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In addition to the amazingly strong financials $7.70 Book value, $2.50 cash and a price to sales/ratio of 0.5 we have this great view, which after going through the numbers and conference calls, look really good. A great example of a misunderstood company. This article tells the story better than I could. I found it on the Yahoo thread.
Exabyte makes a comeback
By Kris Hudson
Camera Business Writer
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Four years ago, this all would have seemed implausible, maybe even a
little absurd.
Four years ago, Exabyte Corp. was the market leader in the mid-range
tape drive industry, well on its way to shipping 200,000 of its 8 mm
tape drives for the year and racking up annual sales that would amount
to a whopping $32.4 million in net income and $381.8 million in revenue.
And, four years ago, Exabyte was gearing up to hit the market with its
Mammoth I tape drive, the first installment in a new generation of
drives that the Boulder company hoped would solidify its industry lead.
The company's stock (Nasdaq: EXBT) hit a high of $23.31 for the year.
It was 1994, and the words "Exabyte" and "comeback" didn't belong in the
same sentence.
But this is 1998, and the story has changed quite a bit.
In the span of four years, Exabyte has been dethroned as the industry
leader in mid-range tape drives by Quantum Corp., a relatively new
competitor that shipped 356,000 of its Digital Linear Tape drives last
year in comparison to Exabyte's 192,000 shipments.
Exabyte's financial picture also has taken a downturn from 1994. Last
year, the company reported a net loss of $30.8 million, and its $335.7
million in sales of tape drives, cartridges and tape libraries was
dwarfed by Quantum's $1.2 billion in DLT-related sales. What's more, for
most of the past two months, Exabyte's stock has been slumming in the $6
to $8 range.
"Comeback" is now a buzzword used from Exabyte's highest offices to its
manufacturing floor. These days, the concept doesn't seem quite so
absurd.
"Now we're on the outside looking in," Exabyte vice president of
marketing Bruce Huibregtse said. "And our opportunity for a comeback
comes with the next generation."
Exabyte has pegged its comeback for mid-1999 < the date by which the
company plans to make its first deliveries of the faster,
higher-capacity, follow-up product in its Mammoth line of drives: the
Mammoth II. But Exabyte will have company in its high-stakes race to
bring the new drive to market because the company's competitors aren't
standing pat.
Milpitas, Calif.,-based Quantum plans to debut the first of its new
series of DLT tape drives, the Super DLT I, in mid-1999, too. And a
third competitor < a group comprised of International Business Machines
Corp., Seagate Technology and Hewlett-Packard Co. < has devised the
technical makeup of a new family of tape drives, called Linear Tape
Open. The LTO drives are scheduled to hit the market next summer.
Exabyte executives say < and some technical analysts agree < the Boulder
company has the best chance of getting its new drive on the market
first. If that happens, Exabyte hopes the Mammoth II can both win back
market share from Quantum and establish itself as the preferred upgrade
for the 1.5 million Exabyte customers who already use the company's
older drives.
But what if Exabyte stumbles and somehow misses its targeted delivery
date for Mammoth II, much like it did with Mammoth I?
"We don't deal with 'if it doesn't work out,'ÿ" said Bill Marriner,
Exabyte's chairman, chief executive officer and president. "I think
we've taken the necessary steps to make sure that this is adequately
funded and resourced to ensure that we pull off this program
successfully."
Indeed, Exabyte has made several moves to prepare for the Mammoth II
push, including a redesign of its production process. But make no
mistake, for Exabyte, a 13-year-old company that draws the majority of
its revenue from tape drive sales, the risks in this race are as high as
the rewards. And the importance of Mammoth II's success is not lost on
the company's 940 employees in Boulder.
"This is a bet-the-company type of phenomenon," said Steve Smith,
Exabyte's chief financial officer.
RUDE AWAKENING
How did Exabyte end up needing a comeback in the first place?
Several factors came into play, but two primary reasons stand out. The
first is that Exabyte missed its targeted delivery date for Mammoth I by
more than a year. The second is Quantum.
For Exabyte, Mammoth I was billed as the first generation of an
ambitious, new line of drives < a product line that Exabyte would
manufacture mostly on its own instead of through its former method of
assembling parts bought from suppliers. Mammoth I, a helical scan drive,
has a data storage capacity of 20 gigabytes and a data transfer rate of
three megabytes per second.
However, as a first-generation product, Mammoth I includes several new
parts and technologies that differ from those in Exabyte's earlier
drives. In particular, Exabyte's development of a new scanner < a
circular drum that passes the drive's heads over the tape < suffered
delays. To a lesser extent, delays also stemmed from the Mammoth I
production process, which required more labor and time than Exabyte had
anticipated.
As a result, Mammoth I did not hit the market in significant volumes
until early 1997 < five quarters later than Exabyte had originally
predicted. "That allowed Quantum to penetrate our sacred space," Smith
said.
While Exabyte struggled with development of Mammoth I, Quantum finalized
its purchase of Digital Equipment Corp.'s data storage business in late
1994 and discovered soon thereafter that among the assets it gained in
the deal was a line of digital tape drives already developed and ready
for market. Since debuting its first DLT drive, the DLT 4000, in early
1995, Quantum has seen its sales of DLT drives nearly double each year.
According to San Jose, Calif.,-based market research firm Dataquest,
Quantum shipped 78,500 DLT drives in 1995, 158,500 in 1996 and more than
356,000 last year. Some of those sales were to Exabyte's major
customers, such as original equipment manufacturers IBM and Sun
Microsystems.
"Literally the day that the (Digital Equipment) deal formally closed and
Quantum took ownership, Quantum's phone rang off the hook from virtually
every major systems OEM that wanted to get involved with DLT," said
Geoff Hogan, Quantum's marketing manager for its Super DLT program.
Prior to introducing DLT drives in 1995, Quantum was known mostly for
its disk drives, which still account for most of its sales.
Quantum's DLT 4000 tape drive offers 20 gigabytes of capacity and a data
transfer rate of 1.5 megabytes per second. An upgrade drive that Quantum
introduced in early 1996, the DLT 7000, offers 35 gigabytes of capacity
and a transfer rate of five megabytes per second. Since Exabyte's
Mammoth I did not hit the market until 1997, Quantum's early DLT drives
offered more capacity and speed than the drives Exabyte had available at
the time.
"(Quantum) was in a strong position, and demand for that next level of
capacity was growing," said Dennis Casey, a technical analyst with Santa
Barbara, Calif.,-based market research firm Strategic Research Corp.
"The window of opportunity for that next level was there, and DLT was
there to fill it."
Three years later, Exabyte is still ruing the missed opportunity.
"If we had been on time, we could have been a $1.5 billion company,"
said Huibregtse, Exabyte's vice president of marketing. "Instead, now
we're at about $300 million (in annual sales)."
RACE TO REDEMPTION
Exabyte is now seeking its redemption in the next round of new tape
drives. And Exabyte's executives aren't the only ones suggesting the
company already has some advantages over its main competitors.
More specifically, Exabyte's primary competitive edge lies in the fact
that the Mammoth II has many parts and technological aspects in common
with Mammoth I, though the new drive will have a larger capacity (60
gigabytes) and a faster data transfer rate (12 megabytes per second)
than its predecessor. In developing Mammoth I, Exabyte purposefully
"overdesigned" certain parts of the drive so those parts could be used
in production of later, more powerful generations of the Mammoth line.
Thus, an estimated 90 percent of Mammoth II's design is "leveraged" from
Mammoth I.
"Mammoth II will be a much more evolutionary product, whereas Mammoth I
was a much more revolutionary product," Marriner said.
Add to that the fact that Exabyte engineers have conducted a complete
overhaul of the company's production process to move its focus toward
automated functions rather than manual work. That way, the company hopes
to gain more precision and consistency in its production tests and
delicate assembly work. Exabyte production managers plan to move some
assembly of Mammoth I drives to the automated line next month, followed
by the first phases of Mammoth II production in November.
"This line will produce twice the output at (the same) headcount,"
Exabyte manufacturing director Matt DuCoeur said. He later added that
the debut of the new production line will not cause Exabyte to cut its
work force if demand for Mammoth products meets the company's
projections.
As a product, Mammoth II has some unique features not found in Mammoth
I. For example, Mammoth II has eight heads for reading and writing data
to tape, as compared to Mammoth I's four heads. Exabyte has installed
circuitry near Mammoth II's heads that will allow the drive to
simultaneously read and write data to tape < two functions that Mammoth
I performs separately. The company has boosted Mammoth II's
data-recording density by more than 70 percent from Mammoth I levels.
And the tape in Mammoth II cartridges has more capacity than that used
by Mammoth I because it is thinner and longer.
Even with the new features, it is Mammoth II's similarity to Mammoth I
that has Exabyte workers predicting the company will not encounter
significant production delays with the new drive, which Exabyte
engineers have codenamed "Kodiak."
"It feels a lot more in our control, because there are not so many
unknowns at one time," said Tim Hughes, Exabyte's director of advanced
technology. "With Mammoth I, everything was from ground zero. Even the
tape was new."
In contrast, Quantum's Super DLT will involve more extensive
redevelopment. As well, the IBM group's LTO drives will be entirely new
products developed separately by the three companies that devised the
LTO format.
Quantum's Super DLT, in particular, is a new generation of DLT tape
drives which will incorporate four new technologies. Those advancements
include a pivoting optical servo that uses a laser to align the drive's
tape path with its heads; a new method of clustering the drive's heads
to achieve higher data transfer rates and capacity; a "partial response
maximum likelihood" channel, or PRML channel, to provide high encoding
efficiency and recording densities; and a high-density format of tape,
called advanced metal particle media.
Quantum's first Super DLT drive, the SDLT I, will offer 100 gigabytes of
capacity and a transfer rate of 10 megabytes per second.
Quantum now finds itself in a similar position to that Exabyte faced
with Mammoth I: Developing a relatively new line of products and
"overdesigning" the format to accommodate future product versions.
Quantum is molding its Super DLT format so it can be used as the
framework for at least three generations of Super DLT drives.
About 50 Quantum employees at the company's research and development
offices in the University of Colorado Research Park in Boulder are
handling much of the company's Super DLT development work.
The challenges Quantum and the IBM group might face in developing their
new tape drive formats have some technical analysts speculating that
Exabyte will be the first to get its new drive to market.
"I think that Exabyte could surprise a lot of people," said Bob
Amatruda, a senior analyst with Framingham, Mass.,-based International
Data Corp. "I think they're going to offer a really high-performance,
high-capacity drive that is going to run with the best of them, and I
think they're going to deliver it before the rest of them do."
Amatruda added, however, that bringing a product to market is only a
prelude to convincing a company's existing base of customers to upgrade
to the new product and exposing the product to potential new customers.
In that scope, Quantum could stage a significant challenge because its
DLT drives have become known as a de facto standard in the mid-range
tape drive market.
"Nineteen ninety nine will be a very interesting year," Quantum's Hogan
said. "We'll see who gets to market and when, and who can execute. But
the one clear advantage that DLT offers is a very reliable,
high-capacity product that has a very large installed base (of
customers)."
For that matter, Mammoth II's competitors go beyond Super DLT and the
LTO drives. A host of companies are planning to introduce tape drives
that, while not direct competitors for Mammoth II, would serve portions
of Exabyte's target market. For example, Sony Corp. plans to debut an
improved version of its Advanced Intelligence Tape drive by the end of
this year.
"The next two years are really going to be pivotal years in the industry
for any technology to survive long-term," said Fara Yale, an analyst
with Dataquest.
August 10, 1998
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