What Tech Downturn? Veritas CFO Wins Over New Investors

Kenneth Lonchar's credibility and communication skills help sustain Veritas -- even as tech stocks take a beating.
Stephen BarrNovember 2, 2001

“Hello, this is Ken.”

Ken Lonchar, that is, CFO of Mountain View, California-based Veritas Software Corp. Unlike many senior executives at much smaller companies, Lonchar actually answers his direct line. “I prefer to pick up my own phone,” he says. “I don’t like to route people through voice-mail hell.”

Of course, Lonchar isn’t this year’s winner of the CFO Excellence Award for Managing External Stakeholders because he’s so accessible. But that trait says a lot about why this CFO is held in high regard for his overall responsiveness to investor and analyst queries, and is hailed for explaining the ins and outs of a large, highly technical software business with precision and passion. He has gained tremendous credibility with an expanding shareholder base that has held strong even as the technology sector has taken a beating.

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“Ken’s ability to provide comfort in such uncertain times is unparalleled,” says Anne Meisner, a software analyst at Zurich Scudder Investments.

In the past year, every public-company CFO in America has had to grapple with the demands of Regulation FD (Fair Disclosure) for greater openness, as has Lonchar. What sets him apart is the aplomb with which he’s handled recent challenges related to a dramatic expansion of the company’s ownership profile, several complex transactions, and the financial reporting problems that have snared some of Veritas’s peers.

And then there was the task of pressing the remote-control clicker to advance a slide presentation while dressed as a gorilla.

The theme of the annual leadership conference for the firm’s top 250 executives, held in July, was that Veritas is the 800-pound gorilla among suppliers of data-access and networking software. Did anyone want to wear the gorilla suit rented for the occasion? The 43-year-old Lonchar, a sports-car buff who owns a 1958 Porsche Speedster to commemorate his birth year, graciously volunteered. And while CEO Gary Bloom quips that the CFO had “trouble with the paws,” he adds that Lonchar “did a great job of laying out all the metrics of our financial strength — a message the top 250 could take back to other employees to help morale, and share with skittish customers so they understand why we’re a company to partner with.”

Talk about a passion for communicating.

Listen First

Lonchar’s tenure at Veritas began in 1997 when the company acquired OpenVision Technologies, a $30 million firm he had taken public as its CFO. During the past four years, he has overseen finances for the company as its total revenues grew fivefold, to $1.2 billion for fiscal 2000, and shares soared from around $5 to an all-time high of $167 early last year.

Lonchar says that throughout the growth spurt, the key to managing external stakeholders has been to remember that listening is as important as talking. “You have to understand what people are looking for and where their questions are coming from to deliver information that is useful,” he says.

Indeed, listening provides critical insights into the product and market issues that often give rise to investor worries. Last December, for example, the company’s stock dropped 7.5 percent the day Sun Microsystems, a major Veritas partner, said it was buying a software vendor whose products seemed similar to those of Veritas. According to Meisner, Lonchar defused the situation by explaining how the products differ and why the Sun acquisition was not a threat. Shares climbed 22 percent the next day.

Lonchar “has an amazing ability to separate hype from reality,” says Meisner. “Other CFOs know the numbers, but when it comes to understanding strategy or products or the implications of some news, he doesn’t have to defer to someone else.”

In the same vein, Lonchar does not shy away from truly bad news, such as last year’s weaker-than-expected results in the Microsoft-related part of Veritas’s business. “Rather than try to disguise this fact in the overall numbers, Ken publicly discussed this weakness,” notes Eric Gerster, a software analyst at T. Rowe Price Associates. “In doing so, he avoided potentially seeming one-sided in his commentary.”

The Seagate Deal

Beyond the day-to-day investor interactions, Lonchar’s skill at stakeholder relations has been put to the test several times by major events. One involved the addition of Veritas to the Standard & Poor’s 500 in March 2000, which prompted a new universe of large-cap and index-fund managers to consider adding the company to their portfolios.

“We had to start a large education process from scratch,” explains Lonchar. “The key was to not lose our patience, and maintain the same passion as we did the very first time we told the story.” Did he do a good job? By the end of last year, the company’s base of long-term holders rose to roughly 63 percent from 57 percent, and as ownership of the stock broadened, the share concentration among the 10 largest institutional holders fell from 45 percent to 27 percent.

A more substantial test involved a landmark three-party transaction that closed in November 2000. A year earlier, Veritas had acquired Seagate’s network and storage management group in exchange for $3.5 billion in Veritas stock. But as those 128 million Seagate-owned shares grew to be worth $22 billion, they outpaced the value of Seagate’s remaining disk-drive business and created an arbitrage play.

This market imbalance troubled Veritas shareholders, who worried that a sell-off of the Seagate shares could depress Veritas stock. Resolving this concern required an intricate deal in which Seagate’s assets were sold to a private equity firm and its block of Veritas shares was distributed tax-free to existing shareholders. Beyond the complexities of the deal, Lonchar had to market it to three diverse investor groups to pull it off.

“There were concerns about volatility, with arbitrage players in the stock, and doubts that we could even close this deal,” he acknowledges. “We arguably overparticipated in financial events, because I wanted to stay very visible to address any topic that might come up.” In the end, the share price held firm through the closing, and Veritas investors were able to recapture some $3 billion in incremental value.

Yet another test for Lonchar came early in 2000, when Legato Systems, a major competitor, disclosed that it had misstated revenue for the previous two quarters. The news sent Legato shares tumbling, and there was concern about collateral damage at other software firms.

As it turns out, in 1999, soon after the purchase of Seagate’s network software group, Veritas had changed its revenue-recognition model from sell-in to sell-through. In this model, revenue is recognized based on final sales, not preliminary reports. “We thought we’d done a pretty good job of making people aware of the change,” says Lonchar, “but when Legato announced its problems, it would’ve been easy for investors to say we had the same problems.” He took several calls “to comfort people,” but the stock rose the next day, and during the next four months, while Legato’s shares fell 82 percent, Veritas’s doubled.

Weathering the Downturn

The jury is still out on the latest and most grueling test for Lonchar: stakeholder relations in the downturn. Veritas shares are trading around their 52-week low, off more than 80 percent from their 52-week high last October. The company has met analyst estimates for the first two quarters of fiscal 2001, but has also twice lowered its guidance on revenue growth.

But CEO Bloom, who joined Veritas last October, believes the firm’s chances of weathering this storm are bolstered in part by Lonchar, whom he credits with “an uncanny ability to help me understand what investors want to hear.” “This is a difficult climate [in which] to explain what you’re doing and why,” he adds. “Facing [a] skeptical audience is a real test of a CFO’s communication ability.”