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conference date: August 2, 2006
for quarter ending: June 30, 2006 (2nd quarter)
Overview: Continued heavy R&D investment and settlement with Crossroads result in losses despite revenue growth. Sales to Sun very strong; new customers coming on line in the September quarter.
Basic data:
Revenues of $66.3 million, up 13% sequentially from $58.7 million and 0.5% from year-earlier revenues of $65.9 million. GAAP net loss of $6.6 million or .15 per share was about twice the magnitude of year-earlier losses. A $3.35 million charge for the Crossroads legal settlement was included in the GAAP loss.
Cash ended at $110.2 million, down 4.6 million from the March 2006 quarter.
Research and development expense was $12.4 million, up from $5.3 million for the June quarter of 2005. Total operating expense was $23.5 million, up from $13.2 million from year-earlier.
Guidance: September quarter revenues of $59 to $62 million, for losses of .05 to .07 per share.
Conference Highlights:
Hanif Jamal, new CFO, introduced himself.
Reiterated deals with Newtech and Stratus Technologies. Commenced shipment of new RAID subsystems to OEM customers.
Largest OEM customer accepted record shipments, hence strong sequential revenue growth.
Expect some gross margin erosion in Q3 (from 20.9% this quarter) as pilot production units of new products are shipped, which have lower than typical margins.
R&D expense will decline in the future as shifting from shipping prototypes to pilot production to final products.
July saw new systems begin shipping to customers.
New customer wins expected to be announced in the near term. Relation with largest customer is strong, with over 10,000 units shipped and early results for September quarter also strong.
Looking for lower cost manufacturing locations (outside U.S.) and other means of lowering operations costs.
Q&A:
New patent monitization? Patent is for simulcast technology. Faster in dual controller environment than competitors. Part of new products that are shipping. More patents coming soon.
Use of cash? Spent a little too much on R&D, but was necessary to keep customers happy. It was a one time expense. Data management services is seeing significant investment. Willing to use cash strategically, but any acquisition would have to be margin enhancing.
Sales to largest customer (Sun)? $55.8 million. 84.3% of total revenue.
Second large OEM customer? No comment on launch dates for new OEMs, because Hill provides pieces for their client's products. Q3 and Q4 may see some revenues for new products.
Chaparrel incorporation? Shipping production volumes of new RAID controllers already. All OEM wins are based on own RAID controller with Chaparrel technology.
$740,000 in stock-based compensation expense. Should be about level in Q3.
Reached the important milestones of making products stable and shippable.
Other storage companies had a difficult Q2.
Won't realize profitable margins until production is moved offshore. That could be Q1 next year. Is comfortable with Q4 2007 guidance of $125 to $132 million and will see break even by then.
Cash burn? $6 to 7 million for Q3.
Percent of Sun revenue will decline as new product and new customers come online. But expects increased Sun unit volumes and revenues. Fibre Channel sales remain strong.
Expects gross margins on RAID controllers in high 20s to low 30s once new models get fully into production.
Launch announcements by partners are often after Hill has been working with them from 6 to 9 months, such a prototypes for testing.
A/R increase is due to push up of revenues at end of quarter. Largest customer's fiscal quarter ends end of June.
Share buybacks are being discussed by board, but no decision will be made until after an extensive analysis.
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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. Before making or terminating an investment you should always verify any factual basis of your decision.
Copyright 2006 William P. Meyers