OCZ Revenues Spiral Upward on SSD Craze

The high-performance solid-state drive and memory-module maker OCZ Technology (NAS: OCZ) delivered record second-quarter revenues of $78.5 million, more than double those from the year-ago quarter. While the revenue was in line with analyst expectations, operational losses came as a disappointment to the Street. Let's take a brief look at the numbers to see why.

Solid revenues, weak profits
The doubling of revenues from the year-ago quarter was mainly due to the phenomenal growth in the sale of its SSDs, or solid state drives, by a head-spinning 252%. Gross margins also made a significant improvement from 11.6% a year ago to 21.6%, while selling and administration margins reduced from 22.3% to 14.9%.

However, despite significant growth in quarterly revenues, OCZ disappointed the Street with operational losses of $1.9 million. This was mainly due to higher research and development expenses that grew fourfold to $7.2 million. But in spite of this, the company managed to post a positive net income of $3.2 million, primarily due to other nonoperating income of $5.2 million.

Toward a solid-state future
OCZ also announced its plan to augment its research and development operations by acquiring a U.K.-based research center from PLX Technology (NAS: PLXT) . The acquisition, combined with a team of 40 engineers and intellectual property licenses, will further strengthen OCZ's global R&D operations.

This purchase would add to OCZ's expertise in controller designs and enhance the company's SSD products at lower costs. The company also hopes to reduce the time-to-market -- the time it takes for a product to hit the market after it has been improved upon.

Driving ahead with SSDs
So, what are SSDs? They are a faster alternative to traditional HDDs, or hard disk drives, commonly used in computers.

The difference between the two is that SSDs have no moving parts inside, unlike HDDs, which have a rotating disk inside. In comparison, SSDs produce less heat, are faster, and consume less energy. Thus, SSDs are now becoming a must-have for the storage needs of large enterprises as well as for those of ordinary PC users. However, the main detractor is the high price per gigabyte.

Teeming with competition
OCZ is not the only one producing SSDs. It also faces competition from other small and large players. These include STEC (NAS: STEC) , a manufacturer of enterprise SSDs, chip giant Intel Corporation (NAS: INTC) , and SanDisk (NAS: SNDK) , a leader in flash-based storage solutions. And let's not forget traditional hard-disk manufacturers like Western Digital (NYS: WDC) and Seagate (NAS: STX) , which are making faster traditional and hybrid HDDs at much cheaper rates.

The Foolish bottom line
OCZ faces a lot of competition from both small and large companies. As SSDs become all the more mainstream, prices will fall and squeeze margins further. The only way OCZ would be able to keep its dominant position is through constant product innovation and research.

It's a given that solid state drives are the way forward in terms of storage needs for large enterprises as well as small consumers. According to researchers, the market for SSDs is set to grow by around 70% to 90% annually for the next five years. Given this fact, I feel that despite the competition, OCZ will be able to cash in on this trend and grow its revenues and profits significantly.

At the time this article was published Keki Fatakia does not hold any shares in the companies mentioned in this article. The Motley Fool owns shares of Intel and Western Digital. Motley Fool newsletter services have recommended buying shares of Intel. Motley Fool newsletter services have recommended creating a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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