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Imation: Fiscal 3Q16 Financial Results

Pretty rare for storage company to register so bad financial results
This is a Press Release edited by StorageNewsletter.com on 2016.11.09

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(in $ million) 3Q15 3Q16 9 mo. 16 9 mo. 16
Revenues 14.5 11.5 47.1 32.8
Growth   -21%   -30%
Net income (loss) (152.3) (7.1) (184.1) (103.8)

Imation Corp. released financial results for the third quarter ended September 30, 2016.

The company's Nexsan segment began shipments of its next generation E-series product family, which include enhancements that effectively double the performance of highly available storage arrays. Nexsan also delivered its UNITY product family, a next-generation hyper-unified storage platform that provides the utility of a Network Appliance (NTAP) unified storage system, the ease and flexibility of Box and the speed and power of Pure Storage.

The third quarter revenue was $11.5 million, up 8.5% from the prior quarter, down 20.7% from Q3 2015. 

The decrease from the last year was due to the strategic decision to exit the Nexsan segment's underperforming regions and low-margin portions of the business to focus on next-generation UNITY and E-Series product families.

Gross margins improved from 35.2% in Q3 2015 to 45.2% in Q3 2016.

Selling, general and administrative expenses declined by $7.0 million, or 44.6% year over year, and the operating loss from continuing operations (excluding special charges) was reduced by 52.6% to $6.4 million from a loss of $13.5 million in Q3 2015.

The company's cash balance and short term investments totaled $49.6 million as of September 30, 2016.

Imation's Interim CEO Robert Fernander commented: "Q3 marked the shift from business stabilization to growth. Increasing gross margins, reduced operating expenses, new product introductions, increased customer satisfaction and revenue growth are key metrics validating Nexsan's turnaround. Customer acceptance of UNITY and a refreshed E-Series product line exceeded management expectations."

Imation's newly formed asset management subsidiary has received approval from the SEC as a registered investment advisor.

The subsidiary has continued its efforts to become a best-in-class Multi System Alternative Investment Platform. The focus is to develop a leading enterprise in technology driven Asset Management.

The plan is to grow this business by hiring experienced investment teams, evaluating joint venture opportunities with asset management firms, and/or making select acquisitions to jumpstart the effort.

Management and the board are actively examining alternatives and will prudently deploy capital as necessary to support these efforts.

Detailed Q3 2016 Analysis
The following financial results are for continuing operations, including Nexsan and the corporate holding company, for the current and prior periods unless otherwise indicated.

  • Net revenue for Q3 2016 was $11.5 million, down 20.7% from Q3 2015. The decrease was due to the strategic decision to exit underperforming regions and low-margin portions of the business.
  • Gross margin perentage for Q3 2016 was 45.2%, 10% better than Q3 2015. The improvement was primarily driven by the production cost improvements, price optimization programs and product mix changes. Despite the year over year revenue decline, the gross profits were relatively flat.
  • Selling, general and administrative expenses in Q3 2016 were $8.7 million, down $7.0 million, or 44.6%, compared to Q3 2015 expenses of $15.7 million. The decrease was primarily related to Nexsan cost reductions - including the strategic decision to exit underperforming regions and low-margin portions of the Nexsan business - and corporate cost reductions - including reductions in corporate headcount, IT and facility costs.
  • R&D expenses in Q3 2016 were $2.9 million, flat from Q3 2015.
  • Special charges were $1.3 million in Q3 2016 compared to $90.8 million in Q3 2015. Special charges in Q3 2016 were primarily related to consulting fees and pension settlement costs. Special charges in Q3 2015 were primarily related to goodwill, intangible and assets impairments.
  • Operating loss from continuing operations was $7.7 million in Q3 2016 compared to a loss of $104.3 million in Q3 2015. Excluding the impact of special charges described above, the adjusted operating loss would have been $6.4 million in Q3 2016 compared with an adjusted operating loss on the same basis of $13.5 million in Q3 2015.
  • Income tax expense was a benefit of $0.2 million in Q3 2016 and in Q3 2015.
  • Discontinued operations had a gain (after-tax) in Q3 2016 of $0.2 million compared with a loss of $47.7 million (after-tax) in Q3 2015. The gain was a primarily due to liability reversals offset by legal and consulting fees. Discontinued operations include the results of the IronKey business, which was divested, and the legacy storage media and accessories businesses which Imation exited.
  • Loss per share from continuing operations was $0.20 in Q3 2016 compared with a loss per share of $2.54 in Q3 2015. Excluding the impact of special items, the adjusted loss per share would have been $0.16 in Q3 2016 compared with a loss per share of $.34 in Q3 2015.
  • Cash and short-term investment balance was $49.6 million as of September 30, 2016, down $6.6 million during the quarter, driven primarily by operating losses and, to a lesser extent, the remaining charges from the company's restructuring.

Year-To-Date Summary
For the nine months ended September 30, 2016, Imation reported net revenue of $32.8 million, down 30.4% compared with the same period last year. Operating loss from continuing operations totaled $29.9 million for the nine months ended September 30, 2016, including special charges of $7.1 million, and a diluted loss per share from continuing operations of $0.76. For the nine months ended September 30, 2015, Imation reported net revenue of $47.1 million, an operating loss from continuing operations of $132.7 million, including special charges of $92.3 million, and a diluted loss per share from continuing operations of $3.27

Our Comments

It's pretty rare for a storage company to register so ugly financial results: quarterly revenue down 21% at only $11.5 million with net loss of $7.1 million. Only other example is Violin Memory.

The only positive sign is a 8% increase of sales from the former quarter.

Imation is going to disappear. It was a $2.1 billion company in 2007, this figure being down to $529 million in 2015 and probably reaching no more than $50 million this year.

One last solution could be to sell Nexsan but who will acquire a company in RAID subsystems, furthermore a small actor in a market with too many competitors including big storage firms?

But how Nexsan could get new customers if they look at these horrful financial results?

Imation got Nexsan for $120 million in 2013 and nobody will now pay this price for a firm having annual revenue of $82 million in 2011 and to be twice less five years later.

Maybe there is a value for the Imation brand name, but a better one  was 3M (Imation was started in 1996, when 3M spun off its data storage business).

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