Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Overland Storage (NASDAQ:OVRL)

Q2 2013 Earnings Call

February 13, 2013 5:00 pm ET

Executives

Jim Byers - Senior Vice President

Eric L. Kelly - Chief Executive Officer, President, Independent Director and Member of Special Committee

Kurt L. Kalbfleisch - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Secretary

Analysts

Glenn Hanus - Needham & Company, LLC, Research Division

Evan Ratner

James G. Kennedy - Marathon Capital Management, LLC

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Overland Storage Second Quarter fiscal 2013 Financial Results Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, January 13, 2013. I would now like to turn the conference over to Mr. Jim Byers with MKR Group. Please go ahead.

Jim Byers

Thank you, operator. And thank you for joining us this afternoon to discuss Overland Storage's fiscal 2013 second quarter financial results conference call for the period ended December 31, 2012. Before we begin the call, I would like to note that management, during the course of our discussion today, including the Q&A section of this call, will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Management may discuss future plans and prospects for revenue, product introductions, market conditions, competitive conditions, gross profit margins, spending levels and other financial metrics. 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 Overland's results as well as the company's filings with the Securities and Exchange Commission including the risk factors, management's 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 current expectations and speak only as of this date. The company undertakes no obligation to publicly update any forward-looking statements to reflect new information, events or circumstances after the date of this release and conference call. Now with that said, at this time, I will turn the call over to Overland's CEO, Eric Kelly.

Eric L. Kelly

Thank you, Jim. Good afternoon. I'd like to start off by thanking everyone online for joining us for our fiscal 2013 second quarter conference call. After I provide a brief overview of the quarter and an update on our new product offering, I will hand the call over to Kurt Kalbfleisch, our CFO, so he can review the financials in more detail. After that, we will open the call up for questions.

For the second quarter of fiscal 2013, total revenue grew to $12.6 million, representing an 8% sequential increase. Gross margins increased by almost 300 basis points over the previous quarter to 6 -- 36.5%, reflecting increased sales of our new high-margin branded product and service offering as well as the steps we have taken to improve operational efficiencies and cost structures.

During the quarter, we saw a strong demand for our sales across all product lines led by a 42% sequential increase in sales in Europe. We are encouraged by the rebound in EMEA sales this quarter, as Europe continues to be a significant portion of our business.

Overall, we are optimistic about market conditions in 2013 as global storage needs continue to grow and companies not only face exponential data growth but also the regulatory requirement they must meet to protect and retain their data. We continue to make significant progress with the execution of our branded product strategy. With the acquisition of 623 new customers in Q2, we saw strong unit sales across all product categories and continued market adoption and growth of both our disk-based and paid-based products. In Q2, we saw our NEO Series tape library unit sales increased 30%. This was driven by a strong demand in our NEO 200s line, which increased 59% sequentially. We saw similar growth in SnapServer unit sales, which were up 34% sequentially. This growth validates the continued success of the SnapServer DX Series and the strong adoption of DynamicRAID by our customers globally.

Many have inquired about the market acceptance of the SnapServer DX1 and DX2, which are 1U and 2U servers that we announced in October 2001 and March 2012, respectively. This new product launch began Overland's official transition from an OEM-centric company to an innovative branded solutions provider. Unit sales of our DX product grew over 250% year-over-year from the second quarter l year ago to Q2 this year. In addition, we are proud to report that SnapSAN revenue more than doubled last quarter driven by significant increases in ASPs, up 75%, as we began to see the benefits from our SnapSAN S3000 and S5000 product launch in July last year. Our SAN product lineup will be further enhanced this quarter with the recent introduction, a replication on our entry level SnapSAN S1000.

On the product front, we achieved many milestones, including the introduction of SnapScale, the first full-featured enterprise clustered NAS solution aimed at and priced for the mid-range enterprise market. In addition, Overland was the first to market and the first to ship LTO-6 drives across our entire NEO Series tape product portfolio. From a business perspective, we have seen a strong increase in deal registration from our partner base. In January, we've added $7 million to our current quarter pipeline. Furthermore, I'm happy to report that over $4 million of that pipeline comes from SnapScale, our new clustered NAS solution introduced in mid-October.

I'd like to pause here and take a moment and take -- and talk about our new ScapScale clustered NAS product offering. As you may recall, we launched SnapScale in mid-October of last year. As we entered into a $14 billion scale of NAS marketplace, the introduction of SnapScale allowed us to significantly increase our total addressable market. Clustered NAS is becoming increasingly more important as companies address regulatory requirements to protect and retain data. Historically, clustered NAS has been expensive to acquire and incredibly complex to implement and manage. SnapScale changes the landscape by giving businesses the ability to simply and economically manage their explosive data growth while achieving unparalleled data protection and maximized uptime. Simply put, SnapScale is a disruptive technology that allows companies to acquire clustered NAS at a significantly reduced investment versus the established leaders in the market without sacrificing the features they need to ensure compliance, uptime and growth over time. Until SnapScale, medium and large enterprises could have easily spent over $100,000 for a full-featured clustered NAS solution. SnapScale NAS is not only a substantial market opportunity for Overland but is a paradigm shift for our business. SnapScale is creating opportunities that are exponentially larger than we have seen in our past, and we believe that the increasing demand and the interest we are seeing reflects a substantial value SnapScale provides. To that end, we are laser-focused in all areas of the organization to support SnapScale and our customer demand. This includes significant lead generation, training initiative as well as new dedicated enterprise sales team. As part of this effort, we launched a multi-city educational tour that kicked off last week. Our scale across the globe roadshow is specifically tailored to ensure our partners understand the resources we have to support them as they ramp through their sales effort on SnapScale. Having the opportunity to meet with and educate hundreds of partners on why SnapScale is the better alternative than the current clustered NAS offering had been an invaluable experience as we ramp our SnapScale globally. It's been equally rewarding to see our partners as excited about SnapScale and the opportunities it brings as we are.

As it pertains to our patent litigation, we remain confident that we will have a positive outcome. On March 27, 6 weeks from today, the ALJ will provide us their decision regarding our stringent claim on the '766 partitioning patent and on the '581 mail slot patent. On June 25, the ITC Commission will provide their final ruling and issue their report. I will make some additional remarks after Kurt gives the financial update. So with that, I'd like to turn the call over to our Chief Financial Officer, Kurt Kalbfleisch, so he can take you through the details of the financials.

Kurt L. Kalbfleisch

Thank you, Eric, and thank you, everyone who is joining us today. Let me provide some further detail on our fiscal second quarter results. Total revenue for the second quarter of fiscal 2013 was $12.6 million compared to $15.1 million in the same quarter of fiscal 2012 and up 8% sequentially from $11.7 million in the immediately preceding quarter. Total branded product revenue in the second quarter, including service and warranty, was $12 million compared to $14.7 million in the same quarter of fiscal 2012 and up from $11.5 million in the immediately preceding quarter. Warranty and service revenue totaled $4.8 million or 38% of total revenue in the second fiscal quarter compared to $6 million or 40% of revenue in the same quarter last year and $5.1 million or 44% of total revenue in the immediately preceding quarter. During the second fiscal quarter, we experienced 42.4% sequential growth in the EMEA region. This growth in EMEA was tempered slightly by a reduction in the Americas channel of 12.6% as compared to the prior quarter. Our gross margin percentage for the second quarter increased to 36.5%, up more than 300 basis points from 33.2% in same quarter last year and up from 33.7% in the immediately preceding quarter. This improvement reflects increased sales of our new higher margin branded products as well as the result from steps we have taken to improve our product costs and other manufacturing-related expenses. Total operating expenses for the second quarter were $8.7 million, down from $9.3 million in the same quarter last year and relatively flat as compared to $8.6 million in the immediately preceding quarter. This reflects our ongoing effort to maintain operating efficiencies.

Total share-based compensation expense included in the operating expense for the second quarter of fiscal 2013 was approximately $1.3 million compared to $1.3 million in the immediately preceding quarter and $1.4 million in the second quarter of fiscal 2012. We expect stock compensation to remain in the range of $1.1 million to $1.3 million per quarter through the remainder of the fiscal year. Depreciation and amortization for the second fiscal quarter was $316,000 compared with $270,000 in the immediately preceding quarter and $362,000 in the second quarter of fiscal 2012. The net loss for the second quarter of fiscal 2013 was $4.3 million or $0.15 per share compared to a net loss in the same quarter of fiscal 2012 of $4.3 million or $0.18 a share and net loss in the preceding quarter of $4.9 million or $0.17 per share.

On the balance sheet, total cash and cash equivalents at December 31, 2012, was $3.2 million compared to $10.5 million at June 30, 2012. At the end of the second quarter, we had $3.5 million outstanding under our credit facility compared to the $4 million at the end of the preceding quarter.

Net accounts receivable was $7.7 million at December 31, 2012, compared to $6.2 million at the end of the preceding quarter. Operating cash usage in the second quarter of fiscal 2013 was $3.1 million compared to $3.3 million in the preceding quarter. With that, I will turn it back to Eric.

Eric L. Kelly

Thanks, Kurt. I just like to close by saying that from the very first platform we developed, our strategy has been to create a portfolio of differentiated disruptive storage solutions that offer significant value and ROI for our customers we serve. We are excited about the SnapScale brings to the table and believe it is a game changer, not only for Overland Storage but for the marketplace. In addition, I believe with the stabilization of our core business as well as the entry into SAN and clustered NAS market this year, coupled with a $36-plus million pipeline, means it time for us to move up market and into the growth phase of our business. With our successful raise of $14.25 million, we have the capital structure, the right team, the right strategic partners and the right technology and product roadmap to accomplish this. This capital will also allow us to continue to find new areas of growth in 2013 by investing in R&D and sales and marketing to further capitalize on SnapScale and our clustered NAS market as well as ensure leadership position in the cloud and big data storage for the second half of this year. Before we end, I'd like to thank our investors, our customers, our partners and our employees around the world for continuing to support Overland and for working so hard to support our business. We are optimistic about 2013 and the initiatives we have in place to support our customers globally. With that, I will go ahead and open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Glenn Hanus with Needham & Company.

Glenn Hanus - Needham & Company, LLC, Research Division

So maybe you could give us some color around Europe and the U.S., the sequential changes there and what we can expect over the next couple of quarters?

Kurt L. Kalbfleisch

Glenn, this is Kurt. In Europe, we were really pleased, obviously, to see the recovery because last quarter was off more than we had anticipated. I think that what we saw was kind of a blip and we should be back to the expectations we had laid out for Europe. In the U.S., we did have a small decline last quarter and part of the reason for that decline was we are unable to ship the amount of orders we had on the books for LTO6. We just weren't able to manage all that and that was better than half of that shortfall. So we did have a little bit of a blip there, but we expect that to come back this quarter and meet our expectations going forward.

Glenn Hanus - Needham & Company, LLC, Research Division

And then could you talk about your outlook now for reaching -- you've previously given some time frame targets for being EBITDA positive and you'd given some financial goals. Can you give us an update on the goals now and the timing to get there?

Eric L. Kelly

Glen, this is Eric. Yes. We're not -- we haven't changed our previous guidance in terms of where we're headed.

Glenn Hanus - Needham & Company, LLC, Research Division

All right. So can you restate that then? So by the June quarter then, you're expecting to be EBITDA positive and can you just go through what the business model should be by then?

Kurt L. Kalbfleisch

Glenn, at this point, it remains the same. And from EBITDA basis, what it was excluding all noncash items. And at this point, we remain comfortable with that for the June quarter.

Glenn Hanus - Needham & Company, LLC, Research Division

Okay. And can you give some color around adoption of the scale-out, how that's being received? And I don't know if you can give some kind of sense of how much it's being adopted at this point and what the pipeline is for adoption of the scale-out capability?

Eric L. Kelly

Glen, this is Eric. Yes, we're very happy with the pipeline. I think I stated earlier, we added about $7 million to our pipeline this quarter and $4 million of that is the scale-out technology. So launching it the middle of October, wondering what the pipeline would look like, we're pretty pleased with what it looked like today. And in fact -- and that's around the world, I mean so we have deals that we're working on, not just here in North America but throughout Europe as well. And I think it kind of goes to kind of the paradigm shift that we see happening. I mean we're delivering a scale-out clustered technology that for the most part, customers haven't been able to see or be able to acquire at such a more -- I wouldn't say aggressive price point but a price point that they haven't been able to see in the mid-range market. I mean, to give you a good example, we have -- if you look at the kind of the leaders in the industry today with a feature set that we have, they would typically be double the price that we can actually deliver that solution to our customers. So what it allows us to do is to really get the attention of our customers, the mid-range customers, that are looking for, as you know, clustered NAS solutions that provide high availability, provide high redundancy, but they just couldn't reach the price points or they couldn't afford the price point that were out there prior to us coming out with our product. So -- and we also mentioned in terms of -- we're continuing to build the organization to support the demand, so we have our team out there. I talked about our scale-out global roadshow. I mean we're hitting multiple cities in the U.S. We're hitting multiple locations throughout Europe and the attendance is more than what we've expected.

Operator

The next question is from the line of Evan Ratner with Charter Management.

Evan Ratner

I guess my first question is on gross margins. It looks like data expanded about 2.5% a quarter since Q4, and I just want to know if that's a reliable trend or give us any kind of estimates as where we should expect gross margins kind of to go in the future?

Kurt L. Kalbfleisch

Yes. Evan, this is Kurt. We're real pleased with the progress we've made on gross margins. And what we stated in the past, we expect to see that not necessarily going on a pure linear trend but kind of comes in chunks, and we're pleased with the chunk we're able to get. A lot of that is in relation to some changes we've made on some of our product costing and as well as some of the transportation needs and things of that nature, as well as the volume help on the absorption. And so I think we're pleased with that. We expect to continue to see progress towards that. I'd like to hope we could see an additional step here as we go through the next couple of quarters.

Evan Ratner

Okay. And then I had one other question around the financing. This morning, I saw you guys raised about $14.25 million. I just want to know kind of cash burn, how long do you guys expect that cash to kind of last? I know you kind of expect to be breakeven by the June quarter. And I guess my second part is management hasn't gone out and bought any stock at all recently, and correct me if I'm wrong, and I just want to know if that's going to change anytime in the near future?

Kurt L. Kalbfleisch

I'll take the cash burn question. We're pleased with where we're at on cash burn. Obviously, last quarter, we burned more than we had expected. We were able to come back, we've put some strength back on our AR this quarter and we expect that to continue. And as we go towards the target of non-GAAP breakeven excluding those noncash items, we'll burn some cash in working capital. We expect that to continue to be reduced.

Eric L. Kelly

And Evan, just a follow-up on your previous question the second half, of your second one, just to add to what Kurt was saying. Our steady-state gross margin targets for the businesses of anywhere from 42% to 45%. So it's obviously not a straight line but we think we're making the progress toward that direction. In terms of management buying stock, we're always interested in participating with our investors. The thing that we always are cautioned from our counsel is when do we not have inside information? And as you know, all the things that are happening relative to our patent litigation case and other areas that are strategic, it's very -- it's a very small window and we'll get guided on the risk profile of doing something like that and then having some significant event following right behind it. But the commitment is there for the management team in terms of making sure that we actually deliver what we've promised, and we're all motivated to make it happen.

Evan Ratner

I guess just to recap, so 36.5% in gross margins, is kind of what I should expect for base? And kind of 42%, is that kind of the goal or is that just on one product? And then also are you guys just not able to do 10b1 (sic) [ 10b5 ] plan, where you guys can constantly just buy stock over time? It doesn't matter if you have any information or not, but you do have a set amount that you're going to buy at certain times.

Eric L. Kelly

Ye, we can talk about that. We -- 10b5 plans are great to have in place. But if you have a 10b5 plan on the buy side, I mean you really don't know what you're actually spending. And so everyone doesn't have the balance sheet to be able to take a number, Evan, so that makes it pretty challenging. But our gross margin, it's not a straight line. I mean we continue to have to make certain investments to improve the line, I mean to improve the gross margin. So -- and for example, you're jumping up to 36.5%, we made some investments to make sure we can get that done over the last couple of quarters. So it's going to be, again, not a straight line, but we know it's going in directionally correct. And we think when we're said and done, we'll be in the 42% to 45% gross margin.

Operator

Our next question is from the line of Jim Kennedy with Marathon Capital Management.

James G. Kennedy - Marathon Capital Management, LLC

A question for you. You mentioned 2, let's call them, legal deadlines earlier in your commentary. Is there anything that gives you confidence at this point that these are indeed deadlines as opposed to us looking at another 3-month, 6-month push out or whatever, simply because the courts are too busy or there are some mitigating factor. Is there something that is buffering your confidence here to, say, Well, these are the dates?

Eric L. Kelly

Well, I mean I think at some point, Jim, they have to stop delaying. I mean I'm not going to predict that they're not but I can just tell you that we've gone through the process where both sides have gone back and forth. That actually went -- if you recall the history, it went up to the Commission, they reviewed and asked the ALJ to look at some documents and to then redefine the linear array, which is in our favor. So I think we're at the end. So I feel a lot more confident that the dates are going to hold than they have in the past, but I -- obviously, I can't guarantee it. But I think just based on what's transpired, the last one was the petition that we put out there that asked them to review that, considering the new definition of a linear array. They did accept it and they're reviewing it. And that really was, I think, one of the major reasons why it slipped from December to March. But we're thinking that this should be the dates, but I'm not going to make any guarantees. But I'm a lot more confident just based on what transpired. And at the end of the day, they can't continue to kick the can forward. I mean everyone's got all the information in that they, whatever, have to review. And so I think it's going to hold.

Operator

There are no further questions at this time. I would now like to turn the call back over to management for closing remarks.

Eric L. Kelly

Well, great. I wanted to thank the investors again for supporting us. We are very excited about 2013. We've announced some very strategic products, our scale-out NAS products, our SnapServer DX Series as mentioned both in October and the mid-range in March. We also have on the horizon, our cloud solution and our unified storage solution that actually will continue to advance our technology and put us in a leadership position in the second half of 2013. So even though we have great technology, we have a very robust roadmap that I think is going to definitely continue to put us in that position and allow us to enter into even new markets that are growing just as fast as scale-out and provide even much higher gross margins. So with that, I look forward to talking to everyone on the next earnings call and I appreciate your time.

Operator

Ladies and gentlemen, this concludes the Overland Storage Second Quarter Fiscal 2013 Financial Results Conference Call. If you would like to listen to a replay of today's conference, please dial 1 (800) 406-7325 or (303) 590-3030, with the access code of 4595341. Would like to thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Overland Storage Management Discusses Q2 2013 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts