OCZ Technology Group (Reg S) Announcements

RNS Number : 7672H OCZ Technology Group, Inc. 10 November 2008  
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NOT FOR PUBLICATION, DISTRIBUTION OR RELEASE IN THE UNITED STATES, CANADA, THE REPUBLIC OF IRELAND, THE REPUBLIC OF SOUTH AFRICA, ISRAEL, JAPAN OR AUSTRALIA, OR THEIR RESPECTIVE TERRITORIES OR POSSESSIONS

10 November 2008

OCZ Technology Group, Inc.

Interim Results for the six month period ended 31 August 2008

OCZ Technology Group, Inc. ("OCZ" or "the Group", AIM: OCZ), a worldwide leader in innovative, ultra-high performance and memory and computer components, announces its unaudited interim results for the six-month period ended 31 August 2008. 

Financial Highlights

Revenue up 55 per cent. to $79.6 million (2007: $51.3 million) 
Non-memory sales up 194 per cent. to $30 million (2007: $10.2 million)
Memory sales now comprise 62 per cent. of total sales (2007: 80 per cent.) 
Flash based product sales up 500 per cent. backed by strong SSD sales to $13.8 million (2007: $2.3 million) 
European sales up for the sixth consecutive half year period; growth of 74 per cent. to $40.1 million (2007: $23.1 million) 
Asia Pacific sales up 67 per cent. to $2.5 million (2007: $1.5 million)
Operating expenses reduced to 17.8 per cent. of revenue (2007: 19.2 per cent.) 
Underlying* EBITDA of $150,000 (2007: $1.6 million)
Increased banking facilities from $10 million to $12 million; trade credit terms increased to c.$40 million

Operational highlights

Moved to larger, lower cost Taiwan facility 
Added in-house manufacturing for memory modules, potential to reduce cost of goods by up to $1.50 per unit sold 
Reduced ongoing fixed operating costs
Memory module units shipped up by 82 per cent. to 915,000 (2007: 500,000)
More than doubled  memory module market share in key North American clients
Preparation underway to secure dual listing of shares in US 
*excludes stock based compensation and restructuring costs

Ryan Petersen, Chief Executive of OCZ commented: 

"Despite the turbulent economic conditions, we significantly increased our revenues, contained cost 
growth, released several key new products and executed a major manufacturing move. Through our improved market position and brand profile, we are positioning OCZ to exploit the current challenging economic environment and to increase our market share. 

"In order to widen the opportunity for specialist North American investors, both institutional and retail, we plan to seek a listing of OCZ shares in the US." 

 Enquiries:
 
OCZ Technology Group, Inc
 
Ryan Petersen, Chief Executive Officer
+1 408 733 8400
Arthur Knapp, Chief Financial Officer
 
 
 
John East & Partners Limited
+44 (0) 20 7628 2200
John East/Bidhi Bhoma
 
 
 
College Hill
+44 (0) 20 7457 2020
Adrian Duffield/Carl Franklin
 

Note to editors

OCZ develops, produces, and distributes high-performance computer components including flash memory storage, memory modules, thermal management solutions and computer power supplies, designed to make computers run faster, more reliably and more efficiently.
 
With a reputation for innovation and excellence in a demanding and discerning market, OCZ extended its market leadership when it acquired PC Power & Cooling in May 2007, to become a global force in high-performance power supply and cooling products. In October 2007, it acquired high performance laptop and desktop computer systems maker Hypersonic PC to further diversify its product offerings.

Recently the Group released new products such as the Neural Impulse Actuator ("NIA"), Solid State Drives ("SSDs"), DIY Notebook solutions, and Fatal1ty memory solutions. These products were shown at Games Convention 2008 in Leipzig Germany and at NVISION in San Jose, CA.

OCZ was recently ranked number 21 on Deloitte's 'Technology Fast 50' programme for Silicon Valley Software and Information Technology (IT) Companies, with an increase in revenue of 1,241 per cent. from fiscal year 2003 to 2007. 

Based in the heart of Silicon Valley, OCZ employs approximately 290 staff across offices in the USA (Sunnyvale and San Diego), Canada, Holland and its manufacturing and logistics centre in Taiwan.

www.ocztechnology.com
  Overview

The Group achieved revenue growth of 55 per cent. by following through on its strategy to diversify OCZ's product range and target markets. Non-memory product revenues grew by 194 per cent. and now comprise 38 per cent. of revenues compared to 20 per cent. only a year ago.

The Group also achieved a number of major milestones despite the global economic conditions, including making substantial changes to its manufacturing facilities in order to increase product margins and, as stated in September's trading update, reducing credit exposure to some of its larger customers as it tightened its payment terms.

During the period, the Group successfully introduced several potentially transformational products such as Solid State Disk drives ("SSDs"), 'whitebooks' and the NIA (Neural Impulse Actuator). These and others will enable us to continue to build profitable, diversified revenue streams.

Operational review

Manufacturing operations

In June, the Group moved its Taiwanese manufacturing facility to larger, yet less expensive premises, which allowed OCZ to achieve a more efficient throughput of goods and contain costs as turnover grows. This relocation and expansion, implemented during the traditionally slower summer season, resulted in the temporary suspension of manufacturing operations and had a negative impact on trading in June and a portion of July. However, it is encouraging to note that the benefits of this relocation are already beginning to be seen.

The Group further reduced costs in August, when it moved its memory module manufacturing in-house. Previously, the Group had outsourced the board level assembly portion of its manufacturing to outside contractors. However, as unit volumes increase, OCZ now expects to benefit substantially from the cost savings provided by in-house manufacturing. The cost savings on an ongoing basis from in-house manufacturing are expected to be up to $1.50 per unit sold.  

Total memory module unit volume for the six months to 31 August 2008 was 915,000 units, up from 500,000 in the same period last year. 

New products and marketing

In July, the Group launched its low cost SSDs. Initial consumer demand for SSDs exceeded management expectations, achieving sales of approximately $4 million in July and August. Significant volumes of the product are now being delivered as demand remains high.  SSDs and flash memory revenue jumped by 500 per cent. to $13.8 million (2007: $2.3 million).  IDC predicts that the annual global market for SSDs will grow to $11.1 billion by 2011.

OCZ signed an agreement with Jonathan "Fatal1ty" Wendel to be the exclusive brand for "Fatal1ty" memory and power supplies. The "Fatal1ty" memory modules have been well received and have helped increase OCZ's overall market share in mainstream gaming. The co-branded power supplies will be introduced during the key pre-Christmas holiday period. 

OCZ successfully launched and sold over 5,000 units of the innovative NIA peripheral. New revisions of the product now make it possible to utilise the product with the latest 64-bit operating systems and games. The NIA was met with strong praise from the leading online trade press and continues to be highlighted by both print and television media. 

The Group has recently introduced its line of 'whitebook' and enthusiast 'Do It Yourself' notebooks. Although these notebooks are available through the Group's existing channels, under the Group's Hypersonic brand, volume sales are expected to be achieved through sales to OEMs.

Hypersonic PC continues to expand its product offering and grew customized desktop sales over the period. In September, Hypersonic beat the competition in all the major performance benchmarks and a leading trade publication stated "It's official: The Sonic Boom ATS sets the bar for luxury PCs."

The Group has further developed its partnerships with leading platform partners including Intel, AMD and NVIDIA. A highly successful collaboration with Intel resulted in the release of Intel/OCZ co-branded "XMP" memory modules which are optimized for the latest Intel based premium systems. These modules were promoted by both companies in a successful bundle which was funded by Intel and targeted the leading e-tailers. This increased sales and fostered quick adoption of the new technology. 

Customers and markets

OCZ achieved substantial increases in the size of its client base and more than doubled its market share in key clients, as evidenced by the sell through of OCZ products.

In response to global credit markets, the Group tightened its payment terms which reduced exposure to some of its historically larger customers.  Since OCZ produces branded products, some of these sales moved into other retail and e-tail outlets and the Group was still able to achieve record revenues despite this shift in policy. 

Financial review

OCZ achieved revenues of $79.6 million in the six month period ended 31 August 2008, an increase of 55 per cent. (2007: $51.3 million). Our successful strategy of diversification resulted in growth of 194 per cent. in non-memory products representing 38 per cent. of revenues (2007: 20 per cent.) 

Underlying gross margins were 17 per cent. (2007: 21 per cent.). The reduction was mainly due to operational disruptions during the relocation of the Group's Taiwan manufacturing facility in June and July, and a shift in product mix to lower margin products.  However, with anticipated increased volumes, the lower operating costs which are associated with these lower margin products are expected to result in improved operating profit.

Total operating expenses increased to $14.2 million (2007: $9.9 million), representing 17.8 per cent. of revenue (2007: 19.2 per cent.). Within expenses, the Group bore increased outbound freight costs, due to a steep rise in fuel costs, of $1.9 million (2007: $0.8 million). The Group expects its freight costs now to drop, due to improved internal logistics and reductions in the cost of fuel.

Underlying EBIDTA was broadly in line with our expectations at $150,000. This excludes stock based compensation and restructuring costs related to a credit note provision for a customer, with which the Group is not currently trading, and Taiwan lease termination charges (see pro-forma computation in financial statements).  Typically the Group sees lower profitability during the summer and the temporarily suspended operations during the factory relocation, held back revenues and margins. Underlying loss before tax was $0.6 million and the Group reported a loss before tax of $1.8 million (2007: profit $0.9 million).  

Underlying loss per share was 0.9 cents compared to the Group's reported loss per share of 2.7 cents (2007: profit 1.3 cents).

The Group has recently increased its existing loan facilities with Silicon Valley Bank from $10 million to $12 million. The Group has also increased trade terms with major suppliers such that it is now in a position to purchase inventory up to approximately $40 million. At the period end, the Group had drawn down $9.4 million of its existing loan facility and $19 million of its available trade terms.

The final $500,000 loan note ("Note") payable from the 2007 acquisition of PC Power & Cooling was recently partially redeemed by the issue of 848,000 shares (in respect of $200,000 principal due under the Note) and a cash payment of $100,000. The payment date of the remaining $200,000 Note was then deferred three months to August 2009. This restructuring not only reduced short term liabilities but also freed up additional capital.  

US dual listing

The Group intends to file a registration statement with the US Securities and Exchange Commission in order to seek a US listing of its shares. The Board is confident that there is considerable interest in specialist technology companies such as OCZ amongst both retail and institutional investors in the US, particularly as the Group has a high profile consumer brand. A dual listing in the US would result in the Group reporting quarterly financial statements.

Current trading and prospects

Based on OCZ's market position, strong brand profile, expanded worldwide distribution channel, increased manufacturing and distribution capability, and a larger financing facility, the Board expects the Group's revenues to continue to grow in the second half of the financial year.  However, with uncertainty surrounding consumer spending in the forthcoming Christmas period, which is the most important trading period of the year, the Board remains cautious and continues to monitor the Group's cost base very closely in order to actively manage its margins and working capital.  

Overall, the Board remains confident about the prospects for the Group's growth, continued market share gains, and margin improvement from its new manufacturing facilities.
George Kynoch
Chairman
  Consolidated Income Statement 
6 months 
ended 31 August 
2008
(Unaudited)
US$'000
6 months 
ended 31 August 
2007
(Unaudited)
US$'000
14 months ended
29 February
2008
(Audited)
US$'000
Revenue

Sales - net
79,633
51,326
134,687
Cost of sales
66,930
40,449
108,572
Gross profit
12,703
10,877
26,115
Expenses

Sales and marketing 
5,360
4,184
10,261
General, administrative and operations 
7,732
4,827
12,916
Research and development 
1,086
862
1,772
Total operating expenses
14,178
9,873
24,949
Operating (loss)/profit 
(1,475)
1,004
1,166
Other income/(expense)

Other (expense)/income - net
(71)
9 
251
Interest and financing costs
(292)
(111)
(340)

(363)
(102)
(89)
(Loss)/Profit before tax
(1,838)
902
1,077
Tax benefit/(expense) 
440  
(300)
740
Retained (loss)/profit 
(1,398)
602
1,817
(Loss)/Earnings per share - basic

(Loss)/Earnings per share - cents
(2.7)
1.3
3.7
Weighted average number of shares ('000)
52,200
48,000
48,600
(Loss)/Earnings per share - diluted

(Loss)/Earnings per share - cents
(2.7)
1.2
3.6
Weighted average number of shares ('000)
52,200
49,400
50,000
Proforma computation - Underlying EBITDA:

GAAP Operating (loss)/profit
(1,475)
1,004
1,166
Plus: 

Stock based compensation
360
318
848
Depreciation and amortization
400
270
584
Restructuring charges
865
-
-
Underlying EBITDA
150
1,592
2,598

  Consolidated Balance Sheet
As at  
31 August 
2008
(Unaudited)
US$'000
As at 
31 August 
2007
(Unaudited)
US$'000
As at
29 February
2008
(Audited)
US$'000
Assets

Current assets

Cash and cash equivalents
732
1,608
1,544
Accounts receivable, net
26,050
15,604
20,480
Inventory
17,758
9,970
14,827
Deferred tax asset, net
1,326
141
836
Prepaid expenses and other assets
2,508
1,443
3,086
Total current assets
48,374
28,766
40,773
Property and equipment, net
2,096
1,278
1,940
Other assets

Goodwill and acquisition intangible assets
10,344
8,979
10,169
Deposits and other assets
57
52
65

10,401
9,031
10,234
Total assets
60,871
39,075
52,947
Liabilities and stockholders' equity 

Current liabilities

Notes payable
575
1,000
75
Bank loan payable
8,478
-
6,899
Accounts payable
19,315
6,494
13,033
Accrued taxes
-
357
1
Accrued wages and payroll taxes
108
200
38
Accrued expense
3,763
1,728
2,414
Accrued warranties
107
78
97
Deferred revenue
112
89
92
Total current liabilities
32,458
9,946
22,649
Other Long Term Liabilities
-
1,000
500
Stockholders' equity

Common stock
52
52
52
Additional paid in capital
30,195
29,535
29,796
Cumulative translation adjustment
(231)
(38)
(205)
Retained deficit
(1,603)
(1,420)
155
Total stockholders' equity
28,413
28,129
29,798
Total liabilities and stockholders' equity
60,871
39,075
52,947

Consolidated Statement of Cash Flow 
6 months ended
 31 August
 2008(Unaudited)US$'000
6 months ended 
31 August 2007
(Unaudited)
US$'000
14 months ended
29 February
2008
(Audited)
US$'000
Cash flows from operating activities

Net (loss)/income 
(1,398)
602
1,817
Adjustments to reconcile net income/(loss) to net cash provided/(used) by operating activities:

Depreciation
343
241
518
Amortisation of intangibles
57
29
66
Stock based compensation
360
318
848
Changes in current assets and current liabilities

Accounts receivable
(5,550)
(2,552)
(7,468)
Inventory
(2,932)
(5,692)
(11,595)
Prepaid expenses and other assets
578
(499)
(2,627)
Accounts payable
6,282
1,097
7,820
Accrued taxes
-
(53)
(213)
Accrued wages and payroll taxes
70
(9)
(98)
Accrued expenses
1,329
292
1,610
Accrued warranties
10
28
51
Deferred tax asset, net
(490)
(21)
(284)
Deferred revenue
20
69
3
Net cash used by operating activities
(1,321)
(6,150)
(9,552)
Cash flows from investing activities

Purchases of fixed assets
(500)
(657)
(1,604)
Increase in deposits
8
57
15
Cash payment for acquisition
(230)
(6,100)
(7,779)
Net cash used in investing activities
(722)
(6,700)
(9,368)
Cash flows from financing activities

Sale of common stock
38
14,999
15,499
Bank loan
1,579
(3,029)
3,069
Notes payable
-
2,000
500
Net cash provided in financing activities
1,617
13,970
19,068
Foreign currency effect on cash
(386)
98
(27)
Movement in cash and cash equivalents
(812)
1,218
121
Cash and cash equivalents at beginning of period
1,544
390
1,423
Cash and cash equivalents at end of period
732
1,608
1,544
  
Consolidated Statement of Stockholders' Equity
Shares
No '000
Amount
$'000
Additional paid in capital
$'000
Cumulative translation adjustment
$'000
Retained earnings
$'000
Total
$'000

As at 31 December 2006 (Audited)

43,489

44

11,026

(22)

(2,022)

9,026

Issuance of common stock for acquisition, net of costs

623

1

1,975

-

-

1,976

Issuance of common stock - net of costs

6,620

6

15,251

-

-

15,257
Capitalisation of promissory note
579
-
500
-
-
500

Exercise of stock options and warrants

853

1

241

-

-

242

Increase in Cumulative translation adjustment

-

-

-

177

-

177
Stock based compensation
-
-
848
-
-
848

Tax effect of stock based compensation

-

-

(45)

-

-

(45)
Net income
-
-
-
-
1,817
1,817
As at 29 February 2008
(Audited)
52,164
52
29,796
155
(205)
29,798
Exercise of stock options

184

35

-

-

35
Decrease in Cumulative translation adjustment

-

-

-

(386)

-

(386)
Stock based compensation
-
-
360
-
-
360

Tax effect of stock based compensation

-

-

4

-

-

4
Net loss
-
-
-
-
(1,398)
(1,398)

As at 31 August 2008
(Unaudited)
52,348
52
30,195
(231)
(1,603)
28,413

  Notes to the Interim Statement

For the six months ended 31 August 2008

1.  Basis of preparation
The financial information for the six months ended 31 August 2008 is unaudited and does not constitute statutory accounts. These statements have been prepared in accordance with US GAAP and on a basis which is consistent with the accounting policies adopted by the Group.

The financial information for the six months ended 31 August 2007 is unaudited but has been extracted from the report for the 14 months ended 29 February 2008 on which the Group received an unqualified auditor's report.

2.  Taxation
The tax credit for the half year is based on the estimated effective tax rate for the Group for the full year ended 28 February 2009 as applied to the half year's pre-tax loss.

3. Stock-based compensation expense
Effective 1 January 2006, the group adopted the provisions of SFAS No. 123R under which compensation cost is determined as of the date of grant. This cost is then recognised over the periods in which the related services are rendered (generally the vesting period).

Stock compensation expense for the six months ended 31 August 2008 was $360,000 which increased net loss by $274,000 after the related income tax effect. In the comparable period for 2007 stock compensation expense was $318,000 or approximately $210,000 after the related income tax effect.

4.  Earnings/(loss) per share
The basic earnings or loss per share is calculated using the weighted average number of common shares outstanding for the period and in accordance with US GAAP. The diluted earnings per share for the 2007 period reflects the potential incremental effect of options and warrants using the treasury stock method. These instruments are excluded for the 2008 calculation since their effect would be anti-dilutive due to the net loss.

5.  Dividends
No dividend is declared for the six months ended 31 August 2008.

6.  Copies of report
The interim statement is available on request from the offices of John East & Partners Limited at 10 Finsbury Square, London EC2A 1AD and from the Group's website www.ocztechnology.com.

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