Overland Reports Q4 Results

SAN DIEGO -- Overland Storage, Inc. (Nasdaq: OVRL) today reported fourth quarter and full-year results for its fiscal year ended June 30, 2008.

Net revenue for the fiscal 2008 fourth quarter was $28.9 million, compared with $34.1 million for the same period a year ago. The company reported a net loss of $8.6 million, or $0.67 per share, for the fiscal 2008 fourth quarter compared with a net loss of $6.0 million, or $0.47 per share, for the same period a year earlier.

For the twelve months ended June 30, 2008, the company reported net revenue of $127.7 million compared with $160.4 million for the twelve-month period in the prior fiscal year. The net loss for the 2008 fiscal year was $24.6 million, or $1.93 per share, compared with a net loss of $44.1 million, or $3.45 per share in fiscal 2007. The 2007 twelve month period net loss included an $8.4 million, or $0.66 per share, charge related to the impairment of acquired technology.The company noted that net revenue for the fiscal 2008 fourth quarter decreased 15.2 percent from the fiscal 2007 fourth quarter and 9.0 percent on a sequential basis from the fiscal 2008 third quarter due to lower sales to OEM customers. Specifically, sales to the companys largest OEM customer were down 39.1 percent compared with the fiscal 2007 fourth quarter, continuing to reflect the customer’s previously announced transition to a new product from an alternate supplier. On a sequential basis, sales to this customer declined 29.0 percent from the fiscal 2008 third quarter, primarily due to a large spare-parts shipment to the customer in the third quarter that was not repeated in the fourth quarter. Total branded revenue in the fiscal 2008 fourth quarter increased 3.5 percent from the fiscal 2007 fourth quarter and 3.7 percent on a sequential basis from the fiscal 2008 third quarter.

Gross profit in the fiscal 2008 fourth quarter of $6.1 million was essentially unchanged from the fiscal 2007 fourth quarter, despite declining revenue. The gross profit margin of 21.1 percent in the fiscal 2008 fourth quarter improved over the fiscal 2007 fourth quarter margin of 18.1 percent principally as a result of the elimination in the prior year of charges associated with the company’s terminated outsourced manufacturing arrangement. On a sequential basis, gross profit of $6.1 million in the fiscal 2008 fourth quarter decreased 20.7 percent from $7.7 million in the fiscal 2008 third quarter due to lower revenue and increased manufacturing costs. The gross profit margin of 21.1 percent in the fiscal 2008 fourth quarter declined on a sequential basis from the 24.2 percent margin in the fiscal 2008 third quarter due to a relatively lower mix of OEM spare revenue and increased manufacturing costs.

Operating expense of $13.7 million in the fiscal 2008 fourth quarter increased 14.1 percent from $12.0 million in the fiscal 2007 fourth quarter and 10.6 percent sequentially from $12.4 million in the fiscal 2008 third quarter. The cost increases reflect the company’s expanded sales and support organization, as well as enhanced marketing and channel programs.Cash, cash equivalents and short-term investments at June 30, 2008 amounted to $9.7 million. The decline from the prior quarter was driven primarily by three elements: cash used in operations of $2.6 million, cash used in the acquisition of the Snap Server business of $2.5 million, and the reclassification of $4.2 million of auction-rate securities from short-term investments to long-term other assets. During the fiscal 2008 fourth quarter the company also recorded a non-cash impairment charge to other expense of $1.1 million to write down these securities to their current estimated fair value.

“Although disappointed with the overall financial results for the quarter, we are encouraged on a number of fronts,” commented Vern LoForti, president and chief executive officer of Overland Storage. “We have worked hard over the past two quarters to improve both our disk-based appliance products and the ability of our sales force to sell these solutions. As the industry shifts to complement tape-based data protection with disk-based solutions, we believe our capability in the disk sector will prove critical to our company’s success. Our efforts paid off in the fourth quarter as sales of REO and Ultamus products grew 63 percent on a sequential basis compared to the fiscal 2008 third quarter.

“This focus on disk-based solutions also led to our search for a NAS (“Network Attached Storage”) product to complement our product portfolio. We believed that the addition of a NAS product capable of providing data replication of distributed file systems across wide-area networks would round out our data protection portfolio. Our acquisition on June 27, 2008 of the Snap Server NAS business from Adaptec fit this requirement. Though only five weeks into the acquisition, our progress to date is highly encouraging. Our announcement of Snap was well received by the industry analyst community and channel partners, including existing Overland and Snap partners, many of which overlapped. We are already receiving significant interest from Overland partners that previously did not sell Snap products, but now want to add these products to their line cards. We believe the initial response from our partners and the analyst community supports our contention that the Snap solution is an excellent addition to Overland in terms of its strategic fit, its complement to our existing product portfolio and its target SMB and distributed enterprise market.

“Our first goal for the Snap business is to leverage this well-designed and robust product family by improving product availability and service to our channel partners and end-users, which draws on Overland’s core competencies. Although still early, we are seeing increased interest in the Snap products and an acceleration of order flow. Our operations team is currently working with suppliers to generate sufficient product flow to accommodate expressed and anticipated demand.

“We see great value in the Snap brand. Further, we believe that the Snap software platform holds the potential to become the building-block for delivering new and enhanced features. Some of these enhancements will develop from the integration of existing technologies in Overland’s portfolio. Additionally, we believe the Snap products are an excellent fit, and can be marketed to a number of fast-growing vertical markets and applications. The addition of the Snap business is expected to immediately more than double Overland’s disk-based revenue, and we aim to grow the business rapidly throughout fiscal 2009 and beyond.“Our immediate challenge is to integrate the Overland and Snap businesses. Although I believe that the $3.6 million purchase price of Snap at approximately 20 percent of its annual revenue run-rate was attractive, it nonetheless impacted our cash balance and will consume more cash in coming quarters as we build accounts receivable to support the business. Through the acquisition we gained a capable development team, as well as sales, marketing and technical support organizations. It is imperative to our overall corporate recovery that we quickly rationalize the combined organization, identify initiatives and products, and develop a roadmap to which we can apply our limited resources and deliver compelling products. We expect to complete this process within the next 30 days,” concluded LoForti.

Overland Storage Inc.