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OCZ Technology Shares Plunge 20% on Earnings & Forecast

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OCZ Technology Shares Plunge 20% on Earnings & Forecast

OCZ Technology Group Inc. (NASDAQ:OCZ), the solid-state drive maker, pre-announced disappointing results for the third consecutive quarter. The company lowered its revenue guidance for the second quarter ending August 31, 2012 to $110 -$120 million from the prior guidance of $130-140 million. This time the company blamed the shortage of 25nm NAND flap memory chip in the last two weeks of the quarter for the shortfall in its revenues. In the last quarter, it placed the blame on a shortage of power regulators.

“Despite achieving bookings in excess of our expectations for our second fiscal quarter, we were not able to meet our previously stated revenue guidance, due primarily to constraints in NAND flash supply,” CEO Ryan Petersen said. “During the month of August we experienced a significant shortage on certain NAND flash components, based on industry wide tightening of supply.”

According to a report by Benchmark analysts, the reasons for revenue shortfall seem more to be an excuse than reality. The analysts also raised questions over how OCZ Technology Group Inc. (NASDAQ:OCZ) missed estimates by approximately 15 percent. Did the company completely fail to manage its inventory?

The NAND flash suppliers have reduced the production to drive the NAND flash prices higher. However, Benchmark believes that any NAND supplier would not turn away its business simply to solidify the pricing. It seems that Benchmark decided not to pay for 25nm MLC NAND flash. If OCZ Technology Group Inc. (NASDAQ:OCZ) wanted to buy MLC NAND flash, it could easily have been bought, because no vendor has reported the shortage of 25nm MLC NAND flash.

What if the supply constraints persist? Well, the company may then leverage 20nm NAND. However, not all controllers of OCZ Technology Group Inc. (NASDAQ:OCZ) support 20nm NAND yet. The company CEO said that a prolonged supply constraint would have much worse effects on the already lowered estimates.

If the NAND supply issue is resolved immediately, the issue will not affect earnings again. The company management said it is negotiating deals with a number of manufacturers. Piper Jaffray has reduced its target price for OCZ Technology Group Inc. (NASDAQ:OCZ) to $6 from the previous target of $13. Even after lowering the target, Piper Jaffray said there are certain factors that may pose a risk in achieving the target price, such as increasing competition, negligible investment in R&D and working capital constraints.

The company may burn $10 million in free cash flow during 2Q13, which would bring the company’s cash balance down to ~$30 million. OCZ does have up to a $50 million line of credit with Wells Fargo (WFC); however, the ability to drawn down on this
line may be impacted by recent financial performance. Without the line of credit, it would be difficult for OCZ to fund its expected revenue growth during 2H FY13.

OCZ stocks are down 22 percent to $4.27 in market trading. In the regular session. In the pre-market session shares dropped by as much as 30%.

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