New Chairman Steadies Course for Cipher Data Products

When Gary Liebl took over as Cipher Data Products chairman and chief executive in January of 1987, he faced problems that would have daunted the most gung-ho of executives.

Cipher Data’s dependence on a single major product--a tape drive used as a backup data-storage device for minicomputers--had come back to haunt the company. The market for “minis” was under siege by the new generation of powerful personal computers and workstations. As a consequence, demand for Cipher Data’s tape drives fell off and the company reported a drop in both sales and earnings for 1986.

Moreover, Cipher was low on cash, suffered from a bloated inventory and faced serious quality-control problems. To add to Liebl’s worries, the company was stuck with an apparent lemon: the Optimem optical disk-drive unit it had acquired in July, 1986, that was losing millions of dollars trying to develop elusive technology for an “erasable” or re-recordable optical disk drive.

“The issues that I faced did not lend themselves to simple fixes but to a fundamental . . . restructuring of the total company, including its top management,” said Liebl, who came to Cipher Data after 8 years with McDonnell Douglas. He had left as a group operating officer in charge of the information systems group, a $1.2-billion, 18,000-employee unit.

Liebl wasted little time with the overhaul and has since reduced the number of Cipher Data employees by 25% since 1986 to about 1,800. Another 200 jobs will be cut by the end of June. Only two of 10 corporate officers at Cipher Data in 1986 are still with the company. Organizationally, the company has been carved into four groups, each with profit-and-loss responsibility.

To cut costs and improve efficiency, Cipher Data has moved the bulk of the company’s manufacturing operations to Singapore from plants in San Diego and Garden Grove, where jobs have been cut from 700 to 150 in 2 years. The company has instituted a “quality college” for all employees that has raised customer acceptance of its products to 99% from the 85% level 2 years ago, Liebl said.

At Optimem, research on the erasable optical disk drive has been scrapped as the company focuses on its existing “write once, read many times” (WORM) products marketed to mainly government customers with heavy document-storage needs, including the U. S. Patent Office.

Liebl’s most recent move is Cipher Data’s $74-million tender offer for Irwin Magnetic Systems of Ann Arbor, Mich., a manufacturer of “minicartridge tape drives” that provide backup data storage for personal computers and workstations. The acquisition will add 3.5-inch tape drives to Cipher Data’s product line, which now starts at 5.25-inch drives and goes up.

Strengthened Position

The acquisition of Irwin, which reported a $1.5-million profit on $49.2 million in 1988 sales, is being made possible by Cipher Data’s strengthened cash position of $82.2 million, up from $13 million 10 quarters ago, Liebl said. Cipher Data will pay roughly half in cash for Irwin and the rest with bank loans, Treasurer Thomas Anderson said last week. The tender is expected to be complete early next month.

The jury is still out on whether Liebl’s restructuring will translate into significantly higher profits, observers say. Cipher Data’s $10.4-million profit on 1988 sales of $185.4 million was an improvement over the $4.3-million profit on $178.2 million in 1987 sales but not enough to satisfy David Claridge, senior technology analyst with Hambrecht & Quist investment bankers in San Francisco.

“Two factors that I have concern about is that neither Cipher nor Irwin have high pretax margins.” Less-than-desired profit margins “have been a longstanding issue with Cipher,” Claridge said. And, although the Irwin deal makes long-term sense by expanding Cipher Data’s product line, it may reduce earnings in the short run because Irwin’s profit will be less than the interest income Cipher has been making on its cash, Claridge said.

The stock market has responded less than enthusiastically to the Irwin merger. Cipher Data stock closed Monday at $8.375 a share, off from a 52-week high of $11 set last month before the deal was announced.

Cipher Data is also involved in patent-infringement litigation with the overall leader in the tape drive market, Costa Mesa-based Archive. Cipher has alleged that Archive is illegally using its loading technology in a line of quarter-inch tape drives.

Bolstered by a favorable, multimillion-dollar settlement last year with Wangtek, a subsidiary of Culver City-based Rexon and another tape drive maker whom Cipher Data had sued for patent infringement, Liebl said Cipher is “comfortable” with its position versus Archive.

Liebl acknowledged that the Irwin deal may hurt profits at first. But he said the earnings dilution is an acceptable price to pay for entry into a growing market that is 52% controlled by Irwin. Archive also sells a 3.5-inch minicartridge drive but has a less than 10% market share, Liebl said.

High growth prospects for Irwin’s 3.5-inch tape drives were attested to by Bob Abraham, vice president of Freeman Associates, a Santa Barbara-based market research firm that tracks computer peripheral-product sales. He said unit shipments of 3.5-inch tape drives should triple from 500,000 units shipped in 1988 to 1.5 million units in 1992. The dollar value of the 3.5-inch tape-drive market will grow over that time from $120 million to $320 million, he predicted.

“Irwin has dominated that market, so if Cipher Data can simply maintain that dominance, they are in a growth market,” Abraham said. The growth afforded Cipher by Irwin is needed because the market for Cipher’s existing bread-and-butter products will grow only at a 5% to 8% rate in coming years, he added.

$1-Billion Company

Liebl said the Irwin acquisition will bolster his goal of Cipher Data becoming a $1-billion company by 1996 as well as the world’s largest supplier of “removable media” data-storage equipment. To round out Cipher Data’s product offerings, Liebl said, the company may well buy a floppy disk-drive manufacturer at some point.

And he defended Cipher’s profit margins, saying that the company has made heavy investments in the development of new products that will pay off later. The future of one of those products, Cipher Data’s 3000 line of half-inch removable cartridge tape drives, is still unclear, however. Cipher Data had hoped to introduce the product last year with an International Business Machines imprimatur in the form of a major supply contract. But IBM passed on the product, whose development it had helped finance, and now Cipher Data is marketing the product on its own.

Those issues aside, Claridge and others commended Cipher’s chairman for crafting a leaner, more focused and broadly based company. “Liebl has made a big difference,” said David Claridge. “He has stabilized the company and has it focused on internal operating disciplines.”

Bob Katzive, vice president of Disk/Trend Report, a Mountain View market research firm, said: “I think they’ve come from a long way back. For a while, people wondered if (Cipher Data management) knew where it was going.”