Analyst Conference Summary

conference date: March 13, 2008 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2007 (4th quarter 2007)

Forward-looking statements

Overview: Promised ramp of sales to HP has not yet begun. Big non-cash write off in quarter. Still not profitable.

Basic data:

Revenue was $51.8 million, up 13% sequentially from $45.7 million but down 14% from $59.4 million year-earlier.

Net income loss was $46.4 million, sinking sequentially from a loss of $4.1 million, and down from a loss of $9.1 million year-earlier.

EPS (earnings per share) were negative $1.01, down sequentially from negative $0.09 and down from $0.20 year-earlier.

Cash ended at $82.4 million, down sequentially from $90.2 million.

See also non-GAAP results below.

Guidance:

Revenues of $48 to $52 million and non-GAAP net loss of $0.15 to $0.19 per share [excluding odd items]. Includes expected R&D expense for new products for HP.

Conference Highlights:

Sequential increase of revenue was from greater-than-expected sales to two largest OEM customers [Sun and NetApp]. Year-over-year revenue decline was in line with falling sales to largest OEM customer [Sun]. Sales of Series 2000 products also contributed to increased Q4 revenues. Revenue was above original guidance but in line with recently revised guidance.

Non-GAAP net loss was $5.7 million ($0.12 per share). This excludes the $40.7 million non-cash goodwill impairment SFAS 142 charge.

Gross margin was 12.2%, improved (y/y) due to Series 2000 margin improvements and migration to offshore manufacturing. But hurt by decline of high-margin product sales to Sun.

Cost of goods sold was $45.5 million. Gross profit $6.3 million. Sales and marketing expense $4.5 million, R&D $5.9 million, general and administrative $3.2 million, goodwill impairment (non-cash) $40.7 million, for total operating expenses of $54.3 million. Operating loss $48.0 million. Interest income $1.0 million. Income tax benefit $0.4 million.

Continued ramp of low-margin products to NetApp.

Revenue by segment:
25.1% SAN Net 2 Fibre channel
19.8% SAN Net 2 SCSI
0.5% SAN Net 2 SATA
12.1% SAN Net 2 Blade
13.8% Series 2000
25.2% G to NetApp
3.5% Other

Looks to turn profitable some time in 2008. Focus on reducing costs and ramping up Series 2000 sales to current and new customers. Higher margin revenues from Sun expected to continue to decline in 2008. Ramping up products have lower margins. Inventory may need to double to supply NetApp and HP.

Series 2000 and 5000 products now all from newer sources. 5730 early feedback is very positive. NetApp sales were about one-quarter of revenue in 2007. Now has 26 OEM customers.

Believes HP win is very important. Must execute well. Validates our Revolution products and could become our largest customer. Enables us to sell DMS software.

Continue to target entry-level market while entering mid-range, higher-margin market.

Q&A:

Sun declining slower than expected? Our forecasts depend on the forecasts we get from Sun. Our outlook is prudent. True, revenue has not trailed off as quickly as some projected.

HP warrants? $2.40 exercise price. Straightforward terms and conditions.

Stock based compensation? About $0.7 million for both Q4 and Q1.

NetApp ramp? Q4 was the first quarter, so we don't have data for projections yet.

HP ramp? HP stated to the public they intend to start shipping in March. We look forward to seeing what the ramp amounts to. Will let you know at the Q2 analyst conference.

Where might cash bottom out? No specifics, but depends on inventory build (which could more than double) and operating losses before we hit profitability.

HP gross margins? Usually start at low margins, because you are competing for the business. Then you might be able to ramp later in life cycle if costs go down as volumes ramp up. We have a lot of operating leverage in our supply chain, and it they take the DMS software, that would have high margins. Don't know if it will be accretive or dilutive this year. This does lay some new risks on our path to profitability.

Sun service side should ramp up as new sales ramp down; we have a lot of equipment in the field that is going out of warranty.

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