Adaptec Inc. (OTC:ADPT-OLD) F2Q08 Earnings Conference Call October 31, 2007 4:45 PM ET
Nicole Noutsios - Investor Relations
Sundi Sundaresh - President and CEO
Chris O'Meara – Vice President and CFO
MichaelCoady - B. Riley
Thank you for joining this Adaptec Quarter Earning ReleaseConference Call. Today's call is being recorded.
For opening remarks, I would like to turn the conferenceover to Nicole Noutsios. Please go ahead.
Thank you, operator. And good afternoon, ladies andgentlemen. During today's call, you will hear from Sundi Sundaresh, Presidentand CEO, followed by Chris O'Meara, Adaptec's Chief Financial Officer. AfterChris's remarks, we will host a brief question-and-answer session.
Some of the comments today will include forward-lookingstatements regarding future events and/or projections of the financialperformance of the company based on our current expectations, including ourprojection of operating results for the third quarter of fiscal 2008.
These statements are subject to significant risks anduncertainties and cause our actual results to differ materially from thoseexpressed in these forward-looking statements. We refer you to the risk factorssection of the documents that Adaptec has filed with the SEC, specifically ourmost recent Forms 10-K and 10-Q, which contain important risk factors thatcould cause actual results to differ materially from expectations.
In addition, some of the financial measures that areincluded in this presentation are non-GAAP. For a reconciliation of GAAP tonon-GAAP measures, please visit our website at www.adaptec.com/investor.
With that, I would like to introduce Adaptec's President andCEO, Sundi Sundaresh.
Thank you, Nicole. Good afternoon and thank you for joiningus. During this call, we will be reviewing our latest quarterly resultshighlighting important developments and providing an update on progress we madeon our plans to improve our operating results. We’ll discuss the results of ourmost recent cost reductions efforts and progress and our Data Protection andStorage Solutions businesses.
But before jumping into a discussion of our financial andoperating results. Let me say a few words about our recent settlement with oneof our largest investors, Steel Partners.
As many of you know, we've been in discussions with Steelover the past several months about ways Steel and the company might worktogether. I am happy to report that the company and Steel have reached anagreement that both parties believe within the best interest of allstockholders.
The board has agreed to nominate free steel representativesto join what would be a nine-member board. Steel in turn has agreed to vote forthe combined slate of directors. Again, the board believes this is a goodoutcome for the company and its stockholder and together I expect we willpursue of course designed to maximize value for all our stockholders.
Now lets take a look at the specifics of the past quarter.Adaptec revenues for the fiscal second quarter were $44 million. Exceeding ourcompany guidance of $38 million to $42 million.
However, I want to emphasis that although the quarter endedstrong and the near-term outlook remain steady this is due to some short-termrevenue upside attributed to IBM and parallel products in the channel.
We recorded a non-GAAP loss from continuing operations netof taxes of $2.4 million or $0.02 per share. As a result of our disciplinedapproach to cash management our balance sheet continues to remain strong,during the quarter we added approximately $6 million to our cash position andwe ended the quarter with cash and equivalents of $598 million. Chris willprovide further details on the company’s financial’s and outlook.
Last quarter we discussed a fundamental dynamics of the RAIDmarket and how they are effecting Adaptec business setting forth our views onthe most appropriate and prudent strategic direction for the company.
Although we have made progress on a number of operationaland business fronts, we still expect revenue from our OEM business and parallelSCSI products to decline significantly over the next 6 to 12 months reflectingthe changing technical and market dynamics in our industry.
Despite these difficult challenges, the team has made a lotof progress. We are continuing to take the right steps to improve our operatingresults. Two years ago we began our process of improving our financialperformance through divestitures, narrowing our focus of two business units,rightsizing our businesses, rationalizing our worldwide locations andout-sourcing as appropriate.
Our most recent initiative to align the company’s operatingmodel with revenue levels which we discussed during the last earnings call isfocused most on the reducing expenses in the DPS business. We are alreadystarting to see the benefits of our cost efficiency measures from the secondquarter of fiscal 2008 restructuring plan.
We expect a fully realize a financial benefits by the fourthfiscal quarter. Overall, since I rejoined Adaptec in the first quarter offiscal 2006. We have successfully reduced operating expenses by approximately40% over the two-year period after adjusting for discontinued operations.
We continue to expect that most of our revenue growth willbe in the channel, we therefore redoubled our efforts to grow our channelbusiness and to increase market share to a number initiatives for example, werealigned our sales organization to strength an account coverage whileimproving our sales processes and supply chain efficiencies.
Although we continue to have business challenges withrevenue growth the product development teams have been executing very well.Adaptec continuous to exhibit product leadership in the area of Serial RAIDtechnology and our teams notch significant milestones during the quarter.
We gain market share in the channel in particular wecontinue guardian our wins over competitors with our Unified Serial controllerslaunched in March which have been rapidly gaining traction in the channel.
In fact, the NPD group and independent market research firmissued a report on US serial revenues in the channel in June 2007. And reportedthat Adaptec had gone 29% of the market in the second quarter, up from 17% inthe prior quarter.
From our product perspective this quarter our DPS teamcontinue to expand our full line of Unified Serial Controllers. The developmentteam added a new two-portrait controller design to ensure; high performsexternal storage connectivity. Our PCI express equipped, Windows and Linuxcomputers were used in digital media applications.
Adaptec’s comprehensive line of serial controllers, nowoffers one of the widest ranges of foot counts from 2 to 16, as well as thevariety of internal and external connectivity options to meet current andfuture market demands.
In terms of new market opportunities iSCSI is one of thefastest growing areas of the storage industry today, especially in the smallmedium enterprise market. Industry experts IDC are predicted that by 2010 thetotal iSCSI storage market will be over $5 billion up from $305 million in2005.
To address this growing market opportunity. We have joinedforces with Open-E a principle developer of iSCSI software to deliver reliablestorage solution based on Adaptec great technology.
As a result, customers will have remote access to theadvanced data protection and superior management services offered in ourproducts. To established our presence in the growing iSCSI market. Wesuccessfully introduce a new series of iSCSI storage appliances, leveraging thecompanies on target software, design from medium size business that need tocost effectively deploy an IP SAN.
The company has established in our server lineout networkattach storage systems. Also continue to break new ground and expand theirwidespread industry acceptance. Recently, AccessFlow and VMware authorizedconsultant partner, selected Snap Server as a key component in their VMwarevirtual infrastructure offerings.
Looking to the future. We’ll continue to focus on improvingthe company’s profitability, even though our revenue outlook for the DPSbusiness remains challenge. While we are improving our sale in market share andin the channel with our full line of Unified Serial Controller, we will befaced with significant decline in our parallel and OEM revenues.
As you can tell by or recent accomplishments the team atAdaptec remains focused on wining in the face of difficult odds and I lookforward to leading them through this next set of challenges.
I’ll now turn the call over to Chris O'Meara, Adaptec ChiefFinancial Officer for the detail look at our financial.
Thank you, Sundi. And welcome everyone. Please note that allfinancial numbers I am discussing, except for revenue will be on a non-GAAPbasis, unless otherwise noted.
In summary, our total net revenue of $44 million includes$37.6 million of revenue from our DPS business and $6.4 million from our SSGbusiness. The overall channel mix is approximately 51% from our total revenue.
Our top customer, IBM represents 36% of our revenues, whileour two largest distributor Tech Data and Ingram Micro represent at 14% and 10%respectively of our net revenue for the second quarter of fiscal '08.
Our gross margin in Q2 was 35%, compared to 33% in Q1 as wecontinue to reduce our component cost. Our total cash and investments improvedby $6 million to $598 million up from $592 million in Q1, primarily as a resultof our refund that we receive from IOS and our effort to maintain positive cashflow from operation. Our non-GAAP EPS was a $0.02 loss per share compared witha $0.05 loss in Q1.
Now I would like to provide you with some guidance for thethird quarter of fiscal 2008. We believe potential favorable seasonality bothwith the channel and with our largest OEM customer, IBM will help stabilize ourbusiness despite the continue decline in our parallel SCSI business.
As a result, we expect revenue to range from $39 million to$43 million. Non-GAAP EPS is expected to range from a $0.03 to a $0.01 profit.
Now, I’ll turn the call back to Sundi to briefly summarizeour comments today.
Thank you, Chris. Going forward, we’ll continue to drive ouroperational efficiencies in the company. OEM on our channel business to takemarket share from competitors and focus on developing new adjacent high growthmarkets in storage that will help to support and scale our business.
I am proud of the hard work of our employees and themanagement team, and grateful for the guidance of our board of directors as wework our way through this important period of transformation for Adaptec.
I’ll now turn the call over to the operator to begin thequestion-and-answer session.
(Operator Instructions) We will go first to Michael Coadywith B. Riley.
Michael Coady - B. Riley
Thanks. Good afternoon. Hi Chris. Hi Sundi. What did youtalked previously about making some more investments in the channel in terms ofsome sales and marketing when you talk now about your restructuring effortsbeing fully utilized in the fourth quarter. Could you give us an indication ofhow much our OpEx could drop on a quarterly basis?
I think we are working at Apex coming down, another couplemillion dollars as we fully realize the savings. The majority will be comingout of the R&D areas we really rationalized our -- have rationalized ourcost structure there. We continue to tune sales and marketing with more focuson our handful of region and more focus on some of our marketing programs aswell.
Michael Coady - B. Riley
Okay. And the gross margin of 35% was pretty strong. Wasthere a function of channel mix in the quarter and do you think that issustainable not only in our December quarter but a couple of quarters though?
I am really going to talk with regards for one quarter but Ithink, if you look at the product mix and in fact, we are now getting some ofthe sales we probably would from our out-sourced manufacturing perspective andas well as just continually focus on our cost of sale and I think this is astarting for Q3 is sustainable.
Michael Coady - B. Riley
Okay. Thanks. And just last the, a cash flow from operationsfigure if you’d exclude the $49 million benefit?
The $49 million was in the previous year. You are thinkingof the tax adjustment and probably year ago.
Michael Coady - B. Riley
I am sorry. So what was the cash flow from operations guys?
Cash flow from operations, we grew cash about $6 million andso cash flow from operations was essentially above $1 million positive, wasabout $5 million from the tax refund.
Michael Coady - B. Riley
Got it. Thank you.
(Operator Instruction) At this time, I want to turn theconference back to management for any additional or closing remarks.
Thank you everyone for joining us today. On the recap byfinding you that we have not increased focus on our business, now that we'vegot our agreement with Steel. We've increased our channel share. We arecontinuing to improve our operating results with the focus on profitability andthank you until the next earnings call.
Ladies and gentlemen, this concludes today's conference. Weappreciate your participation and you may disconnect at this time.
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