Thank you Bonnie, and welcome to everybody joining in the conference call. 2012 has been an incredible year for OCZ. Against the backdrop of a rapidly growing, constantly evolving market, we executed on our internal goals which were simple, to achieve rapid revenue growth with increasing gross margins and to solidify our position with our OEM clients and in the enterprise.
We are proud to report that recent data from industry analysts indicate that we’re now the world’s largest independent manufacturer of SSDs. As we look forward to fiscal ‘13, it’s interesting to know that IDC expects the amount of storage capacity shipped will more than double by 2015 from about 760 exabytes in 2012. While hard drive based storage continues to be the dominant technology, we expect that the recent NAND flash cost reductions coupled with new technology introductions will significantly drive continued adoption of SSD technology as a percent of shipments, in the short-term as well as over the longer horizon.
Given our recent financing, our progress in operations, supply chain management, and technology, we feel that we’re better positioned than ever to take advantage of the growing SSD opportunity. In short, we’ve earned ourselves the position of the starting line. And in the coming year, we expect SSDs, the NAND flash based storage technologies to become increasingly important. We’re prepared to aggressively address the opportunity before us, as I am sure you’ve all have heard before the old saying, fortune favors the bold.
Now moving on, let me briefly discuss our results. Our fiscal ‘12 revenues increased 92% to $365.8 million compared to fiscal ‘11 net revenue of $190.1 million. Revenue in the fourth quarter was a record of $110.4 million, an increase of 71% compared with net revenue of $64.6 million reported in Q4 ‘11. Our SSD revenue was $338.9 million for the year, up 154% year-over-year compared with a $133.2 million.
I think it’s interesting to note that our Q4 SSD revenues were approximately 80% of the entire fiscal ‘11 revenues, and that during the year, our second half represented about 60% of our annual revenue. Our gross margins increased in the fourth quarter to 25%, up both sequential and year-over-year, as we continued to see the benefits of our scale and improved product mix. We’ve begun to see the results of our key initiatives to purchase the majority of our NAND flash from the past directly as opposed to through brokers and we expect that our gross margins will continue to expand as we move forward.
We’ve recorded a non-GAAP loss in Q4 of roughly $6 million as we continued to invest heavily in building out the business. It’s important to note that we announced an increase in our R&D and sales and marketing spending in the fourth quarter in relation to our acceleration of the product roadmap. This spending approximated $6 million and will let Art go into more detail and resulted in the early launch of our Vertex 4 and Everest 2 products.
It is our expectation that these products will have a major positive impact on revenue and gross margins during fiscal ‘13. In addition, this quarter we began breaking out our PCIe products or SAN replacement product revenues. So that investors can clearly see the progress we’re making with our Z-Drive Series and PCIe SSDs, which were launched in August. As previously stated, we expect sales of these products to gain traction in the second half of our fiscal ‘13 due primarily to the long design cycles prevalent with enterprise storage products.
That being said, sales for our SAN replacement products in the roughly six months post launch have pushed $20 million. This indicates a high level of interest in our SAN replacement products and we feel we’re well positioned to see this product category span at a rate well in excess of our core growth. During the year, we made several key acquisitions including Indilinx early in the year and most recently SANRAD in the fourth fiscal quarter.
These acquisitions have positioned us well from a technology and a competitive standpoint. And we expect them to add considerably to our operating leverage as we move forward. I’d like to move on and update everyone briefly on a few key operational areas before giving you some color on the market segments. In terms of manufacturing operations, during the year, we expanded our manufacturing capabilities on a number of occasions, and after a series of rapid expansions, we consolidated test to manufacturing into a single facility capable of meeting our needs as we move forward.
We kept this move off with the recent hire of our Senior Vice President of Operations, Jason Ruppert, who joined us from his role in a Senior VP of ops at Harmonic. Jason has about 25 years of experience in senior operations roles and he is an excellent addition to our management team.
Moving on to our supply chain. We’ve been successful in shipping from the model of purchasing NAND flash primarily from the spot market to primarily from NAND flash fabs such as Micron, Toshiba, and SK Hynix. NAND flash can account for between 60% to 90% of our cost of goods. And as such this move recently began to positively impact our gross margins as the purchasing structure not only provides lower cost, but decreases price volatility.
In February, we raised a $110 million, in part to support the move to NAND flash wafer purchasing which really requires a company to carry a 12 weeks of inventory and that’s a significantly lower price for NAND flash. This again is expected to contribute to increase gross margins and lessen risk associated with NAND price volatility.
In terms of technology developments, while we continue to significantly understand our competitors, we’ve increased our technology lead not only by investing in the SANRAD and Indilinx acquisitions but increasing our organic R&D spending. Our investments in R&D have increased significantly for good reason. These investments are critical in enhancing our strengths across the various SSD segment as we continue to pursue technological dominance across all product segments.
I will for once, spare the listeners the long list of technological advances, we have made over the past year as our revenue and margin really speaks for itself. To encapsulate things in short, we feel we now have a sustainable reason in terms of SSD technologies and that this will help ensure our success as we move forward. In recapping our R&D strength, it’s worth bringing up that we’ve recently accelerated our product roadmap across the board.
It perhaps goes without saying that the early release of that Everest 2, will have a major impact on our business as sales ramp for this product. Now I’d like to call out that we’ve recently achieved a tape-out of two unannounced SSD controller platforms. That these products we believe be released mid-year well ahead of schedule and should provide considerable revenue upside. It’s worth mentioning, that while the cost related to these two new platforms are in fact reflected our operating expense guidance we have not reflected any additional revenue or margin upside, and we will update guidance to reflect the benefits of these products post product release.
In regards to sales and marketing, we’ve continued to invest heavily in expanding our platform resulting in increased sales of account and a number of customers wins in key customer groups, including PC OEMs, server manufacturers, and data centers. It’s worth noting that a year-ago we had no material revenue of tier one OEMs. And while we’ve now established ourselves with these OEM clients, historical growth notwithstanding, we have yet to fully exploit most of these relationships. It is critical as we move forward that we continue to build out the appropriate sales and marketing structure to support our ongoing OEM growth initiatives. Now with that I’d like to move on to give a little bit of color around our two major product areas.
In regards to the hard disc drive format business which includes our SAS and SATA product lines, we continue to see strength and we expect that our early launch of our Everest 2 Controller will positively impact margins and revenue, particularly as we rollout the various derivative products. These subsequent products include the mass market and enterprise variance, for example, the Agility 4, and the Intrepid 3 which we’ll launch in coming weeks.
Simply put, we now have superior technology and a substantially lower cost versus our SandForce-based products. Our price and performance offering clearly illustrates the benefit of our new technology introductions. As an example with recent NAND flash price decreases, we have been able to introduce market leading products with price points of approximately $0.65 per gigabyte without negatively impacting our gross margins.
These cost reductions continue to drive SSD adoption and we feel it is critical to continue to drive cost down. With that we planned to launch both 1x nanometer and TLC support during the year subject to NAND availability. In short, we expect recent declines in NAND flash pricing to make SSDs more attractive to mainstream applications such as SANs, network appliances, Ultrabooks and mainstream serves.
And further it’s our intent to continue to bring low cost technologies to market such as our TLC-based products, enabling this trend. Now moving on its been to get to the Vertex 4 product had the margins approaching 40% compared to SandForce-based predecessor product since Vertex 3 as an example with gross margin in the 20% range.
While these margin estimates are broadly accurate, I’d like point out that in line with our strategy of market share expansion, we will over the longer term be pricing the Vertex 4 and its derivative in line with market expectations. This pricing strategy enabled by lower cost of goods on the Everest 2 Controller and the enhanced performance specs should shift sales away from our Vertex 3 line and could provide additional significant margin upside as well as drive significant in-market demand.
Let me be as clear as possible. We are targeting increased margins and simultaneous market share growth. These goals are supported by a proprietary technology that allows us to use low-cost flash in high performance applications. I think it’s important to note that while we continue to focus on SSD products, we’ve historically sold our controller platform to a number of companies including OEMs such as Juniper and Cisco and to our competitors including well known enterprise SSD manufacturers who sell SSDs and an SSD Controllers under their own brand names utilizing our controller platforms.
Given the recent launch of our Everest 2 platform, we intend to continue to support serving strategic partners with our controllers. And we have recently finished qualification with the number of SSD manufacturers. Now sales of our controller products were less than a $1 million in the fourth quarter, but carried gross product margins in the 60% to 75%.
As we only recently released the current generation platform, we are now providing guidance on the revenue ramp for SSD controllers. We do expect considerable growth of revenue in these products and we will update to markup when appropriate. Moving on to enterprise storage, the market for enterprise storage continues to go through a period of innovation which is impacting how enterprise storage solutions are adopted as system architecture level.
And we believe that we’re positioned at a cross roads or a shift in the storage environment and then our SAN replacement products are unique with the vision to take advantage with that shift. We continue to provide our SAN replacement solutions such as the Z-Drive R4 to independent media for analysis. In March independent product reviewers of storage review redeveloped their testing platform to better accommodate the burdening PCIe SSD space and tested the R4 side-by-side with competing products.
Their conclusion was simple, the Z-Drive R4 is nearly impossible to beat in performance, price, or flexibility. Its key to note that we launched our Z-Drive R4 in August of last year and have only recently with the acquisition of SANRAD, build out a fully featured virtualization software offering. With that in mind and despite the fact that we have a considerable growth in a short period of time, we don’t expect sales of those products to ramp until the third fiscal quarter.
Now since the acquisition of SANRAD, we’ve launched our VXL software offering, which has given us access to a broader array of opportunities than were previously addressable. We are very pleased with the momentum we’re seeing. As we’ve noted and also our competitors have noted, that customers continually indicate that vMotion support, ease of installation and support for cache sharing among servers are prerequisites for our customers’ virtual environments.
Our VXL software is unique in its ability not only to reduce installation complexity with an exiguous approach but to share a single Z-Drive over a multiple servers and to support vMotion with no loss of cache. The value of this differentiation is a measurable. VXL was designed from the start with a simple rule, to empower virtualization with flash rather than to hamper virtualization whenever the flash is used by a virtual machine. VXL is a catalyst opening the door for flash, bringing flash’s full benefit to the virtual environment even under the most demanding workloads.
Now I’d like to take a moment to characterize the large Greenfield opportunities that our SAN replacement products address. In reviewing our business pipeline for these products, we see our top 50 opportunities have an estimated deployment value of approximately $1 billion. Now while we may not be able to win each discrete opportunity at this level, it’s an encouraging trend. Given the limited competitions we see in these accounts, further eyeing up the opinion that we have yet to scrap the surface in the SAN replacement opportunity.
Moving on, in addition to the bundled PCIe plus VXL offering, we are seeing early signs of interest in our VXL software as a standalone sale both to OEMs for integration into their flash storage arrays and directly to large data centers. Now we’re not currently forecasting the opportunity but we’re pleased with the early success of the product and are optimistic in regards to future sales success with this standalone software.
So moving onto our sales opportunities going forward, in speaking to our growing enterprise customer base, we begun to generate revenue with initial orders from several major data centers. Now though they represent a small portion of our revenue, historically speaking, these wins showcase OCZ’s transformation in 2012 and give insight into our future opportunities. Some of our largest new data center clients recently began to point or finish qualification during fiscal ‘12. These included a leading social media website, a leading cloud and content delivery provider, a global software-as-a-service provider, the world’s leading online auction site, the world’s leading web-based content management system, the world’s second largest telecommunications provider and three of the world’s top 10 data centers by size.
Further it’s worth noting that our largest current data center client, an American multinational internet company, headquartered in Sunnyvale has recently provided increased forecast of over three times their current run rate. That being said, growth in data centers is expected to drive sales for OCZ as we move forward. Now moving onto our OEM relationships, we’ve been able to secure our relationships with the majority of the tier-one OEMs exiting the year.
And we expect that these relationships will continue to grow as we expand our product offering and as we grow our sales and support organization to provide on the ground support at the manufacture site. Now moving on and before turning it over to Art, I want to take a moment to comment on our annual and quarterly revenue guidance. Art will provide a little bit more detail in regards to expense guidance during his commentary and we are guiding – so to move on, we’re guiding our net revenues for the fiscal quarter to be in a range of $110 million to $120 million and annual revenues to $630 million to $700 million for our fiscal ‘13.
It’s key to note that we expect about 60% to 65% of our revenues to occur in the second half of the year. This is in line with our normal seasonality. As a midpoint, growth is approximately 80%. In regards to our visibility on annual revenues, I wanted to take the time to remind our audience that our initial guidance at the beginning of fiscal ‘12 was $300 million to $330 million and we closed the year at $366 million. For fiscal ‘13, the increase in OEM and data center opportunities has helped us to increase our visibility into our client base.
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