Adaptec, Inc. F1Q09 (Qtr End 06/30/08) Earnings Call Transcript

Aug.25.08 | About: ADPT Corp (ADPT-OLD)

Adaptec, Inc. (OTC:ADPT-OLD) F1Q09 (Qtr End 06/30/08) Earnings Call Transcript July 31, 2008 4:45 PM ET

Executives

Nicole Noutsios – IR

Sundi Sundaresh – President and CEO

Mary Dotz – VP and CFO

Analysts

Mike Bradford [ph] – B. Riley & Company

Brian Freed – Morgan Keegan

Operator

Thank you for joining this Adaptec first quarter 2009 earnings release conference call. This call is being recorded. For opening remarks and introductions, I would like to turn the call over to Ms. Nicole Noutsios. Please go ahead, ma'am.

Nicole Noutsios

Thank you, operator. And good afternoon, ladies and gentlemen. During today's call, we'll first hear from Sundi Sundaresh, our President and CEO, followed by Mary Dotz, Adaptec's Chief Financial Officer. After Mary'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 our projections of the financial performance of the company based on our current expectations, including a projection of operating results for the second quarter of fiscal 2009.

These statements are subject to significant risks and uncertainties that could cause our actual results to differ materially from those expressed in these forward-looking statements. We refer to you the risk factors section in the documents that Adaptec has filed with the SEC. Specifically, in our most recent Form 10-Ka which contains 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 Web site at www.adaptec.com, under the IR section.

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

Sundi Sundaresh

Thank you, Nicole. Good afternoon and thank you all for joining us for our first quarter 2009 earnings call. During this call, we will briefly review our business and product execution, and then I'll turn the call over to Mary to outline the progress we made to improve our fundamentals.

To cut to the chase, we had a good quarter. I'm pleased with our execution and as our financial results show, we continue to make steady progress on our operating model. Mary will provide a more in-depth financial summary, but I would like to share a few highlights from the quarter to show our progress.

Our first quarter revenues were $31.5 million, at the high point of our range once you exclude the Snap business. We've been improving our margins, which were in line with our expectations at 47%, up significantly from 32% in the first quarter of fiscal 2008.

Our non-GAAP EPS from continuing operations was a $0.04 income per diluted share, $0.02 above what we guided for the quarter. This also compares very favorably with a $0.05 loss per share for the same period last year.

Lastly, our balance sheet continues to be a core strength, allowing us flexibility with our strategic opportunities. The divestiture of the Snap Server business was another operational step the company executed to further streamline the business. On June 30th, we announced that we sold the brand and all assets related to the Snap Server NAS appliances to Overland Storage for a gain of approximately $5.8 million. Taking this step will be good for our business model and help us with our goal of maintaining profitability.

At a high level, it's important to note that we could not scale the business without significant investments in sales and marketing and the business had a negative contribution margin at current levels, which put a drag on our business fundamentals. Further, streamlining the business will allow us to focus on strengthening our leadership position in the Unified Serial RAID controller business.

We continue to make solid progress in the channel, and the company has shown steady improvements with our serial products. Sell-through demand for our serial products grew 12% quarter-over-quarter and 62% year-over-year.

In addition, over the last year, Adaptec's channel program has expanded to include new relationships with more than 20 strategic storage ecosystem partners worldwide and in the quarter we added – we were added to the CDW Sapphire Partner Program. This is a testament to the value Adaptec places on the channel.

The Sapphire Partner program will provide Adaptec with the opportunity to work closely with CDW to offer specific training and recommendations regarding Adaptec product and market benefits.

We're maintaining a rapid pace of innovation and in the quarter. We unveiled a new family of entry level Unified Serial RAID controllers. The new, low profile Series 2 RAID controllers built on the same architecture used in the successful Series 5 RAID controllers provide significant performance enhancements and scalability to low cost data storage systems.

The Series 2 controllers eliminate the limitations of software rate based solutions commonly found in entry level systems, delivering a wide range of advantages for inexpensive SATA and SAS disk and tape drive systems.

As I'm sure you're all well aware, the issue of green IT, specifically reducing a company's IT energy costs and minimizing its carbon footprint is becoming increasingly important to many of our customers.

As the leading supplier of RAID controllers, finding ways to make storage solutions more efficient – more energy efficient, is not only good for the environment, it can be good for our bottom-line. We have important initiatives underway to take advantage of this growing trend. You'll hear more about them later in the year.

With that, I'll turn the call over to Mary to provide a more detailed financial overview.

Mary Dotz

Thank you, Sundi, and welcome everyone. Before I start, I'd like to reiterate that all the comments here today are based on non-GAAP financial measures, exclusive of discontinued operations and exclude results from the Snap business unless otherwise noted. I encourage you to refer to the reconciliation of GAAP to non-GAAP financial results that is included with the press release and posted to our Web site.

During the first quarter of our fiscal 2009 year, we have continued to make progress on both financial and operational fronts. As we take proactive measures to streamline the business, the expense reductions continue to flow to Adaptec's bottom line.

I'm pleased to report that for the third quarter in a row, we've reported positive net income. Further, our balance sheet remains strong and provides us the needed flexibility as we move through the company's transformation and for other strategic initiatives such as the stock repurchase program we announced today.

Our first quarter net revenues were $31.5 million. I'm pleased to report that this was well within our guidance of $30 million to $35 million, which had originally included our Snap NAS business, which is now reflected in discontinued operations. The net revenues are down from the $35.6 million in the fourth quarter of 2008, primarily due to the continued decline of our OEM business.

Our top customer, IBM, represented 35% of our net revenues while our largest distributor, Ingram Micro, represented 11% of our net revenues.

We had strong gross margins in the first quarter of fiscal 2009, up slightly to 47% from 46% in the fourth quarter of fiscal 2008, and up significantly from 32% in the first quarter of fiscal 2008.

We continued to improve our component cost and had a favorable product mix this quarter.

As mentioned in prior earnings calls, we will continue to face decreasing revenues, as our OEM revenues decline under the continued transition of parallel technologies to serial solutions. Despite our declining revenues, we will continue to create more operational efficiencies and maintain very tight fiscal control so that we effectively manage this transition.

During the first quarter of 2009, we initiated another restructuring effort and incurred charges of $1.8 million. We anticipate additional restructuring charges of $2 million within the next quarter in order to complete these efforts and further align our operating expenses to revenue.

Our progress is being realized in our non-GAAP net income and EPS. For example, in Q1 '09 our non-GAAP net income, which is exclusive of discontinued operations, was $4.8 million in comparison to a loss of $5.6 million in Q1 '08 and net income of $6.6 million in Q4 '08.

In fiscal Q1, our non-GAAP EPS was a $0.04 income per diluted share, compared with a $0.05 loss per share for the same period last year and a $0.05 income in the fourth quarter of 2008.

Additionally, we had profit from operations exclusive of interest income for the first time in several quarters. We had positive operating cash flows from continuing operations of $7.5 million during fiscal Q1, driven by our operating profit.

Net interest and other income was $4.4 million for the quarter, down from last quarter, due to many of our investments maturing and having to be reinvested at the lower prevailing rates.

As noted earlier, our overall balance sheet continues to improve and is a core strength for Adaptec. We ended the quarter with $632 million in cash. During July, we purchased $69.7 million of our $225 million in convertible bonds. Our total estimated improvement to our 2009 P&L as a result of this bond repurchase will be approximately $700,000. As previously stated, our expectation is that all of our bonds that remain outstanding will be put to us in December of this year.

Today, we also announced a $40 million stock repurchase program. We've steadily improved our fundamentals and we remain focused on building for the future and felt that initiating a repurchase program demonstrates our belief in the long-term value of our stock.

Now, I'd like to provide you with guidance for the second quarter of fiscal 2009. We expect to continue to experience decreasing OEM revenues and the transition of parallel SCSI technologies to serial solutions and further expect these factors to be partially offset by growth in our channel business.

As a result, we expect revenue in the range of $27 million to $30 million as mentioned earlier, keeping the company at non-GAAP EPS positive and maintaining tight fiscal control, our goals of the company.

We will continue to improve expenses and expect to report non-GAAP EPS in a range of breakeven to $0.02 income per share. Our operating cash flow should be slightly positive. As is the case for the last few years, we will continue with our cost reduction measures in order to ensure that our expenses are aligned with our reduced revenue level.

Now I'd like to turn the call back over to the operator for your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We'll go first to Michael Coady with B. Riley.

Mike Bradford – B. Riley & Company

Hello?

Sundi Sundaresh

Hi, Michael.

Mike Bradford – B. Riley & Company

Hello, this is actually Mike Bradford [ph] calling in for Michael.

Sundi Sundaresh

Okay.

Mike Bradford – B. Riley & Company

Had a question about your working capital. Was just curious, what changes do you expect as a result of the sale of the Snap business going forward?

Mary Dotz

I think if you look in terms of the working capital needs of the company, certainly as Sundi mentioned, the Snap business had been a drag on our fundamentals and since we weren't able to really invest further in terms of sales and marketing, it was prudent at that time for the company to go ahead and sell the business. As you know, we don't give guidance out past a quarter, but again, we expect that, that sale of that business to help stabilize our working capital and I think as I mentioned, I think on a cash flow from operations basis, we should probably be slightly positive next quarter.

Mike Bradford – B. Riley & Company

Okay. And can you give any more color into your cash position the end of next quarter?

Mary Dotz

Again, I think since our operating cash flow is going to remain either flat to slightly positive, and as you did see, we repurchased some of our bond, so that will have an effect by it. It's going to go down, based on that. But other than that, other than bond repurchases, again, our cash should stay relatively stable.

Mike Bradford – B. Riley & Company

Okay. And can you comment on the sequential decline from the – in revenues from the Snap business and declines with IBM?

Mary Dotz

So, again, as the company has been reporting for the last few quarters, as the IBM business – the platform that they're on transitions, we're going to see a continued decline.

Mike Bradford – B. Riley & Company

Okay. And then as far as the Snap business?

Sundi Sundaresh

Well, that's been divested, so there's no future Snap revenues.

Mike Bradford – B. Riley & Company

Yes.

Sundi Sundaresh

In our reported numbers for this quarter, there were no Snap revenues. It was recorded in discontinued operation.

Mary Dotz

So the guidance that I'm giving you now and all the comparatives that we've given you are excluding Snap.

Mike Bradford – B. Riley & Company

All right. Well, I'll jump back in queue.

Mary Dotz

Thank you.

Operator

We'll take our next question from Brian Freed with Morgan Keegan.

Brian Freed – Morgan Keegan

Good afternoon. Thanks for taking my call. With respect to your progress in finding a silicon partnership in the past, Sundi, you've indicated you're working to find silicon partnerships and you need to. Can you kind of update on what's the progress on the strategic front there?

Sundi Sundaresh

Well, we have nothing specific announced at this time. We continue to look for partners and depending on the products in our family, we have chosen different silicon vendors to be our vendor for those platforms and we have other products in the pipeline where the vendors will be different from the ones that are used in the Series 5 and Series 2. And in the future, when the 6-gig market gets ready, we'll have other partners.

Brian Freed – Morgan Keegan

And secondly, in terms of timing of 6-gig, we're definitely seeing samples out there and some OEMs actually adopting 6-gig. Are you still feeling comfortable with your ability to deliver at least sample products and ultimately production products on pace with the market adoption?

Sundi Sundaresh

We believe we can. Keep in mind that in our environment and with the business we have, our focus is really the channel. The OEM business is being executed directly by those silicon vendors and they usually lead the market. And they will also be providers of silicon to us as we execute in the channel.

Brian Freed – Morgan Keegan

Okay. And lastly, in terms of the roll-out of the next generation Intel platform and the roll-off of your large OEM design win, do you have any more insight into the timing and duration of that decay?

Sundi Sundaresh

Well, that's still a hard one to predict. If you recall, when we had the announcement last year about the transition, we said 12 months to 18 months and almost a year into it at this stage, I'd probably stay it's in the six to 12 month range. It's both a function of where the Intel transition happens and a function of when the OEMs start cutting over their platforms.

Brian Freed – Morgan Keegan

Okay. Great. And lastly, Mary, if you could provide a little more detail in terms of – with respect to the hard cost savings out of the Snap side of your business, the number of employees that left. I know it was in the press release, but just remind us and kind of what the – what was the kind of trend-wise in Snap in terms of loss per quarter in millions, if you don't mind.

Mary Dotz

Sure. We reported previously that I think in terms of our actual revenues for the quarter, I think we had – we would have had Snap in our guidance of around $3 million or so. But – so if you look at that, that will of course, go away. At the end of Q1, in terms of employee headcount, the company had around 290. So with the Snap divestiture, our headcount has come down. And what I would encourage you to do in terms of getting things in terms of a comparative without the Snap is that in our comparative financials that we're filing, everything is excluding now the Snap business, so it's pretty easy for you to look at the impact that it would have had on our business.

Brian Freed – Morgan Keegan

Okay, great. And one final question, the engineering agreement you guys announced a week or so ago, does that extend to any engineers that are local or is that strictly in Bangalore?

Sundi Sundaresh

That's strictly in Bangalore.

Brian Freed – Morgan Keegan

Okay. Thank you.

Operator

(Operator instructions) And we have a follow-up question from Michael Coady with B. Riley.

Mike Bradford – B. Riley & Company

Hi, guys.

Sundi Sundaresh

Hi.

Mike Bradford – B. Riley & Company

Question, as far as OpEx goes, do you see it bottoming out in Q3 or when do you think you could get to a bottom level?

Mary Dotz

Well, I think the company has obviously over the last several quarters initiated many, many initiatives to get their expenses in line, things recently of course as the divestiture of the SSG business. Again, since we don't give guidance out past the following quarter, I can't really comment on that. But I can say that I think we've continued to streamline our operations. Since we're a tech company, of course, we're going to continue to invest in R&D and invest in things going forward. So, I think the company's already done a lot, if you will, in terms of their expense reductions, so–

Mike Bradford – B. Riley & Company

Okay. And can you comment on any possible acquisitions down the road or any color?

Mary Dotz

Well, as you know, we're going to continue to look at all the strategic opportunities available to us for the company, but we can't really comment.

Mike Bradford – B. Riley & Company

Okay.

Sundi Sundaresh

At this point.

Mike Bradford – B. Riley & Company

Okay. Thank you very much.

Operator

And we have no additional questions at this time. I'd like to turn the conference back over to Sundi for any closing remarks.

Sundi Sundaresh

Thank you, everyone. We had a good quarter but we still have a lot of work ahead of us and I'm pleased with our steady progress on a number of fronts. We continue to innovate and you should expect to maintain a strong pace of innovation in the future. And further, to regain OEM traction, the company is still exploring relationships with ASIC companies. Overall, I feel that Adaptec has a clear focus and a solid foundation to build our future. Thank you, everyone.

Operator

This concludes today's conference. We thank everyone for their participation. You may now disconnect your lines.

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