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The CFO makes some tough human-capital decisions but takes comfort in sitting on a big pile of cash.
David McCann, CFO.com | US
April 2, 2009
For NetApp Inc., it was a bittersweet, ironic juxtaposition of events. On January 22, Fortune magazine rated the $3.3 billion data storage and management supplier as the best company to work for in the United States. Eighteen days later, the company announced plans to lay off about 6% of its 8,000-plus employees.
Idyllic workplace or no, NetApp was hardly immune to the effects of the recession. For its most recent quarter, which ended January 23, it showed a net loss of more than $75 million, compared to earnings of about $102 million for the same period a year ago and $49 million for its quarter that ended in October.
The company's stock price has been battered too, trading at around $16 today after reaching a high of $41.56 in December 2006. The good news is that analysts expect strong revenue growth for NetApp through next year because of the strength of the storage market relative to the rest of the technology sector.
Steve Gomo, the company's vice chairman and chief financial officer, spoke with CFO.com about the challenges of leading a company through tough economic times. An edited version of the interview follows.
How tough was it seeing your recent quarterly results?
It was in line with what people were expecting. Given the new realities, the challenge now is how to stimulate growth and invest to create more growth in the future. The other thing that's important, though, is that I don't believe, with the world deleveraging the way it is, that business will naturally go back to the old levels. If aggregate economic activity drops, you can expect it to impact everybody.
What can a CFO do about that?
It's back to the fundamentals: reevaluating every aspect of the business model to see if it still applies. What's going to have to be done differently? Do you have to go back and redo your working capital and create more variable expenses? Are you protecting your cash properly — are you too long, too short, do you have it in the right place?
What kind of shape are you in with your capital needs?
We're in pretty good shape. We did a convertible debt offering last summer that worked out very well, and we have lots of cash on the balance sheet [about $1.7 billion at the end of NetApp's January quarter]. Cash is always king, but in these times it's divine. A software-centric business tends to generate a lot of cash, which really helps at this time.
When we issued the convertible debt we made sure we had plenty of financing lined up in case things got bad, and we got that financing done on very good terms. I can't take too much credit for it, because timing is everything — this was in July 2008, at the early stages of the credit crunch. We went with an aggressive call spread wrapped around the debt, which basically allows you to raise the price at which the debt converts to stock. On a normal convertible debt you might have something that would convert at $15. By using a call spread, you raise that to $20 or $25.
Yet you still felt you had to restructure your work force.
We're probably no different from most companies in that the economy has had a significant impact. It was very difficult for us, especially coming right after the recognition by Fortune.
We've heard from human-capital experts that businesses often cut too many people when the economy is down and then have a hard time ramping up to take advantage of new opportunities when things turn around. What guides you in deciding how many jobs to eliminate?
That is the heart of the issue. At a time like this investors will say, well, you should have done even more. But let me be very clear here. Great management teams separate themselves in a single way: They grow their business, and they do it over a sustained period of time. Anyone can cut expenses; all you have to do is say "no" — don't sign the P.O., or whatever is the case. I don't give a lot of kudos for that. It's just a base level of capability that management teams need to have.
Now, back to your question: Deciding how many people to let go, and who and where, is a delicate trade-off. In the short run you're probably going to lean toward taking a little more expense out. But most analyses show that, particularly for a company with a big growth margin like ours, if you miss a step in growth because you took too many people out, very quickly it turns out to be a bad decision. You look forward and say, what's going to happen next quarter? I couldn't tell you. I don't think many people can, because visibility is so poor right now. Now the decision becomes very complicated and hard.
Management has to make decisions like this as a team. You have to listen to each other, the pros and cons. There are economics, morale, and motivational aspects to the decision. There are complications that come up about developing or marketing products or go-to-market activities. A CFO has to be right in the middle of all this.
It sounds like you're not one of those CFOs who is just a "numbers guy."
The job starts with making sure you're meeting all the compliance requirements. If you do that you move up to the next level, where you are the economist of the business. If you do this or that operationally, what is the impact on profits? Then if you do that well you move up to the third level, where you have enough knowledge of the business to participate at a strategic level.
Today, frankly, CFOs who are not at that level are probably not going to be in their jobs for long, because the expectations of boards and CEOs have gone up dramatically.
What happens when members of the management team don't see eye to eye on a strategic decision?
I like to think I'm working with people who evaluate your argument on the merits and are open-minded to change. I can't tell you I've agreed with every decision that's been made by CEOs and other high-level managers I've worked for, but I've always been able to make my point. When the decision goes the other way, your job is to support it as best you can.
Coming back to costs, to what extent is all the scrutiny of executive compensation and marketing expenses at financial firms spilling over to a company like NetApp?
It a fact of life that in today's environment, right or wrong, those things will get more visibility, and you need to understand that as you plan them. Today I feel like I can stand up in front of any shareholder and justify what we've done. I'm happy to put everything up on a slide and be totally transparent about it, and ask them, what would a rational man have done differently?