Well, just listened to the call. I am still cautiously optimistic about the company. However, I must have misheard something. My notes say they did $365m revenue overall, with $205m coming from tape drives, 92m coming from storage systems (ATL + Snap), and $94 million coming from media. But 205 + 92 + 94 is a lot more than $365. Perhaps some of the drive revenue includes some of the tape revenue? I don't know. I don't know, still doesn't make sense. Royalty revenue was $52m, backing that out still doesn't make the numbers add up. But no one questioned them on it on the call, a little bizarre to me. Perhaps everyone has forgotten how to add in these days of calculators? I don't know, if someone can help me out on this, that would be nice. Otherwise, it's a little surreal, but then, with Seagate management buying the drive unit for essentially nothing, what else is knew? If John Gannon had their chutzpah, he'd tell HDD shareholders, hey I'll pay you guys $7/share for HDD, it's a hellavu deal, oh, yeah, we've got over $7/share in the bank, well, OK, I'll pay you $7 and a quarter, don't worry, hellavu deal. Anyway, off my soapbox, back to DSS call sorry for the digression.
As for the rest of the call-- more strange things. But I think I may have a handle on the mystery of why they won't commit to a transfer rate or a capacity or a date for SDLT. They wouldn't be pinned down on anything in the call, but we will find out more in a few weeks, when they make an announcement unveiling "a family of products that address a broad range of segments across the tape backup market". I think I got that quote right, or at least close to right. John Dean tried to pin them down, but MB refused to be pinned. But he did add trying to clarify a little that SDLT will be "extendible", and that there will be a "range of products" at different price and value points.
So....what I take this to mean is that SDLT will not be like, e.g., DLt8000 with a set transfer rate and capacity, selling for a specific price. SDLT will come even at the beginning with a variety of possible prices, transfer rates and capacities, and customers will be able to pick which one they want. I am guessing that this is why this product must go through such a long testing cycle, it must be tested at all of these different possible rates and capacities, even though it is essentially the same machine. This might be totally wacko off base, but it makes sense to me at this moment, in the wee drowsy hours of the morning, after hearing MB talk. We'll see in a few weeks if it is correct or not.
More notes on the call:
Mr. Ebola Virus's constant tirades on DLT8000 problems was more or less put to rest: sales on the 8000 more than doubled sequentially, which was probably as responsible as anything for them making or beating their numbers this quarter. The drive mix was better, with the 4000 being 1/3 of drive revenue. Dean tried to get them to say why the mix was better this quarter after last quarter they said that mid-range growth would be anemic going forward. They thought that quals for the 8000 were still going on in Q4, and last Q was the first full quarter for some OEMs to be selling it. [My note: Overland, for one, said that demand for DLT was stronger than they anticipated, though as we all know Exabyte that mighty mite said in their CC that DLT demand was weaker. So much for their sense of the market.] They have reversed their previous plans to move 4000 manufacturing to Malaysia, instead they will keep it in CO, and move 7000 and 8000 manufacturing to Penang. This is another mysterious thing, especially after they said last Q that mid-range demand was down and low end demand was strong favoring the 4000. They only way I make sense of this is that they are planning to cut costs enough on the 7000 and 8000 to eventually make them their low end drive, phasing out the 4000, and ceding the very low end entirely to companies like Ecrix or whoever. They will squeeze at least $40m of cost savings over the next year with the move, and will get a little more from materials savings. Their projections for the first half are flat to down somewhat for drive revenue and earnings, as they make the move and transition to SDLT. Then they project higher earnings for 2H, as their cost savings kick in, and (I am perhaps extrapolating a little here), SDLT kicks in. But they declined to be specific about the second half when invited by an analyst to do so, other than to say that they they believed that the $40m in cost savings will be realized by the end of FY01.
Their growth will mainly come from Snap and ATL, but they will still have strong cash flow from drives and profits from media + royalties. They generated $108m in cash, bought back 5.6m shares for 58m dollars, have $160m left for more buybacks. Storage systems is now 25% of revenue at 92m, and grew at 42% last Q. Look for more of the same, with triple digit growth at Snap for the foreseeable future. They didn't break out Snap revenue, but I think it is probably around $9-10m. They said it grew over 200% last Q, Y-Y, over 70% sequentially. ATL/Snap will be increasingly a greater part of the revenue mix. They are also growing service revenues for ATL libraries/SAN business, and will make additional investments in this business. Sounds like a good recurring revenue source, it was up 70% last Q, Y-Y. They installed over 100 FC backup systems last Q. Look for continued strong growth. This all sounds a lot like DLT/HDD in the pre-tracking stock days, so perhaps we'll get yet another tracking stock for QNTM! (Just joking. I think.)
Tax rate is now 40%. Moving CO production offshore should lower that to 36% next year.
$339m in cash at end of Q, or a little more than $2/share.
All inventory problems now in the past. Channel inventory for DLT looks low, in fact, everything else looks normal.
All in all, a positive CC, with a couple of mysteries. But it probably won't move the stock up much, will stay in the trading range of 9.5-13 until the SDLT situation is cleared up, hopefully in a couple of weeks. Then we'll have to see. If SDLT gets resolved in a positive way, the stock is a great buy at 11 in this market, with at least 50% gains within a year a virtual certainty (barring a serious recession of course), and 100% or more gains likely in a 12-24 month time frame, IMVHO. |
