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EXABYTE DEAL WITH IBM PROVES FRUITFUL
By Lyn Berry-Helmlinger

Exabyte Corp is proving it knows a thing or two about resiliency and survival. Following a huge market share loss in the '90s, a merger with Boulder-based rival Ecrix Corp, the departure of former CEO Bill Marriner and hundreds of job cuts, the 18-year-old data storage company continues to edge toward profitability.

Exabyte announced Oct. 23 that it was cash-flow positive in the third quarter -— "for the first time in a long time," said company spokesman Rich Miller. The struggling company narrowed its loss to $3.2 million, or a loss of 10 cents a share, compared with last quarter's loss of $8.2 million, or 25 cents a share. The company's earnings grew from $35.6 million in the second quarter to $36.9 in the third, which was attributed to sales of four new products and a major OEM (original equipment manufacturing) agreement with IBM. Exabyte president and CEO Tom Ward said the company's efforts in the last three quarters were focused on one common goal: returning Exabyte to profitability.

"The changes we have put in motion... are contributing measurable improvement to our business," he said. "The third-quarter results validate that we targeted the right set of goals and that our plans for Exabyte are working." Exabyte co-founder Kelly Beavers said these goals are part of a major restructuring effort that began months before Ward joined the company in June. "I think that you could say that we are basically changing everything," he said. Beavers points to a recent deal with IBM as the first big milestone in the restructuring effort.

Early this month, IBM announced it would buy Exabyte's VXA-2 tape drives and sell them as an internal feature on certain IBM e-Server pSeries servers and workstations. The VXA-2 is a technology Exabyte acquired when it purchased Ecrix Corp in August 2001.

IBM also will sell the tape drives as an externally attached storage enclosure on the 7206 Model VX2.

Other than the obvious financial benefits, Beavers said the deal is significant because it is a major endorsement of Exabyte's tape drives as the best replacement technology in the digital data storage market. DDS is an older tape storage technology that has reached the end of its "life."

Fara Yale, chief analyst for Gartner Dataquest computer storage service, said the major workstation and server OEMs will determine the outcome of the race to replace DDS. "OEMs carefully select their product portfolios to match current and anticipated market needs and their endorsements offer significant potential for any tape manufacturer," she said in a statement.

"We're the first competitor for the DDS space to win anything," Beavers said, noting that there were as many as 1.4 million drives in the DDS market in 2001. "I think we have a good opportunity to win all of that space."

Bob Abraham, president of Ojai, CA-based market research firm Freeman Reports, agrees. "IBM's agreement to offer VXA is a significant endorsement of VXA technology and positions Exabyte for further success in the dynamic and lucrative server market," he said.

Though IBM could not be reached for comment on the deal, the company's Web site calls Exabyte's VXA-2 "a higher capacity, cost-effective alternative to DDS," and declares, "With the DDS tape technology nearing the end of its evolution, the new VXA-2 standard provides a migration path to greater tape storage capacity at a price point similar to DDS drives."

OEM agreements like the one with IBM are attractive to Exabyte because they usually result in high-volume sales, Beavers said. The company's current OEM sales are about 20 percent of total revenues.

However, he said the company would like to see that number move closer to 60 percent and take advantage of more OEM opportunities from Dell, HPQ (Hewlett Packard/Compaq) and Sun, as well as IBM and a host of smaller companies that have been in talks with Exabyte.

In the meantime, the company's mantra will be "sell more, save more," —- which requires shifting all of its products into outsourcing, Beavers said. "We're getting out the manufacturing business," he said. "Exabyte is not competitive when we compare to other companies working offshore. Our costs are much higher."

Company officials hope this strategy will help Exabyte regain market share —- something it's lacked since the mid-'90s when the likes of Quantum, IBM, Hewlett Packard and Seagate snatched it away.

However, Beavers said Exabyte -— which suffered between $150 million and $200 million in total losses in the last four years and laid off 300 of its 750 employees since last November -— isn't out of the woods yet.

"Life isn't easy for us by any means," he said. "But I think we're motivated by the fact that we do have a future. There are goals ahead of us that are within our reach."