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conference date: November 8, 2006
for quarter ending: September 30, 2006 (3rd quarter)
Overview: Sequential decline in revenues and tax charge leads to major net loss. New product sales showed revenues in quarter.
Basic data:
Revenues of $54.8 million were down 17% sequentially from $66.3 million, but up 2% from Q3 2005's of $53.6 million.
Net loss was $60.1 million or $1.34 per share, but that included a tax charge of $52.5 million. Without the tax charge the loss would have been $7.6 million or .17 per share. In Q3 2005 the net loss had been $1.3 million or .03 per share.
Cash and equivalents ended at $108.5, down from $110.2 million the prior quarter. This was attributed primarily to a $3.35 million payment to Crossroads for the intellectual property settlement.
Guidance:
Q4 2006 revenue of $52 to $55 million, resulting in net loss of .20 to .23 per share. R&D expense to be flat to down. Does not have guidance for 2007 yet.
Conference Highlights:
Third quarter was challenging. Bullish about opportunities. No action needs to be taken on stock option compensation accounting.
Backlog at end of quarter rose to $4.3 million from $3.6 at the end of the prior quarter.
2730 storage products began shipping to about a dozen OEM customers, but revenue from them was offset by "seasonality at the company's largest OEM customer." (Sun, I think.)
HILL added several new OEM customers during the quarter.
Margins are negative for the new 2730 products, and will continue to be so until manufacturing is transferred to Asia. This is happening as fast as possible but may not be completed until the first half of 2007.
2730 products shipped twice what they had expected for the quarter (655 units. Expect to double that in Q4). Competitors claims of problems with products are false. First to market with robust fibre to fast SATA product.
Tax charge was because 47.1 million deferred tax assets eliminated in Q4 2005. In Q3 2006 analyzed carrying value of tax deferal assets, so re-established $47.1 allowance. $5.3 million charge recognized due to tax rate change.
12.8% gross profit very low due to higher manufacturing overhead for new products. Mainstream volume shipping products have remained stabile. R&D investments are slowing down.
30.1 petabytes of storage shipped. SAN Net 2 Fibre-channel was 46.4% of revenue, SAN Net II SCSI was 27.5% of revenue, SATA was 5.5%, blade was 10.3%. 2730 products were 5.8% of revenue.
Days sales outstanding decreased to 61 days from 68 days in the prior quarter. Inventory stayed flat at around 4 days. Days payable outstanding increased to 58 days.
Expects increased financial volatility due to shift from one to many customers.
Believes follow-on products with high margins will be introduced.
Key factors for return to profitability are ramping the 2730 products, reducing supply chain costs and product costs, product mix, and higher margin products like software that have not yet launched.
Launch dates for OEM products are hard to predict because they are part of complex verification processes. Very strong acceptance of new storage products at this price performance point.
Q&A:
Factors in guidance? Reorganized sales force to maximize revenues for partners to help them win new business. Have less control with larger OEMs. Product and customer mix will have most impact.
Large OEM? Conservative approach of existing OEM leads to Q4 guidance. Being conservative in expectations for that OEM.
Talk about problems? Worked out all they know of. Stratus has qualified it, and they are the quality leader at this point. There were some serious problems earlier on.
New pro-forma tax rate? 2006 to be negative 4% because of foreign taxes associated with Crossroad settlement.
81% of revenue was from the primary customer, which was down from 84.3% from prior quarter. Reliance on Sun revenue will continue to fall, but Sun revenue itself has been flat.
Units: Fibre 2473, SCSI 2774, blade 2921, SATA 431, Neptune 655.
Cash use in Q4? Around $10 million. Not predicting Q1 of 2007. Margins expected to come down before they go up.
Cost sharing of offshoring? Does not share with smaller OEMs, so all cost reductions will acrue to HILL.
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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