Xyratex's CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: Xyratex Ltd. (XRTX)

Xyratex (NASDAQ:XRTX)

Q2 2013 Earnings Call

July 01, 2013 4:30 pm ET

Executives

Brad Driver - Vice President of Investor Relations

Richard Charles Pearce - Chief Financial Officer, General Manager of Capital Equipment and Director

Ernest J. Sampias - Interim Chief Executive Officer, Director, Chairman of Audit Committee, Member of Nominations and Governance Committee and Member of Compensation Committee

Analysts

Glenn Hanus - Needham & Company, LLC, Research Division

David Ryzhik - Brean Capital LLC, Research Division

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

Kevin Salimian

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Xyratex Earnings Conference Call. My name is Philip, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Brad Driver, Vice President of Investor Relations. Please proceed, sir.

Brad Driver

Thank you, Philip, and good afternoon, everyone. Thank you for taking the time to join us this afternoon. I'd like to welcome investors, research analysts and others listening today to Xyratex's Fiscal Second Quarter 2013 Results Conference Call. On our call today are Ernie Sampias, Chief Executive Officer and Director; and Richard Pearce, Chief Financial Officer. Also on the call today is Ed Prager, GM of our Storage Solutions business. Ed will be available for questions following the formal comments by Ernie and Richard.

Today's call is being recorded and will be available for replay on Xyratex's Investor Relations homepage at www.xyratex.com. Our press release is available both on PR Newswire and our website.

I'd like to remind everyone that today's comments, including the question-and-answer session, will include forward-looking statements including, but not limited to, a forecast of future revenue and earnings and other financial and business activities. These statements are subject to risks and uncertainties that may cause actual results and events to differ materially. These risks and uncertainties are detailed in Xyratex's filing with the Securities and Exchange Commission, including the company's 20-F dated February 21, 2013.

Also, please note that in addition to reporting financial results in accordance with Generally Accepted Accounting Principles, or GAAP, Xyratex routinely reports certain non-GAAP financial results. These non-GAAP measures, together with our corresponding GAAP numbers and a reconciliation to GAAP, are contained in our earnings press release.

We encourage listeners to review these items.

I would now like to turn the call over to Richard for a financial review of the quarter.

Richard Charles Pearce

Thank you, Brad, and good afternoon, everyone. First, I'd like to provide you with some commentary about our results for the second quarter of 2013. Please note that all numbers are in accordance with GAAP unless stated otherwise.

I was pleased with our performance in the second quarter. We have seen stability in our 2 core businesses and generally, our customers appear more positive in their near-term opportunities. Revenue and gross margin in each of our product areas exceeded our expectations. Revenue for the second quarter was $216.2 million, down 33% as compared to the second quarter of last year and up 11% from our prior fiscal quarter.

Sales of our Enterprise Data Storage Solutions products in the second quarter were $169.3 million, representing a decrease of $109.1 million or 39% compared to the second quarter of last year and down 4% compared with $176.6 million in our prior fiscal quarter. The reduction from last year, as we have discussed previously, primarily reflects changes in sourcing by certain of our major customers, particularly the proportional product volume shift as per our annually declining contract with our previous largest customer, NetApp.

Sales of our Capital Equipment products in the second quarter were $46.8 million, up 7% compared to the second quarter of last year and up 146% compared to our prior fiscal quarter. We have experienced a significant level of customer orders in the quarter and are close to full coverage of the fiscal year plan at this point.

Gross margin for Q2 2013 was 21.8% compared to 16.5% in the same period a year ago and 18.9% in our prior fiscal quarter. The increase from the prior quarter was expected and was primarily due to a change in customer and product mix in both product segments.

For Q2 2013, the gross margin of our Enterprise Data Storage Solutions products was 18.4%, up from 16.3% a year ago and 17.8% in the prior quarter. The increase, as compared to last year, was primarily due to changes in customer and product mix, including revenue from our ClusterStor product line, offset by a reduction in revenues from NetApp.

For Q2 2013, gross margin for the Capital Equipment products was 34.2% compared to 19% in the second quarter of last year and 28.9% in the prior quarter. The increase in gross margin in the quarter was due to product mix as well as improved operational efficiencies.

Non-GAAP operating expenses in the quarter were $44.9 million compared to $42.4 million in Q2 of last year and $40.8 million last quarter. Expenses in Q2 included $2 million of restructuring costs from headcount reductions related to the reduction in revenues. We continue to expect 2013 operating expenses to be at similar overall level to 2012. We will be undertaking further restructuring in Q3, primarily in connection with manufacturing operations for our OEM storage product lines.

Moving on to net income. GAAP net income in the quarter was $2.9 million or $0.11 per diluted share compared to GAAP net income of $7 million or $0.24 per diluted share in the second quarter of 2012. On a non-GAAP basis, net profit for the second quarter was $2.7 million or $0.10 per diluted share compared to non-GAAP net income of $9.3 million or $0.32 per diluted share in the second quarter a year ago. The reconciliation between non-GAAP and GAAP net income is provided in our press release.

Turning our attention now to the balance sheet. Cash and cash equivalents at the end of the quarter was $85 million, down from $93 million at the end of Q1. Cash was slightly down compared to our expectations due to the timing of customer payments. Cash generated from operations in the quarter was $2.5 million.

Inventory increased by $12 million to $157 million in the quarter, having decreased by $34 million in Q1. Inventory turns were 4.4 compared to 4.2 for the previous quarter. We are targeting further decreases in inventory during 2013 as inventory related to certain end-of-life customer programs is depleted.

Accounts receivable increased by $21 million in the quarter to $120 million. Days sales outstanding were 50, up from 45 the previous quarter due to changes in the timing of revenue during the quarter. Headcount at the end of the May quarter was 1,830 permanent employees, a reduction of 31 employees or 2% over the previous quarter, primarily from our operations activities, as we scaled our capability in line with demand.

I will now provide you with our business outlook for our fiscal third quarter 2013 ending August 31. For our third quarter of 2013, we are projecting total revenue to be in the range of $195 million to $225 million, down 29% to 18% as compared to last year and down 10% to up 4% compared to 2Q '13.

For Q3, gross margin is expected to be 20.5% to 21.5%. We are estimating non-GAAP earnings per share to be between a loss of $0.04 and earnings of $0.20. Non-GAAP earnings per share excludes noncash equity compensation, amortization of intangible assets, specified nonrecurring items and related taxation expense.

The number of shares outstanding at the end of Q3 on a weighted average treasury method is expected to be 27.9 million. Our cash position at the end of Q3 is expected to be $90 million.

I'd now like to turn the call over to Ernie Sampias.

Ernest J. Sampias

Thank you, Richard, and good afternoon, everyone. I was pleased with our execution during the quarter, and I believe that our results reflect our focus on improving our operational efficiency. Within our 2 core businesses, the OEM Storage Solutions business and the Capital Equipment business, we continue to develop and deliver compelling technology to our established customer base, as well as consistently identifying new customer and product opportunities.

I continue to believe that both of these businesses will provide long-term contributions to the company. Within our more recent strategic initiatives to address the High Performance Computing, Big Data and cloud markets, we are making encouraging progress. We will be looking to focus our investments within the areas where we have already had significant success, and we'll carefully review our opportunities to expand into new markets, verticals and geographies.

I believe we are well positioned to improve our market opportunities with a focus on execution, an experienced management team and a strong portfolio of products and solutions. I feel good about the progress we have made in our development activities and cost management and as a result, I believe that our business can deliver more consistent and reliable returns in the longer term.

I would now like to provide you with a broader business overview. Generally, we continue to see good dynamics in the overall data storage market. As we mentioned to you last quarter, we saw some rebound from last year, and we have spent the last 2 quarters catching up to this demand. Over the course of the last quarter, we've made significant progress in meeting this demand a bit sooner than we originally expected. Overall, our view remains generally positive for the remainder of 2013 and beyond. It is estimated that terabytes shipped will grow at an excess of 30% in 2014 and 2015, and that data will continue to grow at healthy rates long term, driven in part both by trends in cloud computing and unstructured data, which should be positive across our product ranges.

In our Storage Solutions business, we are experiencing good demand across the majority of our customers, including both our Tier 1 and emerging OEM customers. Specifically, 2 of our larger OEM customers exceeded their forecast in Q2, while several of the customers who are delivering all-flash and cloud solutions saw upside.

We continue to see strong demand for our market-leading, high-density OneStor 84-drive platform in both the storage application platform and expansion enclosure formats. During the quarter, Xyratex was awarded another high-density win at a current Tier 1 customer and expect shipments to begin in late summer to early fall. We also initiated shipments to 2 other OEM customers for the same platform. Both of these OEMs are targeting cloud infrastructure applications with the 84-drive platform. Specific to our storage application platform in 2U and 4U configurations, we were also awarded several emerging OEM account wins.

We continue to work closely with our customers and industry partners to prioritize our product development road maps, investing in the development of a compelling range of hardware platforms to enable our customers' success in the market where we're seeing strong interest for our next generation storage application controllers, also 12 GB SaaS solution. Customers are looking to increase performance, capacity and flexibility, all aligned with the ever-expanding virtualized data infrastructures and cloud deployments. Xyratex allows the OEMs to provide next-generation solutions ahead of market demand, all while delivering a scalable and upgradable platform. OEMs can easily leverage a family of offerings from Xyratex to integrate their software applications that address multiple end-user market segments.

Overall, I believe this business is well positioned to capture further market opportunities with the strength and breadth of our expanding product portfolio, global fulfillment capabilities, competitive cost structure and strong customer relationships. We always recognize that we are in a highly competitive market, which includes the potential risk of our customers choosing to in-source certain products when transitioning platforms, but we remain focused on demonstrating our technology innovation and value-add service differentiation.

In our ClusterStor High Performance and Big Data storage businesses, we continue to expand our position in the market and gain industry recognition from our performance leadership. We have added 14 new customers over the course of the last 2 quarters, including in market verticals such as scientific research, energy exploration and life sciences.

These commercial and scientific computing markets require sophisticated, scalable, data-intensive processing tools, and our family of ClusterStor products, including our recently announced ClusterStor 1500, specifically address these requirements. The 1500 product will allow our ClusterStor business to address an incremental accessible market of over $1.5 billion, and we are seeing very positive signs regarding the market acceptance with a number of key customer wins, particularly in the academic market.

We also released a new version of our ClusterStor operating system that delivers additional scalability and usability enhancements that will further help us drive the adoption of our technology and growth in this business. We are making good progress in our reseller relationships with Dell and HP and our OEM relationship with Cray, through the trading and support of their global sales organizations, which we will believe -- which we believe will be integral to our long-term success in this growing market. I believe we are making good progress towards our prior guidance of achieving approximately $60 million in revenues for this business this fiscal year, with gross margins ranging from 35% to 55%.

In our Capital Equipment business, we have experienced demand slightly above our expectations for a number of our products so far in the first half, and we expect good demand through the remainder of the year. As we highlighted for you in our last call, we have now effectively -- we now have effectively all of our projected revenue for the full year covered by committed purchase orders.

We believe the overall capital investment of the HDD providers continues to be impacted by the overcapacity that was created a couple of years back. Looking beyond 2013, we see a positive dynamic developing that we expect will result in strong demand for our component Capital Equipment. Given the continued slowdown in areal density improvements and the lack of a commercially available technology that would allow more capacity per disk, we are expecting to see strong demand for our component technology in areas such as head and media automation and inspection. Early indications from our customers show that they will be requiring more capital equipment in this area in 2014 and 2015.

On the operational side, we continue to make good progress in many of our planned activities, such as nearing completion of consolidating our North American operations to Mexico from Northern California, and we continue to manage headcount as we focus on those activities and investments where we can bring true value to our customers. In summary, I am pleased and encouraged by the progress we have made in our strategic position in our core businesses, as well as the ClusterStor business, and the execution of our technology investment strategy.

We are a valued partner with all 3 HDD manufacturers and 5 of the 7 Tier 1 data storage providers, plus many emerging data storage providers. I believe our technology and our core comprehensive product portfolio will enable us to maintain a leadership position in the areas where we currently provide capital equipment. In Storage Solutions, we have diversified our customer base and are delivering new technology and products that will allow our customers to deliver compelling solutions to their end-user customers. I feel confident that we remain well positioned in the 3 markets we serve to benefit from continued growth in data storage demand through the remainder of the year and beyond.

Now before I turn the call over for questions, I would like to provide some updates from our board meeting and AGM last week. Firstly, I would like to welcome Ken Traub, who was appointed to the board immediately following the AGM, in line with our agreement with Baker Street Capital. At the AGM, Vadim Perelman, Mike Windram and myself were reappointed as directors.

As part of the board meeting, we undertook a detailed review of the business, and as reported in our press release earlier today, the board unanimously confirmed its support of the long-term growth strategy, including a continued investment in ClusterStor, which is approaching an inflection point where it is anticipated to contribute positively to Xyratex in fiscal year 2014 and to become a self-sustaining business line going forward. I should also like to confirm that our search for a new CEO continues and is progressing well.

Before we open up the call for questions, I'd just like to take an opportunity to thank our employees worldwide for their continued commitment to the business, recognizing the personal sacrifices that many of them make.

That concludes our formal comments. I would now like to open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line from Glenn Hanus of Xyratex.

Glenn Hanus - Needham & Company, LLC, Research Division

I'm from Needham. A few of the regular questions, I'll get them out of the way. Can you give us the OEM customer breakdown like you usually do?

Richard Charles Pearce

Yes. Sure, Glenn. I'll give you them as a approximate percentage of the overall Storage Solutions revenue. NetApp was approximately 26%, Dell was approximately 13%, IBM was approximately 30% and HP was approximately 16%.

Glenn Hanus - Needham & Company, LLC, Research Division

Okay. And in terms of the breakdown of the -- I mean, I know you don't formally have segments, I guess, but we model the -- how we normally model the business of revenues and gross margin, could you give us an update on how you're thinking about that for the quarter and the year?

Richard Charles Pearce

For the proceeding quarter? For Q3?

Glenn Hanus - Needham & Company, LLC, Research Division

Yes, for the third quarter and whatever comments you could make for the balance of the year as well.

Richard Charles Pearce

Sure. So on the Storage Solutions business, we previously guided to somewhere between 15% and 18% and obviously, as we've commented, too, in our comments earlier today, there has been changes in product mix and customer mix, particularly as we move from -- away from NetApp, again, as well documented. So within the quarter, in the second quarter, the margins in that area were just north of 18% actually, so just north of the top end of the guidance that we've previously given. As I look out into 3Q and the back end of the year, I would expect those margins to stay consistently at the top end of that previously provided range, maybe even creeping up towards 19% in 3Q, and then going up above 20% in the 4Q, and that's primarily related to the ramp -- the anticipated ramp in the ClusterStor product line, which obviously has a significantly higher level of technology and hence, a significantly higher level of gross margin, as we discussed before. And I would have thought, when you look at that then annually, the annual margin will be somewhere in the range of 19% to 20%. On the Capital Equipment business, again, as we noted in our comments, we have had some changes in terms of the product mix, and some areas where I think you're aware that we make charges for NRE, nonrecurring engineering expenses, where -- when we hit product milestones in certain development products, we can charge some revenue, and that obviously comes in at 100% margin and that helps the margin. So we've had -- in fact, the product mix is slightly different than I anticipated in 2Q and 3Q. There was a bit of flip-flopping around between those 2 quarters. So the margins are higher than I expected them in 2Q and probably will be slightly lower than I originally expected them in 3Q. So margins in the second quarter, yes, just north of 34%. As we move into 3Q, I'd expect those margins to go back down, based on the product mix, to somewhere just north of the sort of 25% level, somewhere between 25% and 28%, and then going back to more normal levels in the 4Q. We've always guided to approximately 30% in that business, albeit when the revenues have been slightly lower, we're more towards the 25% to 30%. Again, if you look at that for the full year now, in terms of my expectations, I think we'll be somewhere between 28% and 30% for the whole year in that business.

Glenn Hanus - Needham & Company, LLC, Research Division

And then the revenue breakout between the businesses in the August quarter?

Richard Charles Pearce

Yes, so in terms of the guidance that we've provided in the August quarter, I'd expect the Storage Solutions revenues to be somewhere between $150 million and $170 million, and the Capital Equipment revenues to be somewhere between the $45 million and the $55 million.

Glenn Hanus - Needham & Company, LLC, Research Division

And I kind of missed your comment there on how to think about operating expenses over the next couple of quarters.

Richard Charles Pearce

Yes, and again, consistently with what we've said in previous quarters, my expectation is that, over the full year, operating expenses will be at a very similar level to 2012. We did see operating expenses actually go up from around $40 million in Q1, where we had particularly low levels of third-party engineering expenses within the R&D line. So we got up by $4 million in the second quarter. Some of that is some additional engineering expenses. $2 million of that is actually restructuring expenses related to the headcount reductions, again, that we talked about in the call. As we move out into Q3 and Q4, I would -- obviously we won't -- we are doing some additional restructuring, as I touched on, but I don't expect that to incur significant costs. And we'll expect the expenses to move down to around the $42 million mark for the last 2 quarters, which again, if you sum those up, will come very similar to the overall expenses in 2012.

Glenn Hanus - Needham & Company, LLC, Research Division

And maybe lastly, Ernie, could you comment on -- you've been kind of reviewing the business, thinking about restructuring, perhaps exploring a sale of either segment and other strategic alternatives. Maybe just talk a little more about what you've recognized over the last 3 months, and it seems like you're more committed to operating the business as you have, a little bit more efficiencies and continuing to invest in the strategic areas you've mentioned.

Richard Charles Pearce

Sorry, Glenn. I think you addressed that one earlier.

Ernest J. Sampias

Yes, thanks, Glenn. Yes, I've been in the CEO role for 3 months now. But again, I've been on the board for 9 years. And -- but you get a different perspective as the CEO, a much deeper perspective being involved in the management -- with the management team and the customers. And again, my comments that we prepared today, I think, really reflect my continued confidence in the core business, the 2 core business segments, the OSS business as well as the Capital Equipment business. And those businesses are performing well, and as I looked, we did the analysis and we shared that with the board last week, 2013 looks like a cyclical low point, and particularly as we transition away from NetApp. And the good news is we have been winning new business in both of those core business segments that make the forecast [ph] beyond 2013 look particularly encouraging. And clearly, we've gotten the breakeven point expenses down in the Capital Equipment business quite significantly, and such that now both the OSS and Capital Equipment business are operating profitably, generating positive cash flow. And then we've been investing into the growth initiative, ClusterStor. And that business also, when we did the review with our board -- our new board members, and that business, I think to their surprise, was growing very nicely. And based on the view that we have for the rest of this year, as well as into 2014, the growth initiative does not look like it would be a drag on the business going forward. And so at this point, it would not be -- it would not make economic sense to do anything to slow down the momentum, the nice momentum that, that ClusterStor business has given its progress, and the fact that we're reaching the inflection point where we'll actually start contributing positively to the overall EBITDA of the company. So from my perspective, and I know you saw the press release we put out, the second press release regarding Ken Traub's appointment to the board, but more importantly, the entire board unanimously supporting the long-term growth strategy of the company, all lines -- all 3 segments of the business, and particularly recommitting ourselves to the ClusterStor initiative. So after 3 months and I think the work we did with the board, I'm very positive on the business.

Operator

Your next question comes from the line of Ananda Baruah from Brean Capital.

David Ryzhik - Brean Capital LLC, Research Division

David Ryzhik here on for Ananda Baruah. Just curious what your thoughts were on returning to more normalized operating margins in the mid-single digits, perhaps 5% to 8%, and what time frame you're thinking of?

Richard Charles Pearce

Dave, yes, Richard here. Obviously, there's been quite a lot of restructuring going to the business over the last year or so, particularly in the Capital Equipment side of the business. I guess in reality, my expectations of getting back to what you call a normalized operating margin-type level, obviously with the cyclicality on the Capital Equipment business, we have tended to sort of peak at certain times over the last few years. But as it stands today, my expectations is -- are that we would get back into that sort of range in 2015, is kind of where I'm thinking about at the moment.

David Ryzhik - Brean Capital LLC, Research Division

Great. And any sense of what the run rate would be post NetApp run-off in the storage systems business?

Richard Charles Pearce

Yes. I mean, yes, it's not my intention to give projections here for going out past 2013. But as I look at that at the sort of macro level, if you look at the NetApp business, obviously we provide the proportion of that business as we're required to do on a quarterly basis. And if you follow that through, looking at the proportion of the NetApp business through this year, then it's likely that the total revenues that we will be getting are somewhere in the region of $160 million in the EDSS business sector, which includes the OSS businesses as well as the ClusterStor business. If I look out into next year, yes, I can see it, as Ernie has stated in his prepared comments, backfilling some of that NetApp business in the OSS business with new customer wins. And obviously, back again to the ClusterStor comments, we're also anticipating continued growth in that side of the business. If I look at that collectively, then whilst revenues for the full year are probably going to be somewhere -- based on the forecast that we've given in Q3 and not looking for that to change significantly probably in Q4, that our overall revenues in the Enterprise Data Storage Solutions will probably be somewhere sort of $660 million to $680 million. If I look into next year, whilst we will probably lose the NetApp side of things, which is $100 million -- approximately $160 million, as we've stated, I would suspect that overall revenues may only come down by somewhere between $20 million and $50 million. So really looking to backfill a good proportion of that into next year, and then that would represent growth, excluding Network Appliance, of somewhere north of 10%, and then looking to continue that trajectory as we go out then into the future years.

Operator

[Operator Instructions] And your next question comes from the line of Aaron Rakers from Stifel.

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

A couple quick questions as well. Can you just tell us what your ClusterStor revenue was in this last quarter?

Richard Charles Pearce

Yes, we're not proposing to sort of break ClusterStor out specifically as we go forward. I think that we did point to what the revenues were in the first quarter, and I think we've given projections for the full year. And I think we gave forecast for the second quarter that our expectations are somewhere between $10 million and $15 million, and we were within that range, but I wouldn't want to break it down too specifically, Aaron.

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And you guys now stand at 14 net new customers. I think last quarter, you had reported that you had added 6 customers in the ClusterStor product. How many of those 14 are currently shipping and actually being revenue recognized at this point?

Richard Charles Pearce

They will either be shipping and revenue recognized by the end of the second quarter or in the third quarter, all of them.

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

All of them?

Richard Charles Pearce

Yes.

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And when you talk about the ClusterStor being additive to the operating model looking -- or the EBITDA looking into 2014, what is the break-even level on a quarterly basis for ClusterStor?

Richard Charles Pearce

Again, Aaron, I really don't want to get down, at this stage, to predicting on that specific 1 product line. I think the comments that we provided in the call are sufficient for people to recognize the importance of that business going forward.

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Fair enough. And then you had made a comment in your prepared remarks that you had, was it 2 of your largest OEMs that had actually exceeded your expectations in this quarter?

Richard Charles Pearce

Yes.

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then the final question for me, I'd like to understand a little bit more of the mix going on in your Capital Equipment side of the business. Can you be a little bit more specific on what kind of trends you're seeing? Because the hard disk drive industry doesn't seem to need any kind of production capacity. But can you help us understand exactly what the mix of that business looks like, where you're seeing the accelerated demand for?

Richard Charles Pearce

I think as we look out into 2014 and particularly into 2015, we certainly see a mix shift for us, from traditionally what we know that the back-end test business, really testing and recognizing and mapping the drives out, which are the large systems that we provide, which historically have provided about 70% of the overall revenues in that side of the business. And we see a trend moving more towards where we provide our equipment into the component side, again, as we talked about in the prepared comments, on head inspection, positioning, automation, as well as obviously we continue to provide equipment into the servo -- or what was known previously as servo track writing, actually writing the master tracks of the disk. So we do expect the areal density to slow down quite considerably, and I -- we understand from speaking to our customers that the expectation on areal density benefits will sort of reduce to somewhere into the 15% to 20% on an annual basis, with some of the benefits of shingle writing coming in for a certain proportion of the drives, and then obviously looking at Hammer Technologies a little way out for the majority of the drives. So what that will mean is that they will be -- yes, to meet the increased required in overall capacity, that is being met by more heads, more disks in the same units. So where we provide equipment into those specific component areas, we see increases in demand there. That's the longer-term view. In the shorter term, in terms of our mix, that's been more not I would say in terms of the market trends. That just happens to be that we did actually ship more of the component-type technology in the second quarter rather than the DPS equipment. But that wasn't read through any demand trends. It just happened to be where the demand sat right at the end of the quarter. I'm expecting some things to go out the back end, some things at the front end of the next quarter. And it so happened that some of the DPS equipment, and I think we've talked about this historically, particularly the new platform, which we introduced at the back end of last year, which was coming in at a much lower margin. Those margins have improved as we've managed to take some cost out of that box, but it's still not at historic levels for that type of equipment, and we're still working on further cost reductions there. But that's why the margins are slightly better in Q2, because where I expected them to ship, they're now shipping out in Q3 and being recognized to revenue in Q3.

Operator

You're next question comes from the line of Kevin Salimian from Viking Global.

Kevin Salimian

You mentioned that 2 of your OEM customers have seen -- exceeded your forecast. Do you think that was driven more by the overall storage spending environment getting better? Or do you think that was more driven by the specific projects or designs that you're working on? Is it more project- or company-specific?

Richard Charles Pearce

I would have said, particularly in one case, that it was driven more by the specific product line that we are providing into at one of these customers, where they're having particular traction in that market space. On the other particular customer, I really don't know. But again, I think it's more related to the product than, I would say, than seeing necessarily a trend in the overall market.

Operator

Ladies and gentlemen, this concludes today's question-and-answer session on today's call. I would now like to turn the call back over to Brad Driver for closing remarks.

Brad Driver

Thank you, Philip. Once again, thank you for joining us this afternoon. We look forward to speaking with you again on our Q3 earnings call, which will be scheduled for early October 2013. In mid-August, we'll be at the Oppenheimer Technology Conference in Boston, and we'll provide a business update in our presentation. As always, you're welcome to call me if you have any additional questions over the course of the quarter. In the meantime, have a good week and safe Fourth of July. Thanks again.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation, and you may now disconnect. Have a great day.

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