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OCZ Technology Group, Inc. (OCZ)

F1Q 2012 Earnings Call

July 06, 2011 5:00 p.m. ET

Executives

Bonnie Mott - Investor Relations Manager

Ryan Petersen - CEO

Arthur Knapp - CFO

Analysts

Aaron Rakers - Stifel Nicolaus

Rich Kugele - Needham

Alex Kurtz - Sterne Agee

Christian Schwab - Craig-Hallum Capital

Richard Shannon - Northland Capital

Shebley Seyrafi - FBN Securities

Gary Mobley - Benchmark

Nehal Chokshi - Technology Insights

Mitchell Sacks - Grand Slam

Presentation

Operator

Good day ladies and gentlemen and thank you for standing by and welcome to the OCZ Technology to host fiscal year 2012 first quarter conference call. At this time all participants are in a listen only mode. Later we'll conduct a question and answer session and instructions will follow at that time. (Operator instructions)

As a reminder, this conference is being recorded. Now I'll turn the program over to Bonnie Mott, Investor Relations Manager of OCZ Technology. Please go ahead.

Bonnie Mott

Good afternoon and welcome everyone. On the call today are Ryan Petersen, CEO, and Arthur Knapp, CFO. Ryan will provide a business overview, and then Art will review the firm's financial results. Following their formal remarks we will open the floor to a few questions.

Before I turn the call over to them I need to remind our listeners that the information is presented as of July 6, 2011. Please keep in mind that while being made available for listening after today, the information is current only as of today. Remarks made during this call may contain forward-looking statements that involve risks and uncertainties.

Forward-looking statements on this call are made pursuant to the Safe Harbor provisions of the federal securities laws. Information contained in the forward-looking statement is based on current expectations and is subject to change and actual results may differ materially from forward-looking statements. Such of these factors that could cause actual results to differ are discussed in the reports filed with the SEC

These documents are available on OCZ's Web site, www.ocztechnology.com. With that it is now my pleasure to turn the call over to Ryan Petersen.

Ryan Petersen

Thanks, Bonnie and good day to all of you. We're pleased with our record results during the first quarter as we have achieved several key milestones. Our year over year revenue increased by 115% to $73.8 million, SSD revenue increased year over year by 418% to $69.1 million. Our SSD products represented 94% of our revenue versus 39% of revenue in the first quarter of 2011.

Compared to last quarter, SSD revenue increased about 19% sequentially representing our seventh straight quarter of sequential revenue growth for our SSD products. GAAP gross margins were up 790 basis points to 20% for the first quarter versus 12.1 a year ago and 340 basis points over the 16.6% we reported in Q4. These margin increases were led by higher SSD margins.

Over the past four quarters OCZ has undergone a significant transformation, establishing a solid foundation in the SSD market. And while we're pleased with our rapid progression from being a commodity DRAM player into a solid-state drive technology provider, we are cognizant of the many opportunities that lie before us.

We're focused on our continued evolution as a storage provider and on further leveraging our significant technological advantages, our recent increases in scale, and the improvements in our working capital afforded by our April $93.7 million follow-on, which will allow us to further take advantage of our position as a leader in the growing SSD market.

Key opportunities provided by our increased working capital and scale include greater purchasing power, potentially increased allocation from NAND flash manufacturers. Those are expected to result in increased margins and enable us to more adequately fulfill demand for our products. In March, in a key movement to improve our technological leadership, we acquired strategic partner, Indilinx, in a private - which is a privately-held manufacturer of SSD controllers and firmware.

We expect this acquisition to expand OCZ’s presence in the high margin embedded, hybrid storage and industrial markets while reducing our reliance on third-party controllers and allowing for increased margins. This acquisition is also intended to broaden SSD controller-related IP portfolio. We’ve recently finalized the integration of Indilinx and are expecting our work forces both in Korea and the US to expand.

We’re on schedule for delivery of our next generation Indilinx controllers. As we continue to execute on our strategy of rapidly transitioning the business to be more enterprise and OEM focused, I think it’s important that I describe some of the critical ongoing activities in this regard.

We’ve recently discussed our plans to increase manufacturing capacity and I’m happy to report that we’re on track to bring our new facilities online, which will increase our ability to fulfill demand for our products and better meet the needs of our OEM clients in the second half of fiscal '12.

We’ve been making significant strides in this past quarter to increase our R&D and sales strength, driving our ever-increasing focus on direct to enterprise and OEM sales. We have some of the highest performing enterprise products and are committed to stay the technological and performance leader. We've increased our R&D work resources significantly and continued to add key individuals to directly target enterprise data center and OEM clients.

We believe that this will allow us to continue to grow the business profitably and to drive steady gross margin improvements. The transition to an enterprise focus is not only apparent in our gross margins but also in the recent changes to our client base. For example, it's worth noting that our historically largest client, Newegg, while continuing to grow SSD revenue substantially, no longer represents more than 10% of our revenue.

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