OCZ: Fiscal 3Q10 Financial Results

OCZ Technology Group, Inc. reported its third quarter results for the fiscal year 2010, which ends on February 28, 2010.

Corporate Highlights:

• Revenue during the fiscal 2010 third quarter increased 8% over the same period last year, exceeding $38 million amid the company’s shift in focus to SSD and flash-based storage products
• Five-year CAGR totals 50%; Company anticipates potential year-over-year revenue growth of 90-100% driven by growth in its SSD segment
• Demand for company’s SSD and flash storage products to potentially shift future revenue mix from 33% in the nine months ended November 2009 to 70-80%
• Gross profit increased 26% over the nine-month period last year and 1,816% for the reported third quarter as the company shifts business to higher-margin SSD products
• Company expects overall growth in calendar 2010 as current demand for its products exceeds supply
• Company launched its 4th-generation MLC-based Z-drive, PCI-E SSD+HBA for enterprise-class storage applications, which is the world’s first field-upgradeable and serviceable PCIe-based SSD, and fastest at 300,000 IOPS and higher, depending on the application

Management Discussion
Ryan Petersen, President and Chief Executive Officer, commented: “We are pleased to see that revenues showed a year-over-year increase during a period in which the company is shifting its emphasis for margin and revenue growth to the manufacturing and distribution of our next-generation SSD products, from our high-speed memory and power operations. We are dedicated to becoming a leader in the SSD market, and as indicated above, we expect this to increase our overall growth to 90-100%, with our SSD product mix growing to 70-80%.”

Mr. Petersen continued: “We have been able to leverage our experience with low-latency, high-speed and mission-critical reliability memory subsystems to produce what many third party reviewers consider the fastest SSDs on the market. We were among the first to implement cost-reducing technologies such as MLC flash technology, 43nm and 34/32nm node support, which has allowed us to lower the cost of high-performance and enterprise-quality SSDs significantly. We are one of the largest SSD providers in terms of unit volume and we believe a cost leader in many segments due to our technology, which enables lower cost of goods. In addition, we believe that we are one of only two companies to offer our SSDs for a wide variety of interfaces enabling a ‘plug & play’ capability for existing infrastructures. In some cases, a single OCZ SSD can even replace a complete array of traditional rotational hard drives.

“While the switch to SSDs is an overall trend in the industry, OCZ believes it is well-situated to play a key role in helping drive forward this cost-reducing and speed-enhancing technology. As we continue to advance SSD technology, we are able to make use of new node reductions with more advanced controllers and firmware to improve the performance and longevity of the drives while decreasing the overall cost to the end user. Our R&D team continues to drive innovation and received praise at the recent International Consumer Electronics Show for our 4th-generation MLC-based Z-drive, which is a PCI-E SSD for enterprise-class storage applications. It is the world’s first field-upgradeable and serviceable SSD in this form factor. We believe it is also the fastest PCIe-based SSD on the market. We look forward to growing the adoption of this product offering to enterprise customers in an all-in-one, fully functioning RAID HBA-plus-storage solution.

“OCZ has partnered with a number of industry-leading companies to make our SSD products more accessible to the complete spectrum of customers. For example, by working with Symwave a leading semiconductor company, OCZ was able to use its flash technology expertise and develop even faster solutions making use of the new USB 3.0 standard by taking full advantage of the faster transfer rates made possible with this next-generation USB interface. We expect our external SSD device will deliver 10 times the transfer rate of USB 2.0 at 5Gb/s, and it will incorporate several ‘green’ improvements including superior power management and lower CPU utilization.”

Mr. Petersen continued: “OCZ will continue with our goal of being a leader in offering the latest high-end memory solutions as new platforms become available. To our knowledge, we are currently the only memory company to offer co-branded memory solutions from all of the leading platform providers (Intel, AMD and NVIDIA), and we work closely with these partners to ensure that when a new platform comes to market, we are able to offer customers a fully validated product. As a result, we offer a total solution for consumers, system integrators and enterprise clients. Moving forward, you can expect to see OCZ offer new lines of DDR3 memory that push the envelope in terms of performance and stability. We will also continue to offer our memory and power management solutions and have a healthy customer base for our OEM power management products.

“Currently, OCZ’s products are sold through a network of more than 300 distribution partners and direct clients (i.e., those who integrate or resell the product) on a global basis as only approximately 40% of our sales are in North America. Generally, we sell through a network of regional distributors that are experts in their own regions. Our customer concentration is very low, with our largest client, Newegg Inc., at less than 20% of revenue, and our next largest client, SYX Distribution (NYSE: SYX – News), at less than 10%
.”

Mr. Petersen concluded: “We believe that we still have substantial room for growth in all channels enabling revenue to continue expanding as quickly as our capital allows. OCZ will continue to explore all financing options to accelerate our growth. Margins in the enterprise segment tend to be higher than in the PC and laptop market, so the product mix between enterprise/industrial and PC/laptop will be the primary driver of margin growth. Now that we have commenced trading in the US, we look forward to updating our current shareholders on the execution of our business plan.”

Revenue Segment Information
and Unfulfilled Order History:
To have investors better understand OCZ’s historical revenue trends and recent SSD growth, highlighted below is a revenue segmentation chart for the twelve-month periods ended November 30, 2008 and 2009. The table illustrates the company’s rapid transition from its historical high-speed memory business to its SSD business.
                        
                                                  

The company has continued to experience a considerable amount of demand for its products, including but not limited to its SSD products, which it has been unable to fulfill due to working capital constraints. These constraints required OCZ to allocate a larger percentage of its working capital to SSDs and away from other product lines.

Financial Results for the Fiscal Third Quarter of 2010

For the three months ended November 30, 2009 (third quarter of fiscal 2010), revenue increased $2.8 million, or 7.9%, to $38.0 million, from $35.2 million reported in the third quarter of fiscal 2009. This was due primarily to a 56% increase in Average Selling Prices (ASPs), which was offset by decreased unit sales. The increase in ASP was partially due to the company’s transitioning to sales of higher-margin solid-state device (SSD) products.

Cost of revenue for the current quarter decreased $3.3 million, or 9.5%, to $31.6 million, from $34.9 million reported in the third quarter of fiscal 2009. Cost as a percentage of revenue was 83% for the third quarter of fiscal 2010, compared to 99% reported in the third quarter of fiscal 2009.

Total operating expenses for the quarter totaled $7.5 million, compared to $9.4 million reported in the third quarter of fiscal 2009. The company reported an operating loss of $1.05 million for the quarter, which was down from an operating loss of over $9.0 million during the third quarter of fiscal 2009.

R&D costs rose by $587,000, or 79%, to $1.3 million from $738,000 for the third quarter reported in fiscal 2009. The increase was primarily due to an increase of $466,000 in salary and benefits resulting from growth in R&D personnel and an increase in overhead and development costs associated with new products.

Sales and marketing expenses for the third quarter of 2010 decreased $310,000, or 11%, to $2.5 million, compared with $2.8 million reported in the third quarter of fiscal 2009.

General, administrative, and operations expenses decreased $2.2 million, or 37%, to $3.7 million for the third quarter of 2010, compared with $5.8 million reported in the third quarter of 2009. General, administrative, and operations expenses were 16.5% and 9.6% of net sales for the fiscal third quarters of fiscal 2009 and 2010, respectively.

Net loss for the fiscal third quarter of 2010 was $972,000, or $0.05 cents per fully diluted share, compared with a net loss of $9.3 million, or $0.45 per fully diluted share reported for the fiscal third quarter of 2009, a decline of almost 90%.

Financial Results for the Fiscal 2010 Nine-Month Period

For the fiscal 2010 nine months ended November 30, 2009, net sales decreased by $3.3 million, or (2.8%) to $111.6 million, compared with $114.8 million reported for the fiscal 2009 nine-month period. This was due primarily to a decrease in the number of units sold due to limited working capital, which was partially offset by a 1.7% increase in Average Selling Prices (ASPs). The decrease in unit volumes was primarily due to the lack of working capital needed to fill orders.

Cost of revenue for the fiscal 2010 nine-month period decreased $6.6 million, or 6.5%, to $95.2 million, from $101.8 million reported in the nine-month period in the previous year. Cost as a percentage of revenue was 85.3% for the current period, compared to 88.6% reported in the same period in the previous year.

Total operating expenses for the fiscal 2010 nine-month period decreased slightly to $22.9 million, compared to $23.6 million reported in the nine-month period of fiscal 2009. The company reported an operating loss of $6.6 million for the period, which was down from an operating loss of over $10.5 million during the nine-month period of fiscal 2009.

R&D costs rose by $2.2 million, or 127%, to $4.0 million from $1.8 million for the fiscal 2009 nine-month period. Research and development expenses were 1.5% and 3.6% of net sales for the nine months ended November 30, 2008, and November 30, 2009, respectively. The increase in absolute dollars in fiscal 2010 was primarily due to an increase of $1.5 million in salary and benefits. We anticipate our R&D costs will continue to rise as we develop new products.

Net loss for the nine-month period of fiscal 2010 was $7.0 million, or $0.33 per fully diluted share, compared with a net loss of $11.2 million, or $0.53 per fully diluted share reported for the nine-month period of fiscal 2009.