Tuesday, July 10, 2012

OCZ Technology Drops On Mixed Results

Or at least OCZ Technology (OCZ) dropped due to missing the headline numbers. The stock dropped 9% in the regular session and another 9% in after hours to trade below $5. The company reported Q113 numbers after the close that generally missed expectations. The guidance though was maintained.

The provider of high-performance solid-state drives (SSDs) for computing devices and systems still reported 54% revenue growth even if it slightly missed expectations at $115M

What the market has missed is that the company reported record bookings of $140M or some $26M above the reported revenues. The company typically has minimal bookings that push over to the next quarter. The main culprit this quarter being a power regulator shortage. Otherwise, revenue for Q113 would've been closer to $140M and earnings undoubtedly would've smashed estimates.

On top of the parts issue, the company increased marketing expenses in order to capture the bookings revenue that ended up not shipping. So expenses topped the high end $39M forecast with revenue slightly missing expectations.

That culminates in an almost perfect world for the shorts on this stock. The agenda can now be pushed that the world is ending for this fast growing stock. Doubt will exist in even the most hardened bulls that the story might have holes.

NAND Flash Pricing
Contrary to everything published on the web, falling NAND flash prices are very positive for OCZ. The main reason is that it makes SSD products more affordable and price comparative to HDD. Investors always seem to miss that OCZ is a buyer of NAND and not a producer. The cheaper input just allows them to lower prices on products and hopefully at a slower rate then the input price drops.

The recent drops in prices has led to higher capacity products seeing stronger demand. Management expects it could produce a material demand increase for HDD replacement products.

Though not clear from the call (or at least to me) was whether this area was the main culprit for the higher bookings. The NAND price drops likely created at opportunity that OCZ jumped on though failing to realize that part shortages would exist. Remember that the shortages only occurred on the demand that exceeded original estimates.

Microsoft
The company finally discussed Mr. Softee as a customer though the past quarterly amount was only $1.5M. While presented as a negative on the message boards and twitter world, this actually is very bullish when considering the whole picture. In essence, OCZ has built a market leading customer base without meaningful revenue inclusion from Microsoft.

The more important details were that OCZ bid on 6 sizable deals and expects to win 4 or 5 as mainly the sole source provider.

Even more remarkable is that such revenue is not included in the guidance due to timing issues. The company was very unsure whether revenue would ramp by Q413 or Q114. Amazing that the guidance of up to $700M for FY13 doesn't even include what could become the largest customer in FY14.

SAN Replacement
Not much to add on this category other than it is expected to ramp in Q3. Revenue did dip from Q412 though the total isn't that meaningful yet. The sales force is being expanded to meet the ramp in demand.

Cash
The other big issue was the vast reduction in cash. The company consumed nearly $50M in order to fund the operating loss and expand inventories. The CFO was clear that inventories would begin to decline on an absolute basis and significantly relative to sales.

The company also was prudent to sign a credit line of $35M that could be expanded to $60M or even $100M if certain conditions were met. My guess this goes back to if Microsoft ramps up purchases the bank will be happy to fund the working capital. Never hurts to have a customer with a pristine balance sheet.

The company expects to use the credit line in Q3 before becoming cash flow positive in Q4.

Guidance
The numbers remained inline with previous numbers provided on the Q412 earnings report. Several analysts were able to make it absolutely clear that the guidance was lowballing as bookings would have to drop nearly 20% sequentially to miss the higher end of $140M for Q213.

Basically the company began the quarter with $26M in revenue already booked. Just hitting a flat sequential bookings of $140M would make the reported revenue for Q2 reach $166M.

The CEO clearly responded to one analyst that the numbers were conservative due to operational risks. Ones that aren't even known but could happen based on Q1. Possibly the company could face more supply issues if orders weren't made in advance assuming a $160M+ quarter.


Highlights from the PR

Financial Results:

  • Net revenue in Q1'13 was a record $113.6 million, and increased 54% compared with net revenue of $73.8 million reported in Q1'12.
  • Q1'13 SSD revenue reached a record $106.5 million; an increase of 54% compared with Q1'12 SSD revenue of $69.1 million.
  • Gross margin in Q1'13 25.0% compared with 20.0% in Q1'12
  • Net loss for Q1'13 was $6.3 million or $0.09 loss per share compared with a net loss of $9.1 million or $0.20 loss per share in Q1'12.
  • Achieved Record Bookings in Q1'13.
  • Non-GAAP gross margin was 25.2% compared with 20.0% in Q1'12.
  • Non-GAAP net loss for Q1'13 was $11.5 million or $0.17 loss per share as compared with a non-GAAP net profit for Q1'12 of $0.5 million or $0.01 per share.

Business Outlook and Commentary:

  • OCZ expects net revenue for its second fiscal quarter ending August 31, 2012 (Q2'13), to be in the range of $130 to $140 million.
  • OCZ expects net revenue for its fiscal year ending February 28, 2013 (FY'13) to be in the range of $630 to $700 million. This represents a growth rate of approximately 80% at the midpoint; we expect, based on historical trends, revenue to be weighted to the second half of the year, with approximately 60% to 65% of revenue to occur in the second half of the year.
  • Non-GAAP gross margins are expected to increase in Q213 and to exit the year in excess of 30%, with typical sequential gross margin increases of 100 to 250 basis points per quarter throughout the fiscal year, subject to changes in product mix as the SSD landscape continues to evolve.
  • OCZ expects non-GAAP operating expenses for Q2'13, to be in the range of $38 to $41 million with expenses exiting the year at between $43 and $47 million per quarter, as OCZ continues to invest in its ongoing growth objectives. 

Conclusion
The market is a strange beast in the short term. Everybody is right to question the execution of this management team. Profits are continuously pushed out in favor of growth. Though investors continue to miss the discrepancy between the market opportunity and the valuation of this stock.

Based on the after hours price of $4.95, the company trades in the $330M market cap range while revenues in the 2H should approach $450M. Yes, the math is correct if you calculated that Q413 revenue might hit $250M while Q113 only hit $113M.

As a management team would you push out profits to increase R&D and Marketing expenses in order to capture that opportunity? Think everybody would be willing to take that risk. Even though the company continuously hits the revenue targets and provides reasonable assurance that the guidance is doable investors still question everything to the max.

Sometimes being too skeptical will cost you to lose out on a great investing opportunity. OCZ just might be that example.


Disclosure: Long OCZ. Please review the disclaimer page for more details. 





6 comments:

Anonymous said...

boiler room operation - all pumpers must be exposed! OCZ is for losers.

Mark Holder said...

Move on then if you don't like the facts.

Anonymous said...

Very good article, clearly laid out. The market valuation of OCZ is way too low considering the explosive growth they are seeing. The sad fact is that the stock has been subject has been subjected to a series of planned short attacks, and they will only stop when OCZ can announce the big enterprise wins and revenue which should not be too far away now. Until then it will be in the hands of the shorters.

Mark Holder said...

Great points. The shorts clearly own this stock right now. No matter what the company does, the shorts are able to press it down.

Just not sure OCZ ever announces those big deals. The MSFT mention on the CC might be as much as you ever get and that did nothing for the stock price.

Anonymous said...

Yes I'm talking more about the revenue from these wins- the market wants to see the numbers, not conjecture. We know that the qualification period is vigorous and protracted, but once the revenue from any enterprise wins starts rolling in, then the game changes.

For now, at under $5 I see it as a buying opportunity. I think RP knows that they cannot shake the shorts this quarter, after the 27m delay and earnings miss. I think he purposefully left the guidance the same (very conservative considering the guaranteed extra 27m rolled over) so that they will blowout on the next results which should provide the catalyst for a massive short squeeze.

Mark Holder said...

Yeah, the point to raising guidance more was rather pointless. Just another target for the shorts to attack. If investors aren't happy with a year end target of up to $700M, I'm not sure how an extra $27M was going to make a difference.