Analyst Conference Summary

conference date: November 6, 2008 @ 1:30 PM Pacific Time
for quarter ending: September 30, 2008 (3rd quarter 2008)

Forward-looking statements

Overview: Surprising continued growth despite economic turmoil, but still has not reached profitability.

Basic data (GAAP) :

Revenues were $76.6 million, up 8% sequentially from $71.0 million and up 68% from $45.7 million year-earlier.

Net income was negative $3.7 million, improved sequentially from a loss of $7.4 million and from a year-earlier loss of $4.1 million

EPS was negative $0.08, improved sequentially from negative $0.16, and from negative $0.09 year-earlier.

Guidance:

Not much visibility. Fourth quarter 2008 revenue target range of $70 to $76 million with a non-GAPP net loss of $0.05 to $0.10 per share. Operating expenses flat to lower.

Conference Highlights:

Pleased with continuing revenue gains, a record. Focus is now "margin improvement and the attainment of sustainable profitability." Return to profitability is likely to be delayed into 2009.

Non-GAAP numbers: net loss of $3.1 million or EPS $0.07. 11.8% gross margin.

GAAP gross margin was 11.7%, up sequentially from 10.2% due to material cost reductions, accrued payment, and settlement benefit.

Cash and equivalents ended at $56.5 million, down sequentially from $62.1 million. There is now a debt of $0.9 million. $2.25 million was paid for intellectual property from Ciprico. Some cash was needed for operating capital. Working capital requirements could continue to grow. Inventories ended at $12.2 million. Accounts receivable was $48.2 million.

Two of the larger OEM customers drew from inventories at the end of Q3. This has been reflected in Q4 guidance.

Cost of goods sold was $67.7 million. Gross profit $8.9 million. Operating expenses of $13.0 million included: R&D $6.9 million, sales and marketing $3.0 million, general and administrative $3.3 million. Other income was $0.3 million. Income tax benefit of $0.1 million.

Much of the growth came from continued ramping of shipments to HP and NetApp, offset by continuing decline in shipments to Sun.

Included in revenue is a $1.7 million accrued payment from a large OEM customer. Expect $1.3 million similar payment in Q4. Also included in GAAP revenue and income was a $0.5 million legal settlement benefit.

HP provided 44% of revenue, up 40% sequentially. NetApp was 21%. Sun was 16%. Leaving 29% for all others.

54% of revenue was from series 2000 and 5000
23% was from legacy SAN Net 2
21% was from NetApp jbot
2% other.

Thinking of moving headquarters from California to Colorado to reduce expenses.

FoxConn will be new manufacturing partner, with products shipping in the second half of 2009. Expects good margin improvements once this is in place.

Q&A:

Sales and marketing expense? Overall operating expense should be flat, but there may be rebalancing within op ex. Reasonable to use that for 2009 projections.

Software attach rates at HP? Both companies want to grow that revenue, we are seeing positive trends.

End of life from Sun? Some products were end-of-lifed in quarter, other not. End of life means shipments will stop in 6 months to a year.

Explain payment related to price reductions? In return they gave us $1.7 million.

Ciprico RaidCore? It is a very robust RAID software product. We have known about it for 4 years. Ciprico went into bankruptcy, so we grabbed our chance to get it. With faster server CPUs and transition to 2 and 1/2 inch disks, will need feature-rich data protection. Operating margins should be very good. Will port existing data management services to RaidCore. Nominal revenues in Q4, considerable customer interest already.

October market conditions? Very uncertain times. We are trying to be appropriately cautious. October was alright, we did not see any slowdown.

FoxConn transition? Margin impact likely in Q3. We will continue to do business with Mytek as well. We have employees in China now that can track this transition. Should not have a large inventory that needs to be drained down.

Headcount was 275 at end of quarter. Do not expect that to grow.

Tier II / Tier III OEMs revenues grew sequentially, but may be influenced by macroeconomics. Some are in financial vertical, not a great place to be.

Is NetApp flattening out? Had 2% sequential growth. Products have been shipping since September of last year. Product is well received.

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