At first glance, it seems as if data-storage companies are all
growing at a torrid pace.
Fusion-IO (NYSE:
FIO
)
, for example, which I discussed
this past spring
, is on track to boost sales roughly 50% in fiscal (June) 2013,
while many other industry players look set for double-digit sales
gains as well.
But looks are deceiving. The broader industry isn't growing
quite that fast, and for every industry winner that can only grow
quickly throughmarket share gains, there are also big-time
losers.
OCZ Technologies (NYSE:
OCZ
)
, for example, is surely a loser.
As I noted a month ago
, "OCZ continues to generate negativefree cash flow (a cumulative
$125 million over the prior two fiscal years). And with further
free cash flow losses in the currentfiscal year , the
company'sbalance sheet could soon start to feel the strain."
Well, the news is even worse than I thought, as this
technologylaggard may soon see its stock lose some or all of its
value.
Funny numbers
OCZ Technology is hardly at the technological vanguard of the
data-storage industry. The company simply builds storage equipment
using components and technologies developed by other firms, making
it more of a high-end assembly shop. This explains why OCZ had
gross margins of just 13% in fiscal (February) 2009, 2010 and 2011,
and negative operating margins of roughly 8%. The company appeared
to find ways to boost margins in fiscal 2012, as gross margins
surged past 20% and operating losses shrank sharply.
But as it turns out, that may have been just fiction. The
company just announced that it had "material weakness" in
itsaccounting . On Monday, Oct. 15, the company is set to provide
more clarity on this matter, when its files its10-Q . The company
might need to restate fiscal 2012 results, though that's not the
real concern here.
Instead, it's an alarming cashburn rate . Note that OCZ had
generated negative $28 million in free cash flow in 2011, which
expanded to a $96 million free cash flow drain in fiscal 2012. To
keep cash in the bank, the company had to sell 22 millionshares in
fiscal 2011, raising the share count to 51 million.
But here's where things get scary: OCZ now says fiscal
second-quarter sales plans will be well below the $120 million
consensus estimate, leading to a hefty operating loss. The fact
that OCZ likely had negative gross margins in the most recent
quarter is truly scary. As of the end of the fiscal first quarter
(ended May), OCZ still had $43 million in cash left, thanks to that
2012 capital raise from the share count increase. But the company
just tapped a credit line, which is a worrisome sign.
How much of that cash was left as of the end of August? And if
losses continue, then how much will be left after the quarter ends
this November?
OCZ will find it much tougher to raise cash by selling stock
this time around. Investors who bought into the previous capital
raise have been badly burned, so they probably won't return the
bankers' calls this time. In short, OCZ has a very short window to
stop the bleeding.
Watching for bankruptcy
Last week,
I kicked off a new series of articles
that look at companies in deep financial distress.
All three companies mentioned in that article need to play their
hands with a deft touch or they will start to pop up on short
sellers' list of "terminal shorts." In short, these companies might
make a beeline for bankruptcy with a few bad breaks, although I'm
removing
Clearwire
(Nasdaq:
CLWR
)
from the Bankruptcy Watch for now.
New reports have circulated that wireless services
firm Clearwire may end up getting acquired as part of a
multi-tieredacquisition strategy by Japan's Softbank. There are a
lot of questions around these rumors -- Softbank'sability to pay
formultiple firms, for example, yet the mere specter of these
rumors are likely to provide support to shares.That's why I'm
removing this stock from the bankruptcy watch list, though I may
look to put the company back on this list if Softbank fails to move
forward with its rumored plans.
In the case of OCZ, its bankruptcy score of
six tells me "bankruptcy is possible within the next 12
months."
Risks to Consider:
Upside risks? It's hard to see them, at least in the near-term.
New management will try to enact aturnaround but that will take
time, and in all likelihood, things will get worse before they can
get better.
Action to Take -->
It's unclear whether prior results will need to be restated. The
real issue is the fundamental nature of thisbusiness model . Is it
capable of generating positivecash flow ? Or will cash simply dry
up? With questions such as these, this could soon emerge as a
serious candidate for a bankruptcy filing as management seeks court
protection while fixing the business.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.