Imation: Fiscal 2Q16 Financial Results

Imation Corp. released financial results for the second quarter ended June 30, 2016.

Overview
Nexsan subsidiary released the UNITY product line, a next-generation storage platform that combines the performance, scalability and value of DRAM and flash along with private cloud file system synchronization and true data mobility support. These features, in addition to universal connectivity for FC, Ethernet and SAS, and advanced services including NAS and SAN, are all integrated into a single product. This product will provide multi-site enterprise n-Way Sync., 24X7 secured access to the enterprise private cloud for all mobile devices, tablets and PC, eliminate the drudgery of using unpopular and aging VPN technologies. The final product is expected to be ready by Q4 this year.

The second quarter revenue was $10.6 million, relatively flat from the prior quarter, down 37.3% from Q2 2015 due to our strategic decision to shutter Nexsan segment’s underperforming regions and exit low-margin portions of the business to focus on next-generation UNITY product.

Gross margin percentage improved by 350 basis points from 40.8% to 44.3%. Selling, general and administrative expenses declined by $8.8 million, or 51.4% year over year, and the operating loss from continuing operations (excluding special charges) was reduced by $6.3 million to $6.8 million from a loss of $13.1 million in Q2, 2105.

The company’s cash balance and short term investments totaled $56.2 million as of June 30, 2016.

Interim CEO Robert Fernander commented: “Though Q2 revenues were flat compared to the prior quarter, we are delighted with our progress in reducing the operating loss, a significant milestone towards achieving a cash flow break even at Nexsan. Gross margin improvements, the UNITY product introduction and a transformation of our go to market architecture support our transition from stabilization to growth.”

During the second quarter of 2016, Imation’s newly formed asset management subsidiary received approval from the SEC as a registered investment advisor. To lead the subsidiary, Imation has recruited a leading senior executive to spearhead the formation of the next generation alternative investment platform.

Detailed Q2 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 Q2 2016 was $10.6 million, down 37.3% from Q2 2015. The decrease was due to the strategic decision to shutter underperforming regions and exit low margin portions of the business.
• Gross margin for Q2 2016 was 44.3%, 350 basis points better than Q2 2015. The improvement was primarily driven by the supply chain improvement, eliminating low margin revenues and product mix changes.
• Selling, general and administrative expenses in Q2 2016 were $8.3 million, down $8.8 million (or 51.4%) compared to Q2 2015 expenses of $17.1 million. The decrease stemmed primarily from corporate cost reduction and underperformed region exits.
• R&D expenses in Q2 2016 were $3.2 million, up from $2.9 million in Q2 2015, reflecting the company’s increased investment in the UNITY product.
• Special charges were a benefit of $1.0 million in Q2 2016 compared to a charge of $0.9 million in Q2 2015. Special charges in Q2 2016 were chiefly related to the property tax refund for the former Oakdale HQs and pension settlement costs.
• Operating loss from continuing operations was $5.8 million in Q2 2016 compared to a loss of $14.0 million in Q2 2015. Excluding the impact of special charges described above, the adjusted operating loss would have been $6.8 million in Q2 2016 compared with an adjusted operating loss on the same basis of $13.1 million in Q2 2015.
• Income tax expense was a benefit of $0.5 million in Q2 2016 compared with $0.0 million income tax expense in Q2 2015. The benefit of $0.5 million was mostly offset by the tax expense related to the discontinued operations.
• Discontinued operations had a gain (after-tax) in Q2 2016 of $0.6 million compared with a loss of $3.3 million (after-tax) in Q2 2015. Discontinued operations include the results of the IronKey business, which was sold, and the legacy storage media and accessories businesses which Imation closed down.
• Loss per share from continuing operations was $0.17 in Q2 2016 compared with a loss per share of $0.34 in Q2 2015. Excluding the impact of special items, the adjusted loss per share would have been $0.20 in Q2 2016 compared with a loss per share of $0.32 in Q2 2015.
• Cash and short-term investment balance was $56.2 million as of June 30, 2016, down $6.8 million during the quarter, driven by primarily operating losses and, to a lesser extent, the remaining charges from the company’s restructuring and an unrealized loss on the company’s short-term investment portfolio.

Year-To-Date Summary
For the six months ended June 30, 2016, Imation reported net revenue of $21.3 million, down 34.7% compared with the same period last year. Operating loss from continuing operations totaled $22.2 million for the six months ended June 30, 2016, including special charges of $5.8 million, and a diluted loss per share from continuing operations of $0.56. For the six months ended June 30, 2015, Imation reported net revenue of $32.6 million, an operating loss from continuing operations of $28.4 million, including special charges of $1.5 million, and a diluted loss per share from continuing operations of $0.72.

Fernander concluded: “We are on the path we set out to maximize shareholder value, and we look forward to continued progress on this agenda throughout 2016.”

To read the earnings call transcript