Seeking Alpha
Profile| Send Message| ()  

OCZ Technology (OCZ) updated the public via a conference call on December 18th. The end result of the call was a mixed bag that leaves more questions than it does answers. Yet, some good information was presented that can fill in pieces of the OCZ puzzle. In this article, we will cover the call and towards the end of the article, enterprise will be covered.

At the beginning of the call OCZ's CEO Mr. Schmitt stated:

"[OCZ is] Current with payments to major vendors."

Sounds like times are tight for OCZ, as per this statement one could infer that they are not current with minor vendors. However, the key suppliers like Micron (MU) are being paid so the supply of NAND will continue to flow in.

"Improved DSOs (Day's sales outstanding)"

This is clearly a positive event. DSO is the average days it takes you to get paid after you sell a product. The faster you can obtain the cash, the faster you can put that cash to use. A balance must occur however -- too low and you risk losing sales as you limit the venders that will work with you. Too loose and good luck getting paid for that drive you shipped out. It would have been nice if we had a number-to-number comparison so we could get a feel for the actual change. Still (given how loose OCZ was with its sales) it is a good thing to hear that the DSO is tightening up.

Inventory, Cash, and OpEx

At 04:10, "Reduced inventory levels to below $75 million dollars."

Yet another positive event -- granted we do not know the terms that OCZ sold or liquidated its older inventory. It is best to get rid of older inventory rather than carry it on the books, only to be written off later.

04:15 "At the end of our 3rd quarter in November we had approximately $15 million in cash, compared to about $32 million for the end of fiscal Q2 in August."

Yahoo Finance lists OCZ as having $43.23 million in cash; yet we learn that this decreased to $32 million and then $15 million as of the 3rd quarter. It looks like expenses were accelerating and it makes you wonder just when OCZ started selling / liquidating its inventory and where all the money went from the inventory reduction. OCZ could not keep up this burn rate thus they have reduced it.

OCZ has estimated that OpEx will be $27-30 million per quarter. Looking at the old figures for OpEx we can see they were increasing under the old CEO. (click to enlarge)

(Source Ycharts.com)

Now factoring in what OCZ said about OpEx being $27-30 million, let's take the old figure of $41.37 million OpEx for May of 2012 (We get this by adding R&D and SG&A together) and take out roughly 28% of that number. The 28% was the rough number of employees that OCZ laid off in order to reduce expenses. Running the math, we end up with an OpEx of $29.78 million -- right in line with what OCZ is projecting. This is also a positive development as OCZ had to cut its burn rate.

(Note: December 2012 data is estimated!)

Credit Facility

Part of the revenues brought in from the discounted accounts receivables were used to pay down the line of credit by $5 million.

04:30 During this time period, we also drew on our credit facility with borrowings of approximately $20 million in August and reduced this borrowing to approximately $15 million in November.

04:53 Due to the changes in cash vs AR levels and with the outstanding borrowing -- they [OCZ] are in default. OCZ is working on an amendment to reduce the AR requirements for this loan.

Most likely new terms will be agreed upon and OCZ will continue to have a line of credit to tap when needed.

Dilution, Dilution, Dilution

05:23 [We] need to raise capital in order to get to cash flow positive state.

That about says it all ladies and gentlemen... more dilution is coming but it should not be unexpected given the rather precarious position OCZ is in cash-wise. In addition, shareholder lawsuit legal fees, auditor costs, and future products based upon Barefoot 3 (to be announced in early 2013 per the CEO) will demand a capital infusion.

OCZ went on to say they:

"believe if they can achieve revenues of $110 million a quarter then the company will be cash-flow positive."

Question and Answer

One analyst asked the question that we brought up in our last OCZ article which may very well be used in some of the newer shareholder lawsuits. Previously OCZ CEO Mr. Schmitt stated that the restatement is "very focused in a small customer and a small amount of time." Yet... OCZ just announced that the restatement will go back several quarters.

At 17:27 into the call an analyst asked the question "Is it fair to assume (the accounting issues) were not isolated to one small customer?

Answer per OCZ: "Yes, It's fair to assume that."

Gross Margins

OCZ discussed the gross margins and their break down. It could be assumed (since they are unloading old inventory at a discount) that this would pull down gross margins on the consumer side for the time being. Going forward we would assess that once all the older inventory is sold off, GM will go up as Vector contains an in-house controller chip which will cut costs and drive up GM.

"Consumer products are 15-25% GM. GM are high teens on an average basis. Enterprise ranges between 20-60% and 40% on an average basis. Product mix is 70% consumer, 30% enterprise. Enterprise is gaining every quarter."

Enterprise Growing?

Growing enterprise sales should be of some interest to STEC (STEC) and especially Fusion-io (FIO). Fusion-io is the 800-pound heavy weight of the enterprise sector and anything that happens in its ecosystem should gain its attention.

It is interesting to note that OCZ's ex-CEO Ryan Petersen made the following statement about a design win with Microsoft (MSFT) which will be used as evidence in the shareholder lawsuits. We cannot trust this statement whatsoever, yet some morsel of truth might be in it since enterprise is 30% of OCZ revenues now.

In regards to significant customer news, I'd like to confirm that we are expecting Microsoft deployments across a number od discrete opportunities around our Deneva 2 SATA products, our Talos SAS drives, and our Z-Drive R4 PCIe SSD. And this could be material to our business in the near-term and we believe that Microsoft could grow to become one of our most significant clients.

The SEC is looking into these statements but if OCZ actually did win the designs (and kept them despite its rather unstable financials) this might account for the increase in the product mix percentages or it could be Q3 SAN replacement wins (as pointed out here). We simply will not know until the delayed 10Q's come out.

Conclusion

The call is a mixed bag and leaves many questions unanswered. The most pressing issue is how will OCZ raise additional capital and how much dilution will shareholders face? We should receive the answers when the 10Q's are filed on or before February 28th. The enterprise percentage numbers leave much that we can speculate on but clearly something is happening in this area, consider it a wild card.

The bulls and bears can both make money by speculating on the wild swings in OCZ's share price. We however, will sit on the sidelines content to warm the bench. Once all the 10Q's are out and light is shed into the black darkness of OCZ's accounting issues, then we might consider investing in the company.

Source: Enterprise Sales Are Increasing, Is It Time To Buy OCZ?

Additional disclosure: I am long via some Jan 2014 5 Dollar strikes.