The more I review the numbers, the more the plan from OCZ Technology (OCZ) makes sense. The company reported Q4 2012 earnings last week that mostly disappointed investors as the stock plunged 14% the day after the report.
While OCZ Technology dramatically upped guidance for the current fiscal year that started in March, the Street was very disappointed that the company decided to push development expenses forward into Q4 2012 and Q1 2013. So even though the company guided to upward of $700 million in revenue from estimates down in the low $500 million range, investors appear more concerned about short-term losses.
What stunned investors was that research and development expenses jumped over 100% sequentially to $13 million, from $6.6 million in Q3 2011. Other operating expenses jumped as well, leading to a nearly 75% increase, or $14 million more. If the company had chosen to growth expenses at the same rate of revenue, it would have been very profitable.
Why exactly is the Street so disappointed with this plan? Either it doesn't believe the company can control costs beyond the current quarter or that the revenue guidance might be too good to achieve. The higher gross margins leave us less concerned. Either way, the Street view appears conflicted after the company just guided to significantly higher revenue than competitor Fusion-io (FIO). Somehow this relative newcomer to the solid state drive (SSD) arena has been able to surpass the vaulted market leader without getting much credit from the markets.
Fusion-io appears only interested in the high-end SSD market, as it produces higher margins while OCZ Technology snaps up customer after customer. While a good plan for impressing the Street, it has allowed OCZ Technology to sneak in and take market share, with the company recently winning business from a leading social media customer. Remember that Facebook (FB) is one of the prize customers of Fusion-io.
When one reviews the estimates for the next 18-24 months, the plan starts becoming more clear. Fusion-io is expected to continue in strong-growth mode with both earnings and revenue. The difference is that OCZ Technology plans to go from struggling to producing profits on low gross margins, to the point where massively higher revenues combined with solid sequential increases to gross margins eventually create a dramatic jump in earnings.
According to Reuters, Fusion-io is only forecast to make $0.32 for FY 2013 ending in June (see Figure 1 below), while OCZ Technology now has forecasts topping $1.00 for FY 2014 ending in February (see Figure 2 below) .
Figure 1 -- Fusion-io Consensus Estimates Analysis
|SALES (in millions)|
|Quarter Ending Jun-12||14||96.06||100.00||94.00||--|
|Quarter Ending Sep-12||14||104.14||121.20||95.20||--|
|Year Ending Jun-12||15||348.75||352.80||346.75||--|
|Year Ending Jun-13||16||473.88||547.60||396.50||--|
|Earnings (per share)|
|Quarter Ending Jun-12||16||0.04||0.08||0.00||--|
|Quarter Ending Sep-12||15||0.06||0.09||0.03||--|
|Year Ending Jun-12||15||0.29||0.34||0.23||--|
|Year Ending Jun-13||16||0.32||0.46||0.22||--|
|LT Growth Rate (%)||5||33.00||50.00||20.00||--|
Figure 2 -- OCZ Technology Consensus Estimates Analysis
|SALES (in millions)|
|Quarter Ending May-12||10||115.16||116.42||113.05||91.92|
|Quarter Ending Aug-12||10||129.97||135.96||118.00||98.40|
|Year Ending Feb-12||10||368.62||370.59||364.50||--|
|Year Ending Feb-13||10||627.92||685.00||493.00||394.94|
|Year Ending Feb-14||8||879.83||1,020.00||628.22||--|
|Earnings (per share)|
|Quarter Ending May-12||10||-0.09||0.04||-0.16||0.09|
|Quarter Ending Aug-12||10||0.02||0.11||-0.09||0.12|
|Year Ending Feb-12||7||0.05||0.10||0.01||--|
|Year Ending Feb-13||10||0.36||0.53||0.18||0.52|
|Year Ending Feb-14||8||0.98||1.40||0.72||--|
|LT Growth Rate (%)||2||17.50||20.00||15.00||--|
While the recent stock action in OCZ Technology suggests that the market thinks those estimates are impossible to hit, one needs to understand that Fusion-io is worth roughly 6 times OCZ Technology. Maybe the market is correct to question the analyst estimates jaded by the companies guidance, but the discrepancy in what the market predicts and what the company guided is as wide a gulf as investors will see.
The increasing gross margins indicate that OCZ Technology is on the right path. Higher research and development expenses were both necessary and needed. The expenses should pay off down the road.
Disclaimer: Please consult your financial advisor before making any investment decisions.
Disclosure: I am long OCZ.