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Stan Piland  

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  • 7 Reasons Why This Semiconductor Company Is A Buy [View article]
    My comment regarding SNDK was to illustrate flash prices have bottomed and are now rising...addresses your comments about declining flash prices. The voltage regulator shortage impacted Vertex 4 and Agility 4sales in the mrq. Management was quite specific about it on their conference call, and it was the reason they released bookings of $140 mil in addition to sales of $113 mil. I have no clue why you would claim the majority of OCZ's drives are PCIe cards; Only the VeloDrive, RevoDrive and Z-Drive R4 are PCIe products, ther rest are SATA. They have not yet announced many sales for the Z-Drive R4 (launched last August), but reviewers have compared it favorably with the ioDrive Duo, and it has already been qualified by MSFT. OCZ has far greater sales volumes and faster growth than FIO, so don't understand why you think FIO is the leader. Good luck with your short, but the info you are providing is bogus.
    Jul 26, 2012. 12:26 PM | 1 Like Like |Link to Comment
  • 7 Reasons Why This Semiconductor Company Is A Buy [View article]
    Comment reflects no knowledge of the company or the industry. They appear to have bottom-ticked $14 mil of NAND Flash in the last week of the quarter. If you doubt that, look at SNDK surging from $32 to $42 in the past 7 days on their positive outlook. Legacy products have been discounted to make room for new designs, yet GM still ticked higher (even as a shortage of voltage regulators reduced new Vertex 4 and Agility sales by $15-20 mile in the past Q!) In my opinion, there is zero chance of a significant inventory write-down. And the enterprise business will be very strong in 3Q and 4Q. I expect raised guidance before the F2Q is reported.
    Jul 26, 2012. 11:03 AM | Likes Like |Link to Comment
  • 7 Reasons Why This Semiconductor Company Is A Buy [View article]
    Street consensus is based on OCZ guidance and omits expected revenues for SAN replacement business (Z-Drive R4, etc.) The Z-Drive R4 was launched last August, has been in numerous trials, has awesome reviews, and is already shipping to MSFT and others. This is 50%-plus gross margin business. So my model uses F2013 revs of $918.5 mil, 30.2% GM, Sales & Marketing is 8.5% of revs, R&D is 9.8% of revs, G$A is 6.5% of revs, and Operating Margin is 5.4%. Tax rate is 12.3%. Those projections yield EPS of 64 cents. I have modest cash burn (less than $10 mil) in F2Q and F3Q, and positive Cash Flow from Operations in F4Q.

    These numbers may be a little aggressive, but not much...The enterprise business is going much better than people realize, and it's not in the guidance. The chatter about a possible takeover is probably justified, and these numbers would justify a much higher price than most people are thinking...at least $1.0 bil, and probably closer to $1.5 bil, in my opinion.
    Jul 26, 2012. 10:42 AM | Likes Like |Link to Comment
  • 7 Reasons Why This Semiconductor Company Is A Buy [View article]
    Yes Chris, that is their logic. The problem is that R&D, Sales & Marketing, and especially inventory build is completely out of whack with $630-$700 mil guidance. They burned $55 mil in cash last quarter, and it freaked out many holders who puked out the stock. If they had just told the street they were targeting $900 mil for the year, expenses and inventory build would be aggressive, but not insane. Conservative guidance is only helpful if it is consistent with conservative management.

    To be clear, I think OCZ's aggressive posture was the right thing to do, and it's good business. But it should be reflected in their guidance. If other companies are analyzing OCZ as an acquisition (and EVERYONE in this business is analyzing acquisitions), you can bet they are modeling revenues and profits well above consensus estimates. I just think they should get investors on the same page.
    Jul 24, 2012. 10:28 PM | 1 Like Like |Link to Comment
  • Is Seagate Planning Its Future With OCZ Technology? [View article]
    Does not change my views. But if STX buys OCZ, MU's SSD aspirations are toast. OCZ is already way ahead of MU in the SAN replacement market. STX bought Densbits for the TLC NAND technology, but it's at least 9 months out. OCZ has TLC NAND technology now. If STX buys OCZ, they would leapfrog everyone and be the gorilla in that nascent market. In addition, STX has a supply agreement with Samsung; MU would likely lose a big chunk of their NAND flash revenue. I think MU strategically cannot afford to let anyone else buy OCZ if they can help it.
    Jul 24, 2012. 04:11 PM | Likes Like |Link to Comment
  • 7 Reasons Why This Semiconductor Company Is A Buy [View article]
    Nice summary. But it's important to note that $630-$700 mil guidance includes no revs from the SAN Replacement business (Z-Drive R4 etc.) or from two controllers to be launched later this year. More realistic forecast for this year (F2013) should be over $900 mil revs and 60-65 cents in eps. I agree the stock is a buy.
    Jul 24, 2012. 03:11 PM | 1 Like Like |Link to Comment
  • Is Seagate Planning Its Future With OCZ Technology? [View article]
    Again it sounds like you confuse cyclical recovery with growth, but the two are fundamentally different. Good luck on your short; I think you will need it.
    Jul 24, 2012. 02:14 PM | Likes Like |Link to Comment
  • Is Seagate Planning Its Future With OCZ Technology? [View article]
    By that logic, it sounds like you need to forecast when SSDs will completely replace HDDs, what the sales and margins will be at that time, and who the remaining players will be. Then you can assign a 3-5X multiple on those numbers and discount to a current price. My guess is that it would take at least 5 and maybe 10 years, and after the industry has consolidated to 2 or three players, they can earn $7-$8 per share and pay a 4% dividend like STX does. Don't forget, part of the reason HDD suppliers trade at such low valuations is because SDDs are forecast to gobble up their market share.

    Personally, I can't forecast that far out. But I do not think SSDs will completely replace HDDs, particularly in the enterprise. What I think will happen is that SSDs will gain share, and sales and profits will grow very quickly, which argues for much higher near-term multiples.

    By the way, I actually like buying stocks when current valuations are lower than FUTURE valuations...it's the essence of value investing, and often works quite well.
    Jul 24, 2012. 12:39 PM | 1 Like Like |Link to Comment
  • Is Seagate Planning Its Future With OCZ Technology? [View article]
    It doesn't sound like you distinguish between cyclicality and growth. The HDD industry is mature; demand rises and falls with the business cycle, although some believe the cloud will drive faster secular demand growth. The industry has consolidated down to two companies whch control 90% of the market, so pricing should be more stable in the future. Arguably STX and WDC are cheap and deserve to be higher. (I would note that STX has almost tripled since last October.) But mature, cyclical industries ALWAYS trade at low P/S and P/E ratios than growth stocks, because earnings go up and down, but do not grow much.

    In contrast the SSD industry is in its infancy and at some point will take meaningful market share from HDDs. The HDD replacement industry is estimated at $48 billion (revs), and the SAN replacement business could approach $20-$25 billion. And it's just getting started, so valuation must be based on sales and profit estimates several years into the future.

    I disagree that OCZ needs to do a 20 mil share offer. They still have $43 mil in cash, a $100 mil credit facility, and $125 mil in inventory. My model shows slightly negative Cash Flow from Operations for two more quarters, but should turn cash flow positive in the F4Q2013. Moreover, I have them generating a whopping $148 mil in cash from operations in F2014 ( Feb fiscal year.) Guidance for OCZ is worthless because it doesn't include any of the new enterprise business they invested to build. They are already shipping to Microsoft Azure and others, but it's not in the guidance. I think this year's revs will exceed $900 mil, and eps should approach 65 cents. If they can execute (admittedly a big question mark with such rapid growth), next year should see revs exceed $1.5 bil, fully taxed Net Income exceed $150 mil, and EPS over $2.00 per share.

    OCZ has been first to market in almost every segment of the SSD industry. They have the broadest product portfolio, the biggest sales volume, their own proprietary controllers, their own Flash Transition Layer, and their own Adaptive DSP technology. And most important, the investments have already been made. An acquirer who pays $1.5 bil for OCZ would find the deal to be acretive within a couple of quarters. But equally important, if MU does NOT buy OCZ their aspirations to be a major SSD player would be severely impaired, and they would likely lose a big chunk of their flash sales.

    So the potential for a bidding war argues for a much higher valuation in my opinion. I would vote my shares against any deal below $1.5 bil.
    Jul 24, 2012. 09:24 AM | 2 Likes Like |Link to Comment
  • Economists Menzie Chinn and Jeffry Frieden argue that as debt is the major factor dragging on economic growth, inflation should be allowed to rise. This "would reduce the real burden of debt on households, corporations and governments, spurring both investment and consumption." However, while the Chicago Fed's Charles Evans supports the idea, Ben Bernanke doesn't. (Summary)  [View news story]
    "By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some....The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose."

    John Maynard Keynes
    Economic Consequences of the Peace, 1920
    Jul 22, 2012. 10:34 AM | 10 Likes Like |Link to Comment
  • Is Seagate Planning Its Future With OCZ Technology? [View article]
    Theo Valich is credible but the price talk is way too low. OCZ has guided to $630-$700 mil revs for F2013, NOT including any SAN replacement revenues (Z-Drive R4, etc.) or revs from the new controllers. But they are already shipping to Microsoft Azure cloud platform, and other enterprise wins are imminent. Revs for F2013 will probably top $900 mil, eps should be 60-65 cents, and cash flow from operations drain should moderate and turn positive in 4Q. They have $125 mil in inventory and $43 mil in cash as of most recent Q. A deal for STX to buy OCZ would have to exceed $1 bil. And if a bidding war ensues (with MU or others), a final deal at $1.5 bil would not be unjustified, in my opinion.
    Jul 21, 2012. 01:34 PM | 1 Like Like |Link to Comment
  • Tech Report has been tracking prices for solid-state drives (SSDs) sold by OCZ, Intel (INTC), and others since their 2011 releases, and estimates the average drive has seen its price decline 46% since launch time, thanks in large part to plummeting NAND flash memory prices. That has fueled growing SSD use within PCs (I, II), and is one of the reasons (among others) why hard drive giants Seagate (STX) and Western Digital (WDC) have seen their valuations reach dirt-cheap levels.  [View news story]
    Would recommend you check out the Savitz interview with Luczo provided by Micah on STX. I view STX much as I would VZ or T before their recent rise. The stock is incredibly cheap (2.5X F2013 consensus estimates), generates boatloads of cash, yields over 4%, and buys back a ton of stock. The demise of consumer HDDs will happen slowly and is more than adequately discounted in the price. And there will continue to be a significant role for enterprise HDDs within a tiered architecture storage environment for the foreseeable future. But most important, the industry has consolidated down to two players who control over 80% of the market. Without a price-spoiler to crush pricing in a downturn, cash flows should be MUCH more stable in the future...which in turn should justify a higher valuation. So I trade around a core position...sold a good bit over $30 and bought it back a couple weeks ago.

    I also expect STX and WDC to be more aggressive in the SSD business longer term. But there have been so many new players in SSDs recently, that has made sense to wait for a shakeout before spending a lot of money on acquisitions. That window may be closing soon, as clear IP leaders have started to emerge. I actually think an STX/OCZ combination would make a lot of sense for STX. But I think OCZ shareholders can make more over time if OCZ stays independent.
    Jun 24, 2012. 11:48 AM | Likes Like |Link to Comment
  • Tech Report has been tracking prices for solid-state drives (SSDs) sold by OCZ, Intel (INTC), and others since their 2011 releases, and estimates the average drive has seen its price decline 46% since launch time, thanks in large part to plummeting NAND flash memory prices. That has fueled growing SSD use within PCs (I, II), and is one of the reasons (among others) why hard drive giants Seagate (STX) and Western Digital (WDC) have seen their valuations reach dirt-cheap levels.  [View news story]
    This doesn't sound like new news. Declining NAND and SSD prices have punished share prices for hard drive makers (STX, WDC), SSD makers (OCX, STEC, FIO, and LSI) and flash producers (SNDK, MU) all spring. But SSD growth started to go parabolic last year, and that growth is still accelerating. Revenue estimates for OCZ are probably at least 20-25% too low for this calendar year, and the stock is trading at about 5X my C2013 earnings estimate. If they were smart, STX would buy OCZ to boost their SSD exposure. But the stock is so cheap and business is so good, I don't think CEO Petersen would sell. At these levels, neither will I. Disclosure: I own OCZ and STX, and I just started buying MU.
    Jun 23, 2012. 07:03 PM | 2 Likes Like |Link to Comment
  • Fusion-io: Centralize Your Portfolio On Data Decentralization [View article]
    FIO is still a cult stock and overvalued, although not as overvalued as it was. I understand they have great technology. But they still get about 80% of revs from 4 big customers, and gross margin has been under pressure past two quarters. If enterprise adoption is so great, why aren't the revenues already growing as fast as they are at OCZ? Part of the reason is that OCZ offers many enterprise customers a better value proposition.

    OCZ has bigger revenues, is growing faster, has a more diversified product suite, and is getting great traction in the enterprise with the new Z-Drive R4. Moreover, OCZ has steadily moved up the value chain with its software and controller acquisitions, so gross margins are rising. OCZ trades at less than 50% of C12 revenues and about 5X C13 eps compared with 6.0X revs for FIO.

    In my opinion OCZ represents a much better investment.
    May 11, 2012. 12:19 PM | Likes Like |Link to Comment
  • Key On The Gross Margin Improvements At OCZ Technology [View article]
    Great note; thanks for writing! I agree with your thesis in every respect. I would add that, with the success of the new enterprise products, the decision to step up R&D spending and beef up the enterprise salesforce was the right thing to do, even though it pushed profitability out for a few quarters. In my opinion, OCZ management has executed flawlessly during the year that I have followed the company.

    Regarding gross margins, FIO's GM has drepped from 60%-plus last summer to 51.1% in the Dec Q and 52.1% in Mar Q. Part of this is due to a new product transistion; they see it stablizing in mid 50s. I think FIO's valuation reflects its marquis undrwriters and the presence of Steve Wozniak. It is NOT reflective of near-term expected growth.

    OCZ's GM is lower, as consumer and HPC SSDs are lower margin products. However OCZ's GM has been migrating higher and reflects (1) selling the last of the legacy storage module products in F3Q, (2) new supply agreement and wafer processing capability which will add roughly 400 bps, (3) growing presence in enterprise markets, and (4) higher value-added firmware with the Indilinx controllers and SANRAD acquisition. These efforts to vertically integrate and and move up the value chain should push GM to management's 30-40% target within the next 12 months. Important to note that the Z-Drive R4 PCIe product launched last August and has a 50%-plus GM. Enterprise orders for that product are largely responsible for the higher revenue guidance.

    Now that earnings are winding down, I have some work to do on my OCZ model, but I'm pretty confident that Fiscal 2013 revs will be at least $700 mil and F14 (and Calendar 2013) earnings should be north of $1.00 per share. Disclosure: I am long OCZ.
    May 10, 2012. 12:48 PM | 1 Like Like |Link to Comment
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