Analyst Conference Call Summary

conference date: March 14, 2012 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2011 (fourth quarter, Q4 2011)

Forward-looking statements

Overview: Still far from being in the black, but in line with updated prior guidance. Also had $1.1 million positive cash flow from operating activities.

Basic data (GAAP) :

Revenues were $47.0 million, down 2% sequentially from $48.1 million and down 28% from $65.4 million year-earlier.

Net income was negative $6.6 million, up sequentially from negative $12.2 million, but down from positive $0.3 million year-earlier.

EPS was negative $0.12, up sequentially from and negative $0.22, but down from positive $0.01 year-earlier.

Guidance:

$49.0 million to $53.0 million Q1 2012 revenue. Non-GAAP EPS negative $0.2 to positive $0.2. Normally a seasonally down quarter, but because of one particular Tier 2 customer should be up sequentially from Q4.

$205 to $225 million full 2012 revenues. Non-GAAP EPS $0.02 to $0.08

Conference Highlights:

"We have worked aggressively ... to fill the voids left by our competitors, such as winning new OEM customers like Autodesk and Concurrent Computer and new distributors such as Harwood and Pac Data. We have additional wins not yet announced and expect to add others throughout 2012." Actively pursuing bigger opportunities and mid-tier market.

Drive availability constrained revenues in Q4, worth about $4 million. Some high end drive availability is still very tight, but generally drives are expected to become more available as the year progresses.

For 2012 expect respectable top line growth and full year non-GAAP profitability [WPM: but we have heard that before].

AssuredUVS winding down, as it was about to become a drag on EPS. May be able to sell off UVS division. [WPM: not AssuredUVS was billed, when bought, as a margin-expansion segment].

Non-GAAP net revenue was $48.0 million. Gross margin 24.8%, up from 22.0% year-earlier due to a more favorable product and customer mix. Non-GAAP net loss was $1.6 million, or $0.03 per share, reversing a net profit of $2.0 million or $0.04 per share in Q4 Q2010.

Tier 2 OEM customer revenue grew 40% y/y. Now make up about one-quarter of business.

6% increase in revenues y/y if the NetApp business, which was purposefully dropped because of poor margins, is excluded.

Cash balance ended at $46.2 million, up $0.5 million in the quarter. Cash from operating activities was $1.1 million.

67.5% of revenues were from largest customer (HP).

Cost of goods sold were $38.7 million, leaving gross profit of $8.3 million. Operating expenses were $15.0 million, consisting of $9.1 million for research and development, $3.4 million in sales and marketing, and $2.4 million for general and administrative expense. Includes a $2 million charge for a power supply issue, which was excluded from non-GAAP net income.

Did barely reach positive EBITDA for full 2011.

Q&A:

Gross margin trends over 2012? No specific numbers. Growth in gross margin will slow down, but expects some y/y improvements. Revenue contributions from mid-range products in second half likely to be modest, that is more of a 2013 story.

Drive shortages were across the board in Q4. We did raise prices in Q4. We did raise prices in February, so that would be beneficial to margins. We are still seeing constraints on high-capacity drives.

339 employees at end of year.

We will be making investments in engineering and new product launches in 2012, so we expect operating expenses to increase during the year.

It is possible by Q4 2012 we could be at 30% non-GAAP gross margin.

Tier 2 OEM visibility? Expects growth in 2012, as a number are just beginning ramps. We are pleased with our win rate.

Demand in the last month or so? Channel has seen larger deals due to focus on larger resellers. We like the traction we are seeing there. For Tier 2 OEMs we have had a great deal of success in Rich Media and Entertainment segment and Telecommunications.

In telecommunications we have 48V. D.C. power and NEBS certification, which give us a differential advantage. We are not selling raw storage, we are part of a variety of embedded infrastructure solutions. The vertical represents a disproportionate share of our tier 2 business.

Largest customer outlook? We did about the same in 2011 as in 2010. They had challenges in Q4 from disk drive shortages just like we did. We signed a five-year extension with them in 2011.

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