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

Executives

Bonnie Mott – Senior Manager, IR

Ralph Schmitt – CEO

Analysts

Aaron Rakers – Stifel, Nicolaus

Andrew Nowinski – Piper Jaffray

Rich Kugele – Needham & Company

Kulbinder Garcha – Credit Suisse

OCZ Technology Group, Inc. (OCZ) F2Q13 Earnings Call October 10, 2012 5:00 PM ET

Operator

Good day, ladies and gentlemen and welcome to the OCZ Technology Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session with instructions following at that time. (Operator Instructions) And as a reminder, this conference is being recorded.

Now, I’ll turn it over your host, Bonnie Mott, Senior Managing of Investor Relations of OCZ Technology. Please begin.

Bonnie Mott

Good morning and welcome, everyone. On the call are Ralph Schmitt, CEO; Arthur Knapp, CFO; and Alex Mei, our Chief Marketing Officer. They will discuss certain preliminary financial results regarding our second fiscal quarter. Following their formal remarks, we will open the floor to a few questions.

Please note that they will be discussing preliminary results and remain subject to management’s review and the review by the company’s independent accounting firm. Before I turn the call over to them, I need to remind our listeners that the information is presented as of October 10, 2012. Please keep in mind that while being made available for listening after today, the information is current only as of today.

Remarks made during this call may contain forward-looking statements that involve risks and uncertainties. Forward-looking statements on the call are made pursuant to the Safe Harbor provisions for the federal securities laws.

Information contained in the forward-looking statements based on current expectations and are subject to change and actual results may differ materially from forward-looking statements. Some of these factors that could cause actual results to differ are discussed in the reports filed with the SEC. These documents are available on OCZ’s website www.ocztechnology.com.

With that, I will turn the call over to Ralph Schmitt.

Ralph Schmitt

Thank you, Bonnie. Good morning. I want to first of all thank the board for their confidence and trust in my ability to take OCZ through the next phase of the company’s development. For me, this is amazing opportunity to lead a company that has quickly become a leader in one of the fastest growing markets in the technology sector.

The tenets of our business moving forward will be simple. Our actions will be based on innovation, quality and profitability. The DNA of OCZ is in a steadfast focus on time to market and performance. That’ll remain unchanged as we continue to use that focus to drive our efforts into the marketplace. We will innovate to continue to differentiate our products. Our focus will be to further penetrate the OEMs and especially the enterprise market.

OCZ has a polarizing image. There are relentless fans and equally relentless detractors. It is my goal to continue to do the things that make people so passionate about this company. We will build the highest performing and reliable products in our target markets. We’ll fix the things that have been the source of our very vocal detractors.

Credibility and consistency will be paramount, and we’ll talk less and execute better. My approach is to empower our employees to take the appropriate risks, make decisions and be accountable for their actions. When they succeed as individuals, we will succeed as a company.

I want to thank Alex Mei for stepping in as the Interim CEO. He is an amazing leader and rallied the team to start this transition. He has made great progress in beginning a significant impact change even in the past few weeks, and I look forward to partnering with him and the rest of the talented OCZ team to make a meaningful shift in our business.

So, besides my quick introduction, the purpose of this call is to give investors some insight as to the press release this morning in which we filed for an extension to deliver our Form 10-Q. My first day’s a challenging one, as I’m trying to ensure an appropriate start by being transparent, but have some inexact news to share with investors. As I stated, credibility is the key to building a relationship between the company and its investors. We felt it necessary to pass along information that was material as soon as we believe it could be quantified.

The September 5 updated revenue guidance cannot be relied upon. There will be material changes due to customer incentives that were in excess of what was normal and customary in the past. While the good news is our control procedures found the issue before reporting, it however was not sufficient enough to prevent this from happening.

There was such an emphasis in Q2 for management to grow market share at all cost, hence extraordinary incentives were undertaken. We need additional time to ensure that all the proper accounting treatment has been applied to this event. These incentives will also have a significant impact on our gross margins and will make our loss much larger than is expected. Of course you should assume that our cash position has also declined and we’ve accessed our credit facility. We will clearly discuss specific numbers once the earnings call is rescheduled. It is our goal to file our Q and have the call as expeditiously as possible.

So with that, I’ll open the call up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) First question is from Aaron Rakers of Stifel, Nicolaus. Your line is open.

Aaron Rakers – Stifel, Nicolaus

Yeah. Can you hear me?

Ralph Schmitt

We can hear you now.

Aaron Rakers – Stifel, Nicolaus

Okay, sorry about that. Thanks for taking the questions. So first, can you be a little bit more precise on what exactly customer incentive programs means? How much of an impact this might be and whether or not this impact would also require a restatement of prior financials?

Ralph Schmitt

So first and foremost, I believe, Aaron, your first question was around what customer incentive is. So there are rebate programs and some price adjustments that tend to happen throughout the course of business in a quarter depending on the market conditions.

Then in regards to your last question which is in regards to restatement, we currently are still under review process and so far have not had any indication that there will be a restatement.

Aaron Rakers – Stifel, Nicolaus

And then the follow-up question if I can. You talk about actually accessing your line of credit, your cash position actually declining relative to – I’m assuming you’re referencing the May quarter. Can you quantify that at all? And as far as the credit facility, I think there is specific EBITDA covenants as part of that Wells Fargo agreement, if you’ve accessed that, is there not the potential risk of triggering those covenant issues given the EBITDA targets that are laid out?

Ralph Schmitt

Aaron, I’m trying to get all your questions answered effectively. So, first and foremost, on the credit facility, we’re still discussing the potential impact of these financial results and that’s in regards to our bank agreement. So it would be inappropriate to go through that now, but we will clearly go through that at the earnings call.

Aaron Rakers – Stifel, Nicolaus

And what is your cash position?

Ralph Schmitt

Again, because of where we are in getting these financial results finalized, it would be inappropriate to go through that at this point.

Aaron Rakers – Stifel, Nicolaus

Okay. I’ll get back in queue. Thanks.

Ralph Schmitt

Thanks, Aaron.

Operator

Thank you. Our next question is from Andrew Nowinski of Piper Jaffray. Your line is open.

Andrew Nowinski – Piper Jaffray

Hi, thanks. Can you just help us understand what triggered these customer incentive programs? Were they automatically triggered? And then are these programs fixed now so that this issue will be isolated to this quarter or is there more risk or liability to future quarters with this customer incentive program?

Ralph Schmitt

So, the customer incentive programs are a typical way of doing business and we’ll continue – we’ve done some redesigning of them to identify in a more timely basis and record on a more timely basis the effects of those programs. So, those are critical changes. As we mentioned in the release there, it will be a material weakness and with that will come a description of what the root cause and corrective action will be on a go-forward basis.

Andrew Nowinski – Piper Jaffray

All right. Then if they’re essentially a rebate program, I guess, why would that impact your gross margin as well? Doesn’t that impact your sales and marketing line?

Ralph Schmitt

Yeah. It’s a good question. There is – again, because it’s not finalized it’s a complexity there that we – will affect both revenue and gross margin line. So it depends on obviously how big those rebates were and the total impact to the whole P&L.

Andrew Nowinski – Piper Jaffray

All right; thanks. I’ll get back in queue.

Ralph Schmitt

Sure.

Operator

Thank you. Next question is from Rich Kugele of Needham & Company. Your line is open.

Rich Kugele – Needham & Company

Thank you; good morning. A few questions from me, I guess first just from an accounting perspective, do you expect there to be as part of your, I guess, final Q, when it comes out anything to do with the inventory, any write-downs expected, anything that you’re expecting on that side? There has been some inconsistency out there in the market about whether or not there was in fact a shortage or how it affected you or what type of mix you had. So if you have any color there.

Ralph Schmitt

Sure. Yeah, that is something that we’re evaluating or have evaluated as well. And there is a good chance that we will be making some adjustments in regards to that. And again, the particulars are best discussed once the final numbers are out.

Rich Kugele – Needham & Company

Okay. Secondly, was the CEO search one – a long one or was the intention early on to move you down from the board?

Ralph Schmitt

Excellent question. So, yes, there was a search done. I don’t know if I could quantify it as a long one. We’ve been as a board for I guess an extended period of time looking at candidates, knowing that there was going to be a change in the near future. So the – because of some of these issues that we’re dealing with here, clearly we felt we needed to move in a much more expeditious fashion, and hence that played into the decision-making process and the results that you see today.

Rich Kugele – Needham & Company

Okay. And then just lastly actually in that vein, because you have been on the board for a year – over a year, that where do you see the company best strategically fitting in the market over the next, whatever you want to call it, one to two years? What have you guys right versus wrong and how can you implement that with the tools you have in hand?

Ralph Schmitt

Excellent question. So, first and foremost, we are in the midst of rationalizing the product line. The company itself has done amazing job of covering a broad portfolio into almost every market segment that exists. And based on the size of the company, capital structure of the company, that’s just an impossibility. So, clearly the most commoditized areas, what’s called sort of the valued part of the product portfolio, and we’ll be migrating more and more away from that and more into the high-end of both the client market and then obviously driving more into the enterprise market as well.

The positive here is is clearly having a lot of the technology ourselves. The controller technology as well as the software, firmware aspect of things and the knowledge around flash management is very expensive and will be used to differentiate the company. We’re going to be going after differentiation because we obviously know we have some very large competitors that have other strengths such as, obviously, flash themselves and so, we’re going to be playing to our strengths, but one of most – biggest changes you’ll see is a more focused approach to the product.

Rich Kugele – Needham & Company

Okay. Thank you.

Operator

Thank you. The next question is from Kulbinder Garcha of Credit Suisse. Your line is open.

Kulbinder Garcha – Credit Suisse

Thank you very much. I was just wondering you cited that there are some material weaknesses that you’re going to report in your 10-Q and you potentially might have to review the inventory. How comfortable are you with general controls process, the accounting controls process of the company at this point? And then I have one follow-up. Thank you.

Ralph Schmitt

It’s a great question. So clearly the accounting control process I believe is very solid and strong because it had identified this issue and there are some other business processes within the organization, which do need to be upgraded and you’ll see that as part of the fix to the material weakness as being key part of some of the changes that we’ll make.

Kulbinder Garcha – Credit Suisse

And then, I just wanted to follow-up, there were some large Web 2.0 deals that OCZ have been working on for the past year. Can you talk about those coming through over the course of the next year, and where you guys are on that?

Ralph Schmitt

Yeah. I guess we’re making significant progress with some of those opportunities. I’m really reticent to talk about specific customer and opportunity situations except to state as those customers allow us to disclose that information, we will clearly do that. Those are key focuses for us and we’re shipping into those type of end applications today, and we expect that part of our business to continue to grow.

Kulbinder Garcha – Credit Suisse

Thank you.

Operator

Thank you. Our next question is from Aaron Rakers of Stifel, Nicolaus. Your line is open.

Aaron Rakers – Stifel, Nicolaus

Just for the follow-up, I want to build on that last question, to be specific, just to kind of lay out everything that’s going on in the story, the company had specifically called out Microsoft as an opportunity in the past. Can you talk about whether or not you can confirm that at this point and any specifics around your PCIe business particularly?

Ralph Schmitt

Aaron, appreciate the question and understand the detail that you’d like, but I’m not going to comment on that particular customer.

Aaron Rakers – Stifel, Nicolaus

Okay. And then, the other question was based on NAND flash itself, when you guys had obviously initially pre-announced you referenced availability of NAND flash as one of the important factors, where do you stand on that? Was that an impact on the revenue, and if so, where do you stand on Barefoot 3 and the Vector product as we move forward?

Ralph Schmitt

Thanks, Aaron. Yeah, so in regards to what was disclosed before in regards to NAND being an issue for the company, that is true. I state that it was a little more complicated than that. We have been single or sole sourced for a NAND supply. We also had some execution issues internally in regards to forecasting the amount of product that we needed, and hence as the supply got a little tighter, our suppliers just could not be as flexible as we needed them to be. We all know that the demand and supply ratios have basically come more in line. And so, again you have to be very good from our perspective on assuring that we’re aligned with our suppliers in that area. And so, we’ve made some – again, some process changes to try to impact that moving forward, because we’re as much to blame here from an execution perspective as our suppliers are.

Aaron Rakers – Stifel, Nicolaus

And Barefoot 3 and Vector?

Ralph Schmitt

So Barefoot 3 has come out where we’ve done a lot of internal verification of the product. It looks great. And we’re on schedule as far as the release of Vector goes later on this quarter.

Aaron Rakers – Stifel, Nicolaus

Great. Thank you.

Ralph Schmitt

Thank you.

Operator

Thank you. This ends the Q&A portion of today’s conference. Like to turn the call over to Ralph Schmitt for any closing remarks.

Ralph Schmitt

Thank you. We’re committed to supporting our customers, and the team has already made significant progress in transforming the business when it comes to streamlining the company’s offerings, discontinuing value and non-core products. The team has also focused the strategy and resources on the enterprise. We’re here to generate value for our shareholders and we’ve failed at that mission. We’ve lost credibility, but we’ll gain it back through consistent execution that will achieve effective results. The business needs to be run to provide predictable, sustainable and profitable results, while this will not happen overnight as our commitment to make this happen in a very short order. We’ll speak to you more in detail at the upcoming earnings release call. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Have a wonderful day.

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: OCZ Technology Group's CEO Discusses F2Q13 Results - Earnings Call Transcript
This Transcript
All Transcripts