Daniel Warmenhoven isn't a household name, even in Silicon Valley. But in the world of corporate computing hardware, he's unique in one key way: He's the only executive to build a billion-dollar business from scratch in the last 15 years.
His company, Network Appliance (NTAP), is on track to continue its decade-long growth tear this year. First Global analyst Devina Mehra foresees it growing 26% in the year ending April, 2006, to $2.2 billion. And while analysts have long expected NetApp to be trounced by larger rivals such as EMC (EMC), it continues to maintain sky-high gross margins of 61% -- even as it moves into new markets such as storage-area networks.
EGO IN CHECK. The secrets to his success are many. Considered a savvy strategist and a supersalesman, Warmenhoven possesses a congenial, consensus-oriented manner that has helped him retain the same talented corps of executives for more than a decade (see BW Online, 12/27/05, "NetApp's Affable Aggressor").
"They're all filthy rich, but they stay because they truly enjoy the challenge and each other's company," says analyst Steve Duplessie of Enterprise Storage Group. "That's a testament to Dan, and the fact that he is smarter than his ego is big."
In this interview, Warmenhoven shares his strong opinions on management, U.S. competitiveness, and a range of other topics with BusinessWeek's Computers editor Peter Burrows. Edited excerpts follow:
During your tenure, NetApp stock has enjoyed a 34-fold increase. I can understand that you wanted to see the company through the downturn that hit when the Net bubble Burst. But that job is done. Do you ever think of retiring? At the start of every year, I sit down with my board and give them a commitment for the next two years. Around Christmas of 2000, I told them they should start searching for my successor.
But then my wife, Charmaine, who is a psychologist, started doing her psychological pick-me-apart thing. We figured out that the thing I really don't like about the job is the travel. It was so depressing. I'd get into the car headed for the airport not knowing what bad thing would happen -- only that something bad would happen: A delayed flight. A missed connection. Something.
But we figured out that I really do enjoy my job. The best friends I have in my life are inside Network Appliance. Mostly, I just enjoy the game. So we came up with a solution: We bought a plane.
That's not a typical arrangement, to renew your vows to stay on as CEO at the start of each year. Why not give a longer commitment? One of our board members, Mark Leslie, once told me I had to give a commitment for a finite number of years. I told him, "Fine, I'm done," and I handed him my badge. He said, "That's not the answer I wanted to hear!"
But the truth is, there are lots of factors to consider. How is my health? How is my wife's health? How interested am I? I don't think you should be CEO of a company this size unless you're fully engaged. You can start to lose interest. And I don't know how I'm going to feel in a year or two years or three years. Who knows?
People who know you know that you're outspoken on the topic of stock-option expensing. What are some of the other issues you feel passionately about? Sarbanes Oxley. It may go a long way toward increasing shareholders' confidence in Corporate America, but it won't diminish fraud and other types of unethical behavior. New controls will just be abrogated the same way the old ones were.
Look at MCI and Enron. They're not being prosecuted based on new code. Those cases are based on laws that were already in place. So I really think it was a futile effort to try to legislate business ethics. And it has had a set of consequences that aren't helpful. For example, I used to have a much closer consultative relationship with our auditors, but you really can't do that anymore. You almost need a separate team of financial consultants so you can then go to your auditors and say, "Here's where we stand."
You shouldn't be able to control your auditors, but you ought to be able to ask their opinion -- to ask, "Is this something you'd support, or that you'd have a problem with?"
We used to do that all the time. Instead, our audit fees have doubled [since SOX was implemented], and the value derived has halved. So I think SOX took a terrific 10-year relationship we had with Deloitte & Touche and made it far less productive.
Is SOX an isolated problem, or is there a larger concern? I think the whole attitude toward business in America these days is still suffering from the abuses of the bubble period. But the long-term consequences are that we will diminish America's competitiveness. You can see it through the brain drain. If you can't get the big options package here -- well, they don't have that problem in India or China. So I'm not sure the American people and politicians are thinking about this as a global issue.
I personally think we're heading right down the same track Europe has been on. They've got great education [systems] and excellent people, but name a successful European computer company? They've dampened the entrepreneurial spirit and the opportunity to create a highly successful enterprise. So my fear is that we're going to end up pushing a lot of investment and entrepreneurs to other countries that we really ought to be considering our competitors on the world stage. I'm glad I had my era when I did, because my son's era is going to be a lot tougher.
But isn't that a cop-out? You and other tech CEOs in your 50s have made your money, and yet you're for the most part just pointing to the problems rather than offering real solutions. Shouldn't your generation of CEOs be doing more? You're right. I've made my money, and I can live happily after. But I don't think we're empowered to stand up. That may be a cop-out. But the attitude toward business is still pretty negative, particularly toward tech.
I understand you also have a different view about governance practices related to the age of directors. For example, Cisco Systems (CSCO) has announced that Sequoia Capital's Don Valentine [the famed venture capitalist who made early investments in Apple (AAPL), Cisco, and others] will not seek reelection to its board because he's over 70. Will he step off the NetApp board as well? The only public board he'll remain on is NetApp. Why would you want to get rid of someone with his talent and experience? If he was senile, that would be one thing. But he's still one of the sharpest minds you could ever meet, and he has been through every kind of circumstance you could imagine three or four times, and lived through them.
So I don't think the 70-year-old age limit is really about corporate governance or investor performance. It's a perception thing.
Let's talk some about NetApp. Over the years, you've faced many challenges from companies that analysts figured might put NetApp out of commission. Have you finally won Wall Street's trust? They've always been against us. Auspex was going to kill us. Sun (SUNW) was going to kill us. Microsoft (MSFT) was going to kill us. Everyone was going to kill us.
One of my favorite memories was the day EMC finally unveiled their "NetApp killer" product a few years ago. Our stock traded up almost 40% that day [when analysts saw the details of EMC's product offering]. I think there are still some skeptics, but it's down to a much smaller set. And our short position is always very large. I just love to see the shorts get squeezed!
Clearly, your main rival these days is EMC. How would you contrast the two companies? There's definitely a contrast in management styles. At least before [current EMC CEO Joe] Tucci arrived, it was "perform or off with your head" over there. That's why they had a new head of sales every year.
But I have a much different attitude. I'd rather find someone who is highly capable and personally driven to achieve something, and give him a great big stretch objective. I'd much rather have you come up short on a stretch objective than build in a pattern of conservatism where people are afraid to commit to a big goal because they might not make it.
Some people say I don't hold my people accountable. But they probably achieved far more than they would have without that stretch goal, so how can you punish that?
I describe it as the difference between a West Coast offense and the Vince Lombardi-style East Coast offense. That approach is very scripted. Every player knows where he's supposed to be at every instant of every play. There are no decisions to be made.
But in the West Coast offense, you teach players to size up situations and make their own decisions. It's not predetermined. The theory is that really good players can make a better decision based on the circumstances they're faced with than the coach can make. That's how I run my company, and people really flourish in it, and feel a sense of personal accomplishment they can't get anywhere else.
Evidently, you like your chances against EMC. I'll put my sales team against EMC any day, for that reason. I bet we win three out of four times we go head-to-head -- but then, that's partially because they only compete for deals they think they can win. Maybe that says that 25% of my salesforce is stupid!
You used to have a very acrimonious relationship with EMC in the late 1990s [when the companies accused each other of raiding each others' employees]. Is that still the case? I have the highest regard for Joe Tucci. I spoke with him a few months ago, and it felt like a lovefest. He said it seemed to him we were going to be the two players with long-term significance [in the storage market], and that we would have to learn to compete and cooperate at the same time.
I told him I thought he had done an amazing job. Five years ago, we kind of gave EMC up for dead, thought they would never get back off the ground. And the truth is, I really enjoy competing with them. If we can beat them, we've just beaten the best. There's nothing better than knocking off the world champs.
So do you think you get your due, as a businessman, given all the attention and accolades received by many of your high-tech peers? I'm not suffering from lack of attention. I get certain industry recognition. But I'm not Larry Ellison. I'm not as entertaining as Scott [McNealy of Sun]. I run a medium-size company, and I'm not striving to be a rock star. And I can still travel, and no one recognizes me.
But it does get old having to introduce not only yourself but also your company. The CEOs of some of our biggest customers don't even know what we do.
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Burrows is BusinessWeek's Computers editor in the Silicon Valley bureau
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