甲骨文 (ORCL) 2005 Q2 法說會逐字稿

Good day and welcome to the Storage Tech second quarter 2005 financial results conference call.

This call is being recorded.

At this time for opening remarks and introductions, I'd like to turn the call over to the Director of Investor Relations, Ms. Dana Johnson.

Please go ahead, Ma'am.

Thank you, Matt.

Good morning, and welcome to Storage Tech's second quarter, 2005 earnings call.

With me today is Pat Martin, Storage Tech's Chairman, President and CEO, and Bobby Kocol, Storage Tech's Corporate Vice President and Chief Financial Officer.

Hopefully you've already received copies of our earnings release.

If not, please call us at 303-673-5950, or check our website at www.storetek.com.

Before we start, let me remind you that during the course of this conference call, we may provide information which constitutes forward-looking statements, including statements regarding future events.

Actual results may differ materially.

Any forward-looking statements that we make today are subject to risks and uncertainties as described in the Company's reports on forms 10-K, 10-Q and 8K that are filed with the SEC, and the 10-Q for the second quarter 2005, once it has been filed.

In addition, certain matters regarding the proposed merger with Sun MicroSystems will be addressed in the proxy statement to be filed with the SEC at the end of this month.

We urge you to read the proxy statement when it becomes available, because it will contain important information regarding the acquisition of Storage Tech.

You may obtain free copies of the proxy statement and other documents filed with the SEC, at the SEC web site at www.sec.gov.

In addition, you may obtain free copies of the document filed with the SEC by Storage Tech, by going to the Storage Tech investor relations page on its corporate website at www.storetek.com.

Because the transaction is pending, we will not be able to address questions outside of what we've disclosed publicly.

At this time, I'd like to turn the call over to Pat Martin.

Thank you.

Good morning everyone, and thank you for joining us today.

I'll make a few opening marks regarding the quarter and the proposed merger with Sun Microsystems, then I'll turn it over to Bobby who will cover our second quarter performance.

By now I'm sure you've had the opportunity to read our earnings release.

We're very pleased with the revenue improvement on a year-over- year in a sequential basis, as well as the continued strength in our product and service margins.

Our $549 million in revenue was up 6% over the second quarter of last year, and up 10% over the first quarter of this year.

On a non GAAP basis, that is excluding merger costs, we earned $0.32 per share for the second quarter.

Total tape revenue was up 13% compared to the same period year, and up 14% for the first quarter.

Our automation product revenue grew 77% year-over-year.

Worldwide demand for the SL500 was very strong, as we delivered our 1000th unit in the second quarter.

We reached this milestone in just 9 months.

The SL500 provides end-users with unmatched scale-ability, storage density and data center class reliability to the mid-tier market.

It has an extremely adaptable platform, designed to accommodate current and future storage consolidation, and data protection needs.

In addition, we delivered our 500th SL8500 modular library system for the quarter.

The SL8500 provides the ideal solution to allow customers to store petabits of information at lower cost than traditional alternatives.

Its ability to provide enterprise-class connectivity, and online upgrades while maintaining 24 by 7 pace allows a superior level of enterprise-class service.

Total service revenues continue to be strong, and they were up 7% compared to the same period last year, and up 4% from the first quarter.

Our storage services business continues to be central for our business model.

We see a lot of opportunity in the service areas both in traditional maintenance, as well as in the professional services, and the consultant areas.

Our customers look to our services as a key enabler and a primary component of our information life cycle management solutions.

Financially we're in great shape.

In addition to strong revenue margins, our balance sheet remains strong, and we continue to generate positive cash flow.

We ended the quarter with cash investments of just under $1.2 billion.

During the quarter we launched some major new products and product enhancements, which continue to build on our ILM strategy for mid-range and enterprise-class environments.

We released the FlexLine 600, the IntelliStore archive and compliance solution, via-remote services, and the SL8500 pass report.

The FlexLine 600 is the first enterprise-class data technology disk solution.

We've taken our user experience and know-how, and provided a low cost dissolution that has class of performance, reliability, capacity and storage management traditionally found in primary disk (inaudible).

The FlexLine 600 reduces cost and increases up-time.

The FlexLine 600 is also the foundation for our for our new IntelliStore archiving solution.

IntelliStore enables our customers to easily and affordably capture, manage and re-use their business data.

It archives everything from employee e-mail to customer and database information.

IntelliStore performs 10 times better than its closest competitor, and at a lower price point.

Via-remote services offers customers seamless, easy to use off site back up- recovery, and the SL8500 pass report features allows tapes to be passed from one library to the other.

These products and enhancements will continue to strengthen our position in the marketplace, while we continue to expand our addressful (ph) markets.

We were very aggressive in launching these products this quarter.

In addition to the merger cost I mentioned earlier, there were other costs we incurred during the quarter, which we felt were necessary with proposed merger.

We met with customers, employees and industry analysts from around the world to make sure that the message and the benefits of the proposed merger were clearly understood.

There are other transition expenses aside from the merger that we incurred, in order to ensure continuity with the management team, as well as the sales and services teams.

We also invested in our product launch, more in our product launches than we originally planned.

Through a combination of the Wall Street Journal advertising, industry shows, et cetera, we got the word out to the market that Storage Tech's ILM solutions were the best, most comprehensive in the marketplace.

As I said, these product launch costs were more than anticipated.

However we believe that they will pay off as the broader market recognizes the value proposition of the FlexLine 600, IntelliStore and the pass report for the SL8500.

Moreover, these products received very strong market response in their limited exposure in Q2.

Before I turn the call over to Bobby, I would like to briefly talk about our proposed merger with Sun Microsystems.

We're very excited about this opportunity for our customers.

The strategic rationale for combining our two companies is that we can now offer the total solution, compute, networking and storage to our customers.

With Storage Tech currently launching new exciting ILM products, with our ability to attach our automated tape and ILM offerings, to (inaudible) and OS390 Operating environments, the combined enterprise will be able to serve more customers in more ways.

By bringing a systems approach to information life cycle management, the combined Company will be well positioned to help customers better manage their growing privacy, security compliance and policy requirements.

As you know, we've announced a special shareholders meeting to be held on August 30th, and we've cleared the Hart-Scott-Rodino regulatory waiting period.

In addition, we've received strong customer support for the proposed merger, and employee feedback has also been very positive.

We're also pleased with the initial progress we've made on integration planning, and are confident in our ability to be prepared for the expected close of the proposed merger transaction in late summer or early fall.

The proposed merger remains subject to, among other conditions, clearance under the European union merger control regulation, and approval by Storage Tech's stockholders.

Clearly we're going to focus on product launches this quarter, delivering another successful quarter, and successfully managing the transition with Sun.

Our financial condition, our market leadership and our business momentum are all strong, as you look forward to our future with the proposed Sun merger.

However, because the transaction is not yet closed, we'll not be able to address questions regarding the merger outside of what we've already stated publicly.

In addition, although we are confident in our abilities to continue to execute in the quarters ahead, because we expect the deal to close before year end, we'll not be commenting on our prior full year guidance.

I'd now like to turn the call over to Bobby for some further details on Q2 financial results.

Thank you, Pat.

Good morning everybody.

Second quarter revenues of $549 million resulted in earnings of $0.29 per diluted share on a GAAP basis.

However, merger costs, mostly attorney, investment bank and filing fees amounted to approximately 5.2 million, impacting earnings by about $0.03 per share, resulting in a non-GAAP earnings per share of $0.32 per share.

Product sales in the second quarter were up 6% year-over-year to $306 million, and up 15$ sequentially from the first quarter.

Product sales were made up of $242 million of tape, $36 million in disk and $28 million in network and other sales.

Service revenues increased to $243 million, an increased to 7% over Q2 of last year.

Geographically, North America represented 48% of total worldwide revenue.

Europe 37% but the Pac Rim and Latin America making up the rest.

On a year-over-year basis, North American revenues were up 3%, European revenues up 2%, Asia was up 13%, while Latin America revenues were up 32%.

Overall on a consolidated basis excluding our hedging activities, currency impacts were favorable to revenue on a year-over-year basis by about 3 points.

Total gross margins in the quarter were 47%, an increase of 50 bases points from Q2 of last year.

Even with the delays in customer purchase decisions during Q2 as customers evaluated the proposed merger with Sun, both product and service margins remained solid.

Product margins were up 120 basis points over last year at 49%, mostly due to a product mix skewed toward tape automation systems sales.

And service margins for the quarter at 44% were relatively flat to last year, but up over a full point sequentially from the first quarter.

We continue to see solid performance in this area.

Professional services revenue grew 7% over Q2 of last year, and was 12% of the total services revenue.

Total operating expenses for the second quarter were $227 million, and included the $5.2 million of merger costs.

We were very aggressive this quarter investing in both R&D as well as sales and marketing activities.

Clearly, we had higher selling expenses associated with higher sales revenue.

In addition, we invested heavily in a significant product launch activity that we had in Q2, which should continue in the second half of the year as we bring more new product offerings to market.

Net interest income added another $8 million to pre-tax earnings, as we ceased the share buy-back activities once we announced the merger agreement.

And finally, with the changes surrounding the proposed merger, many of which we mentioned, our pre-tax income projections for the year have impacted our tax structures, and our annual effective tax rate.

This resulted in a lowering of our tax rate in the second quarter to 16%, and 18% for the six months.

The balance sheet and financial strength of Storage Tech remains solid.

Cash and investment balances were just under $1.2 billion.

This includes us investing another $38 million in the second quarter through the repurchase of roughly $1.3 million shares of our stock, before we suspended this activity.

Cash flow from operations was just under $50 million for the quarter.

DSO at 76 days is four better than Q2 of last year.

Using the average accounts receivable balance during the quarter instead of the ending balance which is skewed by end of quarter shipments, DSOs were 57 days.

Inventory levels were $127 million, and inventory turns were 5.

Head count was just above 7200 at the end of the quarter.

We had about 80 additions during the second quarter, mostly in sales and in service.

In the quarter, capital expenditures were $16 million, while depreciation and amortization was $20 million, both on target for what we anticipated.

In summary, even with some disruption from the proposed merger with Sun, and the announcement hitting the wires at the onset of our busiest month of the quarter, this was a very good quarter.

The key operational financial metrics, revenue and gross margins were very solid.

Our investments in R&D and sales and marketing should provide incremental benefits, and we continue to be positioned to drive further operational benefits in the business, in order to achieve consistent and improving results.

The new products we have brought to market thus far are having very good success and there's more to come in the upcoming quarters.

That, coupled with the growing service expertise we have, should allow us to solve the complex storage issues our customer face and with that, I'll turn it back to Dana.

Okay, Matt.

We're ready to take some questions now.

Thank you.

We'll take our first question from Andrew McCullough with Credit Suisse First Boston

Yes Bobby, just a couple of questions on mix.

Can you give us the direct versus indirect during the quartering, and also what the geographic breakdown looks like.

Sure.

The indirect portion was 47% this quarter, versus the 57% that we had last quarter.

I think it was like 44% last year.

And then the geography mix, let me look for that here just a second. 48% in North America, 37% in Europe, and the Pac.

Rim and Latin America made up the rest.

And then as it relates to Hewlett Packard Pat, how is the relationship or the potential relationship with HP been impacted by the Sun announcement?

Well, as you know, the HP relationship is in early days, but we spent time with HP.

We've talked to them.

The storage people are very comfortable with the relationship that we have with them and the way we've been able to keep the integrity of those two relationships separate.

Secondly, Sun has made it very clear that they're very interested in our OEM relationships, in particular, HP.

So I'm not sure but we have reached out to HP and I suspect Sun has also.

So we've not seen any negative impact on it, but it's still pretty early in the relationship.

Okay, and then just last question.

On the product gross margins.

Was pricing a function in the product gross margins declining at all?

Was that a factor?

No, not really Andy.

Even a little bit of a surprise, but we thought there would be some more competitive pressure out there once the announcement was made, but quite frankly we did pretty well with respect to margins.

That's why when we talked about some of the key business metrics, to have revenue and margins be where they are, we're very pleased with it.

Matt, next question, please.

We do ask that you limit yourself to one question.

And we'll go to the next question from Harry Blount, from Lehman Brothers.

Hi, guys.

Bobby, Pat, I just want to focus on the OpEx side of the equation a little bit.

I heard your commentary on the $5.2 million of incremental costs, but is it does still look like you if you take the higher sales into account that the OpEx was still up a little bit more than what we would normally expect, particularly SG&A.

What were some of the other factors that contributed to the SG&A growth in the quarter?

Well, as you know, Harry, for some time we've been putting a lot of effort into growing our distribution channels, both the direct and indirected in order to be able to take advantage of the storage market that continues to grow, and in particular, with respect to the huge number of product launches that we have already brought to market, as well as those that we will be deploying this quarter and the follow on quarters coming up.

So what we have seen over a number of quarters has been a gradual increase on a sequential basis, the investments that we've had in the SG&A line.

By the way that's the S part, being the sales and marketing piece.

It's not G&A as you know me well enough.

So obviously, half of the sequential increase when I looked from Q1 to 2 is due to the merger costs that we mentioned.

We talked about the incremental variable costs, the commissions on the increase in revenue.

But we were -- as Pat mentioned, we went very agressive this quarter in our marketing efforts, more than we initially planned.

Pat highlighted a couple of the things that we did.

We really tried to make sure the word was out there.

We spent some money.

Consciously did this in the quarter to make sure that the message was heard.

Traveled a lot to make sure that customers, employees were all brought up to speed, and we did that during the quarter.

And then the other thing too, that I did not mention that I might as well bring up now is, we mentioned the currency benefit on the top line about 3%, and as you know, when you have the favorableness on the top line because of currencies, you get the offsetting negative or unfavorable impacts at the expense line, so there was also an impact regarding the effects that hit the operating expense line as well.

Bobby, just to clarify on getting the getting the word out, was that included in the 5-2 or is that incremental on top of the 5-2?

No, no, it was not in the 5-2.

That's why we state it had that way.

When you look at the accounting pronouncements about what you can call merger costs, they're very, very specific.

And that was really tied to those direct out-of-pocket expenses associated with the attorneys that we needed to have on board, the investment bankers that we had to have on board and the filing fees.

So all those other costs are just in the operational costs that we had in the quarter.

Next question.

We go next to Glenn Hanus with Needham and Company.

Maybe just a general comment on the tape market.

Do you feel like the tape market is seeing, or saw a little bit of an uptick here in the second quarter or would you say your gains were more company-specific, taking share, that kind of thing?

Well, I think -- go back Glenn, to what I said when we launched the SL8500 and the SL500.

We think that we had a terrific opportunity to go through a technology refresh for our install base of (inaudible) and our older L series libraries.

And also to have an opportunity to take some share.

We've not been able to analyze the specific installs in Q2, but certainly in last year and up to Q1, many of the SL8500s were in new customers and new accounts.

We were not actually replacing a lot of (inaudible).

So it looks like we are gaining share at least gaining footprint.

And we don't think until we get the H(inaudible) and the pass reports fully out in the market, do we think that product is prepared to take our (inaudible) ones out.

So I'm not sure if tape itself is - the overall market is taking an uptick.

I think IBM had a pretty good quarter.

I think we'll have to wait and see what happens with some of the other vendors.

But certainly the products are getting an awful lot of excite excitement and awful lot of acceptance in the marketplace as I mentioned in my comments.

Matt, next question.

We go next with Dan Renouard with Robert W. Baird.

Hi, I was wondering if you could give us an update on your new enterprise-drive, status of that, and when we should we expect to see that and your other products rolling out.

Right.

You -- I'm just hesitating a little bit in terms of how to say this.

The new enterprise drive will be out this year.

It will be out obviously in late Q3 or early Q4.

Okay and what was the second part of your question, Dan?

Just other new products you can talk about.

Well, we'll have the continued data protection product out, we believe, in Q4.

We'll have the (inaudible) version of the SL8500.

What that basically does is double the number of robotic arms you have in the drives.

And we also have some continuing enhancements to the FlexLine 600 that will be coming out and continued enhancements with the IntelliStore.

Thanks.

We go next to Clay Sumner from Friedman, Billings, Ramsey.

Thanks.

Since your FlexLine products are built on a video technology as some of Sun's disk products are, can we assume that you guys have slowed or even altered development efforts around some of the new disk systems?

I just heard you say you are expecting enhancements to the FlexLine 600, though.

Yes.

The FlexLine 600 is basically our control, it's our design.

So this is not an (inaudible) based controller system.

It's a Storage Tech design product.

I guess Pat, can you just talk about how you and Sun are rationalizing your disk development road maps at this point?

Right.

There is a product integration team that we formed, both ourselves and Sun.

There's very, very little product overlap.

Obviously, Sun sells some Ingenia[ph]product, we sell some Ingenia[ph] product.

The FlexLine 600 is clearly going to be very, very interesting product.

I don't -- there's been no decisions to be made to limit any of the products that we have coming from market right now.

But I just want to make sure the audience understands, the FlexLine 600 is not an Ingenia[ph] based product.

Okay, thank you.

Next question, please.

We go next to Laura Conigliaro, with Goldman Sachs.

Yeah, this is (inaudible) Park on behalf of Laura.

Just a couple of questions.

Can you give us some indication of your backlog coming out that you had in the June quarter versus where you were coming out of March?

And also since Storage Tech's sales force is the key element behind the merger with Sun, following another soft quarter in disk sales, what are your expectations about Storage Tech's sales force ability to sell disk in the combined company?

Thank you.

Let me just talk about the sales force.

Our sales force is clearly capable of selling disk.

We have a lot of - our customers were waiting for the FlexLine to come out.

We talked about the product.

We had it in EPEs, and it really didn't come out until the last couple of weeks in the quarter, and that muted a lot of the activity.

The -- also, the products that we had on the tape area was generating an awful lot of traction in the marketplace and our sales force was really base trying to handle the demand we had there.

As far as the backlog.

About the only comment we'll make on that is, as we head into the third quarter where we are now, the backlog looks pretty much in sync with where we were as we came into the third quarter last year.

The pipelines are actually a little bit up from last year at this time.

Thank you.

Matt, next question

There are no further questions in the queue, so I'd like to turn the call back over to management for any additional or closing comments.

Well thank you for joining us this morning, everyone.

As you review the results, if you have additional questions, please feel free to call me.

Have a good day, everyone.

And that does conclude today's teleconference.

Again, we do thank you for your participation.

You may disconnect at this time.