Announcing a fiscal Q1 2007 set of results that are frankly dreadful, Overland Storage CEO and president Chris Calisi said: "“The past year and a half has been a difficult period for Overland."
(He was not kidding. It has been hell.)
"We entered this period with a plan to refresh our entire product portfolio, knowing that it would be costly, but important to compete more effectively and facilitate future growth. We also had a substantial cash position that could be invested in our business to fund this effort."
How has he done? A year ago in its fiscal Q1 2006, Overland lost $2.9 million on revenue of $58.5 million. It had lost a substantial OEM contract with HP and just purchased Zetta Systems to prime the technology pump for its entry into protected primary storage (what became the Ultamus arrays). ADIC was circling it as an acquisition target with bared teeth and deep pockets. Things looked bleak.
But Calisi saw off ADIC's Peter van Oppen and must have looked on with rueful satisfaction as ADIC got gobbled up by Quantum. Overland introduced it's Ultamus RAID and then things started to go downhill again. Dell cancelled a developing OEM deal for two automated tape devices Overland was developing. This was partly because Overland had outsourced its manufacturing and product delivery reliability fell apart. Now Overland is taking the manufacturing back in house after what must be viewed as a near disaster.
The net result of 18 month's hard work is discouraging. In fact, compared to the position a year ago it looks terrible. Its FY 07 Q1 result saw a loss seven times that of the year-ago quarter, at $20 million, on revenue 28.5 percent down at $41.8 million.
Loss drivers included its main OEM spending 27 percent less than a year ago (although spending was up 16 percent compared to the last quarter of fiscal 2006) and branded sales being 26 percent down. The backlog was $6.7 million as unsold goods piled up in inventory. Manufacturing costs obviously went up.
Overland spent more to make products which were not sold in sufficient numbers and it didn't replace the lost HP OEM revenue effectively.
ADIC might be ecstatic that it didn't buy Overland. Oppen is a better seller than he is a buyer it appears.
Overland's board might be forgiven for thinking that backing a CEO who has increased the company's loss almost tenfold in twelve months is a courageous thing to do. Perhaps 'courageous' is not the right word.
Naturally cost-cutting and retrenchment are the order of the day. With such losses substantial retrenchment is in order. It's obviously going to be cutting fat - share re-purchase programs - which will dismay investors as a share price floor may now fall away - but also flesh and bone. The primary storage software development effort is being cut with a Seattle office closure and a reduction in the numbers of software engineers associated with it. Whether these engineers would be let go or not was not made clear but probably, they will be let go. Times are very hard at Overland.
The vast bulk of the Zetta acquisition assets yet to be amortised have been written off, adding $8.4 million to the loss. Overland said it was: "due to the high cost of software development without commensurate returns." This has got to get people thinking about the wisdom of introducing protected primary storage which could be crudely and brutally summed up as yet another RAID-protected array, however well Ultamus pricing and value can be presented.
Combine this with the introduction of ARCvault tape product and we might be seeing the very first and slight signs of a retrenchment of the protected primary storage product line.
Tellingly Calisi said 1,000 ARCvault units had shipped in its first four months. He didn't reveal Ultamus sales. If that line is not delivering the revenue goods then surely the days of the president and CEO must be numbered.
The financial statement includes this quote from him: "Our primary goal is to return Overland to profitability. To do so, we must succeed with our new product portfolio and reduce our cost structure. With respect to cost structure, the completion of our product development cycles, coupled with the discontinuation of development of the Zetta technology, will allow us to reduce R&D spending. Additionally, we are further reducing our workforce and other previously planned spending. We expect the workforce reduction to result in annual savings of approximately $4.3 million, exclusive of severance charges which will be recorded in the fiscal 2007 second quarter, and a better alignment of our cost structure to expected revenue." He is not forecasting when Overland will return to profit.
I think it must be abundantly clear that Christopher Calisi's neck is hovering above the block. It is his strategy that Overland is executing. If it succeeds he will be a hero. If it fails or has failed, and people may be making that judgment right now, then he will be a zero and it will be his reign that will be executed and terminated.
It has been an awful year for Overland. In a consolidating tape automation market sales are down almost a third, losses up sevenfold and Dell has just canned an OEM deal. Can it get any worse?
Yes it can - Ultamus could fail. Then the fan, already streaked with brown material, may become so clogged with the stuff it stops turning altogether.
Let's hope Overland pulls out of the mire. It has been a gutsy performance by the company but time will tell if all the hands pushing at the company's wheel have been pushing in the right, Calisi-directed, direction.
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