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OCZ Technology Group, Inc. (OCZ)

F2Q 2012 Earnings Call

October 5, 2011 5:00 PM ET

Executives

Bonnie Mott – IR Manager

Ryan Petersen – President and CEO

Arthur Knapp – CFO

Analysts

Alex Kurtz – Sterne Agee

Rich Kugele – Needham & Company

Aaron Rakers – Stifel Nicolaus

Arnab Chanda – ROTH Capital

Gary Mobley – Benchmark

Mitchell Sacks – Grand Slam

Presentation

Operator

Good day ladies and gentlemen and welcome to the OCZ Technology’s Fiscal 2012 Second Quarter Earnings 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 call is being recorded.

I would now like to turn the conference over to Ms Bonnie Mott, Investor Relations Manager. Ma’am, you may begin.

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 October 5, 2011. Please keep in mind that while being made available for replay and 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. Some of the factors that could cause actual results to differ are discussed in the reports filed with the SEC. These documents are available on OCZ’s website, 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 everybody. We’re pleased with our achievements during this quarter. We had record revenue of $78.5 million in the second quarter, an increase of 106% over our second quarter of fiscal 2011.

SSD revenue for the second quarter reached a record $71.1 million, and increased 252% year-over-year. SSD products represented 91% of revenue versus 53% of revenue in the second quarter of 2011. We believe our recent revenue growth suggest significant momentum moving into the second half of the year. As this is our first year with predominantly SSD sales, up the core from normal protocol to give a bit of color on each of our revenue segments.

Enterprise class SSD revenue increased over 60% sequentially and represented almost 20% of our SSD sales during the quarter. This is due to increased enterprise and enterprise OEM activity towards the end of the quarter related to some of the winds we alluded to late last year. Based on our current progress with enterprise clients, our increasing visibility into this segment and keeping in mind the time lapse between design and revenue being generated, we’re confident in continued growth in this segment.

Server and high-performance products class SSD revenue as expected was slightly down sequentially and represented roughly 75% of our SSD sales during the quarter. It’s important to note, we believe that this trend suggests anotable gain in market share in this segment based on ordering patterns in August and September coupled with increasing demand for our server class product, we are confident in continued growth in this segment.

Consumer class SSDs increased about 70% sequentially and represented roughly 5% of our SSD sales during the quarter. We believe that this increase was a result of increased demand, very late in the quarter by laptop manufactures for Indilinx based SSDs and advance in the fall and holiday season in new product releases. We expect continued growth in this segment and higher than historical margins based on our continuing release of next generation Indilinx controllers.

In regards to our non-core power supply and other revenue, this segment increased 58% sequentially and represented about 9% of revenue. This is a result of increased orders for our PSU products exiting the quarter and is a signal of continuing demand in the distribution channel. To briefly explain the dynamic, PSU have long shipping times and are often ordered 8 to 12 weeks in advance of expected and customer demand by both distributors and PSU manufacturers. We have over, the past four quarters enabled to drive meaningful increases in our gross margins and I’d like to take a few moments to discuss our gross margins and the impacts on a go forward basis.

In the second quarter, GAAP gross margins were 21.6% versus 4.3% for the same quarter last year. And gross margins increased about 160 basis points over the 20% we reported in Q1. Though we don’t disclose segment margins, it’s important to note that the margins for SSDs are higher than our reported GAAP margins as the PSU and other categories carries well margins.

The gross margin increases for the quarter were led by a mix shift to higher margin SSD products and improved supply chain dynamics. I’d like to take a few minutes to focus on our margins and our supply chain.

As we previously discussed, we expect to see major improvements in our cost structure as we continue to shift our NAND flash purchasing from the stock market to buying directly from the manufacturer. We had previously reported that by the end of the fiscal year, our goal was to purchase about 75% of our NAND directly from the fab. We exited the quarter achieving that goal and are confident of being able to achieve the same on a quarterly run rate basis going forward.

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