Quantum: Fiscal 2Q14 Financial Results

(in US$ million)	2Q13	2Q14	6 mo. 13	6 mo. 14
Revenues	147.3	131.4	288.2	279.4
*Growth*		-11%		*-3%*
Net income (loss)	(12.3)	(8.0)	(29.0)	(4.6)

Quantum Corp. reported results for the second quarter of fiscal 2014, ended Sept. 30, 2013.

Revenue for the quarter was $131.4 million, down 11% from the second quarter of fiscal 2013, primarily as a result of softness in Asia and lower-than-expected revenue from the U.S. federal government and Europe.

Quantum achieved record revenue from sales of its big data management and archive solutions and also reported a higher gross margin rate and improved operating income and net income over the same quarter last year.

The GAAP gross margin for the quarter was 42.9 percent, up from 40.2% a year earlier, while the non-GAAP gross margin increased to 43.6 percent, from 41.4% in the same quarter a year ago. Combined with an 11% year-over-year reduction in GAAP and non-GAAP operating expenses, the higher gross margin resulted in improved operating and net income results.

On a GAAP basis, Quantum reported an operating loss of $5.0 million for the quarter, compared to a $10.0 million loss in the same quarter last year, and had a net loss of $8.0 million, or $0.03 per diluted share, compared to a net loss of $12.3 million in the prior year. On a non-GAAP basis, the company generated $1.0 million of operating income, an improvement from a $2.6 million operating loss a year ago. Quantum reported a non-GAAP net loss of $1.9 million, or $0.01 per diluted share, representing a $3.0 million improvement from a year earlier.

“Record quarterly revenue from big data management and archive sales – including several key Lattus storage object deals – helped support a year-over-year improvement in gross margin, operating income and net income,” said Jon Gacek, president and CEO, Quantum. “Our better-than-expected operating results also reflected the strength of our business model and focus on driving profit and cash flow. However, the concerns we expressed as we entered the quarter regarding U.S. federal government spending were validated and were a major contributor to our total revenue falling short of expectations.

“In the second half of the fiscal year, we intend to build on our big data leadership in end-to-end content workflow with our newly announced StorNext 5 platform and Lattus, driving deeper into current vertical markets and expanding into others. We will also leverage our market share leadership in tape automation and our comprehensive data protection portfolio to support share gains in the data center, including deploying Lattus to address converged backup and archive needs. Finally, we are looking to extend our market reach through both existing and new channel and strategic partnerships. Throughout these efforts, we will continue to maintain our balanced approach to driving increased profit and cash flow while pursuing revenue growth.”

For the third quarter of fiscal 2014, Quantum expects:

Revenue of approximately $133 million to $143 million.
GAAP gross margin of 41 to 42% and non-GAAP gross margin of 42 to 43 percent.
GAAP operating expenses of $60 million to $62 million and non-GAAP operating expenses of $55 million to $57 million.
Interest expense of $2.5 million and taxes of $500,000.

Business highlights for the September quarter include:

Quantum announced its new StorNext 5 platform. Based on a re-architected, high-performance engine, it extends the company’s leadership in media and entertainment and offers new opportunities in other markets such as high-performance computing, oil and gas and analytics. StorNext 5 delivers up to 10 times greater performance and five times the scalability of previous StorNext versions – up to five billion files can be shared in a single file system. In addition, the new StorNext platform provides an intelligent framework for unified management of flash, disk, tape and object storage technologies from a single interface.
Extending the benefits of object storage to the data center, the company introduced a joint solution with CommVault for converged backup and archive. Based on Lattus object storage technology and CommVault Simpana 10 software, the solution enables a data protection and archive strategy that reduces primary storage costs and optimizes backup performance while minimizing management complexity, administrative overhead and capital expenditures in multi-petabyte environments.
Quantum also made it easier for prospective customers to experience a full-scale, cloud-based object storage testing environment with the launch of its new Lattus Demo Lab. Located inside Switch’s SUPERNAP data centers, the Demo Lab enables proof of concept testing at the facility, either onsite or virtually, with no need for customers to provide their own equipment or resources.
Info-Tech Research Group named Quantum a Champion in its 2013 Disk Backup Vendor Landscape. It recognized the company based on its DXi-Series deduplication appliances’ rich feature set, ease of scaling and management, and continued innovation in data protection. Quantum was also singled out with a Trend Setter Award, for innovation with upstream deduplication and the DXi V1000 virtual backup appliance, as well as for Dynamic Disk Pools technology.
The DXi6800 was named Product of Excellence in the Disk Backup Appliances category at the Storage Networking World 2013 China show.

Comments

Abstracts the earnings call transcript: Jon Gacek, CEO and president: "The weakness in Europe was across all products, but it was not across all of Europe. We did see strength in Central Europe, but the revenue in the rest of Europe was below last year and at the low end of our expectations. In the U.S. federal space, the weakness was tape and DXi revenue. "The one bright spot in our fed results was our big data management and archive revenue, which increased 36% year-over-year. In fact, total big data revenue encompassing StorNext software and appliances, Lattus and related maintenance revenue was at an all-time high for Q2." Linda Breard, CFO: "Although we still grew big data revenue 6% year-over-year, this was offset by a 30% decline in DXi revenue and a 15% decline in tape automation systems revenue. "For the quarter, non-royalty revenue totaled $120.9 million, of which 83% was branded and 17% was OEM. Royalty revenue was $10.5 million for Q2 compared to $11.6 million in the same quarter a year ago. DLT and LTO royalties in absolute dollars contributed equally to the expected reduction in royalty. "Looking further at various revenue classifications, devices and media totaled $16.7 million in Q2 compared to $15.5 million in the prior year. While revenues were up in both devices and media, devices contributed the majority of the overall revenue increase over the same quarter a year ago. Tape automation systems revenue was $41.6 million compared to $48.8 million in Q2 of fiscal 2013. Branded tape revenue declined 20% or approximately $5.9 million year-over-year, primarily due to a decline in revenue from our enterprise tape automation system. While win rates remain strong, overall enterprise deals that closed in Q2 were down approximately 31%, and revenue from larger deals, deals over 200,000, was down nearly 45% from the same period in the prior year. The weakness in U.S. federal sales and Europe played a role here. "In the midrange, branded revenue was relatively flat year-over-year and exceeded our expectation, while branded entry sales were down slightly over the same period. Despite the year-over-year revenue decline, we acquired over 100 new branded midrange and enterprise customers in Q2. "From an OEM perspective, tape automation revenue was down 7% or $1.3 million over Q2 '13. The decline in OEM tape automation revenue was primarily driven by a reduction in mid-range sales. Both enterprise and entry-level OEM tape automation revenues were approximately the same as the prior year. Disk systems, software and related maintenance revenue, which includes our DXi and vmPRO appliance and software data protection offerings, as well as Lattus object storage solution and our StorNext software and appliances for big data management and archive, was $35.1 million in Q2. This was down 17% from our all-time record quarter of $42.4 million in the prior year. "Looking more specifically at disk systems and related maintenance revenue, it was down 30% year-over-year. The majority of the decline was in our enterprise DXi revenue and was driven by the significant number of big deals we had in Q2 of fiscal '13 compared to this year. Our midrange and entry DXi revenues were down moderately over the same period in the prior year. Our overall DXi win rates remain strong, approximating 50%, but the large deal opportunities were not there as they were last year during the same quarter. The weakness in the U.S. federal space and Europe impacted sales at all levels. We added approximately 80 new disk customers during the quarter. "And on a geographic basis, StorNext software and appliances product revenue was up approximately 35% year-over-year in both North America and APAC but down approximately 60% in EMEA. "Overall, from a customer acquisition standpoint, we added approximately 70 new big data customers in Q2 and continue to see strong win rates in our solution offering. "We ended the quarter with $77.1 million in cash and cash equivalents, up nearly 135% from $33 million in the same quarter last year."