Quantum: Fiscal 1Q11 Financial Results

(in US$ millions)	1Q10	1Q11
Revenues	160.3	163.2
*Growth*		2%
Net income (loss)	5.0	(2.7)

Quantum Corp. announced that revenue for its fiscal first quarter (FQ1’11), ended June 30, 2010, was $163 million, an increase of $3 million from the same period last year (FQ1’10).

This increase was primarily due to record branded disk systems and software revenue, which grew 86 percent from FQ1’10, and higher OEM DXi software revenue recognized in accordance with contractual requirements. Quantum’s branded business grew to 73 percent of total non-royalty revenue, up from 71 percent in FQ1’10.

Reflecting the strength of the company’s business model, Quantum increased both its gross margin rate and operating income from the same quarter last year. Its GAAP gross margin rate was 41.3 percent, up from 38.4 percent, and GAAP operating income rose to $4 million, up from $200,000.

Quantum reported a GAAP net loss of $3 million, or 1 cent per share, compared to GAAP net income of $5 million in FQ1’10, which included an $11 million net gain related to the retirement of convertible debt. The $3 million loss in FQ1’11 included $9 million in amortization of intangibles and $3 million in stock-based compensation charges which reduced per share earnings by approximately 5 cents.

"We continued to make significant progress in several key areas during the June quarter, most notably setting a new record for branded DXi revenue, which more than doubled on a year-over-year basis," said Rick Belluzzo, chairman and CEO of Quantum. "We also continued to deliver strong gross margin and operating income performance. However, although our revenue increased over the prior year, we clearly did not deliver the growth we had expected. While this was partly due to economic challenges in Europe, we continue to believe there is significant opportunity in the market and that Quantum is well-positioned to capitalize on it, particularly given the new products we’ve launched over the past year."

"The key to generating greater revenue growth is building a stronger channel business – especially in the midrange with our DXi solutions – better leveraging our large installed base and further improving our sales execution," continued Belluzzo. "While we believe our go-to-market strategy is still fundamentally sound, we are making targeted changes and investments in all these areas that will help us build a stronger, more diverse revenue base moving forward."

Quantum’s product revenue, which includes sales of the company’s hardware and software products, totaled $108 million in FQ1’11. This represented a net increase of $3 million from FQ1’10. Disk systems and software revenue, inclusive of related service revenue, was $35 million in the June quarter, an increase of 80 percent from the same period last year. The growing strength of Quantum’s branded disk systems and software offerings was reflected in year-over-year revenue increases of 125 percent for branded DXi systems and 36 percent for branded StorNext software. Contributing to this momentum were a variety of large deals, including a multi-site, follow-on DXi7500 sale to one of the top insurance companies in the United States, a significant DXi7500 purchase by a new DXi customer that is one of the leaders in the American music recording industry, and multi-unit DXi6500 deals with a government agency and state university. On the StorNext side, notable customer wins included new business with a major manufacturer of supercomputers, several Chinese television stations, and a top university in the Middle East, as well as a follow-on sale to a large government-owned broadcast network in Asia.

Quantum ended FQ1’11 with $99 million in total cash and cash equivalents and $329 million in total debt. The quarter-over-quarter decline in cash was expected, generally driven by balance sheet fluctuations and, specifically, the final utilization of a customer prepayment. Quantum stated that it expects to generate cash from operations in the current quarter and that it will pay off the remaining $22 million of its convertible debt.

Comments

Abstracts of the earnings call transcript:

Jon Gacek, CFO and COO:
"With regard to revenue challenges, we were at 60% of our sales plan in EMEA, which we believe was a result of economic uncertainty. Also in one of our North America sales areas where have historically seen a number of significantly large deals we were at 30% of our sales plan.
"Overall, EMEA accounted for about two-thirds of our Q1 revenue shortfall plan, while the North America area, I mentioned, was responsible for the remaining third.
"For the first quarter, our branded business represented 73% of our non-royalty revenue, compared to 71% in the same period a year ago.
"On a year-over-year basis, our first quarter branded product revenue grew 6% and for the remainder of fiscal 2011, we expect our branded business to continue to grow for tape, disk systems and software products.
"More specifically the largest contributor to the cash usage was a reduction in deferred revenue of $15.2 million, primarily related to the final utilization of the EMC prepaid royalty, and to a lesser extent a typical seasonal decline in service contract differed revenue.
"Looking further at various revenue classifications, devices and media totaled $20.5 million compared to 27.2 in Q1 a year ago. The decline is primarily attributable to anticipated declines in the OEM devices and media of $5.3 million and declines in branded media of $3.1 million offset by increases in branded devices revenue of $1.6 million.
"As a point of reference OEM devices revenue now totals less than $1 million in this past quarter compared to $6 million in the prior year quarter.
"Tape automation systems revenue was $56.7 million, compared to $61.1 million in Q1 of fiscal 2010. The decline was due to reductions in branded enterprise and midrange product revenue primarily resulting from the below planned performance mentioned earlier in EMEA and in one of our North American sales areas. However, we did see an increase in revenue from our new entry-level products driven by our Scalar i40 and i80 products, which began shipping in the last half of fiscal 2010.
"OEM automation remained relatively flat on both a year-over-year basis and sequentially.
"StorNext revenue grew 36% and the revenue from our existing OEM DXi software agreement increased 69% as we recognized the remainder under the contractual agreement."

Rick Belluzzo, chairman and CEO:
"Our plans for FY 2011 at the highest level are about continuing the delivery of new products, driving branded revenue growth in disk systems, software and tape and introducing new elements of our technology that will position us for further growth and expanded contribution. Clearly our Q1 results were not up to the level that is appropriate given these expectations.
"In recent quarter, a bunch of our branded, mid ranged Enterprise business has been very large deal oriented. In fact, for Q1, nearly 40% of our branded, midrange and enterprise revenue came from deals of more than $200,000.
"On the tape automation side, as Oracle has focused on a direct sales model and increased service pricing from the former Sun StorageTek business, we have seen interest from several VARs in working with us on targeting the Sun Storage Tek install base customers and transitioning them to Quantum where we can provide a significant advantage from the total cost of ownership standpoint. Despite this progress we must do more in engaging with the channel.
"In summary, I wanted to spend most of my time today on the revenue focus of the company. We have a strong sense of urgency to build revenue momentum beyond the 2%, growth we experienced in Q1. At the same time, we will continue to strive for other improvements in our business and in our business model, including our investments as well as our capital structures."