Adaptec, Inc., F3Q09 (Qtr End 12/26/08) Earnings Call Transcript

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 |  About: ADPT Corp (ADPT-OLD)
by: SA Transcripts

Adaptec, Inc. (OTC:ADPT-OLD) F3Q09 (Qtr End 12/26/08) Earnings Call January 28, 2009 5:00 PM ET

Executives

Nicole Noutsios - IR

Sundi Sundaresh - President and CEO

Mary Dotz - VP and CFO

Analysts

Mike Crawford - B. Riley & Company

Brian Freed - Morgan Keegan

Operator

Good day everyone and welcome to the Adaptec's Third Quarter Fiscal 2009 Earnings Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Ms. Nicole Noutsios. Please go ahead.

Nicole Noutsios

Thank you, operator. During today's call, we will first hear from Sundi Sundaresh, our President and CEO, followed by Mary Dotz, Adaptec's Chief Financial Officer. After Mary's and Sundi's remarks, we will host a brief question-and-answer session.

Some of the comments today will include forward-looking statements regarding future events and our projections of the financial performance of the company based on our current expectations, including a projection of operating results for the third fiscal quarter of 2009.

These statements are subject to significant risks and uncertainties that can cause our actual results to differ materially from those expressed in these forward-looking statements. We refer you to the risk factors section in the documents that Adaptec has filed with the SEC, specifically in our most recent Form 10-Q which contains important risk factors that could cause actual results to differ materially from expectations. In addition, some of the financial measures that are included in this presentation are non-GAAP. For reconciliation of GAAP to non-GAAP measures, please visit our web site at www.adaptec.com, under the IR section.

With that, I would like to introduce Adaptec’s President and CEO, Sundi.

Sundi Sundaresh

Thank you, Nicole. Good afternoon and thank you for joining us for our third fiscal quarter earnings call. During this call I will provide a brief business overview, updates on our channel initiatives and details on the integration of Aristos Logic. I will then turn the call over to Mary to provide a financial overview.

Our third quarter revenues were $28.2 million, and our EPS was break-even per diluted share. While we continue to strive for better financial results, I am pleased with the consistency of our execution and delivering on our guidance. Despite the challenging economic conditions and the complexity of the transitions in our revenue base, we continue to closely manage the business.

Adaptec has struck a delicate balance between steadily executing on our product roadmap and being fiscally prudent. We maintain non-GAAP income at or near break-even, decreasing revenues and still rapidly developed and launched products that won2 accolades in the market.

We know that if we are the thrive in the future, it will be because we developed market leading products that delight our customers and outperform the competition. Adaptec continues to deliver on this in the midst of a difficult economic climate. We are allocating resources to support our development efforts and we strive to deliver excellence in product and customer value that Adaptec is known for.

We are also fortunate to have a very solid balance sheet of $371 million in cash and current investments that affords us strategic flexibility during these uncertain times.

On the product front we successfully launched the Adaptec Series 1 Unified Serial Host Bus Adapter in December. Adaptec Series 1 HBAs are designed to maximize scalability and provide system integrators, system builders, resellers, OEMs and IT managers with optimum flexibility.

With this new addition to our product family, we now have a full line of low to high end 3D Unified Serial products supporting SATA and SAS drives.

On the channel front we continue to make solid progress. And we won two awards in the most recent quarter. Channel Web, Most Strategic Vendors of 2008 and Business Solutions, Best Channel Vendor 2009. These awards highlight our strong expertise in supporting the channel. Adaptec was recently selected as one of the top 20 strategic storage vendors by Channel Web, a network of prominent publications read by the storage channel. For this selection storage integrators were asked to identify the vendors they considered their most strategic partner, such that if the relationship were to end, the storage integrators business would be severely affected. Adaptec was the only RAID controller vendor to make the list.

In addition, Adaptec was recently selected as one of Business Solution magazine's Best Channel Vendor for 2009 in the Storage category. Business Solutions target executives of IT channel companies. From an online survey of channel customers Adaptec scored top points in the areas of product reliability, product features and service and support. Again Adaptec was the only rate controller vendor to make the list.

Since the launch of our Series 3 product family, we made great gains with our serial products, reporting over 7 quarters of sequential revenue growth.

In Q3 we were impacted by the economy and reported a 10% quarter-over-quarter decline, but still had strength year-over-year reporting a 31% growth worldwide.

In the quarter, we also successfully completed integration of privately held Aristos Logic, a provider of industry lead RAID ASIC solutions. Now that the two teams are fully integrated we expect sales and marketing engagements to further bolster our opportunities with OEM customers.

As mentioned in earlier calls we are very exited that the integration of Aristos will help drive new opportunities for Adaptec. We have already announced that we won an opportunity with IBM. We also have another large well known OEM where we are shipping in low volume.

With that I will turn the call over to Mary to provide a more detailed financial overview.

Mary Dotz

Thank you, Sundi, and welcome everyone. Before I start, I would like to reiterate that all the comments here today are based on non-GAAP financial measures, exclusive of discontinued operations unless otherwise noted. I encourage you to refer to the reconciliation of GAAP to non-GAAP financial results that is included with the press release and posted on our web site.

Over the past quarter, we continue to make progress on a number of fronts. The integration of the Aristos team is complete. And we have maintained our tight fiscal control.

Additionally, our balance sheet remains strong as we weather this economy downturn and execute on our growth initiatives. As Sundi indicated, we are pleased to announce that our third quarter net revenues were at $28.2 million, which is within our guidance range. Our revenues were down from the $31.7 million we reported in the second quarter of 2009 primarily due to a decrease in our channel sales and the macroeconomic conditions. This was attributed to a decline in our conditional products as well as a reduction in the amount of inventory held by our distributors. We have seen a modest amount of top-line contribution as a result of Aristos Logic acquisition at less than 5% of our net revenue for the quarter.

Although, we continued to have a very strong contribution this quarter from our legacy OEM business, we still faced significant decreases in these revenues over the next two to three quarters. However, we anticipate that our new OEM capabilities will provide long-term revenue growth for Adaptec. The timing of this revenue ramp has been adversely impacted by the economic climate, but we anticipate this to take place towards the end of the calendar year.

In terms of customer concentration, our top customer IBM represented 37% of our net revenues for the third fiscal quarter. We held our non-GAAP gross margins steady at 44% during the third quarter of fiscal 2009, a considerable achievement in this economy. We recorded inventory write-downs for some of our legacy products which were offset by a favorable customer and product-mix during the quarter.

Cost continues to be a key priority for Adaptec and we continue working to improve our operational efficiencies. In light of the challenging economic climate, the company initiated a new restructuring plan to reduce operating expenses during the third quarter of fiscal 2009. The company incurred a charge of $0.9 million related to headcount reductions.

The company expects an operating expense savings of approximately $2.9 million from this plan. We carefully managed our restructuring program to ensure that it did not impact our product road map. Although, we experienced declines this quarter in our top-line, our continued operational and cost improvement have allowed us to maintain non-GAAP income at near breakeven. In the third fiscal quarter, our non-GAAP net income which is exclusive of discontinued operations was $0.1 million. The third quarter non-GAAP EPS was breakeven for diluted share which was within our guidance range.

During the quarter, our cash utilized by continuing operations was $3.9 million. The cash was consumed primarily by the timing of the inventory purchases and a decline in our accounts payable. GAAP net interest and other income was $3.4 million for the quarter inclusive of a one-time gain of $0.4 million on the early repurchase of $52 million of our three-quarter percent convertible notes.

Our balance sheet remains strong and we ended the third quarter with $371 million in cash and current investments. The decrease in cash from last quarter was primarily due to the reduction in our outstanding convertible notes after our early repurchase followed by bondholder redemptions in December. Bond holders were left with approximately $2 million of our three-quarter percent notes outstanding at the end of our third quarter. As of today, this balance is down to less than $500,000.

Now, I would like to provide you with some guidance for the fourth quarter of fiscal 2009. With our decline in OEM revenue as well as the economic impact on IT spending, we are anticipating a top-line reduction over the next few quarters. Given these factors we are going to take a cautious outlook.

We expect revenues to be in the $20 million to $25 million range for the fourth quarter. We will continue to make improvements in operating expenses. However, we plan to invest in the further development as our technology in order to obtain long-term revenue growth. This will result in higher R&D expenses during the fourth quarter.

We expect the fourth quarter non-GAAP EPS to be in the range of a loss of $0.01 to a loss of $0.04 per share, and our operating cash flow should be slightly negative.

Now, I would like to turn the call back to Sundi to briefly summarize our comments today.

Sundi Sundaresh

Thank you, Mary. We are facing uncertain economic times, but I feel that Adaptec is well positioned for the future. We have a very solid and comprehensive product portfolio that has received numerous industry accolades. Aristos Logic has been fully integrated and we can expect further traction with OEMs in the coming quarters.

And lastly, the strategic business decisions we have made over the past two years combined with our healthy balance sheet provide the strategic options during a period of uncertain IT spending.

With that, I would like to open up the call for any questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). We will take our first question from Mike Crawford.

Mike Crawford - B. Riley & Company

Thanks, from B. Riley & Company. You mentioned you had another Q1 OEM that you are shipping that you got design win for Aristos, does that?

Sundi Sundaresh

What was the question, Mike?

Mike Crawford - B. Riley & Company

Your second design win that you are shipping to for Aristos?

Sundi Sundaresh

Yes.

Mike Crawford - B. Riley & Company

You said that you are shipping in low volumes now?

Sundi Sundaresh

Correct.

Mike Crawford - B. Riley & Company

When is that going to be high volumes?

Sundi Sundaresh

Well, that depends on the economy. I think in Mary’s comments, she did indicate that we expect to ramp given the current economy towards the end of the calendar year in aggregate.

Mike Crawford - B. Riley & Company

Okay, so it's not a function of, it's kind of sampling to see if it works. It's just more of a function of the economy, you are saying?

Sundi Sundaresh

It's really a function of the economy.

Mike Crawford - B. Riley & Company

Okay, great. You also said you wrote off some more legacy inventory. How much did you write-off and how much is left?

Mary Dotz

Yes, actually we did write-off some of our legacy inventory but we haven't disclosed the exact amount. We wrote-off what was appropriate based on our inventory levels and the expected amount of inventory required going forward. So, we were in a comfortable position at the end of the quarter with our inventory levels.

Mike Crawford - B. Riley & Company

I am sorry, was it excess inventory that you wrote-off? Or was it lower?

Mary Dotz

It was some of the excess inventory.

Mike Crawford - B. Riley & Company

I see. Okay and then also you guys filed a 13D regarding your purchase of 152,000 shares of Hyphen. Can you talk about what your strategy is there?

Sundi Sundaresh

I think we made our position clear in the 8-K that we filed with it, I will refer you to that.

Mike Crawford - B. Riley & Company

Okay. Alright. Thank you.

Mary Dotz

Thanks Mike.

Operator

Our next question comes from Brian Freed.

Brian Freed - Morgan Keegan

Hey, guys. Thanks for taking my call. A real quick, you guys are definitely in a good position given your cash balance, things look much more attractive, but as we think about you guys going forward and your strategy with Aristos. But you are giving lot of direction to your road map, do you still see yourself as primarily a storage-centric semiconductor components company or would you consider shuttering your existing business and totally changing the road map becoming an entirely different company all together?

Sundi Sundaresh

I think the way to think about us is a company that's really delivering intelligence in the I/O path. And where we sit today is in the value add between server and storage.

Brian Freed - Morgan Keegan

Okay. And so do you think that you can leverage your distribution channel and your brand name recognition to pursue additional opportunities in that segment?

Sundi Sundaresh

I think I have to expand that, I think if you take our technology base and our brand name, we can leverage that presence both with OEMs and with our distribution channels.

Brian Freed - Morgan Keegan

Okay.

Sundi Sundaresh

As you know whether you look at servers or storage the majority of the market is with OEMs.

Brian Freed - Morgan Keegan

Right. And then the final question I had with respect to your second OEM, is that a server based architecture or is it external storage related?

Sundi Sundaresh

I think the better way to describe it is, it a single control architecture or bound controller or HA controller architecture, and it's a single controller architecture.

Brian Freed - Morgan Keegan

Okay. Thanks guys.

Mary Dotz

Thanks Brian.

Operator

And at this time we have no further question, I would like to turn the call back over to today's speaker for any closing comments.

Sundi Sundaresh

Well, thank you everyone for joining us on this third fiscal quarter 2009 conference call.

Operator

Once again that does conclude today's conference call. We thank you for your participation. Have a good day.

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