Quantum: Fiscal 1Q20 Financial Results

Quantum Corporation announced financial results for its first fiscal quarter ended June 30, 2019.

In addition, it has completed the previously announced financial restatement process and provided results for each of the three fiscal years ended March 31, 2017, March 31, 2018 and March 31, 2019, which include the financial data and discussion for all interim periods for these fiscal years.

“Today, Quantum is a leaner, more efficient company poised for growth based on a series of transformative steps we have taken,” commented Jamie Lerner, chairman and CEO. “With the leadership of our new shareholder-engaged board of directors and executive team, we’ve eliminated over $70 million in annualized expenses, completed the restatement process, and are ready to capitalize on a revitalized and healthy tape market as well as the expanding opportunity to store and manage video and image data across a wide range of industries.”

1FQ20 (period ended June 30, 2019)

• Revenue was $105.6 million, compared to $107.5 million in 1FQ19.
  Inclusive of $8.3 million in non-recurring charges, net loss was $3.8 million, compared to a net loss of $7.5 million including $9.8 million in non-recurring charges in 1FQ19.
• Excluding $8.3 million in non-recurring charges, adjusted net income was $4.4 million, or $0.11 per diluted share, compared to of $2.3 million, or $0.06 per diluted share in 1FQ19 after excluding $9.8 million in non-recurring charges.
• Gross profit was $45.8 million or 43% gross margin, compared to $46.3 million or 43% in 1FQ19. Gross margins remained flat Y/Y despite lower royalty revenue in 1FQ20 that was negatively impacted by LTO media supply issues, which were resolved in early August.
• Total operating expenses were $43.1 million or 41% of sales, compared to $50.7 million, or 47% in 1FQ19. SG&A expenses declined 11% to $34.4 million compared to $38.5 million in 1FQ19. R&D expenses were $8.4 million, up 1% compared to $8.3 million in 1FQ19.
• The company incurred $6.3 million in interest expense, compared to $3.9 million in the 1FQ19.
• Adjusted EBITDA increased 82% to $13.1 million, compared to $7.2 million in 1FQ19.
• Balance sheet and liquidity as of June 30, 2019
  • Cash and cash equivalents of $10.8 million as of June 30, 2019, compared to $10.8 million as of 1FQ19. These amounts exclude $5.0 million in restricted cash required under the company’s credit agreements.
  • Outstanding long-term debt as of June 30, 2019 was $146.1 million net of $16.4 million in unamortized debt issuance costs and $1.7 million in current portion of long-term debt. This compares to $145.6 million of outstanding debt as of March 31, 2019, net of $17.3 million in unamortized debt issuance costs and $1.7 million in current portion of long-term debt. Quantum also has a $45 million revolving credit facility which was undrawn at both June 30, 2019 and March 31, 2019.
  • Total interest expense was $6.3 million.

Financial and operational highlights
• Gross margins improved by three percentage points from 39% in FY18 to 42% in FY19 primarily due to lower headcount in service and improved gross margins on products.
• Recurring, high-margin services revenue decreased slightly from $136.5 million in FY18 to $134.7 million in FY19, or 1%.  The related gross profit and gross margin increased from $77.7 million and 57% in FY18 to $79.5 million and 59% in FY19.
• Adjusted EBITDA of $32.5 million for FY19 compared to adjusted EBITDA of negative $4.5 million in FY18, a yearly improvement of approximately $37 million.

Management Commentary: the transformation of the company includes the following:

• New team
  • Reconstituted board of directors to include significant shareholders; this transformation stems from a series of shareholder campaigns directed at corporate accountability and operational improvement
  • Since January 2018, replaced almost three-fourths of prior management
  • Recruited executives including CEO, CFO, CRO, CAO, CIO, VP supply chain, general counsel, corporate controller and director of internal audit
  • Adopted new business priorities, standards and governance practices focused on innovation and profitable sales
  • New corporate strategy focused on leading the video storage market, informed by:
  • The projection that 80% of the world’s data by 2025 will be video or video-like data
  • Customers find the firm to be a leader in both the high-speed processing of video and long-term archiving of video and unstructured data
• New gross margin focus
  • Reset sales commission plan that pays on gross margin achievement
  • Curtailed reselling low margin third party products aimed at boosting revenue at the expense of gross margins
  • Reduced annualized spending by $10 million in cost of sales expenses representing primarily headcount reductions 
• New and enhanced products
  • Physical and software enhancements to tape library products aimed at the hyperscaler and cloud market
  • F-Series, a new line of NVMe flash storage arrays
  • VS-Series, a hyperconverged platform for video surveillance and management of buildings systems
  • R-Series, ruggedized, removable storage systems for in-vehicle data capture, mobile surveillance and military applications
  • Cloud-Based Analytics, enables monitoring and configuration through the cloud, connecting all our products to the firm’s distributed cloud
• New cost structure
  • Eliminated $60 million in annualized operating expenses that included a reduction of approximately 30% of the workforce
  • Vacated 9 facilities and offices worldwide

“With the restatement behind us, we are focused on growing our business profitably and creating sustainable value for our shareholders,” Lerner said. “Our key next step will be to re-list our shares on a national exchange, a goal we expect to complete by the end of 2019. With the accelerating growth of video and hi-resolution image data across all industries, a healthy tape industry that is expected to return to growth, and a right-sized expense structure, we are well-positioned to deliver positive future results for our shareholders, customers, suppliers and employees.“

Outlook
For 2FQ20, management expects revenue in the range of $99 to $105 million. Excluding approximately $3 million in non-recurring charges, the company expects resulting adjusted net income to be in the range of $2 to $4 million. Adjusted EBITDA is expected to be in the range of $10 to $12 million.

“We believe we have a sustainable platform from which to grow, with exciting new products targeting the future of video storage,” CEO added. “Historically, our fiscal second quarter tends to have some seasonal impact from holiday schedules and generally slower business during the summer months. Our fiscal third quarter, which ends in December, traditionally is our strongest of the year.”

For the remaining three quarters of FY20, Quantum expects total revenues to increase by $15 to $30 million or 6% to 10% compared to same period in the prior year, with revenues from new products increasing as the year progresses. Due to the company’s cost controls and focus on improving gross margins, it expects adjusted EBITDA to increase to a range of $50 to $55 million or by 55% to 70% for the full fiscal year compared to the prior fiscal year.