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OCZ Technology (NASDAQ:OCZ) recently disclosed new financial details during the Stifel technology conference on February 6th. After listening to the conference, we think that OCZ Technology has plans to sell the company.

In this article, we will present the case of just how rough things are at OCZ from a financial and business perspective and why selling the company is the only logical solution.

Coup de grâce

Things for OCZ are looking dim. The CEO's tone during the conference was anything but upbeat. We were already keenly aware of the dire financial straits that OCZ was in. Yet, OCZ CEO Ralph Schmitt really brought home just how precarious the situation is with his coup de grâce statement at 18:15 minutes into the conference:

"We tried to monetize as much inventory as we can in order to help fund the company as long as we can. I think we have kind of run that close to the ground at this point. We clearly need some infusion of capital at this point. We have been trying to wait on doing something until after the financials are out in the market. It's not clear to me that we are going to be able to do that. We have looked at everything from strategic money, private equity, PIPES, converts, all the things that you would normally look at. We want to keep the dilution factor to our shareholders kinda minimal as possible."

It is getting down to the wire for OCZ. While they have a (reduced) line of credit with Wells Fargo, the screws are starting to tighten on that via weekly checks on OCZ liquidity by Wells Fargo.

Just how tight are things?

At the very end of the conference, CEO Ralph Schmitt spoke about how they might be able to raise capital by selling off company assets.

"We have some assets, new [production] lines in Taiwan, that are pretty valuable to the company." and "We have a power supply business."

Selling off the manufacturing lines, even if they are new, sounds logical because OCZ is not selling anywhere near the volume of SSDs that they were before. The company's focus has shifted away from the entire consumer market to just the high-end consumer market.

As far as the power supply business, it is a low-margin division, but it does bring in solid profits quarter after quarter. OCZ needs money though and PC Power and Cooling does have a very good brand name. Hopefully, OCZ can fetch some decent capital via selling them. We would not get our hopes up too high. The cooling sector is chock-full of competition and once again commands low margins.

A Great Disturbance in the Force

The auditors STILL have not figured out the convoluted books at OCZ. Per the CEO:

"Have not got to final closure with auditors yet on the range of 65-85 million"

The auditors have quite a job ahead of them though as:

02:15 "[OCZ] will take ALL the incentive programs the company was running and apply them against revenue. In the past it was a mix of marketing and OPEX."

"Took a lot of charges in those numbers. Running big incentive programs on Q2 and Q3 which took a lot of product below cost. Not a good business practice."

Inventory Write Down

On the inventory front - things are going to be... painful.

3:30 We are going to have an inventory write down. We had built up inventory north of 100 million which is way too high for a company of our size. We are now down to about 60 million of inventory. We are going to write off over 2 quarters about 45 million in inventory.

We had built up a ton of inventory in the channel as well. Have been working with partners to move that inventory. Down to 50 million in inventory in the channel today.

5:50 50 million in inventory is about a quarters worth of inventory and that is still too high. We should be in the neighborhood of 8 weeks.

If anything, at least by disposing of the inventory, they can hopefully get to a clean slate for the books. Yet the channel is still churning in an ocean of unsold products.

Gross Margins

Concerning gross margins, the company is going to struggle to get them to the mid 20's.

8:15 Gross margin level, let's say, a target level of the mid 20% level which we had been at the company before.

The key word is target level, not - we are at the mid 20's, but rather - we are trying to get to the mid 20's. This is far cry from the 25.02% margins OCZ had before all of this mess.

(A Blast from the Gross Margin past)

Moving Forward

Just as we have repeatedly wrote about in the past, OCZ is moving towards enterprise and will one day abandon consumer IF enterprise sales pick up. OCZ has a very limited pool of money and R&D to work with and it does not make any sense to divide it among consumer and enterprise when you are only working with $9 million dollars.

13.00 "We made a big flip in R&D where now about 70% of R&D is in enterprise as where before it was kinda opposite before that."

At 16:00 minutes into the conference the moderator asked "Where do you stand on fully integrating your internal controller IP across what you will be going to market?"

OCZ CEO Ralph Schmitt: "I don't think we can fully cover the entire market with our own silicon given the size company and the ability R&D spent. The controller coming later this year is more enterprise focused. As opposed to barefoot 3 which is client focused."

Mr. Schmitt did say they had won some small enterprise deals and that revenue was 70% consumer and 30% enterprise. Our take... OCZ will get what it can from consumer for now... but rest assured that if they survive they will be an enterprise-only company one day.

Even moving to enterprise presents challenges as you have to duke it out with Fusion-io (NYSE:FIO) and STEC (NASDAQ:STEC), plus a multitude of others including IBM (NYSE:IBM) and EMC (NYSE:EMC). It will be very hard for a company with a mere $9 million in cash to fight these companies.

Selling The Company

Certainly it is possible OCZ might slash employee count to cut expenses, sell the power supply company along with some of the manufacturing lines, and survive to some degree.

Yet the smartest move is to just clean up the books and get the company in presentable shape in order to sell it. The management can get a nice fat bonus and stock options, some investors might make a buck on the deal, and the company lives on under new ownership that is cash-rich.

That is really the only logical solution for the long term. It is impossible to defeat the NAND manufactures in consumer such as Micron Technology (NASDAQ:MU). Enterprise is an uphill battle, even cash rich Fusion-io is having a rough quarter. If OCZ had the right financial support though...

We think that management is airing out all the dirt, cleaning the books, dumping toxic inventory, and putting the vast majority (70% of R&D) in to what an acquiring company wants - an enterprise presence with controller chip and firmware know how.

How To Play This

Do you drive 100 mph in a curve at night when the sign clearly says 45 mph? If so - then OCZ might be right for you. Are you prone to financial speculation or just love rolling the dice? If so, you might throw some money at some OCZ stock options in the form of calls. Since we have no idea how long a possible buyout might take (or at what price) it would be best to buy some of the calls 6 months out or so. We would wait until OCZ reports its numbers and they are digested into the stock price before making any bets on the OCZ craps table.

Source: OCZ's 2 Choices: Bankruptcy Or Buyout

Additional disclosure: I own OCZ Leaps.