conference date: August 6, 2008 @ 1:30 PM Pacific Time
for quarter ending: June 30, 2008 (2nd quarter 2008)
Overview: Great revenue growth from new partnerships, but has not reached profitability and is not guiding to Q3 profits.
Basic data (GAAP) :
Revenues were $71.0 million, up 34% sequentially from $52.8 million and up 26% from $56.2 million year-earlier.
Net income was negative $7.4 million, worse than the Q1 loss of $6.1 million, and also worse than the year-earlier loss of $3.7 million.
EPS (earnings per share) were negative $0.16, down from negative $0.13 in Q1 and negative $0.08 year-earlier.
Revenue target for Q3 2008 is $73 to $78 million, with a non-GAAP net loss from $0.06 to $0.10 per share. Gross margins should improve slightly.
Pleased with strong revenue growth and working on improving margins. Ramp up for HP created unusual expenses in Q2, included expedited shipping expenses, that are now being reduced.
Working capital requirements could continue to grow. Entered financing agreement with Silicon Value bank for up to $30 million.
Non-GAAP numbers were a net loss of $6.0 million or $0.13 per share.
Gross margin (GAAP) declined to 10.2%. This was attributed to decline of high margin sales to Sun and ramping of lower margin sales to HP and NetApp, in particular the Series 2000 and Series 5000 products.
Cash and equivalents ended at $62.1 million, down sequentially from $77.4 million due to increased accounts receivable and inventory, plus a cash loss on operations.
Revenue by segment:
33% SAN Net 2
43% Series 2000 and 5000
22% G to NetApp
2% Other (includes services)
Cost of goods sold was $63.8 million, leaving gross profit of $7.2 million. Operating expenses were $14.7 million (up from $12.0 million year-earlier), including $3.65 million for sales and marketing, $7.1 million for research and development, and $3.9 million for general and administrative. The operating loss was $7.5 million. Interest income was $0.4 million. Income tax provision was $0.2 million.
Accounts receivable jumped to $46.5 million from $32.4 million year-earlier. Inventories were $4.5 million. Accounts payable increased to $36.0 million.
Share based compensation expense was $0.9 million. Loss due to currency changes was $0.25 million.
Revenue by major clients: 28% Sun, down from 44% in Q1 and 65% year-ago. NetApp 22%. HP 33%, from 0% year-earlier.
HP had general availability in mid-March. Shipped 5000 units in Q2. Accelerated product ramp did increase expenses, which we think was worth it. Margins were lower than projected. Aggressively reducing costs and increasing high-margin software attach rates. Already getting lower component costs and contract manufacturing costs. Engineering teem now doing design to reduce costs, which will take some time to implement.
Tier 2 and Tier 3 customer margins for 2000 and 5000 products are approaching good levels, but revenues are not what we we like. Some orders were deferred into Q3. New design win pipeline is promising.
Margins in Q3? At this stage we are not going to provide specific guidance because of the volatility we are seeing. The mix with HP was not what we expected in Q2. But we expect there to be some improvement. 12 to 15% would not be a bad way of looking at it given the revenue and operating expense guidance.
We have a 5730 program win with one of our two largest customers.
HP forecasting? We had a positive demand surprise. We expect volatility over next 3 to 4 months, but by end of next quarter we should have much better visibility.
Fijuitsu-Siemens possible split? We don't expect anything to happen quickly.
R&D expense? Will probably go down slightly in Q3 as we complete development of custom products for HP. But we could possibly have more custom development work from HP.
Sales and marketing expense? Trying to keep that flat, if not slightly decrease it, though we are needing more sales and marketing.
Profits in 2008? We still have a shot at it. Depends on product mix, customer mix, and how fast cost reductions are introduced into supply chain. But it could slip if those things do not come together.
Software attach rates so far? Not providing, may provide in future. Pleased with the progress, but not yet material. New data management software products will be introduced this year.
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