Quantum Management Discusses Q3 2014 Results - Earnings Call Transcript

| About: Quantum Corporation (QTM)

Quantum (NYSE:QTM)

Q3 2014 Earnings Call

January 29, 2014 5:00 pm ET


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


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

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


Good day, ladies and gentlemen, thank you for standing by. Welcome to the Quantum Corporation Third Quarter 2014 Conference Call. [Operator Instructions]

I would now like to turn the conference over to Shawn Hall, General Counsel. Please go ahead.

Shawn D. Hall

Thank you, and 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 November 11, 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 Q3 Fiscal 2014 Conference Call. Today, we reported revenue of $145.9 million, non-GAAP gross margin of 43.5%, non-GAAP operating expenses of $54.9 million, non-GAAP operating income of $8.6 million and non-GAAP net income of $6.2 million or $0.02 per share. These results demonstrate the progress we made in our financial model as we have increased net income year-over-year on lower revenue by driving a $7 million decrease in operating expenses. As we indicated in our January 13, 2014, press release, we also had strong sequential growth in our data protection products, primarily driven by branded tape automation and DXi revenue, which grew sequentially 37% and 32%, respectively. In addition, we increased StorNext and related service revenue 20% year-over-year. We generated $7.3 million in cash from operations during the period and ended the quarter with $82.8 million in cash.

Linda will walk through the details of Q3 results in a few minutes. Before I turn the call over to her, I'm going to discuss several business aspects of the quarter.

First, revenue performance. We had solid results across all 3 major geos and across all product categories. Relative to our expectations, branded tape and DXi were particularly strong in Europe driven by several large deals and an improved business climate.

On the U.S. commercial side, we had sequential improvement across all major products but the clear highlight was 94% year-over-year branded revenue growth in our StorNext product family, driven by an increase in StorNext appliance sales, particularly in the rich media or media entertainment vertical.

As for our U.S. Federal business, we did see some revenue, but the federal spending and the associated revenue still appear uncertain and did not make a significant contribution to the quarter.

Finally, Asia was solid across all product categories. As we mentioned in our press release, the $146 million in total revenue was above the high end of our guidance range and up 11% sequentially despite minimal contribution from the U.S. federal sector.

Overall, we are pleased with the revenue performance for the quarter, which reflects the market demand for our products and the positive changes we have made in our sales model over the last 9 months, including the work that Bill Britts and his leadership team have done to improve sales execution and efficiency since he took over the Head of Sales in July.

The second point I want to highlight is the year-over-year improvement in our cost structure. Just over a year ago, we began implementing a series of steps to lower our cost structure to adjust to the changing storage environment. The goal was to drive operating profit and cash flow, maintain as much revenue as possible and have a cost structure that would deleverage and drive more profit in cash as we grow. Compared to the same quarter a year ago, our non-GAAP OpEx was $7 million lower at $55 million. And even on lower revenue, our operating profit for the quarter was $1.2 million higher than a year ago. As we look forward to fiscal 2015, we will continue to analyze market opportunities and balance our investments to drive cash flow and profit and focus our incremental spending in areas where we can drive growth. In some cases, this means we may generate lower overall revenue but more cash and profit, providing greater operating leverage as revenue increases.

Turning to our balance sheet improvement. As compared to a year ago, I mentioned that we had $83 million in cash, that's up from $55 million a year ago and is at the highest level it's been in 3 years.

Third area I want to discuss is our continued introduction of new products across our business.

In September, we announced our new StorNext 5 platform, and I described it briefly in our October earnings call. Built from the ground up and based on a re-architected high-performance engine, StorNext 5 was designed to meet customers' need in changing workflows while leveraging the vast StorNext ecosystem developed over the last 10 years. Workflows are becoming more complex, making efficiency even more important. And StorNext is key to achieving this efficiency by providing high-performance, end-to-end management and optimization of the underlying storage infrastructure. The combination of enabling customers to: one, choose the best performance for each segment of the workflow; two, has a flexibility to set data protection, retention and movement parameters as needed; and three, know that the ecosystem of best-of-breed workflow tools will just work with StorNext due to complete platform compatibility. We believe that StorNext 5 provides a unique value in the marketplace.

In addition, the integration of StorNext in our Lattus Object Storage technology further enhances the benefits we can offer customers, and all of this has greatly expanded our market opportunities.

One example of how changing customer requirements in StorNext 5 capabilities create additional opportunities for Quantum in the media and entertainment industry. The industry continues to generate massive volumes of content. For example, with the latest Ultra HD 4K and 8K resolutions, file sizes are several times larger than current HD video. And as customers increasingly look for ways to repurpose and remonetize its content across multiple platforms, the technical performance and cost challenges of managing, protecting and accessing it have become very difficult. StorNext 5 addresses these challenges by providing high-performance, scale-out shared storage and archive, including the ability to share up to 5 billion files in a single-file system and manage flash, disk, tape and Object Storage's technologies from a single interface, all with the fastest single-stream performance in the industry. I would also add that this goes beyond just serving large enterprise players by creating a comprehensive portfolio of StorNext appliances over the past 2 years and leveraging StorNext's unique capability with Apple Xsan, we have extended StorNext benefits to the Midmarket and M&E customers. In fact, 1 of the 2 new StorNext 5 appliances we announced yesterday, the StorNext M445 SSD, leverages flash technology and provides an unmatched performance for media workflows in the mid-market environments. As I said, it is completely compatible with Apple Xsan.

Turning to the data protection side of our business, we have also continued to introduce new products that address customers' evolving need and provide increased opportunities. In Q3, for example, we announced a new solution based upon the integration of our Lattus Object Storage with Rocket Arkivio data archiving software that can save customers 30% or more in primary storage and backup cost by archiving static, unstructured data.

We also launched a new program enabling managed service providers and VARs to expand their businesses with cloud backup services powered by our DXi virtual deduplication appliances and vmPRO Backup Software. Through unique capacity-based subscription pricing, this program allows them to brand, market and sell cloud based Backup-as-a-Service with offerings of scale as their revenue grows, and thereby reducing need for large upfront expenditures on hardware.

Lastly, in Q3, we finalized preparations for the launch of our new DXi4700 deduplication appliance announced last week. It provides best-in-class scalability with 5 to 135 terabytes of usable capacity along with best-in-class density and cost per terabyte, all in a Pay-as-You-Grow model.

The strength of our product portfolio was reinforced earlier this month when 4 of our offerings were named as Finalists in Storage Magazine, SearchStorage.com's 2013 Product of the Year award, more than any other provider.

Our Lattus Object Storage System, DXi6800 deduplication appliance, DXi V4000 virtual protection solution and our Scalar i6k high HD Tape Library were recognized for innovation and value across 3 different categories.

In summary, we continue to focus on providing customers with scale-out storage, archive and data protection solution that have a differentiated combination of high-performance, overall value and low TCO and easy-to-use -- and provide investment protection. We are positioning these solutions in markets where we can grow and generate profit. And we continue to drive cost structure improvement to deliver predictable and improved financial results. Q3 demonstrate that we made progress on our financial model and it will deliver more operating leverage as we grow.

Now I will 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 third quarter ended December 31 was $145.9 million compared to $159.4 million a year ago, an 8% decrease.

Revenue from our StorNext and Lattus scale-out storage and archive solutions was up 21% year-over-year, driven by revenues in North America, nearly doubling. Offsetting this growth was a decline in disk systems and related service revenue of 19% from a record in Q3 of the prior year, and a decrease in tape automation systems of 15% year-over-year.

For the quarter, non-royalty revenue totaled $135.3 million, of which 84% was branded and 16% was OEM, slightly up from 83% branded and 17% OEM a year ago.

Royalty revenue was $10.7 million for Q3 compared to $11.5 million in the same quarter a year ago. In absolute dollars, LTO and DLT royalties contributed equally to the expected reduction.

Looking further, various revenue classifications, devices and media totaled $17.3 million in Q3 compared to $17.8 million in the prior year. The primary decline was in media, specifically DLT media. While we thought increased revenue in LTO media year-over-year, it was more than offset by the DLT decline.

Tape automation systems revenue was $52.1 million compared to $61 million in Q3 of fiscal 2013. Branded tape revenue declined 16% or approximately $6.2 million year-over-year, primarily due to a decline in revenue from our Enterprise Tape Automation System.

In the midrange, branded revenue was down year-over-year to a lesser extent while branded entry-sales were relatively flat over the same period.

This quarter we saw year-over-year declines in North America Commercial business, as the primary geographic drivers declined in revenue. While win rates remains very strong, overall tape automation systems deals that closed in Q3 were down 19%, and revenue from large deals, deals over $200,000, was down just over 10% from the same period in the prior year. Despite the year-over-year revenue decline, we acquired approximately 130 new branded midrange and Enterprise customers in Q3. From an OEM perspective, tape automation revenue was down 12% or $2.7 million over Q3 of '13. The decline in OEM tape automation revenue was primarily driven by a reduction in midrange sales. Both Enterprise and entry-level OEM tape automation revenues were slightly down from the prior year.

Disk systems software and related-service revenue was $38.3 million in Q3, this was down 6% from our second-highest quarter of $40.9 million in the prior year. Of the $38.3 million, approximately 60% was from disk systems and related-service revenue and 40% was from StorNext and Lattus scale-out storage and archive solutions and related-service revenue. Looking more specifically at disk systems and related-service revenue, as I mentioned, it was down 19% from a record high a year earlier. The decline in absolute revenue dollars was almost shared equally between our Enterprise and midrange DXi. However, the primary contributor to the lower year-over-year revenue was the 32% decline in revenue from big deals, as we had a number of very big deals in Q3 of last year. Our overall DXi win rate remains strong, approximating 55% in the quarter, and we added over 100 new customers.

Turning to StorNext and Lattus scale-out storage and archive solutions, products and related-service revenue increased 21% year-over-year. Contributing to this increase was an all-time record revenue from StorNext appliances. In addition, big deals, again defined as deals over $200,000, increased by 50%. We also saw a 16% increase in the number of worldwide partners selling our StorNext products compared to Q3 of last year.

On a geographic basis, we continue to see strength in our North America business, where we were nearly doubled revenue on a year-over-year basis. Our business in North America is more mature and further along in implementation of our business plan and demonstrates the strength of the opportunity. APAC increased revenues approximately 30%, while EMEA was down nearly 30% over the same quarter in the prior year. Across all geos, we experienced revenue growth from new customer acquisition, compared to the same period in our last fiscal year. In North America and APAC, we experienced growth in install base customer revenue over Q3 of fiscal '13.

Through our next AEL server-based appliances and related-disk revenue along with Lattus, continue to ramp nicely from the prior year. Standalone StorNext software sales were relatively flat compared to Q3 last year. We also had our first Lattus data center deal in Q3, a sale to a large university. And we're excited about the number of opportunities we continue to see in Object Storage.

Overall, from a customer acquisition standpoint, we added approximately 75 new StorNext and Lattus customers in Q3 and continue to see strong win rates in our solutions offering.

Moving to service revenue, it was $36.9 million in Q3, up 4% from $35.3 million in the same quarter of the prior year. The increase was driven by growth in branded contracts related to our data protection products and our client strategy in scale-out storage and archive solution.

Turning to gross margins. Non-GAAP gross margin was relatively consistent at 43.5% in Q3 compared to 43.6% in the third quarter of fiscal '13 despite the reduced revenue level. The primary driver of flat gross margin on lower revenues was reduced costs in our operations, repair and service departments of over $4 million related to cost reduction actions we completed in the last year.

Looking at expenses. Non-GAAP operating expenses were down $7.2 million or approximately 12%, totaling $54.9 million in Q3 compared to $62.1 million in the prior year. Year-over-year, our sales and marketing costs decreased by $3.9 million. The primary driver of the reduction relates to lower salaries, commissions and benefits resulting from the headcount reductions we have implemented over the past year, as well as lower year-over-year revenue. Similarly, research and development spend decreased approximately $2.5 million, primarily as a result of headcount and other cost reduction actions taken over the past year. General and administrative costs declined by $700,000, primarily related to lower infrastructure costs.

Q3 non-GAAP operating income improved 16% year-over-year and was $8.6 million compared to $7.4 million in the same quarter a year earlier. This resulted in a 120 basis point improvement in operating margin from the same quarter in the prior year. The largest contributor to the increase in operating profit on a quarterly basis was the cost reduction actions in both cost of goods sold and OpEx, which were somewhat offset by lower overall revenue. Interest expense for the quarter was $2.4 million compared to $2.2 million a year earlier. This includes cash interest expense of $2 million and amortization of debt issued cost of $400,000. The average interest rate of -- for $205 million of convertible debt is 3.84%.

For the third quarter, we had other income of $400,000, primarily related to foreign currency gains. And we recognized tax expense of $300,000, primarily related to foreign and state taxes.

Summing it up. For Q3, we had a non-GAAP net income of $6.2 million, which is a non-GAAP diluted income per share of $0.02, compared to non-GAAP net income of $4.9 million and $0.02 per share in the same quarter a year earlier. On an 8% year-over-year revenue decline, our bottom line improved nearly 30% due to the changes we've made in our business model over the past 1.5 years, 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 December 31, I would like to highlight several key points.

Cash flows provided by operations for the quarter was $7.3 million. We ended the quarter with $82.8 million in cash and cash equivalent, up over 50% from $54.9 million in the same quarter last year -- and our highest cash balance in 3 years.

At December 31, our debt consisted of $205 million of convertible debt, which has no covenant. 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 $42.1 million. On a sequential basis, manufacturing inventory decreased $6.2 million, accounts receivable increased $18 million, accounts payable increased $5.6 million, and we had an accelerated payment of $6.1 million from one customer. CapEx was $1.8 million.

In closing, I wanted 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 $15.5 million in the first 3 quarters of fiscal '14 compared to using $8.1 million in cash during the same period in fiscal '13.

As I mentioned, the ending cash and cash equivalent balance has increased 50% over the past year. The refinements we have made in our business model since last fall have produced positive results, delivering 120 basis point improvement in operating income even as revenue was down 8% from the same quarter in the prior year.

Finally, we are on plan to complete the transition to a fully outsourced manufacturing model in the current quarter after successfully transitioning the product lines we have targeted for Q3.

Now, let me turn the call back over to Jon.

Jonathan W. Gacek

Thanks, Linda. Our December quarter was a solid quarter, both in terms of revenue performance and profitability and demonstrates that the changes we've made over the past year are making an impact. In addition, as Linda said, this quarter we will complete the final step in our move to fully outsourced manufacturing model. And as we announced in our January 13 pre release, we are also eliminating additional 60 positions company-wide. On a combined basis, we expect that these 2 actions will contribute $16 million to $18 million annually to our non-GAAP operating income in fiscal '15. This is approximately $4 million to $4.5 million in quarterly non-GAAP operating income. With greater profitability in fiscal '15, we also will build and invest in areas where we have unique market position and can drive revenue growth in line with our balanced approach to profit and growth.

For our data protection products, we plan to leverage our market share leadership in tape automation, our install base and our strong comprehensive product portfolio, including Scalar tape, DXi, vmPRO, Lattus-D and our Q-Cloud, Quantum Cloud services, to gain market share in the data center and generate cash and profit. While tape is a mature market, we are focused on taking share by leveraging our industry-leading Scalar product line. In addition, the purpose-built backup in deduplication appliance market is expected to grow at a compound annual growth rate of approximately 15% between 2012 and 2017. And our goal is to leverage our feature-rich DXi product line to add more customers and grow revenue. We will also leverage our StorNext and Lattus scale-out storage and archive solutions, and our market-leading position in the media and entertainment market and other high-performance streaming video Use Cases to deeper penetrate into those markets. As I mentioned earlier, the general growth in media content, the move to 4K and 8K resolutions and our compatibility with industry-leading products like those from Apple and Adobe, as well as our growing partnerships with a range of ISVs will be key elements in driving growth in this product category.

We will also leverage the new features in StorNext 5 to expand further into new verticals like surveillance, oil and gas and genomics, and ultimately, into the data center and the cloud.

We expect revenue from these solutions to grow in both in terms of near-term and long-term over the next several years. In fact, as I mentioned yesterday, we announced 2 new appliances based on the StorNext 5 platform and its integration into our existing metadata appliances. In conjunction with this announcement, we also launched a new StorNext.com website that serves as a resource for customers and partners dealing with some of the most complex content workflow challenges and highlight our end-to-end solutions.

Let me close by providing guidance for Q4. We expect revenue of $125 million to $130 million based upon typical seasonality and continued uncertainty around U.S. Federal spending, particularly project funding and the uncertain business climate in Europe. We expect non-GAAP gross margin of 43% to 44%, and non-GAAP operating expense of $55 million to $56 million, interest expense of $2.5 million and taxes of $500,000.

I would note that our fourth quarter operating expense guidance is $7 million to $8 million lower than the actual expenses in the comparable period a year ago. Also, as a reminder, our Q4 operating expenses include typical Q4 seasonal expenses namely: payroll taxes resulting from the new calendar year; and additional commissions, particularly for accelerators, as we close our fiscal year with certain team members who are achieving above plan.

Finally, with regard to fiscal '15 guidance, we will provide that when we report our fourth quarter results.

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

Question-and-Answer Session


[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

So, Jon or Linda, can you remind us again, in the StorNext Lattus business, roughly how much of that is pure software now versus appliances?

Jonathan W. Gacek

Yes, we don't -- we're not really tracking it that way any longer, Chad, because the kind of the goal of the appliances is to embed it within the solution. So we're -- we're set -- we do sell standalone software, but an appliance, has both hardware and software. And so typically, we'll sell software only to legacy customers, who have done a roll-your-own. But more and more of the business that's -- particularly new customers buy the complete solution that includes software and hardware.

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

Okay. And just on the appliance business then within that segment. How should we think about, as that segment grows pretty rapidly now that the gross margin of an appliance, whether it's Lattus or StorNext appliance, versus your tape or disk business? Is it materially different?

Jonathan W. Gacek

That whole category -- Linda can correct me, it's -- depending on kind of the mix and the given period, like 65% to 70% gross margin category. Because we've got a nice install base in some mature customers, we benefit from...

[Audio Gap]

...look at Linda, yes, it's like 55% to 70%. Higher than the corporate average for sure.

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

Okay. Good. And then shifting topics, on the disk business, obviously saw a pretty good bounce back this quarter, at least sequentially. The comps, I think are getting a bit easier starting in the March quarter and certainly going into the June quarter. Should we think about the DXi business? It sounds like, we should, based on your comments, as a growth business? I know you mentioned the overall market, 12% to 16% or whatever the timeframe was, it's growing about 15%. Do you believe you can grow at market growth rates in that business?

Jonathan W. Gacek

So one of the things that we've done as we take -- done the changes in the model and the reduced cost structure, if you will, is really line up the tape automation products and the DXi products in a portfolio of data protection for the sales reps, but also throughout the company. And when you've heard us talked about this in the past, those 2 products solve the same problem for the customer. They just do it in different ways. And so one of the things that we're doing with the sales team is -- we want to make sure we drive as much revenue in that category as possible. So we don't want to just sell a DXi if selling tape might be a better overall solution, maybe a higher probability of close, maybe even higher margin depending on the configuration. So what we're really trying to do is have a balanced approach to that portfolio. What you said is right, though. I think over time, you'll see tape as a market, decline in single-digit. Our goal is to grab share there, and then leverage our install base position to sell all the products. DXi has a more positive trajectory in the marketplace. Our goal there would be to grow with the market. But we're not -- how we've talked a lot about disk and software, really, we operate the product lines together. And part of how we're driving the cost improvement is thinking of it that way. Does that make sense?

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

Yes, absolutely. Last one for me. In the tape business, again, that one bounced back nicely sequentially, also. I don't want to position it as a growth business certainly but -- are there any kind of incremental new opportunities or Use Cases for tape that you've seen in the last quarter, that maybe you weren't seeing 9 months ago, meaning cloud, data center, big data, or anything like that?

Jonathan W. Gacek

Yes. So we had a couple of things going on. If you recall, about a year ago, we started our agreement with Teradata. And over the course of the intervening 12 months, we really got embedded in their set of solutions. So that opens a nice incremental market that tends to be analytics-driven where we're providing a backup solution. That's one. And then we -- last quarter, we launched an MSP program where we're really focused on people who are trying to provide cloud-like solutions to compete with AWS and others but more on a regional scale, I guess, the way to say that. And we see some business there as well. And then finally, I've mentioned this, we're -- we have really -- as we have adjusted the sales model, making sure that the sales team and the marketing team and the inside sales team that we really drive hard on the fact that we've got a large install base, that tape has a unique value proposition and the right set of Use Cases. We just pick up every tape dollar we can. And last thing I'll say is, on the StorNext side, tape as a tier in a scale-out set of solutions like we often provide, is still a key tier in many of the verticals. In the rich-media, it's significant because of all the content. But I think -- just focusing on that sort of sequential growth in the period, I focus a lot on the sales teams, focus on tape, the increasing benefit from some of these new channels. And I just think of maybe a better overall environment, particularly in Europe.


And our next question comes from the line of Eric Martinuzzi with Lake Street.

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

I have a question about the top line outlook. I'm curious to know what the methodology was? Was it based more on, kind of what happened a year ago? A year ago, you were down about 12% sequentially and this guidance looks like something in the 14%, 15% range? Or was it more of a ground up? What do we get out of the pipeline that we have in front of us?

Jonathan W. Gacek

We had a solid quarter and had good momentum in the quarter, Eric. I think in the guidance range, it's really thinking about it from a seasonality perspective. I actually think that it's about 12%, 12.5%, I think that they're comparable expectations. I think the sales team feels good about what they're hearing in the marketplace. We -- as I said, we had good momentum. It's our quarter end, fiscal year end. So we've hoped we'll drive some growth there. I feel -- and that's the positive side. On the tempered side, sometimes there are some federal spending this period. It's just not clear how that's going to shake out. And while the European economy was certainly better than Q3, it's still not perfect. So I think we're trying to take the same approach we took last quarter in identifying both what's going well and what could go wrong and set the guidance accordingly.

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

Okay. And then specifically within the different products, the tape automation systems, the DXi, I know you talked about the comps do get a little bit easier, but if I just -- just taking tape for a moment. A year ago, that product was off, about 16%. And that's -- I know that's a mismash of both the OEM and the branded -- year-to-date, so 9 months year-to-date on tape, it looks to be down about 14%. Is there an expectation that, that kind of perpetuates here in Q4? Is there something different about tape and the guidance?

Jonathan W. Gacek

No. So let me -- I'm going to kind of address the broader question within what you asked there. One of the things that we've done, and I was pretty specific in my comment. When you reduce sales expense, 10% to 15% like we have on a year-over-year basis, you're going to lose some revenue, too. And so we -- that's just natural because where its territory, there's people -- that you're going to lose a little bit. What appears to be happening now is we've kind of got our feet set and people understand the model and the structure that Bill is driving. And we think that it stabilizes and allows us to grow. So that stats you gave on tape, part of that is the market, but part of that is -- we have fewer salespeople today than we did. The trade-off is, we're more profitable. So where we get leverage now is at, as things grow, we'll create more profit and we think we've got the right structure to do that. This is all going back a year ago when storage and tape really fell off. So I feel -- I think Bill feels and the team feels we've got our feet more underneath us. The long-weighted answer to that is, I think that we will get on track where we're performing at levels at or better than the market. And we'll see what happens in this next quarter. Q4 is always a tough one to call, our Q4, just because you come off of this real high of a strong period. What feels a little bit different right now is that there seems to be more momentum. There seems to be more deals. And Micro to Quantum, some people feel pretty stable about what we're doing and understand what we're doing. So I think we'll continue to monitor the tape market but we're going to get back on -- of taking share-type mentality like we were, before tape fell off last year.

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

Okay. And then shifting over to the cost side, what was your headcount at the end of December? What do you expect it to be at the end of March?

Jonathan W. Gacek

Yes, it was about right around 1400. And we'll be 1,300, 1,400 -- 1,300. Yes, we had the other thing. Yes, 1,300. Yes, we had the outsourcing coming on. So we're closer to 1,300.

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

And is that kind of -- we entered the year -- we enter 2015 with 1,300 and that's -- we stabilize or is there still some potential due to the on-shoring effort, 1,300 may decline some more?

Jonathan W. Gacek

No, that should be done. We always have some open racks too, and we'll will have a couple of places where we're adjusting spending. But I think 1,300 is a good baseline for -- as we think going forward, for next year. Certainly we'd like hire more sales people because we have so much going on opportunity-wise, but we're going to try and do that not in -- too far in advance of seeing where the revenue is. StorNext 5 in particular is an unknown growth potential with the increasing capabilities that it has. If we get traction in one of these vertical markets, we'll address it accordingly.


[Operator Instructions] I see no more questions at this time. I'd like to take the opportunity to turn it back over to management. Please go ahead.

Jonathan W. Gacek

Thanks very much. Thank you very much. I appreciate those who have taken the call, I know it was a busy day in storage, with all the earnings announcements. Just as a reminder, our call will be a little later for the next quarter because it's our fiscal annual audit period. So that will be more in the April or in the May timeframe -- at the end of April. Thanks very much for the support and we'll talk to you in a few months. Bye now.


Ladies and gentlemen, that does conclude the Quantum Corporation Third Quarter 2014 Conference Call. Thank you for using AT&T. You may now disconnect.

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