OCZ Technology Group, Inc. (OCZ)

F1Q13 Results Earnings Call

July 10, 2012 5:00 PM ET

Executives

Bonnie Mott – Senior Manager, Investor Relations

Ryan Petersen – Chief Executive Officer

Art Knapp – Chief Financial Officer

Analysts

Rich Kugele – Needham & Company

Aaron Rakers – Stifel Nicolaus

Andrew Nowinski – Piper Jaffray

Amelia Harris – Sterne Agee

Kulbinder Garcha – Credit Suisse

Mark Kelleher – Dougherty & Company

Presentation

Operator

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the OCZ Technology to host Fiscal Year 2013 First Quarter Conference Call and Webcast. 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, today's conference is being recorded. It's now my pleasure to turn the call over to Bonnie Mott, Senior Manager of Investor Relations at OCZ Technology. Please go ahead.

Bonnie Mott

All right. Good afternoon and welcome everyone. On the call today are Ryan Petersen, CEO; and Art 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 10, 2012. Please keep in mind that 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 the call are made pursuant to the Safe Harbor provisions of the federal securities laws. Information contained in these forward-looking statements 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

Thank you, Bonnie, and welcome everybody. During the first quarter we again reported record revenue and we saw significantly accelerated bookings of nearly $140 million. Our first quarter revenue increased 54% to $113.6 million, compared with Q1 of '12 revenue of $73.8 million. Our SSD revenue reached $106.5 million for the quarter up 54% year-over-year, compared with $69 million in Q1 '12.

Revenue from our power supply and other category was $7.1 million in the first quarter. It's important to note that our power supply business is experiencing significant headwinds in terms of both revenue and gross margins, as sales of desktop PCs which use these products continue to dwindle. As such, our power supply revenue and gross margin during the quarter were well below our expectations.

Regarding our revenue trajectory overall, we achieved record bookings during the quarter of approximately $140 million and successfully launched the first two families of drives based on the Indilinx Everest 2 platform, Vertex 4 and Agility 4. We shipped over 100,000 units in the first quarter.

I think it's important to note that bookings are normally immaterial and we're reporting bookings this quarter to highlight that we experienced the temporary shortage of power regulators late in the quarter. This also experienced the increase in OpEx in comparison to our previously guided range. These supply chain issues were recently resolved.

Our non-GAAP gross margins increased slightly in the first quarter to 25.2% versus 25% in the fourth quarter, and increased significantly from the 20% reported in Q1 '12.

During the first quarter, we introduced our Indilinx Everest 2 platform and started to ship Vertex 4 mid-quarter and Agility 4 in the last few days of the quarter. The success of these products on a go-forward basis is expected to be impactful to our gross margins.

In regards to the Vertex 4 and Agility 4, on our last call we gave you an early look into initial demand. We continue to receive praise from the industry in terms of performance and feature sets, and are extremely pleased with the improved quality and reliability of these drives in comparison to our previous product generations.

We have since launched firmware and HSDL upgrades that have provided significant performance advantages over the initial release. And we continue to work diligently to increase the price and performance lead in relation to our competitors.

It's key to note that as we had indicated on our last conference call, in anticipation of new products that carry higher margin, we reduced the prices of the last generation of products to well below our average gross margin, while maintaining higher margins on current generation products.

It is our expectation that margins will continue to increase as we transition to our newer generation products and we're confident that our gross margins will see an incremental expansion as a result of increasing purchasing scale and improving product mix.

Moving on, non-GAAP operating expenses in the quarter were $39.8 million. This reflects our expenses at the higher $140 million booking rate. To be specific, this include significantly increased sales and marketing spending from both the growth of our enterprise organization and aggressive advertising programs that were meant to foster increased adoption of our next generation SSDs.

Now, to briefly discuss our SSD revenue by product segment, revenue generated from our hard disk drive format products, which includes our SAS and SATA product lines accounted for $100.3 million in the first quarter, up 5% from $95.1 in the fourth quarter and 45% on a year-on-year basis compared to $69.1 million in the first quarter of '12.

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