Quantum: Fiscal 3Q09 Financial Results

Quantum Corp. announced that revenue for its fiscal third quarter (FQ3’09), ended Dec. 31, 2008, was $204 million and included $31 million in disk systems and software revenue. The company had a GAAP operating loss of $334 million and a net loss of $340 million, or $1.63 per share. These figures include an estimated non-cash charge of $350 million for goodwill impairment. On a non-GAAP basis, Quantum generated $31 million in operating income which represented 15 percent of revenue, the highest level achieved in eight years. Non-GAAP net income for the quarter was $26 million, also the highest level in eight years and significantly above analysts’ expectations.

Compared to the same quarter in the previous year (FQ3’08), Quantum’s total revenue was down 19 percent, due to the weaker economic environment, the company’s strategy of continuing to shift its sales mix toward higher margin opportunities and a year-over-year decline in branded tape sales and media royalties. Despite the revenue decline, the company’s GAAP gross margin rate was 42 percent, up from 35 percent in FQ3’08 and the highest level Quantum has achieved in eight years.

"Our December quarter results clearly demonstrate the progress we’ve made in executing on key components of our strategy, even in the face of a very challenging economic environment," said Rick Belluzzo, chairman and CEO of Quantum. "We doubled our disk systems and software revenue year-over-year, with strong sales from our new midrange DXi7500 Express solution and our EMC partnership. This helped drive both the significant improvement in GAAP gross margins, which have increased from 28 percent to 42 percent since we merged with ADIC, and the 15 percent non-GAAP operating income we delivered. While we have more work to do to take full advantage of our opportunities and address the challenges posed by our capital structure, we are continuing to strengthen our market position by providing customers with integrated disk, tape and software solutions for multi-site, multi-tier data protection and management."

Due to a combination of factors, including the impact of the economic environment on its business and the decline in its stock price over the last several months, Quantum began conducting an impairment analysis of its goodwill during FQ3’09, as required by GAAP. Based on the analysis to date, the company has included the estimated $350 million non-cash impairment charge in its GAAP results announced today. The charge does not impact Quantum’s cash balances, liquidity, ability to generate cash flow or compliance with debt covenants. With the inclusion of the impairment charge, Quantum’s GAAP operating expenses for the quarter totaled $420 million, resulting in the GAAP net loss of $340 million, or $1.63 per share. In FQ3’08, GAAP operating expenses were $78 million, and the GAAP net loss was $2 million, or 1 cent per share.

In addition to the estimated $350 million goodwill impairment charge, the $340 million GAAP net loss for FQ3’09 included $9 million in amortization of intangibles, $4 million in restructuring charges and $2 million in stock-based compensation. The net impact of these four items reduced earnings per share on a diluted basis by approximately $1.75.

Quantum’s product revenue, which includes sales of the company’s hardware and software products, totaled $144 million in the December quarter. This represented a net decrease of $41 million from FQ3’08, due to an expected decline in overall OEM revenue as well as lower sales of branded non-royalty media, tape automation systems and devices.

Disk systems and software revenue, inclusive of related service revenue, was $31 million in FQ3’09, a 100-percent increase over FQ3’08. One of the highlights in this area was the introduction of Quantum’s DXi7500 Express deduplication appliance optimized for small and medium-size enterprise environments. Although it only shipped for less than half the quarter, the DXi7500 Express showed strong sales over this period, reinforcing the growing adoption of Quantum’s deduplication and replication technology. Based on shipments through the December quarter, this technology is being used to protect more than 400 petabytes of data. In addition, Quantum’s DXi7500 Enterprise model was recently named as a finalist in the backup hardware category for the Storage magazine/SearchStorage.com 2008 Product of the Year awards that will be announced in February.

Revenue for Quantum’s other two product categories
in FQ3’09 was as follows:

• $85 million in tape automation sales, a decrease of $28 million from the comparable period in the previous year. Approximately two-thirds of the decline related to OEM products, with the other third due mainly to lower branded sales in EMEA.
• $30 million in devices and non-royalty media revenue, down $28 million from FQ3’08. This was primarily the result of two factors — an anticipated decline in OEM device revenue and lower branded media sales, as Quantum chose not to pursue lower-margin media revenue opportunities.

Excluding royalties, the company’s branded share of revenue was 65 percent in FQ3’09, up from 62 percent in FQ3’08.

Quantum generated $19 million in cash from operations for the quarter and, as of Dec. 31, 2008, had $51 million in cash and cash equivalents. The company was also in compliance with all debt covenants as of Dec. 31, 2008, and expects to remain in compliance during the next twelve months.