BofA Notes:
Craig: I enjoyed your brief reemergence and hope that you visit and contribute again soon.
I was able to attend the BofA analysts conference on 2/2 and can report as follows:
Ken, Steve and Paul Fox of BofA were on the dias. I attended both the presentation and the break out session. Both were well attended (with analysts sitting on the floor for the break out).
An initial funny/embarrassing point: Ken's notebook froze on the third slide and everyone had to sit around for a few minutes while he rebooted and eventually switched to Steve's notebook - not a great start for a tech company. Major topics discussed (quotes are somewhat paraphrased):
SUN: IDC estimates that SUN 1998 storage revenues were $1.9 billion (I never saw that figure before). Relationship is "excellent." "On any given day, there are 4-5 ANCR employees on sight at SUN." Question in break out re what ANCR can do to assist SUN ramp: A: not much, ANCR products have been fully qualified for a while. Issue for SUN ramp is diagnostic software. If a foreign i.e. non-interoperable component is installed on a SAN, the entire SAN will shut down. That's OK for certain companies that implement the entire SAN for a client and tell the client not to add any equipment without calling us (maybe like CONSan). But SUN requires a much more robust plug & play like product. Thus they are working on diagnostic software that will detect foreign devices and lock them out without shutting down the entire SAN. That takes time. "SUN revenues will increase every quarter form hear on out." "Significant ramp will not occur until second half of the year." (this one hurt me, I was expecting end of Q1 and into Q2). A questions was asked about the stock price reflecting some uncertainty in the SUN relationship. Ken answered that he didn't know why the stock price did what it did, but that the SUN relationship is solid as can be. "While I don't know Scott McNeally personally., I do know (he named three top SUN storage folks) and the relationship is one of a true partner. If there was any problem, I would know about it." They are also working with SUN on more than one product. Conclusion, FUD re SUN relationship is just that, FUD!!
Finance: Warrants came up again - raised by Steve (not sure why - seems like beating a dead horse and asking for trouble) and one questioner. I thought they did a better job of explaining them than they have in the past. $7.30 exercise price was simply the FMV when the deal was done. There was no discount involved. ANCR wanted to tie sale to product sales, & said you can buy stock if you buy $100 mm of product from us. Unfortunately, accounting hurts them. They will continue to report GAAP and pro forma (without warrants). Warrant sales discount will not hit top line revenue as it is a discount to sales. Discount is also tax deductible.
SG&A and R&D both predicted to be in the 10-12% range this year. ANCR should be able to drive costs down faster than prices will drop to keep margins where they are - but per port pricing will drop. Steve was comfortable with BofA rev forecast (which I thought were light) of Q1 $5.5 mm, Q2 $7.5mm, Q3 $11 mm and Q4 $15mm. OEM: "very bullish on new OEMs, doing well compared to competition." In final stages of major OEMs they simply don't see ZOOX or VIXL: its strictly ANCR & BRCD. If they announce a new OEM, it will be 2-3 qtrs before they see significant revenue from such OEM.
Last quarter: here's what happened: ANCR got a huge order in the last week of Q3, so Q3 looked great. The last 2 weeks of Q4 were slow. Simply a quarter to quarter difference, and Ken doesn't want to manage revenue flow. The nice news, they had a nice order of over $1mm in the first week of Q1 (more than the shortfall from Q4). This stuff just goes to show the problems of the short term focus that pubic companies come under today (my thought). margins: 47%. Target 40-45% but Steve said he thought they might do better - $45- 50%. My question: If Boeing was a high margin customer, then margins without Boeing would have been less than 47%, why? and how much less?
Products: 64 port by midyear; 128 by end of year. Eventually 256 and 512 port switches.
Interoperability: ANCR products are interoperable with all major HBAs, hubs and all but one major switch company (BRCD). ANCR has (or is just completing) a multi million $ interoperability lab, 3k sq. ft., with products from all FC companies in there, HBAs, storage, hubs and switches. Interoperability is a priority for ANCR. "It is the key to making the industry grow."
(My thoughts: I disagree with Craig on this one. Someone I know who is close to CSCO management once told me that closed systems grow at an additive rate, while open systems grow exponentially, and that is the key to CSCOs growth. I agree. While some have been able to grow and prosper in closed systems, market forces favor open systems, and even if ANCR were in BRCDs shoes, I would advocate a move to open systems so that the total market would grow by leaps and bounds.
"Interoperability is needed for the potential of SANs. Multiple sourcing will happen." From the break out: BRCD is the problem with interop. They will not disclose certain parts of their code (primitives I think), taking the position that it is IP. ANCR is 98% interoperable with BRCD, they can share data, but they can't share bits in FC frames (this is beyond my technical expertise). In any case, the interesting point is that Ken stated that 2 of BRCDs big customers are putting a lot of pressure on BRCD to become interoperable, these two are worth a lot of business (my guess is two of DELL, CPQ and IBM). The customers are demanding it, and when it comes, and it is when, not if, it will create a large potential second source market for ANCR, particularly among the NT crowd, which is particularly cost conscious (Ken's words, not mine). Incidentally, the FC standards are not thought to create real interoperability on a bit by bit basis. They are helpful, but not the end all.
General: Ken admitted that BRCD read the market better. ANCR went for high end too early. But, ANCR has better technology for the future. Also mentioned (as conference call did) the VAR channel, 4 signed up , working on a total of 10. No action from major networking companies in SAN market yet. Not until interoperability is solved. Headcount: in process of hiring 40 people.
IB: "ANCR OEMs are pleased with IB involvement by ANCR." This was a helpful analogy to me, a non technical person: FC is to SCSI as PCI is to IB (fwiw). Lots of overlap (>30-40%) between FC and IB. Ken said he eventually sees one ASIC with both FC and IB ports, sharing certain central features. IB switch product late ?01 or early ?02. ANCR has real advantage because FC & IB share so much technology.
Strategy: 1. exploit core technology & ASIC. ANCR performs at 560 nanoseconds vs 840 for BRCD.
2. leverage SUN & INTC with other OEMs.
3. Exploit lead in IB.
4. Broaden product offerings.
5. Continue leadership in interoperability.
Conclusion: overall pretty good. I had never heard Ken or Steve speak or met them live and that in and of itself was helpful. Lots of interest as both rooms were packed. I was a bit put off by the revenue projections. BRCD is doing $30mm per qtr NOW. ANCR is forecasting half that number a year from now. Other than my impatience, I was quite pleased. The future looks bright. I was just hoping the future was sooner than later. Nonetheless, all looks very positive for that future. My question is when will the market realize that and start moving the stock back up. Hope all this is helpful,
Cheers,
Eric |
