Is OCZ a Wonderful Wizard?

With a flurry of feet, and singing bits of "We're off to see the wizard, the wonderful wizard of OCZ," investors beat a path to OCZ Technology (Nasdaq: OCZ  ) yesterday, sending share prices on the flash memory and solid-state drive maker up 16%.

On Wednesday, OCZ released a truly wonderful earnings report. Analysts had expected OCZ to lose $0.01 per share (adjusted). Instead, management boasted a profit of $0.01. Sales for the fiscal first quarter more than doubled to $74 million. To top it all off, OCZ promised investors at least 65% full-year revenue growth for fiscal 2012 -- $310 million minimum, and perhaps as much as $345 million. (Management also says it will achieve 30% to 40% gross margins on that revenue.)

Pretty magical stuff, huh? Now ... let's see what's behind the curtain.

Do not look behind the curtain
Before getting too excited about OCZ's "earnings surprise," be sure to note that these are not GAAP profits we are talking about. Actually, OCZ would prefer you focus instead on its "adjusted" profits, aka "earnings before one-time charges," aka "earnings before bad stuff" -- or "earnings before B.S." Viewed from a more generally accepted angle, OCZ still lost $0.20 per share for the quarter.

Speaking of things generally accepted, it's also worth noting that OCZ's gross margin promise seems, um, "optimistic." So far, OCZ has posted only a 15% gross for the past 12 months. While 30% margins aren't unheard of in this industry -- rivals STEC (Nasdaq: STEC  ) and SanDisk (Nasdaq: SNDK  ) regularly gross in the mid-40s, while Intel (Nasdaq: INTC  ) gets more than 64% -- OCZ seems to be promising a two-to-threefold improvement that would leapfrog rivals Smart Modular (Nasdaq: SMOD  ) and Micron (NYSE: MU  ) . That's pretty aggressive.

Honestly, if I had my druthers, I'd rather see OCZ leave such promises unsaid, and focus instead on turning down the heat on its cash-burning machine. OCZ continues to burn cash at a frenetic pace, you see, with free cash flow plunging to negative $40.7 million for the past 12 months.

Foolish takeaway
GAAP profits and adjusted profits are all well and good. But seeing OCZ conjure up some real free cash flow from its business? That would be truly wonderful.

Will OCZ be able to pull a rabbit out of its hat, or even just a few greenbacks? Add the stock to your Watchlist and find out.

The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Intel and creating a diagonal call position in Intel. Meanwhile, Fool contributor Rich Smith owns shares of SanDisk and Micron. The Motley Fool has a disclosure policy. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

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  • Report this Comment On July 08, 2011, at 4:09 PM, melegant99 wrote:

    Sorry this article is silly. I suppose if I was sucking wind with my MU position I would write this as well. OCZ has delivered on EVERYTHING they promised quarter after quarter...depsite how they spend cash. Boy envy and the internet are like beer and pretzels. Mel99. Shout out to the Lion PEACE.

  • Report this Comment On July 09, 2011, at 11:22 AM, aliceStark wrote:

    OCZ drives are the top seller at Amazon.com and Newegg.com. They currently sell the fastest pesonal computer hard drives in the world. All you have to do is google OCZ drives on any top online retailer. They have no retail competition whatsoever in the superfast hard drive arena. In this space, they are comparable to the first ipad. Anyone who wants computer speeds are eyeballing one of their drives. Is this article a joke?

  • Report this Comment On July 09, 2011, at 1:29 PM, TMFDitty wrote:

    @aliceStark: And sales seem to be doing well, as you'd expect from the facts you cite. The problem with OCZ as an investment (from my perspective) is the fact that the company is not generating cash profit from these sales, and has weak profit margins.

    If it delivers on its promise to double/treble gross margins, that won't be a problem for long. If it fails to deliver, though...

    TMFDitty

  • Report this Comment On July 09, 2011, at 4:32 PM, StankyPigano wrote:

    This commentary does not even qualify as analysis.

    OCZ's old business was high-speed memory modules. It is a low-profit

    margin, commodity business with too many competitors. Micron and

    SmartModular both have huge exposure to DRAM and so have much lower margins.

    So competitors, including OCZ have gotten out of that business to focus on

    faster-growing, higher margin businesses. The 4th quarter of last year was

    the last quarter OCZ included any of the legacy memory business. But

    looking at the last four quarters includes a lot of it, so gross margins

    were much lower. In general, SSD gross margins are much higher, which is

    why STEC and Sandisk post 40%-plus gross margins....it's all they do. And

    for the next year or so at least, OCZ has, by far, the best SSD products and

    a much lower price. I have an independent comparison of the new OCZ

    Z-Drive R4 and Fusion-io's ioDrive Duo. It shows that the Z-Drive is vastly

    superior in every metric: more memory, faster read and write capability,

    more reliable, and longer flash life. But the Z-Drive costs $7 per Gigabit

    vs. over $20 per Gigabit for the ioDrive! OCZ's gross margin was 20%

    compared to 12% last year, and I have little doubt that it can get north of

    40% GM as they get the economies of higher production.

    Regarding the use of non-GAAP earnings vs GAAP earnings, the main difference

    for OCZ is that non-GAAP excludes operating expenses

    associated with the Indilinx acquisition. It therefore provides a more

    realistic reflection of the operating results of the company on an ongoing

    basis. It requires a little more analysis to make sure it isn't being

    abused, but non-GAAP earnings are a useful tool.

    In my view, OCZ posted a fabulous quarter. They achieved profitability

    sooner than expected and raised expectations for the year, both of which are

    good. Moreover, OCZ is trading at a multiple of 1 times revenue, compared

    with Fusion-io trading at about 12 times revenue...very cheap because of

    skeptics like Motley Fool. Finally, it has a huge short position, and those

    folks have to cover if this company continues to grow.

    I think the stock could double from here over the next year or so.

  • Report this Comment On July 10, 2011, at 4:31 PM, aliceStark wrote:

    TFMDitty, it's new technology, of course they will have costs associated in the beginning. But this company is the leader of the pack, and SSD drives are going to replace most people's main hard drives soon because of access speed.

    There may always be a market for the slower and more reliable hard drives for data storage, but this technology is here to stay because people want speed for their primary hard drives, and as prices come down, this will replace today's main drives completely. What profits would that mean in a very few short years?

    If they remain unprofitable, the larger hard drive makers would be looking hard to buy this company, there's almost no way to lose on the stock.

    If you could have bought Apple for under $10, as OCZ is today, would you call that a reasonable investment?

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