Quantum Corporation F1Q10 (Qtr End 06/30/09) Earnings Call Transcript

| About: Quantum Corporation (QTM)

Quantum Corporation (NYSE:QTM)

F1Q10 Earnings Call

July 28, 2009 5:00 pm ET


Shawn D. Hall – General Counsel

Richard E. Belluzzo – Chief Executive Officer

Jon W. Gacek – Chief Operating Officer and Chief Financial Officer

William C. Britts – Executive Vice President for Sales and Marketing

Jerry Lopatin – Executive Vice President of Engineering


Brian Freed - Morgan, Keegan & Company, Inc.

Glenn Hanus - Needham & Company

Joe Feshbach - Joe Feshbach Partners, LLC


Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Quantum Corporation first quarter 2010 earnings conference call. (Operator Instructions) This conference is being recorded today Tuesday, July 28, 2009.

At this time I’d like to turn the conference over to Shawn Hall, General Counsel. Please go ahead.

Shawn D. Hall

Thank you. Good afternoon and welcome. Here with me today are Rick Belluzzo, our CEO, Jon Gacek, our COO and CFO, and Bill Britts, our Executive Vice President for Sales and Marketing.

The webcast of this call, our earnings release and a quantitative reconciliation of any GAAP and non-GAAP financial measures discussed today can be accessed at the Investor Relations section of our website at www.quantum.com and will be archived for one year.

During the course of today’s discussion we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements regarding our business strategy, opportunities and priorities, anticipated product launches and plans, future financial performance including expected revenue, gross margin, and expense and income performance, and debt covenant compliance and trends in our business and in the markets in which we compete.

We’d like to caution you that our statements are based on current expectations and involve risks and uncertainties that could cause actual results to differ materially. We refer you to the risk factors and cautionary language contained in today’s press release announcing our fiscal Q1 2010 results, as well as to our reports filed with the Securities and Exchange Commission from time to time including our most recent 10-K filed on June 30, 2009. Such reports contain and identify important factors that could cause actual results to differ materially from those contained in our forward-looking statements.

All such risk factors identified in our press release and in our filings with the SEC are incorporated by reference into today’s discussion. We undertake no obligation to update these forward-looking statements in the future.

With that I’ll turn the call over to Jon Gacek.

Jon W. Gacek

Thanks Shawn. Good afternoon and thank you for joining us. We are reporting our first quarter results for fiscal 2010. As you are aware, it was a very interesting quarter for Quantum, the storage industry generally and deduplication specifically.

During today’s call, Rick and I are going to cover our Q1 results, our capital structure and the strategic position of our disk and software business as well as our tape business. Let me start by saying that we are very pleased with the progress we’ve made in executing our financial model and improving our balance sheet.

In Q1 we generated $14.4 million of non-GAAP operating profit, up from $7.7 million a year earlier, despite the fact that our total quarterly revenue declined by $61 million or 28% during the last 12 months. And non-GAAP gross margin dollars decreased by $15 million. Over these same 12 months, our debt balance went from $383 million to $278 million total debt, decreasing to $256 at July 7. And our trailing 12 month EBITDA through Q1 was $107 million. Finally, we have refinanced $138 million of our $160 million convertible debt as of July 1, so while we may have lower revenues than we had a year ago, we are a much healthier company with a better financial model and a much better balance sheet.

Now for the commercial finished, here are the key financial results for the quarter. First, disk systems and software revenue including related service revenue was $19.2 million compared to $20 million a year ago. Second, our non-GAAP gross margin was 42% compared to 37% for the same quarter last year. Third, our non-GAAP operating expenses were $53 million, down $21 million or 29% from Q1 of fiscal ’09. Fourth, our non-GAAP operating profit was 9% compared to 3.5% the same quarter last year. Fifth, non-GAAP net income was $8 million or $0.04 per share compared to a $500,000 loss for fiscal Q1 of last year. We generated cash from operations of $33.3 million during the quarter. We had EBITDA of $20.8 million and we paid down $41 million of our senior debt.

And finally, we retired through our tender offer that closed during Q1 and the subsequent to quarter end debt repurchase a total of $137.9 million of subordinated debt and we borrowed $121.7 million to do that refinancing. We have now met the subordinated debt refinancing requirement that is included in our senior debt agreement.

I would like to refer everyone to the financial statements and the supporting schedule including the press release. It will be helpful to review those documents as I make my comments.

Move to revenue. Revenue for our first quarter ended June 30 was $160.3 compared to $221.8 million a year ago. This is a $61.5 million decline year-over-year. However, as I walk through the revenue detail remember that our non-GAAP gross margin is up 500 basis points over the same period a year ago. Royalty revenue was approximately $16.2 million for Q1 compared to $22 million in the same quarter a year ago. The decline was primarily related to our DLT media royalty. The year-over-year DLT royalty decline is consistent with the past two quarters so we’re on a consistent trend there. LTO decreased $2 million year-over-year.

For the quarter, non-royalty revenue totaled $144.1 million of which 71% was branded and 29% was OEM. That compares to non-royalty revenue of $200 million a year ago of which 66% was branded and 34% was OEM.

Looking further at various revenue classifications, devices in media totaled $27.2 million compared to $53.7 million in Q1 a year ago. The decline is primarily attributable to the anticipated declines in branded devices of $7 million, OEM device revenue of $7 million and branded media of $10 million. We continue to manage our media business opportunistically to generate gross profit dollars.

Tape automation systems revenue was $61.1 million compared to $85.7 million in Q1 of fiscal ’09. Over half of this decline or $14.3 million was related to OEM automation products, and the remainder related to branded products. The decline in branded automation was primarily related to volume declines in both EMEA and Asia. One very encouraging sign from both an execution and a macro environment perspective is that our North America performance improved this quarter. In North America this category was up slightly year-over-year and up 16% sequentially. Our focus on improving branded sales productivity in North America is beginning to pay off and our OEM automation business has stabilized.

Disk systems and software products and related service revenue was $19.9 million, down from $20 million a year ago. On a year-over-year comparison, we had an increase in license revenue from EMC, a decline in branded DXi revenue. The decline in branded DXi was a combination of a decrease in our first generation, low and mid-range products, the DXi3500 and 5500, and a decline in the DXi7500.

In the case of the DXi7500 we had some pent up demand last year as we entered the quarter and launched the product. We also believe that EMC’s bid for Data Domain and some of the misperceptions this created about Quantum had an impact in Q1 as both license revenue and branded revenue were down sequentially.

Looking forward, we will launch a new mid-range disk product this calendar year that will be a very good product for our branded channel partners. This will be an important product launch for the company and we will provide more detail as we get closer to the launch date.

As for future EMC license revenue, we expect that quarterly revenue that Quantum will recognize over the next three quarters will be similar in magnitude to what we recognized in Q1. And based on what we know today, we think that it will begin a decline in Q1 of fiscal 2011. However, we are not going to comment on EMC’s product plans or their future roadmap with us.

Moving to service revenue, it was $39.8 million compared to $42.3 million a year ago. This decline is the result of a decline in OEM out of warranty repair offset by an increase in service revenue related to our branded product and our installed base.

Turning to gross margins, non-GAAP gross margin in Q1 was 42% compared to 37% in the prior year period. This improvement was driven by an improvement in mix including a decline in low margin OEM tape drive revenue, a decline in low margin OEM automation, an increase in EMC license revenue, and significant improvements in our manufacturing costs and our product costs. This gross margin expansion comes during a period when total revenue declined $61 million from the same quarter in fiscal ’09 and our tape royalty declined $6 million. The message here is that we have made significant progress in improving the mix of our revenue towards higher margin, higher value products and we have done a good job in reducing our manufacturing cost structure.

Moving to expenses, non-GAAP operating expense totaled $53 million compared to $74.5 million a year earlier. This is a $21.5 million reduction or 29%. How did we do this? We have focused on improving the profitability of our tape business by getting out of unprofitable segments while still investing in our industry leading and profitable enterprise and mid-range automation platforms. In addition, we have reduced our overall sales and marketing spend to reflect the current product portfolio and the go-to-market partners we have. And we’ve also cut G&A expense.

At the same time we’re reducing costs we have continued to invest in our disk and software R&D to capitalize on the opportunity in this early stage but exciting business. As I previously mentioned, non-GAAP operating profit for the quarter was $14.4 million or 9% of revenue compared to $7.79 or 3.5% of revenue in the same quarter a year ago.

Moving to interest expense, it totaled $5.7 million for the quarter compared to $8.8 million a year earlier. This includes cash interest expense of $5.2 million, amortization of debt issue cost of $500,000. The coupon interest rate for our remaining acquisition debt which totaled $207.5 million at June 30 will be approximately 4.1% for the quarter ended September 30. And the average coupon rate for our total debt which includes our senior debt, our EMC debt, and the remaining part of our subordinated debt will be 7.9% for the quarter ended September 30. We expect interest expense will be approximately $7 million per quarter for the remainder of fiscal 2010.

For the first quarter we recognized a net tax expense of $800,000 primarily related to foreign taxes. We still believe it’s reasonable to model tax expense of $1 million per quarter.

So summing up for Q1, we had non-GAAP net income of $8 million with non-GAAP EPS of the $0.04 compared to a loss of $500,000 in the same quarter of last year. Focusing on cash flow for the quarter in the balance sheet of June 30 I would like to highlight several key points. Cash flow from operations for the quarter were $33.3 million, $15 million of which resulted from the prepaid royalty from EMC. We paid down $41 million of our ADIC acquisition related debt during the quarter which totaled $207.5 million at quarter end.

Non-GAAP EBITDA for the quarter was $20.8 million. We are in compliance with all debt covenants at June 30 and we expect to be in compliance with our debt covenants during the next 12 months. For purposes of calculating our debt covenants, our EBITDA for the last 12 months was $107.1. Sequentially, inventory decreased $5.4 million and accounts receivable declined $19.3 million. We also had an accelerated payment of $13.5 million from one customer.

CapEx was $1.9 million. Purchases of service parts inventory were approximately $685,000. And depreciation, amortization and service parts lower of cost to market expense totaled $16.2 million for the quarter.

Also subsequent to quarter end we paid down an additional $20 million on our senior term debt that was funded by an additional prepaid from EMC.

So as we look to Q2 we are forecasting revenue of $160 to $170 million, a small improvement in non-GAAP gross margin, slightly higher non-GAAP operating expenses and flat to slightly higher non-GAAP operating income, net income and EBITDA.

With that let me turn it over to Rick.

Richard E. Belluzzo

Well thank you John. I would like to spend most of my time today discussing our opportunities, strategy and direction given the rapid changes that are happening in the industry. However, I want to start by talking briefly about our Q1 results because to a large extent they reinforce the high level strategy that we’ve been pursuing since we completed the merger with ADIC in 2006.

Our goal has been to drive continued improvement in our business model through its systems business strategy that includes making the tape business more profitable while focusing our investments on the deduplication replication system opportunity.

Over the last year we’ve increased non-GAAP income even as our revenue has declined, as demonstrated by the 9% non-GAAP operating margin we achieved in Q1 versus 3.5% last year. This has come as we have continued to improve and optimize our core tape business. We have also strengthened our cash generation capability, achieved the significant milestone of refinancing our convertible debt, and reduced our total net debt by a third since June, 2008. In short, the fundamental business model is evolving as we intended despite operating in a very challenging economic environment.

At the same time this environment has certainly impacted us, which as evident in our Q1 results. We continued to see customers shift investments to future quarters, most notably in Europe. And while we saw some signs of improvement in North America, the environment here continues to be challenging. As John said, we believe the EMC bid for Data Domain and some of the misperceptions this created about Quantum impacted us both in terms of license revenue for EMC and our branded DXi sales, as customers deferred purchasing decisions waiting to see how all of this was going to play out.

All this reduced our revenue opportunity, and yet our business model progress has allowed us to show substantial improvements over last year’s Q1 results. So now let me shift the discussion to our near term direction and priorities. When Quantum and ADIC merged three years ago, we established a basic strategy that remains largely unchanged. As a result, most of this discussion is about how we respond to recent developments and what near term priorities we will pursue to take advantage of this significant opportunity that we have.

In fact, the opportunity to build market success in deduplication has turned out to be larger and more profound than we envisioned three years ago. The high level strategy we set when we merged with ADIC had three main components. First, we chose to focus on the backup recovery archives segment of the storage industry and to be a specialist in this market. In fact, today we still see the backup redesign, disaster recovery, compliance and archiving remain the top storage spending priorities according to numerous external surveys.

Next, we view tape as a mature segment of these solutions. As a result we decided we would combine our tape businesses to achieve greater synergies, partner where we could, focus on high margin segments and extend our platforms. The net result will be to sustain our leadership and improve profitability. We remain the worldwide market share leader in open systems automation, and over this period we have increased tape operating income margins to the low teens. We have also continued to expand and enhance our automation line, and we’ve recently seen numerous new wins against Sun Storage Tek in the wake of Oracle acquiring them as our open system platforms continue to be well received by customers.

In addition, last week we introduced a new tape encryption solution which is another example of how we will continue to selectively innovate. At the same time we are very clear that this is a mature segment and that we must maintain our focus on margin generation. In fact, the significant changes we have made in this business have allowed us to increase margins despite these revenue declines.

Moving forward, we will continue to manage our tape business for margin. However, there are a couple of incremental opportunities that we will pursue. We will introduce a new platform in the lower end of the mid-range that will improve our competitiveness, and we will aggressively pursue campaigns to replace Sun Storage Tek end customers and with channel partners. These are priorities that we feel will provide appropriate return in this mature market.

The third major element of our post ADIC merger strategy was our decision to invest in building a growth platform in data deduplication replication systems. Between Quantum and ADIC we had most of the core technology and we introduced our first generation product fairly quickly. Unfortunately, as we’ve acknowledged previously, it took time for these products to reach the necessary maturity level and we incorporated various learnings into our second generation product, the DXi7500. It became generally available just over a year ago, which was the same time that EMC started shipping products incorporating this second generation technology.

Both of these developments represented major steps toward building our momentum in deduplication and we have made significant progress. However, as Q1 demonstrates, we have not yet established regular, sequential revenue growth in disk systems and software and EMC’s acquisition of Data Domain clearly changes the direction that we were headed.

At the same time market data suggests that the market for target based deduplication systems will more than triple between 2008 and 2011. This is a very significant opportunity and we continue to believe that we are well positioned to capitalize on this market. We own the foundational patent in the most effective form of deduplication, variable length de-dup, and we have strong technology. We also have an expanded DXi line that scales from less than one terabyte to more than 200 terabytes with a single software architecture which offers de-dup and replication flexibility, provides tight integration with tape, and enables central management a multiple DXi systems and Quantum tape systems.

Finally, our de-dup technology has been deployed in approximately 2,000 systems worldwide. And we have the ability to leverage it beyond just backup through StorNext. Clearly building a growth platform centered around deduplication and replication is the key element of our strategy that holds the most promise and represents our largest challenge. While we expect a continued revenue stream from EMC, it is very clear that their focus will rapidly shift to the Data Domain technology. Therefore while we will continue to partner with EMC, we recognize that our revenue stream will need to develop in other areas.

Our goal in Q2 is to begin building sequential revenue growth in disk systems and software, to make this segment of the business significant and increasingly more relevant. To accomplish this, we have already embarked on a broad based new product cycle that will continue throughout the year. And we are also taking a number of other actions which I will now describe.

First, in the last two months we have introduced the following new products, the DXi2500D, a high performance low cost de-dup appliance for remote and branch office, optimized for replication back to the central data center. It offers four to five times the capacity of a Data Domain product at the same list price. We introduced Quantum Vision 3.0, a new version of Quantum backup management and reporting software that works across sites and across Quantum disk and tape system. We introduced the industry’s first de-dup solution, the 7500, qualified for semantic open storage, direct tape capability, enabling users to create copies on tape in a fully automated process managed and tracked by net backup.

And finally, just last week we introduced the ES Express Backup Software Module for our DXi series, providing a scalable and easy to use data protection solution for VMware environments using our DXi systems.

Next, we are already shifting our go to market focus to put a greater emphasis on building our branded DXi business in the areas where we have particular strength. For example in BTL environments, where our scalability, tape integration and consultative approach is valued by customers. We also have substantial advantage in terms of our install base including more than 70,000 branded tape systems and 30,000 StorNext file systems deployed across the globe. We recently of course have partnered with EMC in many of these areas. Our intention now is to compete by leveraging our strengths, particularly relative to Data Domain technology.

Third, we are establishing a stronger branded run rate business and to do that we will need to achieve this through the VAR channel. To this end we will introduce a new mid-range platform before the end of the calendar year that will significantly improve our mid-range NAS position and strengthen our channel business. In addition to this, the EMC Data Domain transaction does create some disruption among [bars] which makes this launch ideal. We’ve been working on this product for over a year and we intend to launch this in the most aggressive manner possible.

Fourth, we are currently in discussions with new potential, go to market partners that are interested in becoming more active in this space. It is too early to indicate timing, but there is no doubt that some new level of partner engagement is likely to occur. The EMC Data Domain transaction has elevated the priority of deduplication and has created some instability among several storage companies, and we will move decisively to determine which opportunities have the most promise.

And finally, the StorNext component of our disk and software business have significant growth potential. In many ways the market is moving towards our solutions for storage management of very large data sets. In the past this was limited to HPC environments and rich media companies. As rich media becomes more mainstream, we are experiencing expanded interest in our solution. And we intend to capitalize on this through an extended focus on new opportunities.

In addition, we are expanding our StorNext roadmap as we see StorNext as a key foundation to our technology platform for deduplication systems. These actions are all intended to deliver the path towards continuous revenue improvement in disk systems and the software segment of Quantum. We know that achieving growth in this segment is key to enhancing our value and improving or achieving greater relevance.

In summary, it was a very interesting quarter. We managed our way through a tough economic environment to deliver greatly improved operating income and cash flow on a year-over-year basis. We were very pleased that we have resolved our convertible issue, reduced our total debt and achieved greater covenant flexibility. The EMC action does require us to alter our execution priorities, but we have been very focused on expanding our product line and providing more opportunity for our DXi technology. All of this leads to a very focused goal of growing our disk systems and software business with a very high sense of urgency.

In short, we have the right business model and an improved capital instruction and we are a key player in the most exciting segment of the storage industry. We are very clear as to what we have to accomplish.

With that, let me turn the call back over to the operator for your questions. Thank you.

Question-and-Answer Session


Thank you sir. (Operator Instructions) Your first question comes from Brian Freed - Morgan, Keegan & Company, Inc.

Brian Freed - Morgan, Keegan & Company, Inc.

Real quick, on the EMC prepaid royalty can you comment a little bit on the terms and kind of recognition of that? And do you have to repay any of that royalty if, for example, they decided to discontinue shipping your product early in lieu of a Data Domain based one?

Jon W. Gacek

Sure. They can use. There’s no terms. It shows up, you know, it came in as cash and deferred revenue for us and we’ll recognize it over the course of probably the next year. And it can be used for software, it can be used for hardware.

I don’t expect to pay any back. No.

Brian Freed - Morgan, Keegan & Company, Inc.

Can it also be used for tape systems if?

Jon W. Gacek

Yes. That’s what I meant by hardware.

Brian Freed - Morgan, Keegan & Company, Inc.

And the second question I had is as you look at the opportunities in the deduplication space, there’s been a lot of question whether EMC has any sort of, you know, limiting factors in terms of what you can do and can’t do under your OEM. Is there anything that precludes you from signing other OEMs besides EMC?

Jon W. Gacek


Brian Freed - Morgan, Keegan & Company, Inc.

And then lastly do you have any sort of, you know, sense in terms of the shift, in terms of the new software that you brought on a quarter or so ago? Have you pretty much switched everything over from a DS standpoint and you’re running on the latest code update?

Jon W. Gacek

We have, we did a release in the late spring. We’ll have another release out shortly and you know we’re going to continue to have a release pattern of about twice per year. That, the current code base has been very, very stable. This next code release is really about increasing performance in replication in particular and it’s been very well received by us and by the EMC team as they’ve tested it. So that will be out shortly.

Brian Freed - Morgan, Keegan & Company, Inc.

And in terms of the key pieces of your latest code releases, I know one of the early issues was the kind of symmetry between the [right] and the restore. It sounds like the spring launch pretty much evened that up. Is that correct?

Jon W. Gacek

It certainly helped. Actually Jerry’s here today. I might let him answer that where we are on one dot two and that particular aspect.

Jerry Lopatin

Hi. This is Jerry Lopatin. Yes there have been improvements in the rate performance as well over time and there will continue to be some.

Richard E. Belluzzo

Yes, I would just add. I mean this is Rick. These systems are, you know, our large scalability story is important to us and it has an immense amount of system work that has to be done on, you know, in just de-dup, you know, replication, I mean all of these pieces are areas that we are improving rapidly with each release. And even though we generally have a theme with each release that we’re going to make improvements on and you know upcoming is replication where we intend to make a big improvement. We have a, you know, included in this release also is a big focus on NAS performance because we’ve been very focused on DTL. That was the initial design of the product, but we know that the NAS market is larger, has more growth potential, and so we put a big effort into that.

So all these improvements are coming along, moving quickly, I think we’re probably, you know, picking up momentum in terms of how fast we can address new opportunities and improvements in the overall end to end performance because it’s the end to end system performance that is really critical. And I think we’re getting better at that with each release and we intend to do much more.

Brian Freed - Morgan, Keegan & Company, Inc.

And one last metric before I cede the floor. Can you kind of give us some sense in terms of the mix of your DXi solutions that also have right tape?

Jon W. Gacek

Oh. We can get that. I don’t have that at the top of my head. I’ll answer a little bit later in the, well, I’ll have somebody grab it.


Your next question comes from Glenn Hanus - Needham & Company.

Glenn Hanus - Needham & Company

Jon, can you maybe update us on the annual guidance that you gave last quarter?

Jon W. Gacek

Yes. There really hasn’t been any change to it. That’s why I didn’t put it in.

Glenn Hanus - Needham & Company

You know you guys gave a good rundown there on a lot of topics. Could you maybe expand a little bit on new potential opportunities on the disk side in terms of partners? Are you talking to anybody, you know, that perhaps the size of the opportunity is as big as EMC? Give us a sense of where you’re at maybe, you know, I assume on a no name basis with some different potential parties and the structure of maybe the deals what we would be thinking about. You know, license deals just like EMC or something else.

Jon W. Gacek

Sure. I think, you know, one of the things that people have asked about just the business in general and I think Rick’s comments and my comments, both of us, there was no question that all of this churn between net app and EMC and Data Domain caused customers, you know, to think about what they were doing. We feel like we’re kind of through that now. Our month of July on the disk has been very strong. We’ve had a couple deals that were greater than $1 million that have already closed and shipped. Those deals probably would have been EMC deals, you know, beforehand. Now the customer is buying those products from us.

And so we think that piece of the market is improving for us. Remember, too, that you know we launched the DXi7500 and we launched it simultaneously with EMC and they’ve been a great partner. We think they are the best channel for that large scale type of product. I don’t think they’re going to be easy to replace at all in that space. But I do think the new mid-range product that we are coming out with is going to be great for our branded channel.

And then, you know, we’re in discussions with, you know, the group of people who don’t really have de-dup solutions about how to use our software, primarily our software not hardware around their particular hardware offering. And I can tell you everybody knows where we are and we’re having, you know, dialog with many of those entities and some of them are further along than others.

Rick might want to add to that.

Richard E. Belluzzo

Yes. I mean I would just comment that we are first and foremost very clear that we have to, you know, build our branded business and it’s important to recognize that our 7500 is highly configurable, you know, scales to large implementation. It requires a consultative approach. That’s why it was very well suited for EMC.

In the near term we’re going to do that ourselves. We have an install base. We have technical infrastructure in the field and as Jon mentioned we’re starting to win some of those deals, some of which we’ve been working on for quite a while. Because those are long, consultative processes, we feel good about the potential there. But with our size, and there’s only so much of that business you can get, and so we think the second part of our strategy which is our mid-range, channel based, higher velocity NAS product is really the biggest opportunity we have. And we’re very, very focused on that and have been for a year. It’s not like, you know, the EMC announcement changed a lot there. You know we recognized the need to build that segment of the business for a long, long time and we’ve been very focused on doing that.

So those are, so the two opportunities first is to take the current product and go after those consultative deals more aggressively, not partnering with EMC. Secondly, it’s introduce the mid-range product around the velocity part of the business by engaging the channel, who’s a little off kilter today because of this announcement over the acquisition. And then thirdly is to find the right partner to reach other segments that we want to get to. So that we’re engaged in. As Jon mentioned there are a lot of people who want to talk about it. We have to find and optimize it in a way that gives us incremental revenue opportunity and does so without distracting us from those first two objectives, from an engineering, an execution perspective as well. We can only do so many things.

But I would all reinforce the fact that it’s just so early still. You know we did some recent data that the percentage of customers that adopted de-dup and our base is very small. You know it’s less than 20%. So that’s opportunity for growth. That’s why there’s three times growth over the next several years. Very, very positive.

And then all of the other, you know, the other companies that don’t have solutions do represent opportunities that we’re going to focus on. And so, you know, I think our world has changed. Our message is different. And we’re responding to that and believe that there’s still so much opportunity in this market that the most important thing for us is to move very quickly, embracing the new reality, and building on the work that we had already started.

Glenn Hanus - Needham & Company

And with the second item, the mid-range channel opportunity, is that dependent on this new product release or can you begin attacking that at all now?

Richard E. Belluzzo

We are and have been attacking that. We’ve worked to take a product we call the DXi7500 Express, which takes out some of the complexity for that channel. We have, you know, with new software versions we’ll have better NAS solutions. So yes we are working that, but, you know, we intend to make a very substantial improvement over that with the new product line in every respect. The way its performance, its packaging, its pricing, its ease of use, I mean its configuration. You know we really believe we understand the needs of that segment and know what we have to deliver to get there.

So what we will be doing will be a further improvement by a substantial margin. Which again if you look at the market data that’s where most of the volume and revenue is is in the NAS segment and that will grow faster than DTL over the next several years.

Jon W. Gacek

And of course that fits well with our strong tape channel. Our tape products, the bulk of our tape products go through that same way and today our disk product is really above that. It’s a very good fit for the high end EMC, DTL consultative market. But for our traditional, you know, I500, I2K channel partner this next product we think is a leap frog product from where we are today.

Glenn Hanus - Needham & Company

And just shifting gears a little bit on the EMEA, Asia performance, how much of that is sort of the weaker European economy versus your own execution?

Jon W. Gacek

Actually we’ve been executing quite well in Europe up until this past quarter, maybe a little bit the latter part of the last quarter end. So we really think that is macro economic related. Our teams have done a good job over there. You know they were ahead of us in sort of adopting the sales model that we’ve put in here in North America which we clearly saw, you know, very good performance in North America from the team. So we don’t think it’s about us, we think it’s macro.

Richard E. Belluzzo

And we track slipped deals and we could see it. We could see the business and where it didn’t close. And we think it’s all economic. And none of those deals that we look at did we lose competitively. It’s just, you know, budget problems where people deferred decisions. So we continue to see that, especially in Europe. In North America it was better. Still here, we still track those issues as well and we still have some. I would just say that the North American team did a very good job working through the transition of the model, getting more productive and continuing and improving their numbers. And so that was a real actual highlight. I think in Europe the economic environment made it more difficult.


Your next question comes from Joe Feshbach - Joe Feshbach Partners, LLC.

Joe Feshbach - Joe Feshbach Partners, LLC

First congratulations on the debt restructuring and the awesome job on the margin enhancement. That’s phenomenal. A couple of questions. Jon, can you give us a little color on the restructuring charges for this quarter and what sort of that investment, what areas that investment should improve in terms of expenses, productivity, etc.?

Jon W. Gacek

Yes, really it was a consolidation from two facilities down to one in Irvine. And in Irvine we have primarily development and sales and marketing folks. But it was a lease based, getting out of unused space which will kind of flow through all the line items.

Joe Feshbach - Joe Feshbach Partners, LLC

Not much in terms of headcount I assume?

Jon W. Gacek

No, not a lot.

Joe Feshbach - Joe Feshbach Partners, LLC

And were there any one offs in operating expenses, you know, pluses that would have brought G&A down a bit extra? Or minuses or whatever?

Jon W. Gacek

Yes, we had one in G&A. We had I think about a $1 million insurance settlement that reduced our G&A expense related to some theft losses we had a couple of years ago. That’s the only one I can think of. But there’s probably some minuses, too. I’d say run rate wise as we look forward to next quarter, I think OpEx will be a little bit up, above 53.

Joe Feshbach - Joe Feshbach Partners, LLC

A little bit above 53?

Jon W. Gacek

Yes, I think probably 54 kind of range, 54-and-a-half.

Joe Feshbach - Joe Feshbach Partners, LLC

As you, you know, it sounds like the quarter is off to a decent start in July. As you think about revenues from last quarter domestically which obviously did do better in tape automation, etc., was there still a lot of deal slippage? Do you see that there’s just generally better interest because the economy is looking a little brighter? How should we think about momentum, you know, besides just the confusion in the marketplace over de-dup?

Jon W. Gacek

I think we did, it wasn’t just disk deals. I mean we do track, you know, funnel and data through sales force. And we did still see deals slip. We have seen some of those close. I would say the environment still isn’t great but it is better. And you know there’s deal activity out there. I’m going to let Bill kind of give a little more color from the latest meetings.

William C. Britts

So clearly Europe was very different in terms of both the pipeline and the end of quarter close. So we saw a very different end of quarter close in Europe than we did in North America. And in North America it was not as strong as what we saw in the previous two quarters. But I would say overall the environment is strengthening. We’re seeing budgets going ahead and being allocated. We are, we’re still obviously trying to make sure that we understand kind of what the customer problem is that we’re trying to solve. That’s been, you know, something that as we get into these backup redesigns, those sales cycles can be very long. So kind of parsing out what’s just a length in sales cycle because people are trying to figure out what their options are and what they want to do versus just budget. That I think has improved, the environments improved in North America.

Joe Feshbach - Joe Feshbach Partners, LLC

And then when you were talking about operating margin in the tape side of the business being I think in the low teens, I assume that that includes the royalty stream.

Jon W. Gacek


Joe Feshbach - Joe Feshbach Partners, LLC

So that includes the royalty stream?

Jon W. Gacek


Joe Feshbach - Joe Feshbach Partners, LLC

And then I guess lastly, anything else on, oh I know what was service gross margin? Do you happen to have that off the top of your head?

Jon W. Gacek

I’m trying to do it in my head just looking at it. It’s 11 over 38. I seem to be struggling. Between 20 and 25%.


And management we have no further questions at this time. I’ll turn it back to you for any closing remarks.

Richard E. Belluzzo

Okay. Well thank you for joining us for an important call, given all the change that’s gone on. And I hope you were all able to get a good sense of the direction that we’re pursuing and the progress that we’ve made. And I look forward to reporting to you in the next quarter at the next quarter earnings call even more progress. Thanks a lot.


Thank you sir. Ladies and gentlemen this does conclude the Quantum Corporation’s first quarter 2010 earnings conference call. If you’d like to listen to a replay of today’s conference please dial 1-800-406-7325 or 303-590-3030 using the access code of 4114094 followed by the pound key. ACT would like to thank you for your participation. You may now disconnect.

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