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Quantum (NYSE:QTM)

Q2 2014 Earnings Call

October 23, 2013 5:00 pm ET

Executives

Shawn D. Hall - Senior Vice President, General Counsel and Secretary

Jonathan W. Gacek - Chief Executive Officer, President and Director

Linda M. Breard - Chief Financial Officer, Chief Accounting Officer and Senior Vice President of Finance, IT & Facilities

Analysts

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Eric Martinuzzi - Lake Street Capital Markets, LLC, Research Division

Joshua Reilly

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Quantum Corporation Second Quarter 2014 Conference Call. [Operator Instructions] This conference is being recorded today, October 23, 2013. I would now like to turn the conference over to Shawn Hall, General Counsel. Please go ahead, sir.

Shawn D. Hall

Thank you. Good afternoon and welcome. Here with me today are Jon Gacek, our CEO; and Linda Breard, our CFO. 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 1 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 and future financial performance. 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, as well as to our reports filed with the Securities and Exchange Commission from time to time, including our most recent 10-Q filed on August 9, 2013. These risk factors are incorporated by reference into today's discussion, and we undertake no obligation to update them in the future.

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

Jonathan W. Gacek

Thanks, Shawn. Welcome to our Q2 fiscal 2014 conference call. Today, we reported revenue of $131.4 million, non-GAAP gross margin of 43.6%, non-GAAP operating expenses of $56.3 million, non-GAAP operating income of $1 million and a non-GAAP net loss of $1.9 million or $0.01 per share. While our revenue was $16 million lower than the same quarter a year ago, our non-GAAP gross margin was 220 basis points higher, our non-GAAP OpEx was $7.2 million lower and our non-GAAP operating income was $3.6 million higher and our non-GAAP income was $2.9 million higher than the same quarter a year ago. We finished the quarter with $77 million in cash compared to $33 million a year ago. Linda will walk through the details of Q2 results in a few minutes. But before I turn the call over to her, I'm going to discuss several significant aspects of the quarter.

First, revenue performance. As we indicated on our Q1 earnings call last quarter, we were concerned about revenue in the U.S. federal sector for Q2, which we factored into our guidance of $135 million to $140 million. Validating this concern, weakness in federal sales was one of the primary causes of our revenue result for the quarter being below the low end of our guidance range and the other factors being the weakness in Europe. In both cases, revenue came in below our low end of our expectations. 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. However, like other companies, we believe that deals that got hung up in the uncertainty leading up to the federal shutdown may still materialize this quarter.

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. As a result, it made up a larger percentage of our overall disk and software revenue than it has in the past, and we expect it to represent an increasing percentage moving forward. In addition to our second -- in addition to our record big data revenue, our OEM revenue, devices and media revenue and royalty were all at or above our expectations.

Second point I wanted to highlight is the year-over-year improvement in our operating results, business model and balance sheet. On the $16 million revenue decline, we delivered non-GAAP gross margin of 43.6% compared to 41.4% a year ago and non-GAAP operating profit of $1 million compared to operating loss of $2.6 million last year. In addition to the gross margin improvement, non-GAAP operating expenses were $56.3 million compared to $63.5 million a year ago. These operating results were better than our guidance for the quarter and reflect the fact that we are focused on driving profit and cash flow.

Beginning last October, we began a series of steps to align our spending and investments more closely with revenue and improve our cash flow and profit. Our Q2 results demonstrate the financial benefits from various operating and cost structure changes we've made. We also continue to analyze market opportunities to ensure that we are being smart in balancing the cash flow and profit associated with potential opportunities and go-to-market strategies against revenue growth, with greater emphasis on delivering results that are more predictable and controllable and where cash flow and profit are clear. In some cases, this means we may generate lower overall revenue but more cash flow and profit, providing greater operating leverage as the revenue increases.

Turning to our balance sheet improvement as compared to a year ago, we have refinanced our ADIC acquisition debt and are now debt covenant free. We have a $55 million credit line that is 100% available and can draw up to $45 million with no covenants, and we have $77 million in cash compared to the $33 million a year ago.

The third area I want to emphasize is the continued introduction of new products in both big data and data protection. In early September, we announced our new StorNext 5 platform. Designed from the ground up and based on a re-architected high-performance engine, StorNext 5 extends our big data leadership in media entertainment and offers new opportunities in other markets such as high-performance computing, oil and gas and analytics. It delivers up to 10x greater performance and 5x the scalability of previous StorNext versions. Up to 5 billion files can now be shared in a single file system. Lastly, StorNext 5 provides an intelligent framework for unified management of flash, disk, tape and object storage technologies all from a single interface.

In addition to StorNext 5, we launched our Lattus-D object storage system for the data center in Q2 and announced that we were joining with CommVault to provide solutions combining Lattus-D and their Simpana 10 software. This solution enables a comprehensive 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 data center environments. It can also be deployed as an object storage-based private cloud. Reinforcing the opportunities for object storage beyond traditional big data environments, I would just note that shortly after quarter end, we won a Lattus deal at a major U.S. university that want to take advantage of the unique data protection architecture it provides. The university is using Lattus-X product, our Lattus-X product, which provides mass access to multi-petabyte storage for archiving data.

In addition to Lattus D and X, the third product in our family is Lattus-M, which incorporates object storage technology to serve as an active nearline archive and enable rapid retrieval of content and assets for re-purposing StorNext-managed big data environments. We had several significant big data Lattus-M deals in Q2, all of which included StorNext software and/or appliances. One of the deals was a follow-on purchase from a large existing Lattus customer in the U.S. federal space, and the others were in the media and entertainment industry. One of these customers, The Ark, is a leading postproduction facility in London and is already a reference for us. You can read about our implementation with The Ark in the press release we issued on September 13.

In summary, we continue to provide customers with big data and data protection solutions that have a differentiation -- differentiated combination of performance, overall value, lower TCO, ease of use and investment protection. These solutions not only make us more valuable to end users, but also offer opportunities to add strategic partners in the routes to market as is the case with CommVault. This will be a continued focus moving forward.

Now I'll turn the call over to Linda, and then come back to talk about our strategic focus and guidance for next quarter. Linda?

Linda M. Breard

Thanks, Jon. Before I walk through our results, I would like to refer everyone to the financial statements and supporting schedules included in the press release and on our website. It will be helpful to reference those documents as I comment.

Revenue for our second quarter ended September 30 was $131.4 million compared to $147.3 million a year ago, an 11% decrease. North America commercial sales and central Europe were generally strong, but this was offset by the weakness in Asia, the U.S. federal sector and the rest of Europe. In fact, our revenue paced ahead of the first 2 months of the quarter, and then we experienced weakness in worldwide commercial sales and U.S. fed spending in September. Because so much of Q2 European and U.S. fed sales activity is specifically concentrated in September, the weakness in the last month of the quarter had a significant impact on our overall results. Net sales of StorNext, DXi and tape automation were all affected. 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.

Now turning to big data software appliances. Revenue, including maintenance, increased 6% year-over-year to an all-time record. StorNext AEL, server-based appliances and related disk revenue combined continued to ramp nicely from the prior year. Standalone StorNext software sales were relatively flat compared to Q2 of last year.

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. Although we had record big data revenue, big data sales in the U.S. fed space grew 36% year-over-year, and we believe this could have been even higher if there wasn't the uncertainty around the potential government shutdown. Lattus revenue was up 36% year-over-year and contributed more than 10% of the total big data revenue including maintenance. As Jon mentioned, we had several significant Lattus-M deals and we're excited about the opportunities we see in office storage. 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.

Moving to service revenue, it was $36.2 million in Q2, slightly up from $35.7 million in the same quarter of the prior year. The increase was driven by growth in branded contracts related to our client strategy in big data.

Turning to gross margins. Non-GAAP gross margin in Q2 was 43.6%, an increase of over 200 basis points from the 41.4% gross margin in the second quarter of fiscal '13, despite the reduced revenue level. The primary driver of the improvement in gross margin was reduced costs in our operation, repair and service departments of nearly $4 million related to cost reduction actions we completed in the last year.

Looking into expenses, non-GAAP operating expenses were down $7.2 million or approximately 11%, totaling $56.3 million in Q2 compared to $63.5 million in the prior year. Year-over-year, our sales and marketing costs decreased by $3.6 million. The primary driver of this reduction relates to lower salaries, benefits and associated costs resulting from the headcount reductions implemented over the past year. Similarly, research and development spend decreased approximately $3.1 million, primarily as a result of the headcount and other cost reduction actions taken over the past year. General and administrative costs declined by $600,000, primarily related to lower infrastructure costs such as rent and maintenance associated with relocation and consolidation of several facilities in North America.

Non-GAAP operating income for the quarter was $1 million compared to an operating loss of $2.6 million in the same quarter a year earlier. The largest contributor to the increase in operating profit on a quarterly basis was the cost reduction actions in both offices sold and OpEx totaling over $11 million. These were partially offset by lower overall product revenue, resulting in a 250 basis point improvement in our operating income over the same quarter in the prior year.

Interest expense for the quarter was $2.4 million compared to $1.8 million a year earlier. This included cash interest expense of $2 million and amortization of debt issue costs of $400,000. The average interest rate for our term $5 million of convertible debt is 3.84%.

For the second quarter, we had other income of $46,000. We recognized a tax expense of $500,000, which was primarily related to foreign and state taxes.

Summing it up for Q2, we had a non-GAAP net loss of $1.9 million, which is a non-GAAP diluted loss per share of $0.01, compared to a non-GAAP net loss of $4.9 million and a loss of $0.02 per share in the same quarter a year earlier. On an 11% year-over-year revenue decline, our bottom line improved 60% due to the changes we made in our business model over the past 12 months, particularly the reductions in our cost structure and increased focus on driving profit and cash flow.

Focusing on cash flow for the quarter and the balance sheet at September 30, I would like to highlight several key points. Cash flows used in operations for the quarter were $900,000. 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. At September 30, our debt consisted of $205 million of convertible debt, which has no covenants. There were no amounts drawn on our revolver at quarter end. Therefore, we have no financial covenant compliance requirement. EBITDA for the last 12 months was $42.7 million. On a sequential basis, manufacturing inventory decreased $1.4 million, accounts receivable increased $100,000, accounts payable decreased $1.9 million and we have an accelerated payment of $5.7 million from one customer. CapEx was $2 million.

In closing, I want to reiterate the progress we've made over the last year in further improving our balance sheet, better aligning spending and revenue and increasing our operational flexibility. We have generated cash from operations of $8.2 million in the first half of fiscal '14 compared to using $14.5 million in cash during the first half of fiscal '13. The ending cash and cash equivalent balances more than doubled over the year. Our refinancing has solidified the balance sheet with the 2 convertible debt issuances, an unused revolver and no covenant compliance requirement. The incremental improvements we have made in our cost structure since last fall have resulted in a business model that delivered a 250 basis point improvement in operating income from the same period in the prior year. Finally, updating on our progress in moving to a fully outsourced manufacturing model, we have successfully transitioned the targeted product lines for this quarter, and our plan is to complete the transition during our fiscal Q4. This will enable us to have a more flexible business model through the end of fiscal '15.

Now let me turn the call back over to Jon.

Jonathan W. Gacek

Thanks, Linda. Looking back at the first half of our fiscal year, it's clear there were market challenges that prevented us from meeting our revenue objectives. Yet despite this, we improved our non-GAAP bottom line performance by more than 50% compared to the first half of fiscal '13, even when last quarter's royalty revenue for Microsoft is excluded. This speaks to what I mentioned earlier, we are trying to be smart about balancing cash flow and profit versus revenue and growth and working to further improve our business model to drive predictable outcomes with our ultimate objective: to increase and deliver shareholder value.

With this in mind, we are focused on the following areas: first, gain additional access to end users through existing and new channel partners and potentially expanding relationships with existing partners like Dell, Fujitsu, HP, IBM and Teradata, or adding new strategic partners such as our recently announced Commvault partnership around Lattus and Simpana 10 software I discussed earlier. Second, we want to leverage our market share leadership in tape automation, our installed base and our strong data protection product portfolio, including Scalar tape, DXi, vmPRO, Lattus-D and cloud services to gain share in the data center and generate cash and profit. Third, we intend to leverage our big data portfolio, StorNext and Lattus, and our market-leading positions in media and entertainment market and other high-performance streaming video used cases to penetrate deeper into those markets. We will also leverage the new features in StorNext 5 to expand further into new verticals like oil and gas and genomics and ultimately, into this data center and cloud. We expect that these solutions will grow in both the near and long term.

Let me close by discussing our Q3 guidance. We expect to grow revenue sequentially, but the question is, by how much? In studying our revenue guidance of $133 million to $143 million, we determined there is visibility to opportunities sufficient to meet or exceed the top end of the range based on seasonality, our market position and our product portfolio. However, we purposely widened our range on the low end to reflect the uncertainty we have around the business climate in Europe and Asia and the continued uncertainty around the U.S. federal government spending, particularly in IT project funding.

Turning to other elements of our guidance. We expect non-GAAP gross margin of 42% to 43%, non-GAAP operating expenses of $55 million to $57 million, interest expense of $2.5 million and taxes of $500,000.

Now I'll turn the call over to the operator for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Chad Bennett with Craig-Hallum.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

I guess the first question would be we have now -- no, over 60% of revenue declining anywhere from 15% to 20% year-over-year, the tape being almost more astonishing considering the somewhat easy comps year-over-year. I guess what's the plan to stabilize -- to some extent, stabilize those businesses? And what do you think your value in the market is in those segments today?

Jonathan W. Gacek

You mean product value or solution value?

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Yes, yes.

Jonathan W. Gacek

I think what's interesting in the way you phrased that, Chad, is when we were talking a year ago, with the fall-off in tape last year for the industry, we took a series of actions to, what I would say stabilize, the business overall. And I think Linda gave good detail on we reduced costs about almost $44 million on an annualized basis over the last 12 months. There's no question tape is a mature market, and we've had great success as the share leader in that space. But it is about 2/3 of our business. It does drive the bulk of our profits. So when that fell off last year, we had to react to that. From a portfolio perspective, if you go through the portfolio, we still think the tape portfolio is second to none across the portfolio. DXi, again, great technology. Our win rates are high. We are spending less money on it, as you can see on the P&L. Our OpEx was down $7 million year-on-year. So what I would say is we believe we've stabilized the businesses when we look at the whole P&L. Think of it as pruning, if you will. And it gives us much more leverage as we grow businesses going forward. So a lot of focus on the business model. The product portfolios have been improved in all of that. Whether it's DXi or tape, we've been really aggressive about still launching products because ultimately, we're going to need to grow to generate more profit. And to do that, we're going to have to have unique solutions that deliver value to customers, and we're going to have to have routes to market to do that. So that's kind of a broader but also more focused answer to what you asked. I think we have stabilized those businesses. Now as we can deliver growth over time, they will be more profitable. And there'll be more downside risk, if you will, demonstrated by this quarter's result.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

So I guess maybe the definition of stabilization is a little different. I mean, if I look into your next quarter guidance, and obviously I got to make my own assumption on the mix between disc and tape, I mean, you're going to be down in those areas, again, 15% to 20% year-over-year. So assuming you actually hit your guidance, so what am I missing about the stabilization?

Jonathan W. Gacek

Well, you're talking about revenue and I'm talking about the business model. Flip it around, last year was a record quarter in Q3 and Q4 on disk and software, and we lost money in Q3. So there is definitely a trade-off for leaning towards we've got to make sure we're generating profit and cash flow, and then we can deliver growth as compared to we're going to spend a whole bunch of money and deliver growth at all costs. Maybe that's the difference in what you're saying and how I'm answering it.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Okay. So if the business continues to trend as is, you'll continue to cut costs and maintain breakeven to cash flow positive, correct?

Jonathan W. Gacek

Yes, I think so. Yes, but the idea is to cut our costs to grow. I mean, we're definitely making a trade-off on a lot of spending in advance of growth. Last quarter -- last year this quarter is an example. I mean, again it was a record. We were, I think, at $40-plus million in disk and software, but we lost money. And that was primarily tape that caused that. But in fact, as you pointed out, tape was a big part of our business. So we had to do the smart thing for the overall health of the company and the opportunity of the company and take costs out, which we've done. So we're in, we think, good markets. We think we have good market position. The other thing is I can't -- I'm not -- I can't control what I can't control or the company can't. The market is super choppy. I mean, I don't know if there's been a storage company yet that hasn't hit their revenue this quarter. I think we might be the only one who hit our profit target this quarter though. So we're trying to be smart about the choices we are making to position ourselves for growth, and profitable growth at that.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

I haven't backed into the math, Linda, but can you give us a rough -- and maybe you did in this series of metrics you gave. But a rough ratio in the disk and software segment of how much is, I guess you call it big data, StorNext, Lattus now versus how much is DXi?

Linda M. Breard

I think Jon mentioned this directionally. At year end, we gave the fiscal '13 numbers, where it was about 1/3 big data and 2/3 DXi. And given the strength of the StorNext and big data performance this quarter, we were up a fair amount closer to 50.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Okay. And then a couple more for me. So the OpEx guidance for next quarter, how much of that -- and it's good to see the lower OpEx relative to what I was thinking, next quarter, it's just variable comp related because the revenue's going to be lower versus kind of fixed costs, is there way of looking at that?

Jonathan W. Gacek

It's almost the whole...

Linda M. Breard

Differences in the range.

Jonathan W. Gacek

Differences in the range is the variable.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Okay. And Linda, remind us again, when you get the full-fledged benefit from benchmark I think after the March quarter, what that means for, I assume, product gross margins?

Linda M. Breard

Yes, it's basically on an annualized basis, Chad. It's about $10 million a year in cost reductions.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Okay. All out of product gross margins, right?

Linda M. Breard

Right.

Operator

Our next question comes from Eric Martinuzzi with Lake Street Capital Markets.

Eric Martinuzzi - Lake Street Capital Markets, LLC, Research Division

You talked about your win rates being roughly equivalent to what they've been in the past. But that could also mean a change in the pricing environment to which you accommodate it or you adapted your pricing. Was there anything different in the pricing environment in the September quarter versus prior quarters?

Jonathan W. Gacek

No, our pricing has stayed pretty, pretty consistent. But I would say from a competitive perspective, EMC put out their 2 new products which are kind of around ours, if you will. So I think it -- there's more comparisons that need to be done. Win rate-wise, what's interesting about win rates are win rates didn't change a lot. Linda made an interesting point though, and I think it's reflective of the economic situation, is that we just had a lot fewer big deals and in a pretty high dollar amount. So a win is not a win. Eric, I mean, there are some wins that are better than others. The bigger deals, for sure, it feels like there's more anxiety in the marketplace. So I don't want to walk away from the win rates. As a percentage, they're fine or they're good. We want to be in more deals. But there was much -- there's many fewer big deals. And that I think is sensitive to what we talked about in Europe and in the fed space. The other thing is the tape, there's a lot of big tape deals in Europe that just didn't materialize with the uncertainty over there.

Eric Martinuzzi - Lake Street Capital Markets, LLC, Research Division

Okay. So I think I understand. When you talked about anxiety in the marketplace, this is buyer anxiety or is this vendor anxiety?

Jonathan W. Gacek

Buyer, just their own situation with their own budget. We talked about this before. Because we sell through the channel, we tend do sell through technical buyers at the end user. And then we -- as the deal matures, we move your way up to the financial buyer to the partner. And we do a lot now to try to get access to those people. And many of those deals, bigger deals I'll be involved with. And they're just -- it feels more -- there's anxiety about their own businesses' financial situation, especially in Europe.

Eric Martinuzzi - Lake Street Capital Markets, LLC, Research Division

What's the headcount?

Linda M. Breard

We're just under 1,600.

Eric Martinuzzi - Lake Street Capital Markets, LLC, Research Division

Okay. And refresh my memory, how does 1,600 compare with where we finished at June?

Linda M. Breard

Last June, it's probably about 1,700. We're probably down 50 [ph] to 100 this quarter.

Eric Martinuzzi - Lake Street Capital Markets, LLC, Research Division

Okay. And as we go into -- we've obviously had, over the past 12 months, we've had a series of headcount shifts. Some of them tied to outsourcing of production, I get that. But at least for right now, we sort of stable, that this is the right headcount for the current environment?

Jonathan W. Gacek

We'll still have adjustments as we fully transition to benchmark. And that, if you think about it, that's just replacing fixed-costs structure with a more variable-costs structure. Once we get that fully completed, that will be, I think it's like 60 or 70. Maybe 100 people, 100 positions that we will outsource when we get through this process. As you can see in the financial results, we've implemented changes throughout the year as the situation has changed. So we're down, I mean, $7 million down in OpEx and $4 million down in COGS. $44 million, that's quite a bit higher than...

Linda M. Breard

25 million [indiscernible]

Jonathan W. Gacek

So we've been trying to really streamline the business, to kind of deal with Chad's question about stabilized, we think we have stabilized the overall business model. The outsource gave us more flexibility, the balance sheet stabilized and actually improved quite a bit. So we feel like we're well positioned and we're back, talking about products and markets. we think we have the products, we think we're in the right markets. And it's about growing revenue into the channels that we can -- that we can.

Eric Martinuzzi - Lake Street Capital Markets, LLC, Research Division

Okay. And then I'm not sure you can comment, so I'll try and ask the question in an indirect way. But if you were in receipt of a bid for the company and you were running a process to sell the company in parts or in whole, would you not be required to disclose that?

Jonathan W. Gacek

That was pretty direct, actually. So there's a lot of speculations and rumors in the industry right now. It's not the first time those kinds of things come up. We don't comment on that kind of stuff. To answer your question specifically, when people enter into a definitive agreement is when they tend to disclose it.

Operator

Our next question comes from the line of Catharine Trebnick with Northland Capital Markets.

Joshua Reilly

This is Josh Reilly, in for Catharine Trebnick. I had a couple of quick questions. On channel education strategy, is that something that you guys are making progress with, specifically on the DXi and StorNext products?

Jonathan W. Gacek

Yes, I would say...

Joshua Reilly

Is that improving overall?

Jonathan W. Gacek

Yes, for sure, on StorNext, we have a lot of investment around this year, and that's because of the new products, a combination of Lattus, StorNext 5 coming in the appliances. I don't have the exact numbers but our channel partners selling StorNext more than doubled than it was a year ago. So we're still real rich media and government-centric. We have started to have some nice success in what I would call the rich media use case outside of those particular verticals. So these would be things like colleges and universities, sports teams, houses of worship, different types of industry that you have a lot of rich media. We had -- and that's probably being driven by our new partners. On DXi, really around DXi, it's about getting a partner to sell all or parts of our data center data protection portfolio. So that includes DXi, vmPRO, our cloud. One of the places where we've had success with new partners is helping these partners set up their own cloud infrastructure, similar to what we did at ACS. And that has been an increasing business opportunity for us. So for sure, StorNext more than doubled and I would say DXi has improved. Having said that, it's much more linked with our overall data protection strategy.

Joshua Reilly

Okay. And then kind of a follow-up on that, what's your strategy for the Q-Cloud products going forward? I know it's not a material piece of revenue at this point.

Jonathan W. Gacek

Yes, thanks for asking. It's a -- so Q-Cloud is very focused on backup today. And you'll see in our press release that we announced a solution that we have at SUPERNAP for StorNext where people can demo Lattus and thereby StorNext. Over time, we are going to do a variety of things. You'll see us add storage functionality, whether it's archive, protection to quad-offering that we will host and sell. We also have a focus on being what I would call being an arms dealer to MSPs who are below the Googles and Amazons and Microsofts who are doing cloud services. We've had good success there. And the reason we had success is they do an architecture that looks like our Q-Cloud. So we think there is definitely a change in the buying habits of customers. I think people are seeing that across all the hardware vendors. We believe we are ahead of that in establishing ourselves as somebody who can help customers and partners involved to participate in a cloud-type solution. So Q-Cloud today is backup, it will be more than that over time. Lattus is a kind of a key technology there because of its ability to do multi-tenancy, to have object identification and spread the data across multiple geographies. And so you'll see us evolve that over time.

Operator

There are no further questions at this time. Please continue with any closing remarks.

Jonathan W. Gacek

All right. Thanks very much. We appreciate people joining us. We will be reporting in January our Q4. This is a strong seasonal quarter for us. It is our strongest. And in my comments, I want to make sure people understand that we believe we have good access to customers and deals, but we are also trying to be tempered around all the things that we don't control and the environment. So we're driving revenue and profit. We appreciate the questions and the support, and we will talk to you in January. Thanks very much.

Operator

Ladies and gentlemen, this concludes the Quantum Corporation Second Quarter 2014 Conference Call. This conference will be available for replay after 4 p.m. today through October 30, 2013 at midnight Pacific Standard Time. You may access the replay system at any time by dialing 1 (800) 406-7325 and entering the access code of 4644576. Thank you for your participation. You may now disconnect.

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