Rimage 2.0

  • Article by: STEVE ALEXANDER , Star Tribune
  • Updated: May 22, 2011 - 4:16 PM

Rimage's CEO wants to reinvent the maker of CD machines, but some shareholders want the company's stash of cash.

Rimage CEO Sherman Black. Rimage is a company whose base business is steadily diminishing, and it's trying to phase in a whole new business to take up the slack and provide growth. Rather than rely on selling machines that duplicate CD, DVD and Blu-ray disks for corporations, it's trying to sell cloud computing services so that information now shared via disk can instead be accessed online.

Photo: Elizabeth Flores, Star Tribune

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Rimage Corp. is a deer frozen in the headlights of technology change, and Sherman Black is the tough guy brought in to remake the company. But he's getting plenty of flak.

The Edina-based firm makes CD and DVD duplicating machines at a time when flash drives and hard disk drives have undercut demand for disks. But when the disk business started declining three years ago, the company stood still.

"I knew when I joined this company that its disk market was not going to grow," said Black, an intense 46-year-old executive who was made CEO a year and a half ago to shake things up. "I spent my first year as CEO trying to stop the erosion of the existing business."

Black's new strategy is nothing if not bold. He wants to reduce Rimage's dependence on disk duplication by starting an online service for the same set of customers. He won't disclose the cost.

But it's not been easy. Financial pressures have shrunk the company. Revenue continues to decline, save for a brief uptick last year that Black says won't be repeated in 2011.

The company's stock is valued only slightly higher than the amount of its huge stockpile of cash, which totaled $109 million in March. The workforce of 180, including 110 in Minnesota, has been cut 15 percent since 2007. Visitors are met by a locked door and a darkened, vacant lobby, and must phone upstairs to be admitted. The receptionist job was eliminated.

But some stockholders, far from cheering on Black's business transformation, are pushing for him to distribute most of the cash to them, in the form of a one-time dividend. Earlier this year, Black rebuffed the plan, pushed by stockholder Henry Schacht of Notre Dame, Ind., whose investment fund, Schacht Value Investors, holds less than 1 percent of the Rimage stock.

"Rimage's shareholders are mostly professional investors who have far more experience and talent allocating capital than does the management of Rimage," Schacht said in an interview. He noted that after a $100 million special distribution, Rimage would still have $17 million -- "plenty to operate the business and invest for the future," he said.

Black says, politely, that he might agree to return some cash to shareholders later, depending on how much is left after expenditures for the new business and for related new partnerships or acquisitions. But Black was more blunt in a March interview with another shareholder about Schacht's proposal.

"Mr. Schacht's letter is an insult," Black said in the interview that's posted on the website Seeking Alpha (see tinyurl.com/5sn8rbw.) "If we give out $100 million in cash, the company will continue shrinking. We won't have enough left to expand and do it right."

He continued: "If the board ends up following Mr. Schacht's call of action, I'm gone. I'm used to managing billion-dollar companies. I'm not gonna run a rinky-dink operation."

Black was hired as Rimage's president and chief operating officer in April 2009, and got the CEO job that November, when Bernard Aldrich, 59, retired after 13 years as CEO. During Black's short tenure as CEO, the company's downward slide has at least slowed.

Revenue peaked in 2007 at $108.9 million, then declined for two years before rising 6 percent last year to $88.7 million in 2010. In the first quarter, Rimage earned 16 cents a share, beating a Wall Street consensus of 13 cents, on revenue of $21.5 million. However, the company is predicting a decline in revenue again this year, to a range of $80 million to $85 million. In Black's eyes, the problem is far from solved.

It was Black's processor, Aldrich, who presided over the two keys to Rimage's current situation: Relying on the CD and DVD duplicating business despite declines, and amassing more than $100 million in cash. Under the business Aldrich built, Rimage's corporate and law enforcement customers use its duplicating equipment to burn limited numbers of encrypted CDs and DVDs containing sensitive information that's too massive to share via e-mail. About a third of Rimage's revenue comes from selling disk replicating machines costing $3,500 to $35,000, and two-thirds comes from special photographic-quality labels for the disks, Black said.

The resulting customized disks are used to store data as diverse as financial information, consumer photos, broadcast video and evidence in criminal investigations, Black said. But in every case, the customer is someone who wants to make no more than a handful of high-quality copies. For example, Black said evidence in a criminal investigation might be copied only three times: One disk each for the defense attorney, the prosecuting attorney and the court.

Chasing clouds

Black, drawing on his experience at disk drive firm Seagate Technology, where he was a senior vice president of marketing and strategy, came up with a bold alternative strategy: cloud computing.

The cloud would work this way: Rimage would take sensitive customer information that otherwise would have been stored on CD or DVD disks, and upload it to remote data centers operated by Amazon Web Services, a business unit of online merchant Amazon. Rimage would then manage the customer information at the Amazon data center. It would pay Amazon only for the computer and data storage capacity it actually used, which would almost certainly be cheaper than if Rimage had to build and operate its own data center. When Rimage clients wanted to share their data among authorized executives, each person could download the information to his or her own computer or smartphone.

"I don't want customers to choose between disks or the cloud," Black said. "Many of them will need both."

But Black still hasn't revealed some important details of the cloud service, including how the data will be kept secure online -- a big concern with all the news about huge corporate data breaches. He says security involves a special technique he'll disclose later. It's also unclear how he will persuade customers to shift from disks to the cloud.

But Rimage's cloud computing scenario doesn't impress Schacht, the dissident shareholder.

"I'm skeptical of the company's ability to create a so-called 'cloud' product and to compete in this arena," Schacht said. "After all, this is a domain dominated by much larger firms that already have cloud products."

Gregory McKinley, an analyst at Dougherty & Co. of Minneapolis, agrees that there are risks in Rimage's transformation plan.

"This investment decision, which is likely to be complemented with acquisition activity, raises questions around capital requirements, timing, [return on investment] and the ability of the company to profitably deliver a value-added product in the market," McKinley wrote in a recent report.

Black remains unfazed by those who doubt his cloud strategy.

"No one today is doing the product we're talking about," Black said. "I believe we have some innovations that others don't, and we also have a global installed base of more than 20,000 disk copying systems. This new strategy is really tailored to our existing customer base."

And what about the critics?

"Every day we get pressure to make good decisions for shareholders," Black said. "We listen."

Steve Alexander • 612-673-4553

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