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Executives

Nicole Noutsios - Investor Relations

Sundi Sundaresh - President and CEO

Chris O'Meara – Vice President and CFO

Analysts

Michael Coady - B. Riley

Adaptec Inc. (OTC:ADPT-OLD) F2Q08 Earnings Conference Call October 31, 2007 4:45 PM ET

Operator

Thank you for joining this Adaptec Quarter Earning Release Conference Call. Today's call is being recorded.

For opening remarks, I would like to turn the conference over to Nicole Noutsios. Please go ahead.

Nicole Noutsios

Thank you, operator. And good afternoon, ladies and gentlemen. During today's call, you will hear from Sundi Sundaresh, President and CEO, followed by Chris O'Meara, Adaptec's Chief Financial Officer. After Chris's remarks, we will host a brief question-and-answer session.

Some of the comments today will include forward-looking statements regarding future events and/or projections of the financial performance of the company based on our current expectations, including our projection of operating results for the third quarter of fiscal 2008.

These statements are subject to significant risks and uncertainties and cause our actual results to differ materially from those expressed in these forward-looking statements. We refer you to the risk factors section of the documents that Adaptec has filed with the SEC, specifically our most recent Forms 10-K and 10-Q, which contain important risk factors that could cause actual results to differ materially from expectations.

In addition, some of the financial measures that are included in this presentation are non-GAAP. For a reconciliation of GAAP to non-GAAP measures, please visit our website at www.adaptec.com/investor.

With that, I would like to introduce Adaptec's President and CEO, Sundi Sundaresh.

Sundi Sundaresh

Thank you, Nicole. Good afternoon and thank you for joining us. During this call, we will be reviewing our latest quarterly results highlighting important developments and providing an update on progress we made on our plans to improve our operating results. We’ll discuss the results of our most recent cost reductions efforts and progress and our Data Protection and Storage Solutions businesses.

But before jumping into a discussion of our financial and operating results. Let me say a few words about our recent settlement with one of our largest investors, Steel Partners.

As many of you know, we've been in discussions with Steel over the past several months about ways Steel and the company might work together. I am happy to report that the company and Steel have reached an agreement that both parties believe within the best interest of all stockholders.

The board has agreed to nominate free steel representatives to join what would be a nine-member board. Steel in turn has agreed to vote for the combined slate of directors. Again, the board believes this is a good outcome for the company and its stockholder and together I expect we will pursue 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 our company guidance of $38 million to $42 million.

However, I want to emphasis that although the quarter ended strong and the near-term outlook remain steady this is due to some short-term revenue upside attributed to IBM and parallel products in the channel.

We recorded a non-GAAP loss from continuing operations net of taxes of $2.4 million or $0.02 per share. As a result of our disciplined approach to cash management our balance sheet continues to remain strong, during the quarter we added approximately $6 million to our cash position and we ended the quarter with cash and equivalents of $598 million. Chris will provide further details on the company’s financial’s and outlook.

Last quarter we discussed a fundamental dynamics of the RAID market and how they are effecting Adaptec business setting forth our views on the most appropriate and prudent strategic direction for the company.

Although we have made progress on a number of operational and business fronts, we still expect revenue from our OEM business and parallel SCSI products to decline significantly over the next 6 to 12 months reflecting the changing technical and market dynamics in our industry.

Despite these difficult challenges, the team has made a lot of progress. We are continuing to take the right steps to improve our operating results. Two years ago we began our process of improving our financial performance through divestitures, narrowing our focus of two business units, rightsizing our businesses, rationalizing our worldwide locations and out-sourcing as appropriate.

Our most recent initiative to align the company’s operating model with revenue levels which we discussed during the last earnings call is focused most on the reducing expenses in the DPS business. We are already starting to see the benefits of our cost efficiency measures from the second quarter of fiscal 2008 restructuring plan.

We expect a fully realize a financial benefits by the fourth fiscal quarter. Overall, since I rejoined Adaptec in the first quarter of fiscal 2006. We have successfully reduced operating expenses by approximately 40% over the two-year period after adjusting for discontinued operations.

We continue to expect that most of our revenue growth will be in the channel, we therefore redoubled our efforts to grow our channel business and to increase market share to a number initiatives for example, we realigned our sales organization to strength an account coverage while improving our sales processes and supply chain efficiencies.

Although we continue to have business challenges with revenue growth the product development teams have been executing very well. Adaptec continuous to exhibit product leadership in the area of Serial RAID technology and our teams notch significant milestones during the quarter.

We gain market share in the channel in particular we continue guardian our wins over competitors with our Unified Serial controllers launched in March which have been rapidly gaining traction in the channel.

In fact, the NPD group and independent market research firm issued a report on US serial revenues in the channel in June 2007. And reported that Adaptec had gone 29% of the market in the second quarter, up from 17% in the prior quarter.

From our product perspective this quarter our DPS team continue to expand our full line of Unified Serial Controllers. The development team added a new two-portrait controller design to ensure; high performs external storage connectivity. Our PCI express equipped, Windows and Linux computers were used in digital media applications.

Adaptec’s comprehensive line of serial controllers, now offers one of the widest ranges of foot counts from 2 to 16, as well as the variety of internal and external connectivity options to meet current and future market demands.

In terms of new market opportunities iSCSI is one of the fastest growing areas of the storage industry today, especially in the small medium enterprise market. Industry experts IDC are predicted that by 2010 the total iSCSI storage market will be over $5 billion up from $305 million in 2005.

To address this growing market opportunity. We have joined forces with Open-E a principle developer of iSCSI software to deliver reliable storage solution based on Adaptec great technology.

As a result, customers will have remote access to the advanced data protection and superior management services offered in our products. To established our presence in the growing iSCSI market. We successfully introduce a new series of iSCSI storage appliances, leveraging the companies on target software, design from medium size business that need to cost effectively deploy an IP SAN.

The company has established in our server lineout network attach storage systems. Also continue to break new ground and expand their widespread industry acceptance. Recently, AccessFlow and VMware authorized consultant partner, selected Snap Server as a key component in their VMware virtual infrastructure offerings.

Looking to the future. We’ll continue to focus on improving the company’s profitability, even though our revenue outlook for the DPS business remains challenge. While we are improving our sale in market share and in the channel with our full line of Unified Serial Controller, we will be faced with significant decline in our parallel and OEM revenues.

As you can tell by or recent accomplishments the team at Adaptec remains focused on wining in the face of difficult odds and I look forward to leading them through this next set of challenges.

I’ll now turn the call over to Chris O'Meara, Adaptec Chief Financial Officer for the detail look at our financial.

Chris O'Meara

Thank you, Sundi. And welcome everyone. Please note that all financial numbers I am discussing, except for revenue will be on a non-GAAP basis, 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 SSG business. The overall channel mix is approximately 51% from our total revenue.

Our top customer, IBM represents 36% of our revenues, while our 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 we continue to reduce our component cost. Our total cash and investments improved by $6 million to $598 million up from $592 million in Q1, primarily as a result of our refund that we receive from IOS and our effort to maintain positive cash flow from operation. Our non-GAAP EPS was a $0.02 loss per share compared with a $0.05 loss in Q1.

Now I would like to provide you with some guidance for the third quarter of fiscal 2008. We believe potential favorable seasonality both with the channel and with our largest OEM customer, IBM will help stabilize our business 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 summarize our comments today.

Sundi Sundaresh

Thank you, Chris. Going forward, we’ll continue to drive our operational efficiencies in the company. OEM on our channel business to take market share from competitors and focus on developing new adjacent high growth markets in storage that will help to support and scale our business.

I am proud of the hard work of our employees and the management team, and grateful for the guidance of our board of directors as we work our way through this important period of transformation for Adaptec.

I’ll now turn the call over to the operator to begin the question-and-answer session.

Question-and-Answer Session

Operator

(Operator Instructions) We will go first to Michael Coady with B. Riley.

Michael Coady - B. Riley

Thanks. Good afternoon. Hi Chris. Hi Sundi. What did you talked previously about making some more investments in the channel in terms of some sales and marketing when you talk now about your restructuring efforts being fully utilized in the fourth quarter. Could you give us an indication of how much our OpEx could drop on a quarterly basis?

Chris O'Meara

I think we are working at Apex coming down, another couple million dollars as we fully realize the savings. The majority will be coming out of the R&D areas we really rationalized our -- have rationalized our cost structure there. We continue to tune sales and marketing with more focus on our handful of region and more focus on some of our marketing programs as well.

Michael Coady - B. Riley

Okay. And the gross margin of 35% was pretty strong. Was there a function of channel mix in the quarter and do you think that is sustainable not only in our December quarter but a couple of quarters though?

Chris O'Meara

I am really going to talk with regards for one quarter but I think, if you look at the product mix and in fact, we are now getting some of the sales we probably would from our out-sourced manufacturing perspective and as well as just continually focus on our cost of sale and I think this is a starting for Q3 is sustainable.

Michael Coady - B. Riley

Okay. Thanks. And just last the, a cash flow from operations figure if you’d exclude the $49 million benefit?

Chris O'Meara

The $49 million was in the previous year. You are thinking of the tax adjustment and probably year ago.

Michael Coady - B. Riley

I am sorry. So what was the cash flow from operations guys?

Chris O'Meara

Cash flow from operations, we grew cash about $6 million and so cash flow from operations was essentially above $1 million positive, was about $5 million from the tax refund.

Michael Coady - B. Riley

Got it. Thank you.

Operator

(Operator Instruction) At this time, I want to turn the conference back to management for any additional or closing remarks.

Sundi Sundaresh

Thank you everyone for joining us today. On the recap by finding you that we have not increased focus on our business, now that we've got our agreement with Steel. We've increased our channel share. We are continuing to improve our operating results with the focus on profitability and thank you until the next earnings call.

Operator

Ladies and gentlemen, this concludes today's conference. We appreciate your participation and you may disconnect at this time.

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Source: Adaptec Inc. F2Q08 (Qtr End 9/30/07) Earnings Call Transcript
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