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Overland Storage, Inc. (NASDAQ:OVRL)

F1Q09 (Qtr End 09/30/08) Earnings Call Transcript

October 23, 2008, 5:00 pm ET

Executives

Vern LoForti – President and CEO

Kurt Kalbfleisch – CFO and VP of Finance

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Overland Storage first quarter fiscal year 2009 conference call. During the presentation, all participants will be in a listen-only mode afterwards we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded Thursday, October 23, 2008.

It is now my pleasure to turn the conference over to Mr. Vern LoForti, President and Chief Executive Officer of Overland Storage. Please go ahead, sir.

Vern LoForti

Thank you, Tanya. Good afternoon everyone and welcome to our fiscal 2009 first quarter conference call. Kurt Kalbfleisch, our CFO is with me this afternoon, after my comments I will turn the call over to Kurt who will provide more detailed remarks on our financial performance and then we will respond to any questions that you might have. Before we begin, we want to note that our formal earnings release was put out over the wire about a half hour ago at 4:30 pm Eastern Time this afternoon and can be found on our Web site at overlandstorage.com. The webcast of this call can also be found on the IR section of our Web site and will be archived there for one year.

During the course of our discussion today including the question-and-answer session of this call, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We may discuss our future plans, we will discuss our future plans and prospects for revenue, product introductions, market conditions, competitive conditions, gross profit margins, spending levels, working capital needs and cash balances. We caution you that forward-looking statements relating to these and other subjects we may discuss involve risks, uncertainties and assumptions that are difficult to predict. They are not guarantees of performance and the company’s actual results could differ materially from those contained in such statements. There are many factors that could cause or contribute to such differences, we refer you to the risk factors and cautionary language contained in today’s formal press release announcing our results as well as our filings with the SEC including risk factors, management discussion and analysis and other sections of the company’s periodic reports currently on file with the SEC. We remind you that our forward-looking statements are based on our current expectations and speak only as of the date of this release. The company undertakes no obligation to undertake any forward-looking statements to reflect new information, events or circumstances after the date of this release and conference call.

With that behind us, I would like to discuss the results. As you have seen from our press release, we reported revenue for the quarter of $32.3 million and a net loss of $0.54 per share. This represented just a 1.8% decrease in revenue compared to the $32.9 million reported in the prior year first quarter and 11.6% increase compared to $28.9 million in revenue in the immediately preceding June quarter. We are pleased to be able to report the 11.6% sequential revenue growth in Q1 which is often a slow quarter for us given the holiday season in Europe.

There are a number of dynamics which affected revenue for this quarter that I would like to discuss with you, the first of which is the layering in of the Snap acquisition. You will recall that we completed the acquisition right at the end of June and we immediately launched into the integration process which took us till the end of September to integrate the organization and all of the business systems of Snap which needed to be disconnected from Adaptec. We knew that this first quarter would be a rocky one but we were pleased with the level of Snap revenue we were able to generate.

The second item that bears upon the Q1 results is our OEM revenue. As expected, on a year-over-year basis OEM sales declined, they were down about 25% compared to Q1 of FY08. However we were pleased that we actually saw an uptick, a small one, about 2% in OEM revenue on a sequential basis compared to the June quarter. We are conscious of the fact that the fiscal year end of our largest OEM is October.

Another item to discuss is the global economy; the worldwide financial crisis is certainly affecting many businesses. We did see softness in our central European region where we saw a larger share of delayed deals. We still have a very significant pipeline but a number of deals were pushed out into the subsequent quarter. However, we were able to get many deals done around other parts of the world and we feel that we may be insulated to a certain extent because of the lower price range of our products relative to alternate high-end solutions. This is especially true with our new Snap products. In fact we would hope to benefit if this is the case from end users who because of economic constraints search for more affordable solutions.

Lastly, after the acquisition of Snap and the release of our Q4 results, we indicated to our employees and to you the investing public that we needed to accomplish a restructuring. As can be expected, there was great apprehension within our workforce concerning the future and I believe this negatively affected sales in the month of August. Once we announced the details of the restructuring on August 22 however, the effect of the change in leadership of the sales and marketing teams was dramatic. The worldwide team pulled together and produced a significant acceleration in daily bookings that helped us make the numbers that we reported in these results. We are working now to continue that momentum into the December quarter.

Let me turn to gross margins. In addition to a growing top line, a growing gross margin is also key to our return to profitability. With that in mind, we were extremely pleased to report gross margin for the first quarter of 27%. Our gross margin has not been this high in almost four years, as a matter of fact, it was last at that level in the December 2004 quarter. So, this really represented a significant pop from the 21.1% margin reported in the June quarter, immediately preceding this quarter, and it was really driven by improved channel mix branded versus OEM, product mix and lower manufacturing and warranty costs. We are hopeful that we can continue this improvement in future quarters.

Let’s me turn to a comment about OpEx, Kurt will talk about this more, we knew that the acquisition of Snap if you recall our announcement about that acquisition that it would add approximately $3 million per quarter in OpEx. It was for that reason that we needed to restructure our business model. As we have already discussed we cut about $10 million in planned FY09 spending as part of that August 27 restructuring. However, given the fact that that restructuring was affected two-thirds of the way through the quarter and because we recorded about $400,000 restructuring specific cost, OpEx in Q1 were extremely high. We do however expect that future quarters will benefit from this restructuring and that OpEx will fall by about 15% in Q2 compared to the Q1 reported levels.

Let me comment on cash. We ended the quarter with $5.4 million in cash on hand and we have publicly reported that we are seeking $10 million in new financing to fund future operations and growth in working capital as we grow our revenue line. We have retained a professional advisor to assist us in this effort and have Ben [ph] engaged with a large number of potential funding sources. The global liquidity crisis obviously has made this a difficult task but we are pleased that there are non-bank institutions that are privately well funded and are still doing deals, and as indicated in our release, we have recently received letters of intent which we are now considering and working through the process of documentation, analyzation and we hope to be able to report further on this front to you in the near future.

As I indicated in the closing quote of the earnings release, I am significantly encouraged by the passion and productivity of our sales and marketing team. We have really effectively broken down all the organizational laws such that all resources in the company that can be brought to bear to close sales are instantly available for the sales organization and are all working together on a real-time basis. Furthermore, two weeks ago we held a European customer conference where I had a chance to personally interact with our partners in that territory. I was surprised and pleased by the level of interest in our new Snap family of products, and in their desire, the desire of those partners, to participate with us in our push into the video surveillance market. We truly believe that Snap is the perfect storage solution with a transition that is sweeping the globe as we move away from analog video tape solutions to high-res MPEG quality IP cameras and network video recorders. We intend to leverage these Snap products and the fit to this market to capture a share of that market.

With that said, let me now turn the call over to Kurt to discuss some more detail behind the quarterly results and then we will open up the call for your questions. Kurt?

Kurt Kalbfleisch

Thank you, Vern. First I would like to expand on some details of this quarter’s revenue performance. As reported, total revenues for the quarter were $32.3 million down just 1.8% from $32.9 million in the same quarter last year but up 11.6% from $28.9 million in the preceding quarter. The (inaudible) to HP were projected to be down this quarter but came in flat to last quarter. During Q1, HP sales comprised 26.7% of total company revenue compared to 35.3% last year and 29.8% in the sequential quarter. Revenue within the branded channel was $23.1 million, up 12.3% from $20.5 million compared to the first quarter of last year and up 16.5% from $19.8 million compared to last quarter. Service revenue continued to grow posting an 18.3% increase over the same quarter in the prior year and up 2.6% from the prior quarter. The addition of the Snap products to our disk based offerings provided new disk based revenue in the amount of $3.5 million during the quarter resulting in an increase to our disk based product revenue when compared to the first quarter of last year of 98% and sequentially of 78%. Revenue for our REO family of products and ultimates were down 8.9% compared to the first quarter of last year and 18.1% sequentially. VR 2 royalties for the quarter amounted to $172,000 this number represents pure royalties with no chip sales.

The gross margin percentage for the quarter increased to 27% up from 21.1% on a sequential basis and from 19.7% from the prior year quarter. The increase in margin of 5.9% on a sequential basis reflects the continuing shift towards a higher concentration of branded revenues versus OEM revenues and improved product mix as well as reduced inventory charges and warranty costs.

Now on spending level, total operating expenses for the quarter were $15.6 million, up 40.5% from $11.1 million in the prior year quarter and up 14.2% sequentially from $13.7 million. The other marketing expense was up 41%, R&D was up 64% and G&A was up 20% sequentially. The quarter-over-quarter delta [ph] is reflective of planned spending increases in sales and marketing as well as the integration of the Snap Server business. Q1 also reflected one-time costs associated with their August restructuring following the acquisition in the Snap Server business. Given our net operating loss [ph] position and full reserve established against our deferred tax assets, our income tax line consists primarily taxes on our foreign subsidiary.

As for cash flow and the balance sheet, as of fiscal year end, the company had $9.7 million in cash and as of the end of Q1 we had $5.4 million. Accounts receivable increased during the quarter by 25% while days sales outstanding improved by 16%. Inventory levels remained relatively flat on a sequential basis.

Vern, back to you.

Vern LoForti

Thank you, Kurt. Tanya, we will open the call up for questions at this point.

Question-and-Answer Session

Operator

Thank you so much, Mr. LoForti. (Operator instructions) Mr. LoForti, I am showing no questions at this time, sir.

Vern LoForti

Thank you, Tanya. Thank you everyone for joining us on the call and we will look forward to reporting back to you soon.

Operator

Ladies and gentlemen that does conclude our conference call for today. We thank you for your participation and ask that you please disconnect your line.

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Source: Overland Storage, Inc. F1Q09 (Qtr End 09/30/08) Earnings Call Transcript

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