SyQuest Technology, Inc.

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SyQuest Technology, Inc.

47071 Bayside Pkwy.
Fremont, California 94538
U.S.A.
(510) 226-4000
Fax: (510) 226-4108
Web site: http://www.syquest.com

Public Company
Incorporated: 1982
Employees: 1,541
Sales: $200.4 million (1996)
Stock Exchanges: NASDAQ
SICs: 3572 Computer Storage Devices

In an industry where obsolescence is often only months away and a single misstep can sink a company, SyQuest Technology, Inc. has emerged—bruised and battered—a survivor. SyQuest is a pioneer and worldwide leader in removable cartridge computer storage systems using the industry-standard Winchester hard drive technology. After sustaining two years of losses, including more than $136 million in 1996 alone, SyQuest is on the rebound. Leading the way is the company’s new product line, including the industry-leading 1.5 gigabyte Syjet drive, and the 230 and 270 megabyte EZ Flyer drives. SyQuest drives, unlike the wildly successful Zip and Jaz drives of archrival Iomega Corp., use Winchester technology to offer access speeds and data transfer rates that rival fixed-disk hard drive systems. Targeted especially at high-end and professional users, but also at an increasingly storage-sensitive consumer market, SyQuest drives combine unlimited storage capacity with near-real-time access for megabyte-hungry graphics, music, and video files and applications. SyQuest’s headquarters are in Fremont, California, with a product development plant in Boulder, Colorado, and main manufacturing facilities in Penang, Malaysia. After a restructuring of the company in 1996, which saw the ouster of company founder Syed Iftikar, SyQuest is led by computer industry veterans Ed Marinare, as chairman, and Edwin Harper, as chief executive officer.

The Storage Revolution of the 1980s

Winchester hard drive technology, created in the 1970s by IBM, was a primary factor in the personal computer explosion of the 1980s. Winchester technology (so-called because, like the famous 30-30 repeating rifle, the original Winchester hard drive featured dual 30-megabyte disks) represented a breakthrough in data storage. The Winchester drive made possible not only large data storage, but also fast access to that data as well as the ability to access data randomly. The Winchester drive was also more durable and more reliable than previous storage systems. The new Winchester drives, which used 14-inch disks, were, however, initially suited only to large computer environments.

Enter Syed Iftikar. A native of India and a graduate of the University of Madras, Iftikar’s involvement in the computer industry began in the 1960s. An engineering student, Iftikar went to his professor for advice on where to direct his future. As Iftikar told The Business Journal: “I asked him whether I should pursue mechanical, electrical or industrial engineering. He said, ‘Son, get into the computer industry. Take all the computer classes you can. It’s the wave of the future.’” Iftikar took his professor’s advice to heart, leading him to leave India. “All the exciting things in innovation were happening in America,” Iftikar continued, “So I came.”

Iftikar joined Memorex Corp., where he worked for some 10 years as a part of that company’s think tank. But it was his next move that would revolutionize the computer industry. In 1979, Iftikar left Memorex to cofound (with Al Shugart, Finis Conner, later of Conner Peripherals, Inc., and Tom Mitchell) industry powerhouse Seagate Technology. Named vice-president of mechanical engineering, Iftikar led the development team that created the first 5.25-inch hard disk drive using Winchester technology. That drive quickly became the de facto standard of the computer industry, and especially the nascent personal computer market—indeed, that market was only made possible by the development of the smaller hard drive.

By the start of the 1980s, Iftikar had identified a new potential for the Winchester technology: removable storage. In 1982 Iftikar left Seagate to found SyQuest (short for “Syed’s quest”) and develop the first removable storage system. Such a system offered a number of advantages over fixed drives, including an expandable storage solution, and greater data security—data cartridges could be removed and locked away. Funding for the company came from Iftikar’s Seagate stock. By December 1982, SyQuest was ready to launch its first product, the. SQ306, a 3.9-inch removable cartridge drive with a 6.38-megabyte storage capacity. SyQuest manufactured the drive, then sold it to original equipment manufacturers, which would package the drive for sale to end users.

SyQuest floundered in its first years. The removable storage market inspired a host of competitors, including Iomega, DMA, Eastman Kodak, and Data Technology Corp. By 1984, SyQuest was already facing failure. Its hopes were hinged on a contract to supply storage systems to the U.S. Army. But rival DMA appeared to have the lead in winning the contract. As a former SyQuest executive explained to The Business Journal, “It was well known in the disk drive industry that whoever got that contract survived. [Iftikar] had read in the paper that we had lost it. Who knows, we might have. But it was [Iftikar’s] chutzpah that turned it around. He personally met with the military, persuaded them and won the contract. DMA went out of business shortly afterward.”

Desktop Publishing’s Choice in the Late 1980s

By 1986, SyQuest had raised its storage capacity to 15 megabytes; the following year, the company debuted a 44.5-megabyte cartridge system. At the same time, the computer also produced tape-based backup systems. The personal computing revolution was, by then, well underway. SyQuest’s original focus had been on the booming IBM-compatible market. But the company’s success came from a different direction. The rise of the Apple computer and its graphical Macintosh line spawned an entirely new industry: desktop publishing. Desktop publishing, which would remain for years an Apple specialty, made heavy use of graphics, creating large, multi-megabyte files that demanded extensive storage capacity (a typical fixed-disk hard drive at the time barely exceeded 80 megabytes). SyQuest’s drives quickly became the choice of the desktop publishing industry.

SyQuest’s popularity among desktop publishers quickly propelled the company into the forefront of removable storage systems makers. Revenues reached $20 million by 1988, more than doubled to $50 million the following year, and topped $80 million in 1990. By that year, the company had sold more than 150,000 of its systems. Sales of cartridges for its drives were also becoming a primary revenue-driver for the company, with some 700,000 cartridges sold by 1990. Claiming as much as a 90 percent share of the removable storage market, the company expanded its Fremont headquarters, opened an engineering and product development arm in Boulder, Colorado, and built a 40,000-square-foot manufacturing plant in Singapore. Some 75 percent of the company’s sales were to Macintosh users. By 1991, SyQuest had topped $115 million in sales, posting a net income of more than $6 million. An ebullient Iftikar, predicting $1 billion in sales by 1995, told The Business Journal, “We are in just the first phase of growth.”

Missing the Beat of the 1990s

Already in the early 1990s, SyQuest’s control of the Apple market was reaching saturation. In order to fuel future growth, the company needed to expand its share of the booming (and far larger) IBM-compatible market, which, with the introduction of the new Windows operating system, was preparing to enter a new growth phase. In 1991, SyQuest opened a subsidiary, Sydos Inc., in Boca Raton, Florida, charged with developing SyQuest systems for the IBM PCs and challenging rival Iomega’s Bernouilli Box for control of that market.

SyQuest hit the 1990s on a roll. But it was already feeling the effects of its rivalry with Iomega. A price war between the two companies had forced a 17 percent drop in SyQuest’s 1991 net earnings. And the coming years would see a new set of challenges that nearly bankrupted the company.

Nevertheless, SyQuest’s revenues continued to build strongly. Fueled by an initial public offering in December 1991, which raised some $23 million, SyQuest’s sale climbed to $174 million in 1992, and topped $206 million in 1993. Earnings were strong, rising from $13.5 million in 1992 to $15.2 million in 1993. But some 55 percent of sales, and an even larger percentage of earnings, came from sales of additional cartridges for SyQuest systems. This left SyQuest vulnerable to a challenge from an unexpected source. Since 1992, a French company, Nomai Inc., with assistance from the French government, had been developing and distributing its own cartridges for SyQuest systems. Then in 1993, Iomega announced an agreement with Nomai to distribute that company’s SyQuest-compatible cartridges on a worldwide basis. SyQuest launched a bitter legal battle with the two companies, but was unable to secure an injunction against sales of the Nomai cartridges. The company warned its customers that the Nomai cartridges could damage the SyQuest drivers; and further attempts to prevent sales of the cartridges by threatening to void the warranty on SyQuest systems if they were damaged by the Nomai cartridges also proved less than successful.

Company Perspectives:

The goal: To maintain world leadership in removable Winchester technology. The new SyQuest is focused, refueled and racing toward the goal. Your company’s customer-focused strategy centers on bringing to market the most highly compatible, price competitive, high capacity product lines while upholding the quality standard that is synonymous with the SyQuest name.

The following year highlighted another vulnerability for the company. A market glut of fixed-disk drives caused a collapse in prices, which fell some 25 percent in the first half of 1994. The lowered hard drive prices tugged away customers who might otherwise have purchased a SyQuest drive. SyQuest was forced to respond with its own price cuts. But the announcement of a new generation of larger and more powerful SyQuest drives caused customers to postpone their purchases—a common difficulty in the ever-evolving computer industry. SyQuest was forced to write down inventory on its discontinued line of 2.5 inch drives, causing the company to post its first quarterly loss in five years. Nevertheless, SyQuest’s problems seemed only temporary. In May 1994, it launched its new line of 110- and 270-megabyte cartridge drives in the 3.5-inch size that had become the standard of the PC market. The company’s marketing strategy for the new drives emphasized their usefulness as a backup device—over other features, such as expandability, security, transportability, and, importantly, their high-speed access capability. By June 1994, the company was also able to end its dispute with Nomai and Iomega, reaching a licensing agreement that would give SyQuest royalties on sales of the rival cartridges.

The effects of the lower prices in the hard drive market showed in the company’s balance sheet for 1994. The company had raised sales to $221 million, fueled by acceptance of its 3.5-inch PC-compatible drives; yet net earnings had slumped to $5.4 million. And the computer industry was undergoing a sea-change that caught SyQuest by surprise. For one, the IBM PC/Windows system was finally maturing into the desktop publishing market. Despite its efforts to enter the PC market, SyQuest’s fortunes were still very much hitched to Apple, which was having its own problems. Then a new force entered the computing world. “Multimedia” became the buzzword for 1995—and, as personal computer use finally shifted massively into the home, Iomega stood ready with a product, and a savvy marketing strategy, that would offer home computer users a place to store a sudden proliferation of graphics, music, video, and other files, as well as the steadily swelling applications to create and view them. That product was the Zip drive.

In fact, in 1992 SyQuest had been offered the technology behind the Zip, which had been developed by Fuji, but turned it down. Lighter than SyQuest’s Winchester-based drives, the Zip drives were also slower. But they were easier to use, more reliable for the home consumer, and, importantly, much cheaper to produce. The introduction of the Zip drive in 1995 took the removable cartridge market by storm. The Zip’s ease of use, and a brilliant marketing drive that promised users a place to hold all the “stuff” that was suddenly filling up their hard drives, attracted the attention even of SyQuest’s core Macintosh base. Sales skyrocketed, reaching some 2 million units within a year. SyQuest responded to the challenge with a misstep.

Months after the Zip drive had captured the attention of the computer industry, SyQuest rushed out the EZ135, which was designed to appeal to the home computer user. Based on Winchester technology, the EZ135 offered marked advantages over the Zip drive, including much faster access and transfer rates, and a 35 megabyte-per cartridge advantage. But the unit was heavier, and also more expensive, and SyQuest quickly learned that price was often the deciding specification for the home user. When Iomega dropped its price on the Zip drives, SyQuest was forced to respond, cutting prices to below manufacturing costs. This meant that SyQuest lost money for each EZ135 it sold; while the company hoped to make up the difference with sales of cartridges for the new machine, the Zip drive had already captured the market, and sales of the EZ135 lagged.

In September, the end of its 1995 fiscal year, SyQuest posted a net loss of $11.2 million, despite a revenue gain to $299.5 million. The company’s losses continued to mount: in the first quarter of its 1996 fiscal year, SyQuest posted a net loss of $33 million on revenues of $78 million. The company’s sales had still been gaining, but the success of the Zip drive began to cut into the company’s core product line, the high-end SQ5200 and SQ3270 cartridge drives. In February 1996, the company was forced to restructure, moving its manufacturing operations from its long-time Singapore base to Malaysia, where the company had completed construction on a modernized, automated plant. The restructuring caused the company to slash its payroll by some 1,500 employees; charges for the restructuring, including closing its Singapore operations, resulted in the company posting a new, $51 million loss for its second 1996 quarter.

Analysts were sounding the death knell for the company. SyQuest’s restructuring continued: in May 1996, its board of directors replaced the company’s senior management, installing Ed Marinara as chairman, and Edwin Harper as president and chief operating officer. The company also replaced its chief financial officer and senior vice-president. Iftikar maintained his position as chief executive officer, but was now placed within the sphere of the office of the president, and lost day-to-day control of the company he had founded. Iftikar stepped down from the company in September 1996. With the company’s stock price tumbling to just $5 per share, SyQuest became the target of a class-action suit brought by shareholders, who charged management with security law violations. By the following month, however, the company faced a new crisis: its net tangible assets had fallen into the negative, and its NASDAQ listing, predicated upon a company holding more than $1 million in net tangible assets (assets, excluding goodwill, minus liabilities), was under threat. The company hurriedly made a placement of stock to raise $20 million. Analysts began predicting that the company would soon be sold—or declare bankruptcy.

An Uncertain Future

SyQuest did neither. As Iomega announced its forthcoming 1-megabyte Jaz drive, SyQuest was preparing the launch of two new products that would regain its leadership in the removable storage market. The first, the EZFlyer 230 (later expanded to 270 megabytes) featured a 3.5-inch, 230-megabyte removable cartridge based on Winchester technology. The second, the SyJet, featured a 1.3 gigabyte (later 1.5 gigabyte) disk platter system. At the same time, SyQuest cut the price of the EZ135 in half in order to dump its inventory, forcing Iomega to make its own price cuts on the Zip drive. SyQuest also reoriented its marketing position, returning to its focus on the high-performance customers that had always formed its base. The company also stepped up its entry into the retail channel, expanding sales into some 1,800 chains.

The strategy appeared to be working. While the company continued to post losses through 1996—the final tally was some $136 million in net losses on revenues of only $200 million—losses finally began to slow as it entered the next fiscal year. The company’s fortunes were buoyed by the announcement of an exclusive manufacturing and distribution partnership with Legend Group, the largest manufacturer and distributor of computers in the booming Chinese market. Yet SyQuest’s position in the storage market was not yet secure. New technologies, including recordable CD-ROM drives, DVD (digital video disk), and others expected to expand in the coming years may yet threaten SyQuest—and arch-rival Iomega—as the storage solution kings.