September 18, 2012 / 6:43 PM / 5 years ago

OCZ changes leaders, needs to solve supply chain problem

(Reuters) - OCZ Technology Group Inc has changed it top management but efforts to win back investor confidence may take more time as the solid-state hard drive maker, which has not made a profit for nearly a year, has to first fix a supply chain problem.

OCZ said on Monday Chief Executive Ryan Petersen has resigned, a month after it announced the retirement of Chief Financial Officer Arthur Knapp. OCZ’s shares fell 5 percent to $4.23 on the Nasdaq on Tuesday.

“Investor pressure and loss of credibility with the management, because of underperformance in the last three quarters, made the company’s board go for this transition,” Piper Jaffray & Co analyst Andrew Nowinski said.

Petersen has been at the helm of OCZ since 2002 and steered the company to revenue of $365.8 million last year, from less than $10 million when he started.

One of OCZ’s co-founders, he was credited as an inventor of much of the firm’s proprietary technology.

However, Benchmark & CO analyst Gary Mobley described Petersen as a “lightning rod of controversy,” adding that many investors may be glad to see new leadership.

For the last few quarters, earnings at OCZ, which specializes in making high-end storage-media known as solid state drives, has missed analysts’ expectations.

“OCZ has seen worsening balance-sheet, increasing inventory and negative free cash flow, all of which reflects a weaker-than-expected demand for its products,” FBN Securities analyst Shebly Seyrafi said.

The company cut its second-quarter revenue estimate this month, citing an industry-wide shortage of components.

OCZ blamed a shortage of 25 nanometer (nm) NAND flash components used in making some of its products as suppliers were focusing on meeting the needs of Apple Inc, which analysts estimate buys 25 percent of global production.

OCZ had said that it was not the only company affected by the tightening of supply, but rival Stec Inc denied facing any shortage.

Analysts add that other players, including peer Fusion-io, are also not facing any kind of shortage and say the real issue is OCZ’s planning.

“There could be some tightness in 25nm but large SSD manufacturers have more buying power and are probably able to get most of what they need at 25nm,” said Kaushik Roy, principal in the Technology Group of Hercules Technology Growth Capital.

OCZ declined to comment for this story citing “business relationships that we have with our NAND Flash partners.”

SHORT-TERM CONTRACTS HURT

Analysts say OCZ does not have any long-term supply contracts with its 25 nm NAND supplier, Micron Technology, and that contributes to its supply problems.

“Other companies in the market, which depend on NAND components, have contracts in place to ensure supply whenever there is shortage, unlike OCZ,” Lazard Capital Markets analyst Edward Parker said.

OCZ faced a NAND shortage as it depends solely on Micron, which ran out of 25 nm supply towards the end of the quarter as it needed them to produce its own SSDs, analysts said.

Apple’s interest in buying a lot of NAND flash for its products was also a factor.

“When Apple comes out with new products all the major NAND vendors work overtime to please Apple and that comes at the expense of smaller customers like OCZ, who don’t have long-term NAND contracts,” Lazard Capital Markets analyst Daniel Amir said.

NAND flash memory, used for general storage and transfer of data, is mainly used in solid-state drives, memory cards and USB flash drives.

LIKELY ALTERNATIVE

OCZ hopes to overcome the 25nm NAND flash shortage by making a transition to 20nm faster than its rivals. 20nm NAND is a newer technology that lowers manufacturing costs while increasing storage density.

However, most of its products are based on 25nm and it has not yet started shipping 20nm-based products.

OCZ needs to change all its products to support 20nm NAND and get a NAND supply deal as soon as possible to avoid any serious impact on its next quarter, Nowinski said.

OCZ had said on a conference call that it expects to benefit from a tightening of supply by being “first in market with certain new NAND technology and to take advantage of a wider short supply situation.”

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