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OCZ on July 6 Earning and in Fiscal 2012

|Includes:FIO, OCZ Technology Group Inc (OCZ), STEC, WDC

 

What should we expect when OCZ Technology Group reports its Q1’ 2012 on July 6 after closing: A drop or a pop?

 



BACKGROUND

Analysts have been positive though mixed on target prices: From $10 to $13. At OCZ’s current trading price of $8.18, a 22% to 59% upside is implied. The Benchmark Company has gauged the upside and downside to be unattractive and has initiated a “Hold” on OCZ with a price target between $6 and $10 on June 29.  Needham & Co, on the other hand, has reiterated a “Buy” with a price target of $13, based on FY2013 projected revenues of $404 millions, on May 4.

Brokerage Firm

Current Rating

Change Date

Price Target

The Benchmark Company

Hold

6/29/2011

Range $6 - $10

Northland Securities

Outperform

4/25/2011

$11

Stifel Nicolaus

Buy

4/19/2011

$13

Merriman

Buy

5/13/2010

-

Sterne Agee

Buy

6/22/2011

$12

Needham & Co

Buy

5/4/2011

$13

FBN Securities

Buy

6/14/2011

$10

Click to enlarge

 


 

Short interests on OCZ offer a contrasting view on the valuation of OCZ, after a short seller, under the alias of Copperfield Research, published the article, “OCZ - The Master of SSD (Shady, Suspect, Deceitful)” on April 20. After the Copperfield Research article's publication, short interests jumped from 5.58 million on April 14 to 8.65 millions on April 29. As of June 15, short interests seem to have peaked at 13.26 million (or 27.7% of Float) coming into earning season.

               

 

Institutional trading has bucked the short trends with more shares held and bought than sold. SAC Capital, in particular, has loaded up with a 5.1% ownership in OCZ with 2,623,345 shares from less than 400 as of May 26.



FUNDAMENTALS & FISCAL 2012

 

Looking at fundamentals in prior quarters, managements have performed well in transforming the company to a SSD company and even taken extra steps in calming and updating investors.  

 


 

 

 

Q1 2011 (Ending 3/31/10)

Q2 2011 (Ending 8/31/10)

Q3 2011 (Ending 11/31/10)

Q4 2011 (Ending 2/28/11)

OCZ Targeted Model

Total Revenues

34,287

29,523

53,222

64,566

300- 330 millions

%SSD Revenues

39%

68%

78%

90%

90%

%PSU & Other

61%

32%

22%

10%

10%

Gross Margin% (Non-GAAP)

15.00%

18.00%

19.40%

16.80%

28-32%

Account Receivables

-1,272

-8,223

-10,561

-12,567

 

Change in AR

 

-6,951

-2,338

-2,006

 

EBITA

($1,941)

($1,702)

$369

$437

 

Click to enlarge

 

 

Their current SSD revenues break down to the following vs targeted goals: Enterprise 15% vs mid 30’s, 
High performance 78% vs mid 20’s,
 
Consumer 7% vs 18-20%.  

OCZ is progressing well in the high-performance and consumer markets, making up 85% of 2011 SSD revenues.  Its top 10 customers has generated about 50% of revenues in 2011, with no customers with more than 10%, except Neweggs (~17%). 

To meet its goals, OCZ needs to grow its enterprise and OEM revenues by 15% through more enterprise and OEM design wins, to which it has.  According to the CEO of OCZ, Ryan Peterson, OCZ had a “transformational year” in Fiscal 2011 (ending in 2/28/11) with the company:

1)    Transitioning completely from a DRAM to SSDs (SATA, SAS, and PCI-Express) business in Q4’ 11 with 90% of revenues coming from SSD and 10% from PSU and other (DRAM included).

2)    Strengthening capitals with $94 million from April stock offering

3)    Acquiring a privately-held fabless provider of SSD controllers and firmware Indilinx

4)    And winning additional OEM and enterprise design wins (Dell, an Asia-Pacific telecom service provider, a major data center for a cloud service provider, and an enterprise storage OEM).

 

He is optimistic about the future of OCZ.  

 

In a conference call with Stifel Nicolaus enterprise hardware analyst, Aaron Rakers, on May 24, the CEO has hinted at additional revenue boost in 2012 guidance. The recent 3 OEM design wins (with an Asia-Pacific telecom service provider, a major data center, and an enterprise storage OEM) and Indilinx business have not been included in the company guidance.   Gross margins are hinted to benefit from Indilinx controller business and integration: A potential 2-4% addition to revenues. The $94 million of additional capital is expected to allow the company to save in flash memory cost, a potential +2-3% profit, by buying directly through flash vendors instead of spot market. 

 

 

Demands for OCZ’s current products Vertex 3 family series on the consumer and enterprise sides have far exceeded management’s all ready high allocation to met demands. Pricing for OCZ’s current Vertex 3 SSDs family have been steady or have increased. No disruption in manufacturing supply is expected.  For OCZ, the Japanese triple whammies have only temporary increased spot market flash memory prices, which have been passed to customers. OCZ sources flash through multiple vendors, including Micro/Intel, and is less affected than others.  Japanese manufacturing supply has also been coming back stronger than previously anticipated.

 

For the Fiscal 2012 year, OCZ looks solid. The secular, cloud-computering, tail-wind trends support solid state drives in storage:

1)    Higher Input/Output memory processing power required for cloud computering, data collection, and data analysis can only be supplied by SSD storage, not HDD.

2)    Adoption of tier data storage processing hierarchy with SSD products used in Tier 0 (PCI-Express) and Tier 1 (SATA/SAS) [Below Tier 1 HDD].

3)    Virtualization of severs to maximize sever usage requirng more Input/Output memory processing power.

4)    Lowering costs of flash memory over time.

5)    Acceptance of multi-level cell (MLC) flash in enterprise storage.




BEYOND FISCAL 2012: 

Beyond Fiscal 2012, OCZ will face increased completion in current, enterprise SATA and SAS market against SanDisk (Pliant) and STEC and new markets in PCI-Express SSD against Micron and Fusion-IO. Intel and STEC are expected to release PCI-Expree SSDs in the coming months.

 

Interestingly, both technology innovations and pricing may ultimately drive OEM design wins. SanDisk and Micron are at an advantage with higher margin potentials in supplying their own flash memory, the predominant cost of SSDs. Regardless of awaiting completion, OCZ is heading forward. The CEO also reported a doubling of manufacturing capacity in September (Q3’12 to Q4’12 time frame) to meet expected orders in the Stifel Nicolaus conference call.

 

 

So, what to expect when OCZ Technology Group report Wednesday after market closing: A drop or a pop?

…Both: A potential drop in the short terms and popping jumps throughout the Fiscal 2012.  OCZ is a compelling story with future growth expected.

  

 

 Disclosure: I am long on OCZ, FIO, STEC, SNDK 

 

 



Disclosure: I am long OCZ, SNDK, STEC, FIO.
Stocks: OCZ, FIO, STEC, WDC