Its first 2008 fiscal quarter (Q1 08) results were never going to sparkle but they could provide an encouraging uplift for Overland Storage's customers, partners and employees. The Q1 08 numbers did just that.
To recap, the company, a supplier of Neo tape automation, Reo virtual tape libraries and Ultamus RAID-protected hard-drive arrays, is in recovery mode after a tumultuous period featuring the firing of a CEO, the taking back of manufacturing in house after a disastrous foray into outsourcing, and the loss of significant OEM contacts. Overland was facing a severely testing time.
The task for the company has been likened to re-arranging the Titanic underneath the deck chairs, after it hit the ice floe.
The results statement revealed that revenue was down at $32.9 million compared to $41.8 million in the year-ago quarter. That was not unexpected. The net loss at $4.5 million ($0.35/share) was down to almost a fifth of the Q1 07 net loss of $20 million ($1.54/share. This is good news. The revenue decrease was attributed mostly to lower OEM sales through HP where sales were down 45.4 percent. This was expected, Overland says. Losing substantial OEMs like HP or Dell for a product line is never good news.
Sales of Overland's own branded products increased by 5.1 percent year-on-year, 7.4 percent sequentially compared to Q4 07, suggesting that sales of branded product may be accelerating. That would also be good news. Gross profit increased to $6.5 million, an increase of 22.2 percent, with gross margin increasing from 12.7 percent in Q1 07 to 19.6 percent in Q1 08. That is very good news and reflects the benefits of taking manufacturing back in house with consequent cost-savings. Against the background of the revenue decline these numbers are especially creditable.
There was, of course, a lot of expense cutting: op ex (operating expense) declined 36.3 percent compared to Q1 07 and that must have hurt as cuts were applied to sales and marketing, R&D and general administrative expenses. The company stated that op ex had declined for the fifth consecutive quarter, reaching the lowest level since Q4 03.
Overland's president and CEO, Vern LoForti, stressed that seasonality factors made the results more impressive: "In what is normally a seasonally down quarter for our branded channels due to summer holidays in Europe, sales in the European channel increased 4.1 percent and sales in the Americas gained 10.9 percent on a sequential basis. This growth was driven by combined sales of our disk-based Reo and Ultamus appliances that grew 19.2 percent sequentially. We achieved this performance with a reduced sales force that we are now rebuilding."
LoForti reckons that Overland has made convincing progress in rebuilding channel partner confidence, delivering products against its roadmap and re-constructing and re-training the sales force. New products are coming: "Under development, we have additional products offering new and unique technologies with one new product scheduled for a November launch."
It seems that several open systems tape automation companies are in trouble. Quantum just announced a $20 million loss. Tandberg faces losing Fujitsu Siemens Computer as a VXA OEM, the new TX08 being an LTO4-only device. Sony's Super AIT languishes and disk-based protection is eating into entry-level tape sales. In contrast IBM's high-end tape business is reckoned to be very profitable and we might expect Sun's equivalent business to be also generating good cash returns.
Against this background the strength and attractiveness of Overland's disk-based data protection offerings is a crucial factor in its future progress.
Technologies such as de-duplication are flooding into the market; Acer just became a FalconStor OEM as an example of this. With LSI Logic apparently looking to put its StoreAge storage array virtualisation into a chip and FCoE (Fibre Channel over Ethernet) getting ready for 2009 product introductions, Overland's product roadmap strategists have much to mull over.
The company is making solid progress and can be expected to be in profit in another quarter or two at this rate. That will be a milestone that might warrant relaxing expense controls for a bottle of champagne; things will be sparkling then.
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