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| ADPT > SEC Filings for ADPT > Form 10-Q on 5-Aug-2008 | All Recent SEC Filings |
5-Aug-2008
Quarterly Report
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. The statements contained in this document that
are not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including, without limitation, statements regarding our
expectations, beliefs, intentions or strategies regarding our business,
including, but not limited to, our anticipated declines in revenues from our
parallel SCSI products and our serial products sold to our OEM customers, the
possibility that we might enter into strategic alliances, partnerships or
acquisitions in order to scale our business, the expected impact on our future
revenues, and the timing of such impact, of our failure to receive design wins
for the next generation serial products from a significant customer, the total
restructuring charges we expect to record due to our first quarter fiscal 2009
restructuring plan, the possibility that additional significant charges may be
recorded by us in the future in light of an ongoing strategic review of our
business by management, and our expected liquidity in future periods. We may
identify these statements by the use of words such as "anticipate," "believe,"
"continue," "could," "estimate," "expect," "intend," "may," "might," "plan,"
"potential," "predict," "project," "should," "will," "would" and other similar
expressions. All forward-looking statements included in this document are based
on information available to us on the date hereof, and we assume no obligation
to update any such forward-looking statements, except as may otherwise be
required by law.
Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the "Risk Factors" section and elsewhere in this document. In evaluating our business, current and prospective investors should consider carefully these factors in addition to the other information set forth in this report.
While management believes that the discussion and analysis in this report is adequate for a fair presentation of the information presented, we recommend that you read this discussion and analysis in conjunction with our Annual Report on Form 10-K/A for the fiscal year ended March 31, 2008.
Basis of Presentation
On June 27, 2008, we completed the sale of the Snap Server portion of our SSG segment, or Snap Server NAS business, to Overland Storage, Inc., or Overland. This business has been accounted for as discontinued operations. Accordingly, we have reclassified the underlying Unaudited Condensed Consolidated Statements of Operations and Cash Flows and related disclosures for all periods presented to reflect the Snap Server NAS business as discontinued operations. These reclassifications had no impact on net income (loss), total assets or total stockholders' equity. Unless otherwise indicated, and other than our Condensed Consolidated Balance Sheet at March 31, 2008, the following discussion pertains only to our continuing operations.
We also revised our internal organizational structure in conjunction with the sale of our Snap Server NAS business in June 2008. Our former SSG segment provided (1) Snap Server branded file-based NAS storage systems, which were sold to end users through our network of distribution partners, solution providers, e-tailers and VARs, and (2) block-based iSCSI storage solution products. The historical financial results relating to the block-based iSCSI storage solution products of our former SSG segment, which were minimal to our overall financial results, were retained and are now included with our DPS segment. The remainder of our former SSG segment represented results from discontinued operations. Following the revision to our internal reporting structure, we now operate in one segment, DPS.
For your convenience, we have included, in Note 19 to the Notes to the Unaudited
Condensed Consolidated Financial Statements, a Glossary that contains a list of
(1) key acronyms commonly used in our industry that are used in this Quarterly
Report and (2) accounting rules and regulations that are also referred to in
this report. These key acronyms and accounting rules and regulations are listed
in alphabetical order.
Overview
In the first quarter of fiscal 2009, our net revenues decreased 13% as compared to the first quarter of fiscal 2008 primarily due to the declining revenue base of our parallel SCSI products. Our net revenues were further impacted by our inability to obtain design wins from our OEM customers, primarily for our next generation serial products. We expect revenues from our parallel SCSI and serial products sold to OEM customers to continue to decline in fiscal 2009. Our gross margins in the first quarter of fiscal 2009 improved to 47% compared to 32% in the first quarter of fiscal 2008 primarily due to favorable efficiencies with our suppliers and contract manufacturer and improved standard product contributions. In addition, we experienced a favorable product and customer mix and had no further amortization of certain intangible assets after the second quarter of fiscal 2008. Operating expenses decreased in the first quarter of fiscal 2009 as compared to the first quarter of fiscal 2008 primarily as a result of cost reductions and restructuring efforts that were initiated in previous quarters combined with additional attrition in our workforce.
Our future revenue growth remains largely dependent on the success of our new products addressing unified serial technologies and growing our market share in the channel. We currently depend on a small number of large OEM customers for a significant portion of our revenues, and we have been unsuccessful in obtaining designs wins from these customers. We have evaluated this portion of our business, and we are only opportunistically pursuing future business from OEM customers with our current product portfolio, as we believe the future growth opportunities for our current products are limited. As a result, we expect the revenues obtained from large OEM customers to decline significantly in future periods. Since the growth of our new generation of serial products is not keeping pace with the decline in revenues from our parallel products and from our OEM customers, we may seek growth opportunities in this market beyond those presented by our existing product lines by entering into strategic alliances, partnerships or acquisitions in order to scale our business. This includes both strengthening our partnerships in silicon-based technology and broadening our silicon-based intellectual property to improve our business opportunities. We also continue to review and evaluate our existing product portfolio, operating structure and markets to determine the future viability of our existing products and market positions.
We implemented a restructuring plan in the first quarter of fiscal 2009 that was designed to reduce our operating expenses due to a declining revenue base, streamline our operations and better align our resources with our strategic business objectives. This restructuring plan is expected to extend to actions taken throughout fiscal 2009. We expect to incur additional restructuring charges for the remainder of fiscal 2009 of approximately $2.0 million associated with this plan in "Restructuring charges" in the Condensed Consolidated Statement of Operations. In light of an ongoing strategic review of our business by management, additional significant charges may be recorded by us in the future.
Results of Operations
The following table sets forth the items in the Unaudited Condensed Consolidated Statements of Operations as a percentage of net revenues (references to notes in the footnotes to this table are to the Notes to Unaudited Condensed Consolidated Financial Statements appearing in this report):
The following actions affect the comparability of the data for the periods presented in the above table:
Three-Month Period Ended
June 30,
--------------------------------------
2008 (1) 2007 (2)
------------------ ------------------
Net revenues 100 % 100 %
Cost of revenues 53 68
------------------ ------------------
Gross margin 47 32
------------------ ------------------
Operating expenses:
Research and development 19 29
Selling, marketing and administrative 30 37
Amortization of acquisition-related intangible assets -- 2
Restructuring charges 6 4
Other charges (gains) -- (16)
------------------ ------------------
Total operating expenses 55 56
------------------ ------------------
Loss from continuing operations (8) (24)
Interest and other income, net 17 19
Interest expense (3) (3)
------------------ ------------------
Income (loss) from continuing operations before income taxes 6 (8)
Provisions for income taxes 6 1
------------------ ------------------
Loss from continuing operations, net of taxes (0) (9)
------------------ ------------------
Discontinued operations, net of taxes
Loss from discontinued operations, net of taxes (2) (1)
Income from disposal of discontinued operations, net of taxes 18 --
------------------ ------------------
Income (loss) from discontinued operations, net of taxes 16 (1)
------------------ ------------------
Net income (loss) 16 % (10)%
================== ==================
____________
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The following actions affect the comparability of the data for the periods presented in the above table:
(1) In the first quarter of fiscal 2009, we implemented a restructuring plan and
incurred restructuring charges of $1.8 million.
(2) In the first quarter of fiscal 2008, we recorded a gain of $6.7 million on
the sale of certain properties and implemented a restructuring plan and incurred
restructuring charges of $1.5 million.
Net Revenues.
Three-Month Period Ended
June 30,
-------------------------------------------------
Percentage
2008 2007 Change
--------------- --------------- ---------------
(in millions, except percentages)
Net revenues $ 31.5 $ 36.1 (13)%
|
Net revenues decreased by $4.6 million in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008, primarily due to a decline in sales volume of our parallel SCSI products of $4.8 million, and, to a lesser extent, a decline in sales volume of our serial products sold to OEM customers of $3.1 million. This was partially offset by an increase in average selling prices and sales volumes of our serial products sold to channel customers of $3.7 million due to increased acceptance of these products at our international locations. The decline in sales volume of our parallel SCSI products was primarily attributable to the industry transition from parallel to serial products, in which we have a lower market share. The decline in sales volume of our serial products sold to OEM customers was primarily attributable to the fact that certain of our OEM customers have moved to other suppliers to obtain next generation serial technologies. We expect net revenues for both our parallel SCSI and serial products sold to OEM customers to continue to decline in future quarters.
Three-Month Period Ended
June 30,
--------------------------------------
2008 2007
------------------ ------------------
Geographical Revenues:
North America 39 % 42 %
Europe 31 % 27 %
Pacific Rim 30 % 31 %
------------------ ------------------
Total Geographical Revenues 100 % 100 %
================== ==================
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Our North America revenues decreased as a percentage of our total revenues by 3% in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008 primarily due to a decline in product sales to our OEM customers. Our combined international revenues increased as a percentage of our total revenues by 3% in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008 primarily due to increased sales and acceptance of our serial products sold primarily to channel and OEM customers.
A small number of our customers account for a substantial portion of our net revenues, and we expect that a limited number of customers will continue to represent a substantial portion of our net revenues for the foreseeable future. In the first quarter of fiscal 2009, IBM and Ingram Micro accounted for 35% and 11% of our total net revenues, respectively. In the first quarter of fiscal 2008, IBM accounted for 42% of our total net revenues.
Gross Margin.
Three-Month Period Ended
June 30,
-------------------------------------------------
Percentage
2008 2007 Change
--------------- --------------- ---------------
(in millions, except percentages)
Gross Profit $ 14.7 $ 11.5 28 %
Gross Margin 47 % 32 %
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The improvement in gross margins in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008 was due to improved standard product contributions as a result of our continued focus on product component costs and efficiencies gained with our contract manufacturer, our redesign of certain products to improve cost efficiencies. In addition, the improvement in gross margins was also due to the favorable product and customer mix we achieved during the quarter, which was primarily driven by a shift in mix of 13% from OEM to channel customers, with channel customers having higher average margins. In addition, our gross margins were further improved as certain intangible assets were fully amortized by the second quarter of fiscal 2008.
Research and Development Expense.
Three-Month Period Ended
June 30,
-------------------------------------------------
Percentage
2008 2007 Change
--------------- --------------- ---------------
(in millions, except percentages)
Research and development $ 5.9 $ 10.4 (43)%
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The decrease in research and development expense in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008 was primarily due to reduced headcount and related expenses as a result of restructuring programs implemented in fiscal 2008 combined with additional attrition in our workforce, which was reflected by a 46% decrease in headcount for employees engaged in research and development. We also decreased our infrastructure spending and had fewer engineering projects outstanding.
Selling, Marketing and Administrative Expense.
Three-Month Period Ended
June 30,
-------------------------------------------------
Percentage
2008 2007 Change
--------------- --------------- ---------------
(in millions, except percentages)
Selling, marketing and administrative $ 9.5 $ 13.5 (29)%
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The decrease in selling, marketing and administrative expense in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008 was primarily a result of reductions of our workforce and infrastructure spending as a result of the restructuring plans we implemented in fiscal 2008, which resulted in a 37% decrease in our average headcount for employees engaged in selling, marketing and administrative functions.
Amortization of Acquisition-Related Intangible Assets.
Three-Month Period Ended
June 30,
-------------------------------------------------
Percentage
2008 2007 Change
--------------- --------------- ---------------
(in millions, except percentages)
Amortization of acquisition-related intangible assets $ -- $ 0.6 (100)%
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Acquisition-related intangible assets include patents, core and existing technologies, and customer relationships. We amortize the acquisition-related intangible assets over periods which reflect the pattern in which the economic benefits of the assets are expected to be realized, which is primarily using the straight-line method over their estimated useful lives, ranging from three months to five years.
The decrease in amortization of acquisition-related intangible assets in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008 was primarily due to the fact that in the fourth quarter of fiscal 2008, we wrote off intangible assets associated with our acquisition of Elipsan Limited due to a revision in our forecasts that resulted in expected negative long-term cash flows for these assets for the first time.
Restructuring Charges.
Three-Month Period Ended
June 30,
-------------------------------------------------
Percentage
2008 2007 Change
--------------- --------------- ---------------
(in millions, except percentages)
Restructuring charges $ 1.8 $ 1.5 20 %
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All expenses, including adjustments, associated with our restructuring plans are included in "Restructuring charges" in the Condensed Consolidated Statements of Operations and are not allocated to segments but rather managed at the corporate level. For a complete discussion of all restructuring actions that were implemented prior to fiscal 2009, please refer to Note 10 to the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K/A for the fiscal year ended March 31, 2008.
In the first quarter of fiscal 2009, management approved and initiated a restructuring plan to (1) reduce our operating expenses due to a declining revenue base, (2) streamline our operations and (3) better align our resources with our strategic business objectives. This restructuring plan is expected to extend to actions taken throughout fiscal 2009 and will include workforce reductions in all functions of the organization worldwide and consolidation of our facilities. In the first quarter of fiscal 2009, we recorded a restructuring charge of $1.8 million related to severance and related benefits. We expect to incur additional restructuring charges of approximately $2.0 million for the remainder of fiscal 2009 related to this plan, for a total estimated restructuring charge of $3.8 million. By the end of the first quarter of fiscal 2009, we began to reduce our annual operating expenses by approximately $5.6 million as a result of this restructuring plan. Approximately 14%, 26% and 60% of the restructuring cost savings were reflected as a reduction in cost of revenues, research and development expense, and selling, marketing and administrative expense, respectively.
Other Charges (gains).
Three-Month Period Ended
June 30,
-------------------------------------------------
Percentage
2008 2007 Change
--------------- --------------- ---------------
(in millions, except percentages)
Other charges (gains) $ -- $ (5.9) (100)%
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Other charges (gains) primarily consisted of asset impairment charges related to certain assets and gain on sale of certain properties.
In May 2007, we completed the sale of three buildings in Milpitas, California that were previously classified as held for sale, with proceeds aggregating to $19.9 million, which exceeded our carrying value of $12.5 million. Net of selling costs, we recorded a gain of $6.7 million on the sale of the properties in the first quarter of fiscal 2008 to "Other charges (gains)" in the Condensed Consolidated Statements of Operations.
We also recorded a charge of $0.8 million related to costs incurred to evaluate strategic options in the first quarter of fiscal 2008 to "Other charges (gains)" in the Condensed Consolidated Statements of Operations.
Interest and Other Income, Net.
Three-Month Period Ended
June 30,
-------------------------------------------------
Percentage
2008 2007 Change
--------------- --------------- ---------------
(in millions, except percentages)
Interest and other income:
. . .
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