Darrell and All, I am reposting a continuation of the CC trascript provided by Vin Ordinaire over on TMF for those who didn't have access to vcall audio presentation. Many thanks to Vin for doing all the work to put this up on the internet. It is odd about the falloff in Jaz revenues over the past quarter. I wonder if the availability of Sparq drives at discount prices may have had something to do with this fall off? Jaz was a savior to IOM figures in the 4th Qtr. It was good to see IOM holding well in today's market. Mel
Repost follows:
Subject: Transcript, Dan Strong, 15 Apr 99 Date: 4/16/99 3:00 AM
Author: VinOrdinaire Number: of 20631
Conference call part two, from 11:40 of the 36 minute conference call. Dan Strong, CFO, is speaking:
As Jodie mentioned in his opening comments, we generated a slight profit in the quarter of $569,000, and we generated $6 mill. in positive cash flow. We continued our focus on cost containment and reduced operating expenses by $15 mill. compared to the 4th quarter, and by $40 mill. compared to 1Q98.
The bright spot in the quarter was our Zip business. Year-over-year Zip drive units were up 44%, zip disk units were up 39%, and our Zip business showed a solid increase in revenue in all three geographic regions. Zip posted $51 mil. in profit margin in the first quarter, compared to $29 mill. in the first Q of 1998. First quarter revenue of $386 million was down 5% year-over-year. This decrease was due to lower average selling prices as a result of price reductions we took during the year, lower than expected volume in our Jaz business, and the significant decline in our Ditto sales from 1Q98.
For the quarter Zip revenue of $302 mill. was up 13% year-over year. We shipped 2.6 mill. Zip drives in the quarter and 16 million Zip disks. 53% of Zip drive sales were to OEMs. We began shipping the Zip 250 ATAPI drive to Dell earlier this month, and that drive is selling at a positive gross margin. Zip 250 represented just over 10% of Zip drives shipped in the quarter and we expect the mix of Zip 250 versus Zip 100 to continue to grow.
Jaz revenue of $63 mill. was down 43% year-over-year, with Jaz drives down 46% and Jaz disks down 32% year-over-year. Jaz products profit margin showed a loss of $3 mill. in the quarter.
Clik generated minimal revenue in the quarter of $5 mill. As Jodie said, we did not feel it was prudent to spend advertising dollars to generate demand when we did not have adequate quantities in the channel. Due to the limited launch, Clik product profit margin was a loss of $13 mill.
Finally Ditto revenue for the quarter was $10 million, not including any revenue derived from the sale of the Ditto business during the quarter.
Both first quarter total disk revenue of $152 mill. and total drive revenue of $229 mill. were down year-over-year, again primarily due to the lower than expected volumes in our Jaz business and limited ramp of Clik. Looking just at our Zip business, disk revenue was up 12% and drive revenue was up 14% year-over-year.
Geographically, both Europe and Asia-Pacific reported improvements over the year-ago period. European revenue of $103 mill. was up 16% year-over-year, and Asia-Pacific revenue of $33 mill. was up 65% year-over-year, and both regions posted significant gross margin improvements.
Americas revenue of $250 mill. was down 16% year over year, almost entirely due to the weak Jaz sales and significant decline in Ditto revenue.
Now turning to gross margins, At $94 mill., gross margin dollars are down 8% from 1Q98 and represent 24% of sales versus 25% of sales in 1Q98 and 28% of sales in 4Q98. Year-over-year gross margins are down primarily due to price reductions on Zip and Jaz drives and disks, and the impact of lower than expected volumes in our Jaz business. Compared to the fourth quarter, gross margin percentage is down primarily due to the lower than expected Jaz volumes. The price reductions of Zip drives were almost entirely offset by reduced product costs in the quarter.
Turning to operating expense, I'm very pleased with the continued discipline we've showed in controlling costs. SG&A of $70 mill. is down 35% or almost $38 mill. from 1Q98. SG&A as a percentage of sales was 18% in the 1st quarter, compared with 27% in the first quarter and 16% in the 4Q98. R&D expenses of 20.7 mill, or approximately 5% of sales, are down slightly from approximately $23 mil. in the first quarter and $24 mill. in the 4th Q of 1998.
Total operating expenses of $91 mill. is a $40 million reduction compared to 1Q98, and a $15 mill. reduction compared to the 4Q98.
Now moving to the balance sheet, positive cash flow of $6 mill. is primarily the result of improved working capital management. Cash is now flowing more quickly through the system as a result of lower inventory and receivable levels. Payables are largely financing inventory. Cash conversion days of 57 days were down 26 days from 1Q98. We will continue to focus on asset management. And let me give you just a little bit of detail on the components of our cash conversion days, DSO, Dates inventory, and days payable.
Receivables at $228 mill. represent a 2-day improvement. in DSO to 53 days versus 55 days in 1Q98. Our focus on inventory reduction has continued to pay dividends. With our implementation of the virtual model, we reduced inventory by 50% from the first quarter of 1998. Inventory was down 4% from the 4Q98 to $158 mill., however inventory turns decreased slightly to 7.4 turns, versus 8.8 turns in the seasonally strong 4th quarter.
Accounts payable of $144 mill. were down $17 mil. from the 4th quarter, with days payable increasing slightly to 44 days from 40 days. We remain very comfortable with our liquidity. We have now had two consecutive quarters of positive cash flow, and we ended the quarter with $94 mill. in cash, and a completely unutilized $150 mill. bank line.
Due to our quarter closing on March 28, the March 31 payment of the Idanta notes will be reflected on our second quarter balance sheet. The notes were repaid with internally generated funds, and as we said last quarter, we expect to be positive cash flow for the year.
We remain very focused on sell-through and were generally pleased with the improvement in channel inventory. We ended the quarter with Zip 100 drives at 7 weeks, Zip 100 disks at just under 7.5 weeks, Jaz drives at approx. 5.5 weeks, and Jaz disks at just over 11 weeks.
Looking to the second quarter, we anticipate our operating results will be similar to the first quarter, but as Jodie said, we expect to take a special charge in the quarter primarily related to the consolidation of facilities and reduction in head count. The amount of the charge and the savings resulting from cost reduction activity will be finalized in the next several weeks.
Finally with the streamlining we will put in place in the second quarter, we expect our business model to hold for the second half of the year. Model parameters of mid to high twenties gross margin, operating expenses in the range of 20%, should yield a mid-single digit after tax return on sales. We believe there are strong upsides to the model due to the strength of our Zip product line and emerging software applications, but there is also significant downside risk associated with the launch of new products, particularly our Clik platform in the second half of the year.
With that I'd like to turn the call back to Jodie.
[Question and answer followed]
Your humble recording secretary,
Vin
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