Quantum: Fiscal 3Q13 Financial Results

(in US$ million)	3Q12	3Q13	9 mo. 12	9 mo. 13
Revenues	173.5	159.4	492.1	447.6
*Growth*		-8%		*-9%*
Net income (loss)	3.9	8.1	2.2	(37.9)

Quantum Corp. reported results for the third quarter of fiscal 2013 (FQ3’13), ended Dec. 31, 2012.

Revenue for the quarter totaled $159 million, down 8% from the third quarter of fiscal 2012 (FQ3’12), primarily due to expected declines in OEM and branded tape automation revenue. However, total revenue was up $12 million, or 8%, over the prior quarter.

Quantum reported revenue of $41 million from disk system and software sales (including related service), a 13% increase over FQ3’12 due to record revenue from DXi disk system sales. The company also grew tape automation revenue by 25% over the prior quarter, as both midrange and enterprise sales rebounded strongly.

Quantum reported a GAAP net loss of $8 million, or 4 cents per share, for FQ3’13, compared to GAAP net income of $4 million in the same quarter of last year. On a non-GAAP basis, the company had net income of $5 million, or 2 cents per share, down from net income of $12 million a year earlier. The year-over-year declines were largely driven by the lower overall revenue. Compared to the prior quarter’s results, the GAAP net loss in FQ3’13 was $4 million smaller, and the non-GAAP net income was $10 million higher.

"We improved our financial performance in the December quarter, growing revenue sequentially, driving better-than-expected non-GAAP profits and generating cash," said Jon Gacek, president and CEO of Quantum. "We also had another quarter of record DXi deduplication sales, which contributed to the 14% year-over-year increase in combined DXi and StorNext revenue we’ve achieved over the first three quarters of the fiscal year.

"In addition, even as we scaled back spending, we continued to invest in new, industry-leading products and solutions for protecting and managing digital content in physical, virtual, cloud and big data environments. These include our Lattus wide area storage systems, vmPRO 3.0 virtual backup software, DXi6800 deduplication appliances and Scalar i6000 HD enterprise tape libraries."

Quantum generated $6 million in cash from operating activities in FQ3’13 and ended the quarter with $55 million in cash and cash equivalents.

For 4Q2013, Quantum expects:

Revenue of approximately $145 million to $150 million, reflecting typical seasonality, with higher sequential disk systems and software revenue.
GAAP gross margin rate of approximately 41% and non-GAAP gross margin rate of 42%.
GAAP operating expenses of $66 million to $68 million and non-GAAP operating expenses of $61 million to $63 million.
Interest expense of $2.5 million and taxes of $500,000.

Business highlights for the December quarter
include the following:

Quantum introduced a new family of wide area storage solutions, named Lattus, which provides globally distributed disk-based archives that are extremely scalable and cost-effective and allows storage of data forever on disk without interruption or migration. Integrating dispersed next-generation object storage and Quantum file system technologies, the Lattus family offers a new approach to archiving that overcomes the limitations and inefficiencies posed by traditional disk architectures in multi-petabyte storage environments. The first Lattus product, Lattus-X, began shipping in December.
The company integrated its Q-Cloud backup and disaster recovery services with Symantec OpenStorage (OST) technology, providing NetBackup and Backup Exec customers with multiple options for leveraging Q-Cloud’s services. Q-Cloud now directly supports NetBackup and Backup Exec software, enabling both backup applications to stay completely aware of all copies of data backed up to a Q-Cloud DXi appliance.
Quantum began offering full-featured, free downloads of its vmPRO virtual machine backup software and DXi V1000 virtual deduplication appliance, providing a risk-free way to explore their superior features and value. The vmPRO Standard Edition software protects up to 1TB of virtual data and can be upgraded to vmPRO Enterprise Edition for additional capacity, making it easy for customers to adopt Quantum vmPRO and scale it to meet their growth requirements. The DXi V1000 stores up to 15TB of deduplicated data and works with vmPRO software to offer a 100% virtual data protection solution as well as a path to the cloud.
LTO-6 technology started shipping in Quantum’s Scalar i6000 and i500 tape libraries, as well as in its autoloaders, drives and media. LTO-6 nearly doubles capacity and increases transfer rates by up to 43% over LTO-5 technology, further enhancing the role of tape as an integral component of a broader tiered storage strategy.
Quantum products continued to garner industry honors, as the DXi V1000 was named Virtualisation Product of the Year at the 2012 Storage, Virtualisation and Cloud Computing (SVC) Awards, and Quantum’s StorNext data management software was recognized as runner-up in the Storage Software Appliance category. In addition, earlier this month, Storage magazine announced that the DXi V1000 is a finalist for its 2012 Product of the Year awards, and Network Computing selected the DXi6701/02 midrange deduplication appliance as a Product of the Year finalist for its upcoming awards.

Comments

Abstracts of the earnings call transcript:

Jon Gacek, president and CEO:
"The tape automation market has been difficult this year, with the overall market down approximately 20%. However, we have the best tape product portfolio and market position and we should gain share even in a tough market. This year, we've added a lot of excellent salespeople with a wide range of backgrounds, but most have a historical experience was in selling disk and software products. We have taken steps to make sure we are getting the tape opportunities, train our new sales team members to be successful and making sure we have adequate support to close tape deals.
"The second action we took in October, following the reduction in our Q1 and Q2 tape revenue, was to adjust our spending levels accordingly, with a focus on generating cash and income while still driving growth in this system's software and big data products. We implemented a plan that reduced headcount by roughly 10%, with basically all of the actions completed by December 31. Changes were implemented in all functions and in all geographies. We focused on performance, productivity, opportunity and strategic importance as we made these changes. The impact was approximately $1 million of benefit from those reductions in Q3 and we expect to recognize $6 million per quarter of benefit beginning this quarter.
"We also introduced the first products in our new family of Lattus, wide-area storage solutions for big data environments.
"We had our first deal for this technology in Q2. We didn't have any sales in Q3."

Linda Breard, CFO:
"Offsetting our growth in business, we had a revenue decline of $9.5 million in branded and OEM tape automation, devices in media revenue also declined $4.1 million, and as expected, royalties declined $2.5 million over the same quarter in the prior year.
"Royalty revenue was $11.5 million for Q3 compared to $14 million in the same quarter a year ago. Expected reductions in both LTO and DLT royalties contributed to the decline. For the quarter, non-royalty revenue totaled $147.9 million, of which 83% was branded and 17% was OEM. That compares to non-royalty revenue of $159.4 million a year ago, of which 81% was branded and 19% was OEM.
"Looking further at various revenue classifications, devices and media totaled $17.8 million compared to $21.9 million in Q3 of the prior year. The majority of the year-over-year decline was in media, which was expected due to the events of the prior year which caused higher than usual purchases at media. Tape automation system revenue was $61 million compared to $70.5 million in Q3 of fiscal '12. Our branded business performed better than our OEM business, declining approximately 10% year-over-year compared to our OEM business which was down nearly 20%.
"Branded midrange tape revenue was relatively flat year-over-year, while entry-level automation declined approximately 20% over the same quarter a year ago. In our OEM tape automation business, enterprise revenue is relatively flat year-over-year and we saw the largest dollar decline in midrange followed by decreased entry-level sales.
"Overall, our tape business has been outperforming the market. We acquired approximately 175 new midrange and enterprise tape customers in Q3, the highest new customer count in tape we have posted in 3 years.
"Disk systems, software and related maintenance revenue, which includes our DXi, vmPRO appliance and vmPRO software data-protection offerings, as well as wide-area storage solutions and our StorNext software and appliances for Big Data management and archive was $40.9 million in Q3. This was up 13% from $36.3 million in the prior year. This is the second quarter in a row that we surpassed $40 million in revenue in this category.
"Looking more specifically at disk systems revenue, it was up 19% year-over-year to a new record. In addition, we added approximately 175 new disk customers during the quarter, and our overall DXi win rate was 57%.
"At the end of October, we had shipped more than 1,000 DXi6701/6702 units in just over a year since their introduction in the market and the momentum continues.
"urning to StorNext software and appliances, revenue was relatively flat year-over-year. While we grew appliances and Q3's disk revenue over the same period last year, standalone StorNext software sales declined over Q3 of last year, fully offsetting the growth in appliances. The year-over-year decline in StorNext software reflected lower-than-expected federal revenues, resulting from the uncertainty around the U.S. fiscal cliff. We added approximately 75 new StorNext customers in Q3."