M-Systems published very good third quarter financial results today, surpassing the forecasts. The company reported revenue of $34.1 million in the quarter, 33% more than in the preceding quarter, and 89% more than in the same quarter last year. M-Systems develops digital information storage applications, based on flash memory chips.
M-Systems reported a $104,000 new profit in the third quarter, for the first time in 10 quarters. At the same time, it should be noted that the company still posted a $589,000 operating loss, and is not producing cash from its current activity. The good news in this respect is that the company has cut its operating loss by 40%, compared with the preceding quarter.
M-Systems president and CEO Dov Moran said the company expected fourth quarter revenue of $40 million, and a profit of $0.02 per share. That would give M-Systems $120 million in revenue in 2003. The company also predicted it would earn revenue of $180 million in 2004.
”Globes”: What were the factors that caused M-Systems’ gross profit margin to fall from 32% in the second quarter to 27% in the third quarter?
M-Systems CFO Ronit Maor: ”The drop in our gross profit margin was caused by the current market shortage of NAND flash memory chips (which M-Systems uses as its raw material, H.G.). The rise in prices caused by excess demand shrank our gross profit margin. M-Systems’ third quarter sales grew more than we expected. We predicted 10% sales growth, but our actual growth was over 30%. This increased our demand for flash components (NAND components, H.G.) more than expected, which created additional pressure on our gross profit margin.
”We believe, however, that the decline in gross profit margin is temporary. The contract we signed with Toshiba guarantees us large quantities of flash chips, at attractive prices. The supply of flash memory under the agreement will begin only during the fourth quarter. We therefore believe that our gross profit margins will start to improve from the first quarter of 2004.”
When will the company reach the operating break-even point?
”We believe that we’ll pass the operating break-even point in the first quarter of 2004.”
What was the breakdown of M-Systems’ sales between its products in the third quarter?
”DiskOnKey (DOK) sales amounted to $22.4 million in the third quarter, constituting 66% of total company sales, compared with $16.1 million in the preceding quarter, when they were 63% of total sales. Sales of this product grew 40%.
”Sales of Mobile DiskOnChip (MDOC), which is designated for computer-based systems and for the wireless market, totaled $10.5 million in the third quarter, constituting 31% of company revenue, compared with $8.4 million in the preceding quarter. MDOC sales to the wireless market amounted to $4.4 million, constituting 13% of total company revenue, compared with $2.3 million in the second quarter, and reflecting 91.3% growth.”
How was revenue distributed between regions?
”31% of company revenue in the third quarter was from sales to the US, 17% from sales to Europe, 31% from sales to China and Taiwan, and 20% from sales to Japan.”
What was M-Systems’ market share for each of its products in the third quarter?
”Our market share in the DOK fields currently stands at 20%, which is the largest in the field. Excluding the Chinese market, M-Systems’ global market share is 30%.
”Our DiskOnChip (DOC) market share is hard to estimate at this stage, since our product is designed for the smart telephone market, in which it is hard to make quantitative estimates right now. In any case, as of now, we have design wins from five out of the world’s six leading wireless telephone manufacturers. Furthermore, we recently announced an agreement with Sony Corp. to include our product in their advanced PDA. These design wins indicate the volume of the demand for our product in the wireless market.”
What are your projected growth rates for 2003 and 2004 in each of the markets in which you operate?
”The growth of the market resembles the company’s growth rate, except in the DOK field. Research companies expect the DOK market to pass the $1 billion mark in 2005-2006. While the wireless telephone market growth rate is less than 50-60% per year, M-Systems sells to a particular niche in this market (smart wireless phones). This niche is expected to grow by 50-60% per year.”
Toshiba's executive in charge of flash memory is expected to visit M-Systems next week. Also expected to visit is a senior executive from Microsoft (Nasdaq: MSFT), as part of a proposed joint project of the two companies. M-Systems has a long-standing relationship with Microsoft, of which the proposed joint project is merely the latest phase.
Published by Globes [online] - www.globes.co.il - on 20 October 2003