StorageTek Voice - In this Issue

On Friday, June 3, an all-employee meeting was held to give StorageTek employees more information about the recently announced merger with Sun Microsystems. In attendance to represent Sun Microsystems were Scott McNealy, Chairman and CEO; Mark Canepa, Executive Vice President of Network Storage Products Group; and Bill MacGowan, Senior Vice President of Human Resources.

Pat began the meeting by citing the accomplishments that StorageTek has achieved over the past five years, including 18 quarters of continued market growth and the Information Lifecycle Management strategy that redefined the industry’s concept of information storage. Pat also spoke enthusiastically of the new products to be launched later this year, such as the Titanium next-generation tape drive and the Trinity intelligent archiving solution. With the industry as a whole struggling against the repercussions of the Internet bubble, however, the time had come to expand the business by combining forces with Sun Microsystems and its industry-leading variety of server and networking solutions.

“By instantly joining with Sun, our customers today are rethinking us – what does StorageTek mean, what is StorageTek all about – and they’re reconsidering us in a whole variety of ways,” said Pat in his opening remarks. “I’ve talked with a lot of our customers over the last 36 hours, and that’s a fact. They’re talking about us in a much broader way. And obviously by joining our 1,000-person field sales organization with Scott’s over 10,000-field service organization we instantly become one of the biggest channels to bring our ILM message and our ILM products into the marketplace today.”

This merging with Sun Microsystems would help alleviate two of the greatest challenges facing StorageTek, Pat continued, those being the problems of a brand recognition that left consumers thinking of StorageTek as rooted almost exclusively in tape-based solutions, and a sales problem where StorageTek’s sales force of 1,000 faces the challenge of going up against competitors’ sales forces of more than 25,000. By entering into a new partnership with Sun, StorageTek would become the largest storage provider available. “We’re joining forces to create one of the biggest, one of the strongest, and one of the best IT companies in the industry,” Pat concluded.

Sun Chairman and CEO Scott McNealy then took the stage, talking about his history with Sun, and his admiration for the hard work and success that StorageTek has earned for itself over the years. McNealy described the synergies that are possible in combining companies like StorageTek and Sun. “There’s a thing in mergers that’s called synergy….and there’s two types of synergies. There’s revenue synergies and there’s cost synergies.” Scott continued, “You’re the lead dog, and we’re going to ask you to lead. We’re going to ask you to show us the way. And we’re going to ask you to make sure we don’t lose the expertise and the understanding and the skill sets and processes that you have in this market. If we do, we lose the revenue, the margin, the profits, the cashflow, and the revenue synergies, which are huge. That is the big opportunity here, and that’s why we went out and paid a big premium, and why we’re asking for you to be the lead dog here.

“This is not a fixer-upper. I’ve got to tell you, Pat, that you get huge kudos for what you’ve done. We’ve been watching and following, and working with you, and everybody in this room, and everybody out there watching on TV here, you’ve done an awesome job creating a solid, stable well-financed, profitable, cash-spewing (and that last part I really appreciate) company with solid customers who are happy and very sticky. And I like sticky customers. That’s cool. Once you’ve got their data, where are they going to go? So you’ve built a wonderful business here, and understand we’re not coming in here to fix it. We’re coming in here to leverage it, and to go after those revenue synergies.”

Next Scott turned the stage over to Mark Canepa, Executive Vice President, Network Storage Products Group, who will be the driving force behind integrating the storage divisions of both companies. Mark noted that Sun had become thought of in the market as a “very server-oriented and software-oriented sales organization. The world really thought of us as a computational company just like they thought of you as a tape company.” Sun undertook a number of acquisitions of small companies as a result, including, as Mark said, “The technology that’s going into your ASM product [which] comes from technology acquisitions we did about five years ago.” But, he added, “it became very clear a little over a year ago that if we really wanted to be a force in the data part of the data center then we had to do something a little bolder...so I’m really happy that after a year of thinking and working and partnering that we were able to get to this point. Obviously there’s a lot of work to be done.” Mark’s role is to, as he put it, turn this “one plus one into significantly more than two.”

Bill MacGowan, Senior Vice President of Human Resources, followed Mark. “Sun absolutely did this deal because of your talent,” he noted, but he also acknowledged that “as of yesterday, your stress levels went up.” He recognized that StorageTek employee stress levels would remain high until each person found out more information about his or her job. He emphasized that the staff would do that as quickly as possible, and that the management team pledged to communicate as much as possible when possible.

The meeting concluded with all four speakers sharing the stage for employee questions and answers.

Please visit the Joining Forces website at http://growth.stortek.com/ for answers to employee questions, archived communications, and more.

If you missed the employee broadcast, it is available for online viewing via the link below. Three choices are available based on your connection speed: high-speed internet, broadband, and audio-only for dial-up connections.

In addition, as a reminder, a telephone replay of the meeting is also available through June 10 by calling 800.876.6785 in the U.S. or 402.220.5331 if dialing internationally. Use passcode 2070413.

Our eight corporate goals focus on our key priorities of revenue growth, profitability, customer and employee satisfaction, and compliance. Here is an update on how we are progressing on these goals so far this year.

Revenue for Q1 was $499M against the goal of $530M, ROA for the first quarter was 8.3, and profit after tax was $23.4M.

As Bobby Kocol reiterated during the April 25 earnings call with financial analysts, “In summary, it was a challenging quarter. And while it's one that puts us slightly behind where we wanted to be at the end of the first quarter, we believe there are steps we can take in order to get back on track going forward. Granted, there are uncertainties that still exist with the macro-economic environment. But we will continue driving operational disciplines and take the necessary steps to achieve consistent and improving results.

“Having said that, our current backlog and pipeline positions have improved from the start of the first quarter of the year and have improved from the second quarter of last year and we expect to deliver better results for the remainder of the year. That is, we expect to return to year-over-year revenue growth in the second quarter and get back to delivering the earnings growth we anticipated coming into the year.”

The first quarter target for this goal was to have 100 percent of the productivity metrics finalized at the business unit level. At the end of the first quarter, 78 percent met that criteria. Milestones for the remainder of 2005 include a 5 percent improvement in the metrics (from the Q4 2004 level) by the end of the second quarter and a 10 percent improvement by the end of the third quarter.

The results of our semi-annual customer survey will be published at the end of June and will provide a progress report against the 2005 goal. However, in the meantime, we have some positive indicators of our progress: We received the #1 ranking in customer loyalty in a study conducted by CIO Insight magazine. In addition, the “Likelihood to Recommend” score as measured in Field Services surveys with scores of 9s and 10s has moved from 59.2% in 1Q04 to 62.7% in 1Q05. This number is measured on individual transactions and is traditionally higher than the number as measured in our semi-annual CSAT survey. However, it is an indicator of one segment of the population that receives our broader survey.

There are several initiatives underway to address the top areas of customer satisfaction:

Field Service Repair Time – We have analyzed the nuts and bolts of the service process associated with on-site customer service calls and we are in the process of presenting these findings to the field teams who can make a difference for our customers.

CSSC Fix Time – We have observed a very strong correlation between duration of a remote service call to the satisfaction level of the customer. The next step will be to uncover the root causes of lengthy service calls.

Relationship – We have begun an initiative to analyze the top customers around the world noting that a very small number of customers provide greater than 50 percent of our revenue stream. In this work, we will devote time to ensuring that those top customers increase their likelihood to recommend.

OS Disk – We have been working since September on improving the product quality and service surrounding our D-series offerings and have made tremendous progress —reducing labor time applied to service customers while at the same time increasing our customer satisfaction in this market.

Reliability – We have received historically low ratings in the reliability area especially when viewed next to our competition. Our Voice of the Customer research tells us that customers would like availability of their entire system, not just components, and that when something breaks they want it fixed fast. We will continue to drive these issues through to the specific products that require effort in this important attribute.

While individual EMT members have action plans specific to their functions, one of our top priorities to increase “capability development” at the corporate level was Ready05. Announced in the fourth quarter of 2004, Ready05 provides instructor-led training, computer-based courses and additional training materials to equip sales and service teams with the knowledge they have identified as critical to their success. So far, more than 300 people have taken a combined 850 course sessions. Already the program has been so popular that the Global Learning Solutions organization is planning Ready06.

For Q1 2005, StorageTek was on target for our goal to maintain and improve corporate compliance. During Q1 we achieved a key milestone in our corporate compliance efforts by successfully meeting the required filing deadline for Section 404 of the Sarbanes-Oxley Act. Under this act, the Securities and Exchange Commission (SEC) requires that all publicly traded companies include a discussion of the effectiveness of their internal control over financial reporting in their Annual Report on Form 10-K. We concluded that our internal control over financial reporting was effective as of December 31, 2004. Key activities during Q2 2005 to maintain and improve corporate compliance include completing the planning process and kicking off the project to comply with Section 404 of the Sarbanes-Oxley Act for FY 2005 and completing a review of our compliance inventory to ensure that we have an accurate inventory of statutory and regulatory requirements that impact StorageTek.

Our ILM revenues for the first quarter totaled $50.2M, and professional services revenue was $27.6M. While both were below expectations for the quarter, several initiatives are underway to reach our yearly result. One initiative to increase professional services sales is to add new reference customers to build market credibility for our professional services practice. The goal is to reach 50 new reference accounts by the end of the year, and we exceeded the target for the first quarter.

Sanofi-aventis, the world’s third largest pharmaceutical company, had here in Mexico a complete StorageTek Storage Area Network (disk, library and switch) for the last three years. However, the decision had come from headquarters to make Hitachi Data Systems a global standard. The Mexican subsidiary was so happy with their SAN that they refused to migrate to another technology. Nevertheless, pressure to do it was increasing, and when they had to renew their technology they had to accept inviting other vendors.

Months of intense bargaining, interminable negotiations and a tremendous competition from HP, IBM and Hitachi complicated the deal and made it look as if StorageTek Mexico was going to lose the account, but then our disk showed itself to be capable of something probably no other vendor can, something that demonstrated the high quality standards it was built on.

“Many vendors speak about quality and service,” said Data Center Manager Benjamín Campos, “but I experienced what real quality is when I arrived one Monday to our site and found out that we had had a water leak all weekend long falling directly on our 9176 disk. I panicked, as our SIEBL runs on that disk. All basic sales information was there almost floating on a small lake the leak had created. I was close to hysteria when I realized the disk was still on! I ran to the monitor and saw with great pleasure (and enormous surprise) that the disk was still working! That moment I knew there was no corporate standard on Earth that could make me replace my StorageTek disk with any other brand.”

“I received a call from the customer at noon that same day,” said Madián Morante, Account Executive. “The customer informed us that we were back at the game and asked for a meeting. I prepared some ROI [return on investment] and TCO [total cost of ownership] analysis to be presented to the purchase department. After some more meetings, the company decided not only to renew their disk, but also to escalate their existing library. Right now we are also talking about their disaster recovery and business continuity plans. This is definitely a long-lasting and superior partnership with a customer.”

Customer Satisfaction is one of the company’s top objectives for 2005 (see related story). Earlier this year the CSAT team, managed by Liz Litkowski, conducted a rigorous analysis of customer satisfaction data in order to focus and prioritize on the top causes of customer dissatisfaction and to determine projects that would have the greatest impact on customer satisfaction. One of these was a project to address software enhancement requests by our customers.

Some customers had given us feedback to enhance our software, but in many cases these customers had not heard back about the status of their requests. In some extreme cases the customer did not get a response for almost a year. When customers did hear back, in many cases they believed, sometimes inaccurately, that we were not going to take action on their request.

The CSAT team working with the Automated Tape Solutions business unit investigated the issue, gathering data through interviews with customers and by analyzing the requests in our Pinnacle system. Many of the enhancement requests were opened by a small number of customers, while others were opened by StorageTek employees. The team redefined the process to involve the account teams for those customers up-front to ensure the business case is captured and to give the customer a shorter turn-around on the disposition of their request. The requests will fall into several buckets—those requests that are not a strategic fit for the business will be rejected while those that do fit our business will be prioritized. Once every quarter, the prioritized requests will be reviewed with our key customers to see if we need to tweak the priorities. As a release boundary approaches, final decisions will be made about the features to be included in the next version. During this process, there is a mechanism to keep the customer informed continuously. This process manages customer expectations much more clearly and involves a cross-functional communication between the business units, sales, and services. While the results are yet to be fully delivered to our customers as we demonstrate our commitment to the process, we will be monitoring the metrics for the SER process to ensure that we do not make the same mistake again.

Stay tuned to the StorageTek Voice for more examples of how we are working to improve customer satisfaction!

With a variety of updated and improved features, the new Sales Community Web site is set soon to launch with even more functionality and support for its members. System engineers, account executives and sales support staff alike will be able to take advantage of enhanced features such as

Stay tuned to the StorageTek Voice next week for more details on the upcoming launch of the Sales Community Web site!