue starts taking business that NetApp might have won on its own.
BIG TALK. Robert Schultz, head of HP's storage business, says HP's recently revamped product line is far less expensive than NetApp's -- and that NetApp will continue to match the price efficiency of far larger rivals. "It's going to be a challenge for them," says Schultz.
Maybe so, but Warmenhoven hardly seems overly worried. NetApp continues to gain share and maintain its profits while expanding into new markets. He presides over a close-knit management team that has hardly changed in a decade -- a rarity in Silicon Valley. As for HP, he says, "I'm happy they're feeling happy about their success, because it means they'll get apathetic -- and we'll clean their clock."
Sounds like big talk. But many have learned the hard way that it's dangerous to bet against Dan Warmenhoven.
Burrows is BusinessWeek's Computers editor in the Silicon Valley bureau
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