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

Imation Corp. (NYSE:IMN)

Q1 2013 Earnings Conference Call

May 1, 2013 10:00 ET

Executives

Scott Robinson - Vice President and Investor Relations

Mark Lucas - Chief Executive Officer

Paul Zeller - Chief Financial Officer

Analysts

Mark Miller - Noble Capital Markets

Chris McGinnis - Sidoti & Company

Eric Martinuzzi - Lake Street Capital Markets

Operator

Good morning. My name is Steve and I will be your conference operator today. At this time I would like to welcome everyone to the Imation Corp First Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. I’ll now turn the conference over to Scott Robinson, Vice President and Investor Relations. Please go ahead.

Scott Robinson - Vice President and Investor Relations

Thanks Steve. Good morning everyone. And thank you for joining us today for our first quarter 2013 earnings call. I'm your host for today’s call or you’ll be hearing from our CEO, Mark Lucas and our CFO, Paul Zeller. On today’s call we will review our first year results and provide updates about our transformational strategy.

Before that though, I’d like to remind everyone that certain information discussed in the call that does not relate to historical financial information may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from any projected results. Risk factors that could cause the result to differ are outlined in the press release issued today as well as our filings with the SEC.

With that I’d like to turn the call over to Mark Lucas, Imation’s CEO.

Mark Lucas - Chief Executive Officer

Thank you Scott, and good morning everyone. On today’s call Paul Zeller and I will cover progress Imation made and our strategic transformations during the quarter. As I discussed last quarter, we are continuing to leverage our roots in data storage to build a platform for long-term growth and profitability.

Looking at the 2013 first quarter, we made significant progress on many fronts. Including strong scalable storage results, and declining operating expenses. But ultimately our transformation journey continues. Paul will give you more details on our numbers in a few moments, but I want to focus on key elements of our strategy. An important aspect of our transformation involves rightsizing the organization, last year we announced that we are implementing strong costs savings initiatives including worldwide process improvements, office consolidations globally, product line rationalization, infrastructure efficiencies and staff reductions.

We’ve taken aggressive steps in all these areas with the goal of reducing operating expenses and SG&A and R&D expenses were down in the first quarter. Our cost reduction program is working and further reductions are expected to be realized in the quarters ahead. We also announced in February, that we would run a process to divest both the Memorex and XtremeMac consumer electronic brands. That process is moving forward and good progress has been made in identifying interested parties. I wanted to note that we are retaining our Consumer Storage business under both the Memorex and TDK brands.

Additionally, effective on January 1, the company reorganized into two business units: Consumer Storage and Accessories or what we called CSA along with Tiered Storage and Security Solutions what we called TSS. With these two business segments, Imation is becoming a more customer-centric and nimble organization. But I’ll only first comment on Consumer Storage and Accessories or CSA which is a segment that generates solid cash flows for us. CSA includes consumer storage media, primarily optical and flash, as well as storage and electronic accessories focused on storage at the retail level. We planned to launch a number of new products in the upcoming quarters. In fact we recently introduced a USB 3.0 External SSD or Solid State Drive, it features ultra-quick data transfer in a portable forum and it’s sold under the TDK brand.

Next, our Tiered Storage and Security Solutions group or TSS provides strategic opportunities for revenue growth and margin expansion. TSS includes both Imation and Nexsan branded tiered and scalable storage solutions, IronKey branded mobile security solutions and commercial storage media sold under Imation as well as OEM brands. I'm pleased to tell you that our recently acquired Nexsan products had a strong quarter and posted double-digit growth. One of the strength Imation brings to Nexsan is global reach. Currently we are working with our Asia and Australia teams on the portfolio and are putting the framework in place to expand the brand in these regions as well as in Southern Europe. Further, we are investing in the business by adding sales and engineering talent domestically and internationally.

Turning to our mobile security platform we gained a significant win with the Japanese government by landing a contract for the portable workspace product branded PC on a Stick. We also launched several other new IronKey flash drives along with the IronKey Workspace W500 a high performance device that helps companies addressable telecommute needs and compliance requirements.

As a result of the positive changes we’ve made in our TSS business gross margins for that segment increased to 22% in the first quarter compared to 19.4% last year. When we first announced our strategic transformation in February of 2011 we said we needed to increase our gross margins and we have been working on that ever since and are pleased with the progress we made and as product lines grow and we launch more products with stronger margins we will see that percentage continue decline clearly we are on the right track. We are committed to achieve in growth and profitability and becoming a key global player in data storage and security.

I’ll now turn the call over to Paul to provide a more in-depth look at our financials. Paul?

Paul Zeller - Chief Financial Officer

Thanks Mark and good morning. As we continue to execute on our strategic transformation we implemented a few important financial reporting changes effective with our Q1 results. Before I get into the details on first quarter I’ll take a couple of minutes to make you aware of these changes.

First, as moved forward with our previously communicated plans to monetize our Memorex and XtremeMac CE businesses we reached a point during the quarter where we concluded that these should be treated as discontinued operations for accounting purposes. As a result we’ve reclassified their income statement results to a single line below income from continuing operations in our consolidated P&L. We also recast prior periods to confirm with the same presentation as this required by the accounting rules. These rules also require the direct aspects of these businesses meaning revenues, gross margins and direct cost to be moved below the line so to speak but that any unobserved gooberhead needs to stay in continuing operation, this results in a certain amount of cost penalty needing to be observed by our continuing businesses. We anticipated this level when we size the restructuring program we announced earlier.

The second reporting change has to do with our business segment reporting. As Mark just discussed we’re operating the company through a two business units Consumer Storage and Accessories and Tiered Storage and Security Solutions, these have become our segments for accounting purposes versus our previous regional segment presentation. As a result you will note that we presented revenues and profitability by these segments in our results that we released today and we’ve also provided prior year financials by quarter on the same basis to help you understand trends in the business.

When we reorganize the company along these segment lines we also made an important philosophical change in terms of functional accountabilities. In our prior regional structure corporate included RD&E much of marketing and operations. In our new business unit structure these functions are fully the responsibility of our business units and the operating results of those segments include those associated operating expenses. Corporate has become more limited definitionally and through our restructuring efforts also is being right-sized.

In addition to the segment data for our two business units we’ve also increased transparency by providing additional revenue by product category disclosure. We’re in CSA with in CSA we’re now disclosing consumer storage media which is primarily optical and flash media and that separate from audio and accessories primarily products under the TDK brand. In TSS we’re reporting revenues for commercial storage media that’s primarily magnetic tape and RDX media separate from storage and security solutions which is associated with our Nexsan acquisition and mobile security products. We believe these reporting changes around discontinued operations segment and product reporting improve the comparability and transparency of our financial information and makes it easier for our shareholders and analysts to understand our results and to gauge the progress we’re making on our strategic transformation. So with that let me getting into our results where I believe there are a number of positive signs that we’re doing just that making progress on our strategic transformation.

Revenue for the quarter was at $224.4 million, that’s down 14.8% from the prior year, that was driven by Consumer Storage and Accessories as expected with slight growth in TSS. Should be noted that revenues were impacted by plan to rationalizations of certain product categories as we previously discussed and the revenues were also negatively impacted by currency exchange rates especially the weaker Yen overall FX cost that is about 2.5 points on our year-over-year comparisons.

From a segment standpoint CSA revenues declined 25% driven by consumer storage primarily optical media which declined somewhat higher than recent quarters as we fully expected. TSS revenues were up slightly year-over-year within TSS commercial storage media declined 22% driven by magnetic tape. Storage and Security Solutions grew substantially more than offsetting this expected decline in magnetic tape. This was driven by acquisition revenues from our December 31, 2012 acquisition of Nexsan.

On a pro forma basis Nexsan revenues grew double-digits as we benefited from market share growth as well as initial benefits from leveraging Imation’s global footprint. This growth occurred in all three main product platforms NST, E-Series and Assureon.

Regionally we saw a strongest revenue performance in the Americas with both CSA and TSS hosting solid revenues. North Asia was also strong especially in CSA driven by optical. Europe revenues were generally as expected, South Asia slightly soft but not materially so.

Our gross margins were 18.8% in the first quarter and we’re impacted by $2.1 million inventory accrual associated with rationalized businesses. If I exclude those special charges gross margins were a strong 19.7% to sales our highest level in several quarters. Q1 last year was just slightly higher at 20.4% driven by a particularly high optical gross margin at that time, just after we had instituted price increases.

We’re pleased with the 19.7% rate with our best results posted in our Storage And Security Solutions businesses with gross margins in the mid 40s overall. Our legacy product gross margins both optical and tape were within the ranges we’ve seen recently. Operating expenses including research and development as well as SG&A but prior to restructuring and other charges totaled $54.7 million that’s down 5.5% from the first quarter last year.

If we adjust that comparison to exclude the OpEx added with the Nexsan acquisition the core Imation OpEx was down roughly 20% from a yea ago reflecting various actions we’ve been taking to reduce costs. That core OpEx is down 8% sequentially from last quarter reflecting benefits from lower amortization expense associated with year end intangible assets write-offs and the very initial benefits from our recently announced restructuring program. The majority of the restructuring benefits are yet to come with a greatest impact in the second half of the year.

Late last year we announced the restructuring program associated with our costs savings initiatives and in the quarter we’ve recorded $4.2 million of restructuring and other charges. We continue to estimate charges to total between $50 million and $60 million over time with cash costs of approximately $40 million. Cash charges in the first quarter were $4.5 million after just short of $1 million in the fourth quarter.

Our reported operating loss for the quarter including the special charges I just mentioned was $14.7 million. If I exclude those charges that’s an operating loss of $10.5 million in the quarter. Non-operating expense was $500,000 in the first quarter down nicely from the $2.3 million we saw in Quarter 1 last year that’s driven by currency related losses we saw last year.

Our loss per share from continuing operations was $0.39 and if I exclude the special charges that’s a loss about $0.31 per share. Our discontinued operations category had a $5.5 million loss, $1.1 million of that from restructuring charges. That’s leads to an overall final net loss per share totaling $0.52. We ended the quarter with $98.2 million of cash and equivalents down $10.5 million in the quarter, this decline was expected driven by restructuring cash payments and seasonal rebate payments.

In summary, our first quarter results demonstrate that we’re making solid progress on our transformation. We began operating to our business unit structure on January 1 and made good progress in making the necessary organizational changes to support this direction.

We made good progress in integrating our Nexsan acquisition, and we’re pleased with the initial signs both in terms of revenue momentum and gross margin performance. We made progress in our actions to increase our focus on storage as we continue the sales process on our CE businesses. And finally we made significant strides forward in rightsizing OpEx in support of our new organization.

We clearly have more work to do and our results are not where they need to long-term but we’re also clearly moving in the right direction.

With that we’d be pleased to take your questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Mark Miller from Noble Capital Markets. Your line is now open.

Mark Miller - Noble Capital Markets

Good morning Mark and Paul.

Mark Lucas

Good morning Mark.

Paul Zeller

Good morning Mark.

Mark Miller - Noble Capital Markets

Just had a question about the like the impact of product rationalization on your sales, can you give us or quantify that in terms of what impact that was on your sales this quarter?

Paul Zeller

Yeah there was a couple of categories were it was most notable probably the most significant in the remainder of our audio and accessories business around the TDK brand. As we mentioned coming out of fourth quarter when we announced the plans to look at options around Memorex CE and XtremeMac and talked about that in the first quarter as well. We also said that we would be focusing our TDK accessory business more tightly and as a result we saw a more significant declines in that business and really good declines right I mean we’re focused on better opportunities, higher margin and not so much on marginal opportunities. And the other categories some of the revenues associated with our organic growth efforts in Tiered Storage arena with the Nexsan acquisition we’d become more focused on the Nexsan product portfolio rationalizing some of our product categories.

Mark Miller - Noble Capital Markets

May be I missed this but what was your cash flow from operations?

Paul Zeller

Cash flows where we don’t actually disclose that till later in the quarter. I will say overall that it was about what we expected and that we had some cash flows to support restructuring and first quarter is a quarter where we tend to see larger rebate payments a lot of our rebate programs are annual programs with the cash requirements coming just after year end. So all things considered I think it was a solid start to the year and right where we expected it to be.

Mark Miller - Noble Capital Markets

And you mentioned at that you’ll be introducing a solid state drive that area is very competitive as you probably know and I'm just wondering how you’re going to compete in that area with some fairly significant competition?

Mark Lucas

Well actually Mark in terms of the external drives at retail if not as competitive where we’re pretty much one of the first company to come in with it so we’ll be going up against the client of the external hard drive market for the consumers in that area. So far we’ve got in terrific response to it we just and in fact we have not even introduced in the U.S. we hadn’t got introduced in Canada, and we’re just right now in the pipeline in getting distribution on the shelves of it so it’s hard to tell. But we’re very bullish on it we and it is USB 3.0 so if you don’t have it you don’t necessarily see the speed advantage but if you do have USB 3.0 it is super-fast it’s amazing how fast you can transfer photos, videos and so forth.

Mark Miller - Noble Capital Markets

Alright, so it’s an external product. Finally were there any mix, mix-up, mix-down effects on your TSS revenues?

Paul Zeller

Not really that I can think of, there were in our CSA revenues we had pretty strong growth in flash media and flash there is some what lower gross margin than optical in that category and that heard our gross margins percentage-wise but helped our gross margin dollars. TSS, I think the most significant year-over-year impact would be the addition of all that Nexsan revenue in the 40% gross margin and that would have that has had a very beneficial gross margin impact. That will be there all year as we compare against a prior year without those Nexsan revenues, but we also anticipate and have plans to continue to improve gross margins in those categories.

Mark Miller - Noble Capital Markets

Thank you.

Mark Lucas

One example Mark I would say is our product our new products that we’re launching in Nexsan is in that part of our categories as well as in mobile security showed very nice gross margins we don’t – we’re not launching any new products that don’t have 40 plus percent gross margin so I think that’s always a helpful trend.

Mark Miller - Noble Capital Markets

Thank you.

Mark Lucas

Thank you.

Operator

Your next question comes from line of Chris McGinnis with Sidoti & Company. Your line is now open.

Chris McGinnis - Sidoti & Company

Good morning.

Mark Lucas

Good morning Chris.

Chris McGinnis - Sidoti & Company

Just a couple of questions I guess one what’s the – can you just maybe break up the organic growth rate in the new business the Tiered Storage outside the Nexsan acquisition?

Paul Zeller

Yeah. So it’s a – first of all let’s just put it into pieces first of all let’s take the acquisition piece itself the Nexsan revenues, as I mentioned earlier obviously that’s driving all of the growth because it’s inorganic but I think the fair way obviously to look at that is to look at what was their performance prior to the acquisition a year ago and how do we perform in our first quarter after the acquisition and we’re very pleased, we had double-digit growth and what we were hoping to see in terms of the market opportunity but also the opportunity that we have to leverage those products in broader categories and regionally around the world. If you look at the rest of the categories in TSS the most significant overall dollar revenue coming from our storage media principally around tape that did decline relatively significantly, as we expected it declined 22% overall and that clearly held back overall growth in the category. If you look at some of our organic growth efforts in Tiered Storage those are some of the areas that we’ve rationalized as I talked about so that had a minor negative impact as well.

Chris McGinnis - Sidoti & Company

I guess as moving to the – your restructuring, can you just maybe walk through the one the cash costs how they flow through the year. And then secondly I guess you already mentioned this but the $50 million to $60 million of takeout how much you think it really benefit in from the bottle-line by the end of the year or even if you look down to ’14?

Paul Zeller

Okay. Let’s start with the cash cost, we’ve signaled that, that restructuring program would cost us something in the order of $40 million in cash I would suggest most of that will happen in 2013 but not all of it and we’ve seen the start of that with $4.5 million in the first quarter but it will ratchet up as we get throughout the rest of the year I think second quarter will likely be larger than first and then the second half having the balance of that and clearly some of that will occur even into 2014. The actual benefit from the program in terms of OpEx takeout we saw some benefit in first quarter I think the best way to measure that is to look at our sequential decline of operating expenses after adjusting for the Nexsan acquisition it’s a little tricky because we’ve added in SG&A and R&D with the acquisition and our objective is really to reduce OpEx on the core business and if you do that adjustment sequentially we were down about 8% in terms of the OpEx. And some of that 8% driven just by amortization cost reductions and that’s really not part of our restructuring program we’ve always said that’s an additional cost reduction. And so we’re just getting started and I think we should see incrementally more and more of that kind of 25% overall OpEx reduction occurring throughout the year incrementally more in second quarter but the majority in the second half. We would hope to be exiting the year reaching that kind of cost reduction level.

Chris McGinnis - Sidoti & Company

And then just I guess lastly on the selling of the XtremeMac and the other consumer side you just maybe give a timeframe it sounds like negotiation is going well, is that next quarter you’re thinking or later in the year?

Mark Lucas

Well we’re trying to move as fast as absolutely positive Chris, we announced in February you can kind of know get yourself in terms of the time that takes to run a process and complete a transaction. It doesn’t happen in just three months but we are making good progress and we will continue to move as quickly as we possibly can I think it’s in everybody’s best interest to do that so that we can refocus our energies as well as for the health of the long-term state of those businesses.

Chris McGinnis - Sidoti & Company

Sure, Mark. Thank you.

Paul Zeller

Thanks, Chris.

Operator

Your next question comes from the line of Eric Martinuzzi from Lake Street Capital Markets. Your line is open.

Eric Martinuzzi - Lake Street Capital Markets

Thanks. I wanted to dive into the Tiered Storage and Security Solutions segment a little bit deeper. You talked about the commercial storage media being down pretty substantially but kind of inline with your expectations. Where do you see that trending is it was the in your change sort of what we should expect for the near future or do you see any relief there?

Paul Zeller

Well if you look at the historic kind of level of declines we’ve been seeing in the magnetic tape business for instance. This is probably on the higher end of that but it bounces around the quarter by quarter a lot of it depends on when the Next-Generations would say media or launched we also distribute both IBM and Oracle branded media for them and so it depends a bit on their trends. We’ve seen declines anywhere from upper single-digits to lower teens on good quarters to into the low 20s in a softer quarters. So I think it will be in at least in the teams I would say.

Eric Martinuzzi - Lake Street Capital Markets

Okay. And as far Next Gen that might put a wrinkle in that what’s the timing of Next Gen?

Mark Lucas

Eric that the Next Gen is not scheduled this year we are talking probably some time later in 2014. We are actually seeing continued strong demand on tape drives the hardware to IBM and Oracle. So tape still is a legacy product that’s not going away that the simply the problem is that density is increasing faster then the usage rates. And so at some point in time it could be very possible that the decline rates level off because we still believe and most of our customers and suppliers believe it is the most efficient economical way to archive data.

Eric Martinuzzi - Lake Street Capital Markets

Okay. And then the within TSS the other the storage and security solutions I think you guys had said that Nexsan have been running around $80 million annually or so it looks like plenty of the math there that’s about the size of the step up year-on-year. Is that to say that the mobile security products are not growing as fast as you thought?

Paul Zeller

Yeah. I mean they were relatively flattish there wasn’t as much growth as we maybe or hoped to see I think we see a lot of good indicators on opportunity in that especially windows to go and PC on a stick as well as our efforts to broadened the category there beyond just high security and to kind of the medium security realm but I think year-over-year no we didn’t see a lot of growth from the mobile security business.

Mark Lucas

Yeah Eric and one of the things that makes it challenging is that we didn’t actually formed the mobile security group until the end of March last year. So we will still in the first quarter of 2012 still in the process of combining three different businesses together into one so had not really it’s a still hard to look at year-on-year comparisons until we get into the second quarter.

Eric Martinuzzi - Lake Street Capital Markets

Understand. And then my final question is on Nexsan I think you guys I can’t recall the exact number might have been around 50% investment on the sales side on Nexsan just curious if you could give us an update on how that expansion of the sales and marketing for us is going where you are and where you hoped to be by year end?

Mark Lucas

Well we have, we have recruiters and both internally, externally working right now where we are looking at expanding the domestic sales force we are also adding in Europe and in Asia in fact there is a lot of meeting that’s occurred over in Japan, Korea in fact we got our first order in Korea already which is encouraging China as well Australia is also in queue. The European group is adding sales people we are adding people in our R&D facility in the UK and our primary development area which is in Montreal has I don’t know probably adding somewhere between 15 and 20 headcount as we speak right now so it’s just the matter of trying to recruit and get the people on board.

Eric Martinuzzi - Lake Street Capital Markets

Was that right with that 50% number and was that sales or was that OpEx in general?

Mark Lucas

Which number…

Paul Zeller

Are you referring to what kind of uptake in overall headcount would we anticipate with the investment is that where you’re going?

Eric Martinuzzi - Lake Street Capital Markets

That’s correct.

Mark Lucas

I think Eric we’re still sort of storing to that a little bit because that we’re merging the two organizations together where most of Nexsan people are staying we have – we’re downsizing some Imation people in that process and so the puts and takes is still in process so it’s a little hard to tell exactly what that number is but overall there is a significant increase.

Paul Zeller

And we’re committed to investing for growth in this category it’s a good market opportunity and the product roadmap is good we’re liking everything we see in that regard so this is a real opportunity.

Eric Martinuzzi - Lake Street Capital Markets

Thank you.

Operator

And I'm sure there are no further questions at this time.

Mark Lucas - Chief Executive Officer

Great. Well, I appreciate participation in the meeting today and we look forward to staying in touch with all of you. Thank you. Have a great day.

Operator

Ladies and gentlemen, this concludes today’s conference call. 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: Imation's CEO Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts