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Quantum Corporation (NYSE:QTM)

F2Q2011 Earnings Conference Call

October 27, 2010 5 PM ET

Executives

Shawn Hall – SVP, General Counsel, Secretary

Jon Gacek – CFO, COO and EVP

Richard Belluzzo – Chairman and CEO

Bill Britts – EVP, Sales, Marketing & Service

Analysts

Brian Marshall – Gleacher and Company

Chad Bennett – Northland Capital Markets

Alex Kurtz – Merriman & Company

Eric Martinuzzi – Craig-Hallum

Glenn Hanus – Needham and Company

Joe Feshbach – Joe Feshbach Partners

Brian Freed – Wunderlich Securities

Shebly Seyrafi – Capstone Investments

Operator

Welcome to Quantum’s second quarter 2011 teleconference. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Wednesday, October 27, 2010. I would now like to turn the conference over to General Counsel, Mr. Shawn Hall.

Shawn Hall

Thanks and good afternoon. I’m joined today by Richard Belluzzo, our CFO and Jon Gacek, our COO and CFO and Bill Britts, VP 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 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 that 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 Q2, 2011 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 11, 2010. 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 s release and in our filings with the SEC are incorporated by reference in 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 Gacek

Thanks, Shawn. Good afternoon. Thank you for joining us as we report our second quarter of fiscal 2011. I’m going to walk through our results for the quarterly period ended September 30, 2010 and comment on significant accomplishments for the quarter as we continue to focus on becoming a growing and more profitable storage systems company.

For fiscal Q2, we delivered solid results including revenue of $167.7 million. Disk and software group revenue, including related service revenue of $30.6 million, non-GAAP gross margin of 45.2%, non-GAAP operating profit of $19.1 million or 11.4% and non-GAAP EPS of $0.06 per share.

We are very pleased with the gross margin, operating profit and EPS, especially given the fact that we were toward the lower end of our revenue expectations for the quarter.

Before walking through the detailed results, I want to emphasize a few key points from the past quarter. First, as we indicated in our June quarter earnings call, that was going to be the last quarter for which we expected to receive more than a minimal amount of revenue from our OEM deduplication software agreement with EMC, and as we said, we would replace that revenue and the related profit with growth in our branded business. We have done that.

So to provide some context on our overall Q2 performance, I want to walk through the following; if you exclude the EMC deduplication revenue from both Q2 and Q1 of fiscal 2011, we posted a sequential $13.2 million increase in revenue, and a $11.1 million increase in gross margin dollars, which equates to a 330 basis point increase in gross margin.

And these results demonstrate the earnings power we have a Quantum, and as we have progress in our branded business, you will see further expansion in all those measures.

The second key point is that our StorNext business had its best quarter in the history of the company with strong adoption in our core rich media market and expansion into adjacent markets, and we are starting to see broader opportunities for us to grow our StorNext revenue.

Third, we generated $26 million in cash from operations and $24.9 million in EBITDA for the quarter, and we paid off $22 million of our remaining convertible debt during the quarter.

And finally, on the product side we launched our DXI 6700, a mid-range fiber channel VTL product, which was followed by the announcement of our DXI 8500 enterprise product just after quarter end. That product will begin shipping in the next several weeks.

Both products reflect the work that we’ve done over the last year to deliver significantly greater performance in our DXI line, with the DXI 8500 providing the industry’s highest single unit BTL performance. We have already received several sizeable orders for this product and we will have a strong sales momentum at the time of our first customer shipment.

Now I will walk through the detailed results for Q2. 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 refer to those documents as I comment.

Revenue for the second quarter ended September 30, was $167.7 million compared to $174.9 million a year ago, a year-over-year decline of $7.2 million. The primary driver of the decline was lower OEM revenue which decreased 29% due to the anticipated declines in devices and deduplication software revenue and finally in service revenue.

In contrast, we saw an overall increase of 4% in our branded revenue with strong growth in our disk systems and software and a slight decline in tape automation.

Royalty revenue was $17.7 million for Q2 compared to $16.8 million in the same quarter a year ago. We saw growth in LTO royalties this quarter while DLT royalties declined slightly. For the quarter, non-royalty revenue totaled $150.1 million of which 80% was branded and 20% was OEM. That compares to non royalty revenue of $158.1 million a year ago, of which 73% was branded and 27% was OEM.

The decrease in non-royalty revenue was related to decreases in the OEM revenue as described earlier, partially offset by growth in branded disk and software revenue. For the remainder of fiscal 2011, we expect our branded business to grow for tape, disk systems and software products.

Looking further at various revenue classifications, devices and media totaled $22.5 million compared to $27.7 million in Q2 a year ago. The decline was primarily attributable to anticipated declines in OEM devices and media.

I mentioned this last quarter. I’m going to mention it again. As a point of reference, OEM devices revenue, less than $1 million of it this quarter is OEM compared to over $5 million in the same quarter last year.

Tape automation systems revenue was $62.9 million compared to $65.5 million in Q2 of fiscal ‘10. The majority of the decline was related to expected reductions in OEM automation. Branded entry level automation products saw moderate growth related to our I40 and I80 products. Mid-range branded tape grew slightly over the same period in the prior year with new customer acquisition of 16% and growth in upgrade revenue.

Enterprise automation experienced year-over-year growth in both EMEA and APAC regions, but was down in North America for the same period primarily as a result of lower than expected upgrade revenue. However, in Q2, we continued to see the positive trend of adding new enterprise tape end users and we did so at an accelerated rate this past quarter.

Biz systems and software product and related service revenue was $30.6 million, up from $28.2 million a year ago. From a branded perspective, this systems and software product and the related service revenue was up $6.7 million, an increase of 29% over the same period in the prior year.

On a year-over-year comparison, StorNext grew 53%, and Quantum branded DXI revenue grew 19%. Our StorNext revenue was the highest in the history of the company, as was with the case of software. Branded DXI revenue also achieved its highest revenue in the history of the company with the growth being driven primarily by large deals or deals over $200,000.

The enterprise market continued to be strong for our DXI 7500 and we feel we are well positioned to continue to grow our footprint here as we get ready to begin shipping our newest enterprise disk space deduplication and replication product, the DXI 8500 in the next several weeks.

As I said earlier, the DXI 8500 has the highest single unit BTL performance in the industry. In addition, it provides high performance and other presentation option including NAF and OST and is designed to anchor a multi-tier enterprise worldwide disaster recovery and data retention strategy.

In the mid-range, this was the second quarter in which all DXI 6500 models were shipping for the entire quarter and we saw approximately a 50% sequential increase in revenue across all geographies. Adding to our mid-range disk systems product offering in Q2, we introduced and began shipping the DXI 6700, our new deduplication and replication appliance that leverages a BTL enterprise to offer mid-range and enterprise customers an unmatched combination of performance, simplicity and value for fiber channel SAN environments.

As we look forward to the remaining two quarters in fiscal 2011, we expect our disk systems and software products to be a significant driver of growth. The end user market and opportunity is large. Channel partners are supported, and we have excellent products.

The addition of the DXI 8500 and 6700 rounds out the refresh and the expansion of our DXI family so that from top to bottom, we can now offer customers our latest software running on the latest high performance hardware.

Turning to service, revenue was $37.7 million in Q2 compared to $39.7 million a year ago. The $2 million decline was primarily the result of a reduction in OEM out of warranty repair. Branded product service revenue remained relatively flat this quarter compared to Q2 of fiscal 2010.

Moving to gross margins, non-GAAP gross margin in Q2 was 45.2%, compared to 47.1% in the prior period. This 190 basis point decline reflects a significant decrease in OEM deduplication software in Q2 of this quarter, and a reduction of warranty benefits that we had in Q2 of fiscal 2010.

Warranty benefits in the prior quarter or the quarter a year ago were attributable to significantly decreasing our overall service and repair costs and a declining number of in warranty units repaired and of numerous legacy products reaching the end of their warranty coverage.

Stepping back, we are very pleased with the quarter’s gross margin, especially the sequential strength that we showed as we lost significant OEM deduplication software that 100% margin last quarter, and we were able to replace that revenue plus some with high margin branded revenue.

As mentioned earlier, excluding the OEM deduplication software revenue in both Q2 and Q1 of fiscal 2011, we had a sequential increase in gross margin dollars of $11.1 million and 330 basis points.

On the expense side, non-GAAP operating expense totaled $56.7 million compared to $54.1 million a year ago. Half of the overall increase was related to marketing and sales and the other half related to increases in R&D spend.

The increase in marketing and sales primarily related to additional headcount and associated costs and advertising and marketing programs for our new products. The increase in R&D spending was related to investments in our disk systems and software engineering teams.

Non-GAAP operating profit for the quarter was $19.1 million or 11.4% of revenue compared to $28.3 million or 16.2% of revenue in the same quarter a year ago. We tightly managed our operating expenses during the quarter and you can see the flexibility in our cost model.

Interest expense for the quarter was $6 million compared to $6.9 million a year earlier. This included cash interest of $5.6 million and amortization of debt issue costs of $400,000. The current coupon interest rate for our remaining senior debt, which was $185.1 million at September 30, will be approximately 3.8% for the quarter ended December 31, and the average coupon rate for our total debt will be approximately 7.3% for the quarter. We expect interest expense will be approximately $6 million for the fiscal third quarter of 2011.

For the second quarter, we had net tax expense of $400,000 related to foreign and state taxes, and as I say, each quarter you know, we still believe it’s reasonable to model $1 million per quarter for tax expense.

So summing it up for Q2, we had non-GAAP net income of $13 million and non-GAAP of EPS of $0.06.

Focusing on cash flow and the balance sheet, at September 30, I would like to highlight several key points. Cash provided by operations for the quarter was $26.2 million. We paid down $500,000 of our senior debt and $22 million of convertible debt in Q2. At the end of the quarter, the composition of our debt was $185 million of senior debt and $122 million outstanding with EMC. We ended the quarter with $98 million in cash.

Non-GAAP EBITDA for the second quarter was $24.9 million. We are in compliance with all debt covenants at September 30, and we expect to be in compliance with our debt covenants during the next 12 months. For purposes of calculating our debt covenants, EBITDA for the last 12 months was $97.4 million.

On a sequential basis, manufactured inventory decreased $4.3 million. Accounts receivable decreased $4.7 million. We also had an accelerated payment of $11.1 million from one customer.

CapEx was $5.5 million this quarter, quite a bit higher than our normal run rate primarily related to purchases of disk systems, hardware used in test and development of our new DXI 8500 product. Purchase of service parts inventory were approximately $800,000. Depreciation, amortization and service parts lower of cost or market expense totaled $13.3 million for the quarter.

In all, we are very pleased with our progress and continue to see improvement on our financial results and our balance sheet.

Now I’d like to take a minute to point out and explain the 8-K that we filed yesterday regarding an amendment to our senior debt. That amendment allows Quantum to refinance our EMC debt with an expanded variety of options.

As you may recall, we were previously very limited as to the refinancing options available. Practically, only a convertible debt instrument could have been used. As a result of the amendment, we can now utilize more traditional methods of refinancing such as subordinated debt, such as issuing sub debt, issuance of preferred stock, or common stock, warrants or any combination of the above.

At this time, we have approximately four years remaining on our senior term loan and four years remaining on the $100 million EMC debt, so we’re going to take our time to look at those options. We will look at all the financing alternatives and we will decide what is the best approach for Quantum and our shareholders.

In addition and completely separate from the amendment, we have also notified the term debt holders of our intent to repay $20 million in principal this week, and as a result, our senior debt will be $165 million at the end of October.

So as we look forward, on our capital structure and our strategy, it is to continue to pay down our senior debt and to look at financing alternatives that are accretive to Quantum.

Moving on to guidance, for Q3, we are forecasting revenue of $185 million to $200 million, non-GAAP gross margins of 45% to 47%, and total non-GAAP operating expenses of $58 million to $62 million. Interest and taxes should be similar to Q2 and then the math then calculates at an EPS range of $0.08 to $0.10 in non-GAAP EPS.

For fiscal 2011, we continue to forecast revenue of $700 million to $750 million, non-GAAP gross margin of 45% to 47%, and non-GAAP operating expenses of $235 million to $245 million. We expect interest expense of $24 million for the year and income taxes of $4 million. With our stock price rising, the weighted average shares moves up to 230 million.

Now let me turn the call over to Rick.

Richard Belluzzo

Well thank you John. I would like to start today by reinforcing the fact that Q2 was a solid quarter in terms of both improved performance and also in terms of the detailed progress that we are making in transitioning Quantum to a growth company.

Our results this quarter improved over Q1 in virtually all elements that we are focused on, including revenue, gross margin, operating income, net income and cash generation, and all of this was achieved with minimal OEM deduplication software revenue from EMC, reinforcing the strength of our business model.

Said in other way, our Q2 performance can be viewed as the foundation for which we can achieve further improvement as we grow revenue, which is the primary objective of the company, and we remain determined to make FY 2011 the first growth year for Quantum since FY 2007.

On the revenue front, we continue to make progress on the underlying elements of a go-to-market program. While our total revenue for the first half of FY 2011 was essentially flat compared to the first half of FY 2010, what kept us from showing growth was the expected reduction in OEM in our OEM business.

In fact looking just at the first half branded revenue, we grew 5% year over year with significant growth in disk systems and software. Of course this isn’t good enough and it is where we have focused our investment both in terms of enhancing our product offering and building greater revenue or market momentum.

Let me address our revenue efforts by saying a few words on the opportunity. Earlier this year, we established two key marketing goals for FY 2011. The first was to gain market share open systems tape automation and the second was to significantly grow our disk systems and software business.

These goals were established based on three factors. First, the significant improvement in the competitiveness of our entire product line including a nearly complete refresh and expansion of most of our entire tape systems, disk systems and software product platforms.

The other two factors were a continued healthy underlying market for our disk systems and software products and a couple of major disruptions in the market, which allowed us greater opportunity to build momentum with the bar channel.

At Quantum, our mission this year is to combine these factors to deliver growth, even with the decline in some elements of the tape business and the loss of all but a minimal amount of EMC OEM deduplication software revenue.

As we sit here halfway through the year, I would say that the opportunities that framed our view of FY 2011 remain fully intact, and while some elements have taken longer to develop, we remain focused on capitalizing on these three opportunities.

First, our product offerings continue to improve and the combination of the recent launch of the DXi 6500 and DXi 6700 with the earlier DXi 6500 and DXi 4500 introductions position us well across our entire DXi product line, giving us performance leadership in some segments and price performance leadership across the entire family. There will be further product introductions in the second half of this fiscal year that we expect will continue to allow us to make even more gains.

Our tape systems portfolio is also solid across the entire product line from the entry level Scalar i40 to the enterprise Scalar i6000. And in all of these products, we have expanded our leadership in terms of management and innovation. Finally, with the launch of the StorNext 4.0 product earlier this year, we have been able to further enhance our position and a leader in high performance file sharing and archiving. As an example, this week we announced a new archive convergent utility in StorNext to minimize the burden associated with legacy storage platform migration and significantly reduce the expense and time it takes to move files from existing legacy archives to StorNext. The first release of this convergent tool will support the convergence of data from Oracle, Sun’s SANFS and QFS software platform. Our product offering and solution set are advancing allowing for greater opportunity.

Next recent external data reinforces the fact that data deduplication is a very strong growth segment of the storage industry. In fact, in a recent survey conducted by the InfoPro, it shows that deduplication is the number one investment priority for around 25% of both enterprise and SMB storage customers ahead of all other priorities, making the next couple of years significant years for the broad adoption of deduplications in the backup of large and small storage customers. And while the competitive environment is aggressively, we are seeing significant growth in our opportunities for DXi. Although not as significant as deduplication, our StorNext business also has fundamental growth potential coming from their rapid growth in unstructured data, rich media and the need for tiered storage solutions.

And finally, these changes are coupled with the fact that M&A disruption has opened the market for expanding our go-to-market reach with the independent bar channel. The acquisition of Data Domain by EMC has created new levels of interest and engagement from traditional NetApp partners and Oracle’s acquisition of Sun has created opportunity in the enterprise tap market as Oracle’s aggressive moves have resulted in openings and aim customers along with channel partners motivated to find alternatives. There is no doubt that we are in the early phase of seeing advantages or advancements to our tape business.

In short, these elements were the foundation for our growth plan for 2011 and they remain intact. Our challenge, of course, is to be move more aggressively on a worldwide basis to capitalize on these forces, in other words continue our product introduction rhythm and implement sales and marketing programs to enable deeper engagement with the channel and generate more opportunity, expand our relevance and sharpen our competitive position. We are progressing on all of these fronts and at some cases the results are taking longer to materialize yet the underlying momentum is developing.

Let me provide some additional details. At the center of most of this effort is the bar channel. During FY 2011, we have implemented a strategy to gain both focus and reach with bars and in Q2, we saw increased traction. Channel revenue grew by 20% sequentially with significantly greater contribution for our top partners, a category we call focused partners. For example, in North America disk systems and tape automation revenue from focused partners more than doubled from Q1. On the DXi side specifically, although we still aren’t at the level that we would like to be in terms of building our overall mid-range DXi revenue from the channel, it grew by 50% sequentially. We also continued to add new channel partners, including NetApp centric bars that want an alternative to EMC Data Domain.

Another area of focus has been to expand our lead generation program. As a result of our efforts here, we have increased opportunities created through our own marketing and telemarketing initiatives by 41% in North America over the last two quarters, allowing us to deliver significantly more leads to the channel. As a part of these initiatives, we have placed greater focus on our very large tape installed base increasing the frequency of our outreach and doing more segmentation and targeting of our messaging and developing more compelling DXi offerings particularly around our mid-range DXi products. Combined with the lead generation work we are doing, beyond our installed base, this resulted in a 50% increase in our North American mid-range DXi pipeline in Q2, the benefits which will also carry into Q3 and Q4.

On the branding front, we have expanded our efforts to enhance market awareness of Quantum through online marketing events and PR and we are seeing results. For example, requests for more information from our website were up more than 60% from Q1 to Q2. Another example has been two customers speaking slots that we secured at the recent storage networking road show. Barclaycard U.S. presented on how it is leveraging our DXi and tape products and building a light out disaster recovery facility and CERN, the European high energy physics research organization discussed the use of StorNext in one of its major research projects. In addition, as a result of the nomination we submitted Barclaycard won a best practice award at the show. As we move forward, we are also working to drive increased mindshare for Quantum amongst storage professionals and other market influencers by expanding our presence in social media.

Finally, we are continuing to make progress in our competitive position. The competitive environment is complex particular in the area of disk space backup and deduplication where we have work to combine product improvements with enhanced messaging and training. This has given our sales team and channel partners more to work with in providing customers with the solutions they need while also enabling our sales team and channel partners to be more effective in focusing their time and efforts on opportunities where we are better positioned to win and refuting the competitive fug.

As evidenced, this is working and in fact, our win rates and close rates in North America were both up in Q2 when compared to the prior quarter.

As we begin the second half of FY 2011, we will continue to focus on building greater revenue momentum across all these avenues. The progress we have made to-date speaks of the work that we have done, yet we need to gain greater uniformity across geographies, territories and partners to make this progress more consistent and sustainable. We have very good proof of success when these elements align well in a territory. However, we still need to do much more work to build a mid-range velocity DXi business to complement our very – our large deal profile. As John mentioned, in Q2 our business continued to be driven by a number of these very large opportunities with only mixed results in building more run rate performance. Improvements here will be essential over the coming months.

With that said, our continued success in winning large DXi deals is clearly a reflection of our strength in the enterprise market. In Q2, these deals included a multi-site multi-million dollar purchase from a Fortune 50 company that already had over 20 DXi systems, as well as a large deal with the US cabinet department, a European central bank and a top US investment firm. At the same time, we had a number of customers that purchased both DXi 4500 and DXi 6500 appliances, including a large US Federal Agency, a leading provider of business commerce solutions, and a large telecommunications provider.

On the StorNext side, we had four deals for archive with more than one petabyte of data, and we saw increased adoption of new functionality, as the new functionality that’s StorNext 4.0. It’s worth noting that approximately half of the deals involving StorNext storage management were integrated with hardware, software solutions that also included Quantum Scalar libraries. Key wins included new business with one of the largest media and entertainment conglomerates in the world, a European music company and two Asian television stations, as well as follow-on business with an American television network, a North American agency that provides meteorological information and weather forecast and a European international broadcast channel.

Our priorities and plans for Q3 remain consistent with Q2. We will aggressively pursue our sales and marketing agenda building more channel presence, faster disk systems and software growth, and expansion of our tape customer base. All of this is consistent with the guidance that John provided which represent another quarter of sequential growth. As I’ve said before, the primary risk factor we face continues to be economic uncertainty. But over the last few years, we have seen varying levels of caution resulting in delayed purchase decisions. I feel the environment in Q2 was improved over Q1 especially in EMEA. I am confident that the underlying market demand is there and that there is risk mostly around cautious purchase decision namely these delays in decision and downsizing configurations.

Well, with that I will turn the call back over to the operator to take any of your questions, operator?

Question-and-Answer Session

Operator

Thank you sir, we will begin the question-and-answer session. (Operator Instructions). And our first question comes from the line of Brian Marshall with Gleacher and Company. Please go ahead.

Brian Marshall – Gleacher and Company

Great, thanks guys. A couple of quick questions. With regards to the guidance $185 million to $200 million for the December quarter in terms of revenue, can you talk a little bit about, you know, how we get to sort of the range there? And can you talk a little bit about what it would take to, you know, kind of shade the high end of the range?

Jon Gacek

Sure, I will start and Bill can answer. You know, we reported $167 million and we are moving to a seasonally strong quarter. But the move from $167 million to all the way to $200 million as an example, that’s a fairly high percentage, 20% type of range. We feel like we have a lot of opportunity right now. And our funnels are as full as they’ve ever been. The product portfolio across this tape software is really strong, and it’s just a matter of executing on those opportunities. And, you know, we are trying to be realistic about the range, but also sort of indicates that, you know, we’ve got a chance to have a very strong quarter as well. Bill and I and Rick, we’re all just in Europe, you know, things are improving there. And in North America, we’ve met with the teams and we’re seeing an uptick in win rates and you know many, many positive things, but we still have to go, close all the business. You want to add anything to that?

Bill Britts

I just the think the key is that we’re gaining traction with that independent storage channel, the people that really had a reason why they want to purpose Quantum and we spent a lot of time the last quarter trying to make sure that they are trained, that they understand the value prop around our products, that we have enabled them to be able to introduce our solutions into their go-to-market. And as that pays off, then we start to get increasing returns because we get the leverage from having not just our sales force obviously but the channel sales force that has a much broader reach to be able to get to the opportunity that we see.

Jon Gacek

I think one thing Brian that we try to get people to focus on. We are superfocused on driving revenue. But I want to emphasize, you know, that we are delivering profits along with it. And even in this quarter, you know, we are a little bit lower in the range than we expect it to be. Yet our gross margin and our earnings were higher. And I think it’s just a testament to our teams and the business model that we have. And as we add revenue, you know, we are going to have a lot of profitability. So, different than in the past, we are running at growth. I guess I am making the point that we are going run at growth and we are going to be profitable.

Richard Belluzzo

Yes, we’ve had discipline in not just drive revenue growth with lower margins which we know that with segments of our business we can do that. We really have dedicated to be a systems company. That means we’ve got to grow revenue the hard way, but it’s revenue that has sustainability, good margins, and that’s, you know, as I think both John and Bill have said, those opportunities have never been better, but there’s a lot of just a numbers of deals that were yet to close, that we are very, very focused on.

Brian Marshall – Gleacher and Company

That’s a good point. I think your guidance for gross margins in September was actually down sequentially and obviously they are up almost 20 basis points sequentially. Is it safe to assume, you walked away from some business on the top line in the quarter and that’s why we saw a little bit lower than expected on the top line?

Jon Gacek

No, I think what Rick’s talking about is, you know, we are always, you know, we can chase revenue, I mean the media business as example, which is not to. I would say what really was different here is our mix was really nice as far as the types of products. StorNext clearly had a very strong quarter, which is, you know, not a 100% margin, but it’s close. And again, I am trying to emphasize on kind of the points between all three of us, don’t get it wrong, we are driving to the high end of that range. But if we hit the high end of the range, our profitability is going to much higher than people think to.

Brian Marshall – Gleacher and Company

One final question and I will get back in the queue. With regards to the new OEM deal that you guys I think might have – had some recent success here over the past day or two. Can you talk about a little bit the size of that potential opportunity relative to, you know, your last OEM deal that has expired?

Jon Gacek

Sure I will probably won’t answer the way you want, but we will answer it partially. So, this announcement that Brain referring to is the announcement with Fujitsu on net app. That’s part of all the process going on there. Fujitsu has confirmed that their product is based on our DXi software, that’s a real nice quote about how it’s more stable or the best in industry. I can’t remember exactly what was for newer. So, we are confirming that it is Fujitsu. But consistent with the past, you know, it isn’t an EMC like agreement for sure. And consistent with the past, we haven’t included any of that revenue in our forecast or plans. And as it becomes significant or material, we absolutely will bring it up on the call in some way. You know, Fujitsu is the fifth largest computer vendor. They have a big PS group and certainly have a net app. But since we don’t control that business it’s really hard/naïve of us to try and forecast where it’s going to be. As it grows though, you know, we will talk about it more.

Bill Britts

Certainly upside.

Jon Gacek

Certainly upside, Bill.

Brian Marshall – Gleacher and Company

Understood, thanks guys.

Operator

Thank you. And our next question comes from the line of Chad Bennett with Northland Capital Markets. Please go ahead.

Chad Bennett – Northland Capital Markets

Yes, just a quick question, a real quick one for you, John, following up on the last question. So did you recognize any kind of meaningful revenue from that OEM arrangement this quarter?

Jon Gacek

We didn’t disclose any, so you can assume no.

Chad Bennett – Northland Capital Markets

And then the new 8500 product that’s going to be shipping in the next several weeks, I believe you said, is that going to be an incremental market to the 7500 or will there be some cannibalization there in terms of – in the markets that it addresses?

Jon Gacek

Yes, it’s in the same markets. So, you think it as the higher end product, I think you will see customers buy new units that are 8500, and customers who have 7500 may just increase the capacity of those. The two products work together. The 8500 is just based on higher end set of processors and hardware and it has our latest software in it. It’s unbelievably. I mean it is really fast and so to that extent I think it does open us up to some new markets because some of those large customers really have a need for getting their backup servers back on wind and some of those companies have not implemented de-duplication because of performance. And now this product will open up that group, but it is still an enterprise product in that same classification. It’s just a much faster enterprise product.

Chad Bennett – Northland Capital Markets

So implied, I believe you – guys gave a target a couple years, or a couple quarters ago when you gave the yearly guidance and all of us looked at it differently but basically of doubling the disk and software revenue year-over-year this year. I assume you haven’t changed your guidance so you’re not changing your thoughts on that?

Richard Belluzzo

Yes, you’re right, I mean I would just acknowledge it that statement made a lot of things – different things to different people, I mean I would just tell you we are definitely aggressively focused on doubling and beyond that business. The market supports that, our investments are consistent with that and we’re focused very, very aggressively on achieving that level, I mean I think there is just discussion about the timing and all of the that, what base you start from with OEM, with EMC, all that stuff. That aside, we are aggressively growing it, it’s a big part of achieving since we reinforced the guidance, it is a big part but achieving our revenue our revenue. I can’t just tell you when you look at our finals and you look at our opportunities, the DXi part of the business is very, very strong and is the most significant growth segment.

So all of that, there is no real new message intended here that’s varies at all from that initial statement.

Chad Bennett – Northland Capital Markets

Okay, and just one last one from me probably for John on the debt. So it sounds like you’re going to – you’ve indicated towards the – debt – the senior guys that you’re going to pay off another $20 million on your senior facility, I guess do you have the ability to partially pay down EMC or I guess I’m trying to understand with now that you’re kind of the hands cuffs are off on the terms there on the EMC debt, if you’re going to do this anyways no matter what or what the logic was there?

Jon Gacek

Yes, so it wasn’t linked to amendment. We have some excess cash flow requirements in our senior debt. So and they’re annual. And based upon our guidance and our free cash flow, we would be paying down debt sometime during this year. And if the sooner we do it, the more interest we save. We wanted to get the amendment done, that was a step, and we also want to reduce our interest costs. So once we got the amendment done, we’re going to look at kind of aggressively paying down senior debt as well and it’s really money that we’re going to pay down some point during the year. I think that number will be probably at least $40 million or maybe more than that depending on how things shakeout here.

So they were related but the whole strategy is now little bit more linked up.

Chad Bennett – Northland Capital Markets

Good, that’s just…

Jon Gacek

And as far as EMC goes, we could actually refinance parts of it, we don’t have to refinance it all. Now we have a lot more flexibility on thinking about it that way. We can’t pay it out of cash flow, we can only pay the debts from their due or we can refinance them

Chad Bennett – Northland Capital Markets

Got it okay, thanks. Great job on giving more metrics on DXi progress. Thanks.

Jon Gacek

Thank you.

Operator

And our next question comes from the line of Alex Kurtz with Merriman & Company. Please go ahead.

Alex Kurtz – Merriman & Company

Yes. Thanks for taking the question, I apologize for the backgrounds noise. I’ll turn it off on the tape business, where your main competitors recently changed how the channel I believe around maintenance. Any early indications out of storage tech around how that’s impacting your ability to pick off some of those partners it is too early for any tangible thing you can talk about with that?

Jon Gacek

Sure, what Alex is mentioning is disruption the channel that Rick also mentioned with the Sun acquisition by Oracle and then just a strategy that business is employing. And we’ve been saying for a couple of quarters that those changes create opportunities for us and I think recently there was an article out that talked about how Oracle was changing how our (ph) partners were compensated on maintenance. And all of those things are creating opportunities for us and we both Bill, Rick and I, we all think that that’s going to be a help to our business because we are a channel company. We are going to support the channel and it creates opportunities to go into accounts that we frankly haven’t been into before. Having said that, sales cycles for tape is somewhere between three and six months.

And you usually buy those products as need arises. So I don’t think you’re going to see a big title wave of activity for us. I think you’re going to see though an increase in our tape business overtime. And we already see it in new customers acquired in my scrip I didn’t give a number, but I said that we had continuous trend of significant number of new enterprise tape accounts and it actually accelerate this quarter over last quarter. So those are super important trends, I know that Bill add any more color he has got.

Bill Britts

Yes, there are two things that I guess I would emphasize. One is we’ve got a program right now, where we’re running it, kind of we started it last quarter piloting with about 15 key partners that had big Oracle story checked installed base and maintenance revenue. And we’ve engaged with them to basically go out and pitch a tech refresh to their install base of customers. And it can be more likely when they come – when these maintenance contracts come due that you get the opportunity. The second part of that is equally important is that creates also the opportunity to introduce disk space backup with de-duplication as part of that overall value proposition. And that’s really where the intersection with our focus partners in these storage tech are ex-storage tech partners that want to do something different, that’s where that intercept.

Alex Kurtz – Merriman & Company

And Bill just as a follow-up of a separate question. Can you just talk about competitive mix from EMC into the (inaudible) channel what – any changes quarter-over-quarter, I know that you guys use prices as part of your strategy, just talk quickly to that, I appreciate it.

Bill Britts

Well I think the key thing is it’s really about price performance and so we’re trying to be very aggressive being able to make sure that people understand kind of the value of the overall solution and that can take different shapes depending on whether tape is included, whether you pitch a midrange product versus an 80 from Data Domain. So there are elements to this that kind of make the competitive dynamics, I think in our favor because EMC certainly they try to sell what’s best for EMC first, rather than what’s best for the customer. So I think from that standpoint we’re getting traction. The other is quite frankly, they’re the once with the big market share position and we’re attacking them the wars understand it and it just doesn’t look good when you get to the end of the sales cycle and EMC says, yes I’ll match that price. So we’re using all those things to our advantage. But at the end of the day the product is standing up head-to-head against them and these winds that we’re referencing in the quarter, those are very, very powerful in terms of what they signify to the channel because it shows that we can go head-to-head against Data Domain, EMC and win.

Alex Kurtz – Merriman & Company

All right. Thanks, guys.

Operator

Thank you. And our next question comes from the line Eric Martinuzzi with Craig-Hallum. Please go ahead.

Eric Martinuzzi – Craig-Hallum

Thanks. I have a question about the branded disk business. You talked about in the press release that that increased 29% year-over-year and 19% sequentially. I’m not that familiar with the historical trend there. What would keep that 19% sequential growth going, or why would it decrease?

Richard Belluzzo

Well I would start by saying that its – I mean we had lumpiness in previous quarters and so there is a comp at times challenge that we’ve had as we’re trying to build consistency in this business. So that would be the first point. The second point, I’d say is we have to do a lot – we intend to do a lot better than that if we’re going to double the disk systems and software business. We’ve got to grow more, the 29%, 19% and it depends on the comparisons. But we believe that number has to significantly improve and that’s what are plans are based on.

Bill Britts

I think the key thing to remember is if you go back a year ago, we really didn’t have a midrange product that was super competitive. So that’s an very, very big difference and then the other is the fact that we have a channel that as we kind of referenced earlier, we’re building a very, very strong pipeline with them. So you combine those factors and you’ve got a lot of tailwind to be able to help continue to grow that disk and software number.

Jon Gacek

So if you take those comments and just apply them directly to the next quarter, we mentioned in our call we have our funnels have never been larger, and we have the new products that are out and the channel is very receptive.

So I think to Rick’s point what we believe that number on a sequential basis is going to go up. And on a year-over-year basis, it will go up. And for all the reasons that everybody mentioned, we’re driving on that hard. We don’t exactly go the other way I’ll say it that way too.

Eric Martinuzzi – Craig-Hallum

Okay. And then just the announcement this week with the StorNext Archive Conversion Utility. You talk about that being available December 2010. Is there an issue? Do you feel like you’re inhibited from migrating or displacing a storage tech account until you have that out there or is it just it would help accelerate things?

Bill Britts

Yes, no, I would say first answer to that is no. This is a file system product that is basically I don’t know if it’s been discontinued, but it’s clearly not been invested in. And there is a big large installed base there. And that’s all we did was try – basically come out with a solution that makes it easier for people to transition to us as the leader in the segment.

We announced it a little earlier, because it is a longer sales cycle that people have to go through to make the decision to do that. And so we do expect that it gives us opportunities for tape libraries as well. But it’s – it really isn’t an incremental opportunity, it’s very strong message to the channel. I was in Europe last week and I made a tour talking to many, many channel partners.

And there were some that really saw this as a very, very strong message again that we’re going to attack that base with better products, with better solutions, that there is opportunities for them to be able to go into their installed base with solutions at an installed base that is very fragile right now and take advantage of growth potential. That’s what this is and we will continue to look for opportunities like this to be very aggressive to take advantage of the disruptions that I refer to in the script.

Eric Martinuzzi – Craig-Hallum

But what else are you doing? This is obviously one tool in your tool box. Are there other things you’re doing that could mover the needle here? Is there incentive pricing, is there a training effort, things that we might see on the marketing side, what else?

Bill Britts

Yes, we’ve got a number of plays, offers if you will that are in play right now that really try to attack this tech refresh opportunity. So we have offers that would enable an end-user customer to be able to do a tech refresh. In other words, replace their storage tech library. Basically trading off OpEx and for CapEx and be able to do that. So their three-year CCO becomes a very, very straightforward investment decision for them and we’re rolling that out through our own kind of marketing, but we’re also doing that through these channel partners that we talked about earlier.

Richard Belluzzo

We’re also trying to test solutions that are different by including disk as Bill mentioned earlier. Part of that aggressiveness includes disk-based backup and a tech refresh not just a tape library replacement and that message and StorNext is that too. That message resonates well. If our partners like it and our disk offering, Oracle it doesn’t have anything to compete with us there. And so we’re packaging those (inaudible) and really going after that.

Eric Martinuzzi – Craig-Hallum

Okay. And then the housekeeping item here. I don’t know if you covered it or not but your head count at the end of September and your expectation for the head count at the end of December.

Richard Belluzzo

I think it’s about 1,900 is what we’re today-ish. And I think it will be around 1,900. We have it – we have a number of recs outstanding. We’re recruiting heavily in engineering in particular will be the first place. But we don’t – I don’t expect there to be a drastic change.

Eric Martinuzzi – Craig-Hallum

Thanks.

Operator

Thank you. And our next question comes from the line of Glenn Hanus with Needham and Company. Please go ahead.

Glenn Hanus – Needham and Company

Yes, good afternoon, guys.

Richard Belluzzo

Hi Glenn.

Glenn Hanus – Needham and Company

Just going back to the Fujitsu deal for a second. Could you comment on the timing of when we might start to see revenue and I’m not quite sure I heard you right with – did you say the structure would be sort of a licensing kind of arrangement similar to EMC or did you say the deal was dissimilar to EMC?

Richard Belluzzo

No, the licensing is similar, the scale is dissimilar. So EMC is just a huge – was a huge partner and they stole a lot of product right away, our royalty, our license revenue reflected that. So it is a – it’s a 100% margin and it is in similar structure as what we had with the EMC.

We have some revenue now. It’s not significant yet. We have just refreshed the software if you will. And obviously they have signed an arrangement with NetApp that will increase the fee on the streets selling the product. So I don’t know when it’s going to be. Obviously there’s going to be more than it was this quarter or next quarter, but I don’t know when it’s really going to be significant for us to talk about it.

Bill Britts

Yes, I would just mentioned, I was just with them last week, and there is a certain amount of expertise that we’ve certainly learned when you’re in this business that’s unique about how do you size and sell this deduplication solution. And you see in the market that lot of players haven’t been able to get there in spite of having some product and I think Fujitsu is kind of in that place.

They understand that they’re working on it and are actually quite happy with the relationship and have to have a positive view of the latest product releases and where that may go. But they’re going through a big rollout and set a changes on their own. So we think it’s upside as we said before.

And what the NetApp piece provides is upside too, we don’t know really how large it will be, because they’re going to have to go at some level through that same – that same process. But we think it’s a good thing. If nothing else, it also allows us to validate the fact that our technology is leadership, meaningful, significant, and that works in general positively for us as we go out and work to expand our position.

Richard Belluzzo

It’s kind of tactical, but compared to like a tape library OEM where we have to have a forecast, we have to build something. Here there isn’t any – we don’t have to do anything. There is not a forecast. They go and they drive the revenue and then they sell us what they sold. So it’s different in that. We don’t really – we don’t really know and that’s why we’re being circumspect about when and what.

Glenn Hanus – Needham and Company

Do you have any sense of where NetApp is in terms of sort of training their field to be active with this?

Richard Belluzzo

We don’t.

Glenn Hanus – Needham and Company

Okay. So just shifting gears, last quarter you had some variable regional sales execution, especially on the tape side, can you talk about how that’s been addressed and how you’re feeling about the sales execution and straightening that out?

Richard Belluzzo

Yes, I think – I mean I’ll start and then Bill can – I think from a number’s perspective, I think we – that improved dramatically. And I think we’ve all met with the sales teams over the last couple of weeks. And our sales team is on their toes, they like the products, they like the channel. And I think they’re doing great. Bill you want to add anything to that?

Bill Britts

I think that says it well. I mean we are very, very focused on converting this opportunity in the pipeline this quarter. And all the reviews in the last month all – everybody is aligned around that.

Richard Belluzzo

If sales guys like having a bigger pipeline to go work for sure. And this is as big as we’ve had in the long time.

Glenn Hanus – Needham and Company

With StorNext, could you comment a little bit on the competitive environment for that and your go-to-market strategy there direct versus OEM versus channel?

Bill Britts

I think it’s important to realize that StorNext is a very sophisticated high-performance file system that has the ability to integrate tiered storage called the big archive.

And so where it’s positioned best and where we’ve had just market leading success is really in those areas where you have these tremendously large archives that have a work flow that basically integrates the file system in this kind of deeper storage or archive types of application. So we can start to think about the vertical markets in the used case, it is very much a very a high end of the enterprise space.

And so the go-to-market while it’s not direct, it’s really around system integrators and people that are putting together these very specialized work flows and large archives. And so it typically pulls a lot of hardware with it, both disk and tape and a lot of these big installations. And so we really focus to go-to-market around partners and system integrators if you will that can bring all that together.

So the progress that we’ve made the record quarter, a lot of that was driven by the fact that we continue to get increasing returns in the rich media – media and entertainment market and we’re starting to see the applicability of StorNext in some of these other used cases that are in adjacent markets, and that’s why we continue to invest.

Glenn Hanus – Needham and Company

Okay. And on the – would the total year guidance suggest that perhaps March could be sequentially up? Can you – and it could get into even the middle or upper half of your range there, Jon. Can you comment at all on the March quarter?

Jon Gacek

Well, I mean I think you have to take the math that we gave and sort of do the if and if. You know, if it’s this, it’s this; and if it’s this, it’s this. Clearly what we would like to see is a very strong Q3 and then we would go from there. And we are driving hard to take advantage of our sequentially strong quarter, the momentum in the channel, and all the things going on around it. If we have great momentum all through that quarter and we deliver where we think we can, we’ll have a different discussion around Q4 when we get there. But we’re – I think what you’re hearing, Glenn, and this is a sports analogy, I usually don’t do them on these calls, this is the game we’re trying to win right now, we’re super-focused on Q3, and our teams are driving hard to a very good, strong Q3. And that will set us up for Q4.

Glenn Hanus – Needham and Company

All right. Thank you.

Operator

Thank you. And our next question comes from the line of Joe Feshbach with Joe Feshbach Partners. Please go ahead.

Joe Feshbach – Joe Feshbach Partners

Hey. Nice work. A couple of quick questions. Implicit in your guidance, I guess for Q3 versus Q2, you’re looking for something like a $17 million to $33 million sequential increase in absolute dollars, if I’ve done the math correctly. And it seems – do I have that right?

Jon Gacek

Yes, that’s right.

Joe Feshbach – Joe Feshbach Partners

Yes, that’s right. So, obviously royalties, the royalty stream shouldn’t change much plus or minus, is that a reasonable way to think about it?

Jon Gacek

It is not going to change at those kind of percentages for sure.

Joe Feshbach – Joe Feshbach Partners

Yes. And service generally doesn’t change much either and other disk and media doesn’t change, so really down to tape automation and disk and software for those revenue increments.

Richard Belluzzo

Yes. I would stop for a second here and remember that the December quarter is seasonally a very big quarter. That will be true for our OEMs, that’s true for our branded business. But even your comments about media, it’s normal that in storage people always talk about budget flush and what these people expended on, if they have budget. I mean all of those dynamics, it’s unclear how they will go this year, but often that creates improvement across a lot of aspects of the storage business.

So I think we expect to see that at some level because it is the typical quarter to do that, that we think will benefit many aspects of the business. Having said that, clearly where we’re focused in building momentum is around tape automation, disk systems and software branded through the channel, as we’ve discussed in this call, and we expect our momentum and set of opportunities to also be positive there. I’m not sure if that answers your question, but I wanted to make that clarification.

Joe Feshbach – Joe Feshbach Partners

Yes. No, I’m well aware seasonality isn’t a non-trivial factor in seeing this sequential increase, but still as you look towards the midpoint of that range, it would seem to me that you have a chance – implicit in your guidance, there’s certainly a shot at 30% to 50% type sequential increases in disk and software kind of at a minimum to really get there –

Jon Gacek

So, not coming on that piece, but that’s how you – basically you got service and you have royalty that aren’t going to grow 30%. That’s correct.

Joe Feshbach – Joe Feshbach Partners

Right.

Jon Gacek

And so if you do what you did, those product lines would have to grow greater than the overall percentage, that’s correct. And that’s kind of the point.

Joe Feshbach – Joe Feshbach Partners

Yes. And so I’m just looking for maybe a little clarity on how one would think about the division between tape automation and disk and software. And within disk and software, how much growth you’re seeing from – how you see StorNext playing out versus branded DXi, and also you mentioned early in the call that you already had closed some deals in the 8500, that would seem to me to be at a very high ASP compared to your velocity-type products in the 6500. So I don’t know, if you can just put a little more meat on the bone about how you help us with the roadmap.

Jon Gacek

Yes. So we don’t –

Joe Feshbach – Joe Feshbach Partners

So, just subcomponents, kind of more fine-tuned?

Jon Gacek

Yes. So we don’t give product guidance, which is what you’re kind of asking me for. But at a high level, at a high level, DXi is in a growth market and we’ve got new products and we’d expect that to grow a lot.

Software StorNext is obviously starting to grow, it’s coming off of a smaller base, and so you get into the percentage versus dollar amount. And then on the tape side, obviously the biggest of all of them, and we have very positive things going on including devices and media, as Rick pointed out, on those as well.

So we’re not going to prognosticate how the split is going to be. We do like the perspective of where we are and we recognize that we have a lot of work and we recognize that we have some unique products right now in a hot market, and a great channel momentum. So we’re pushing on all of them, but we’re not prepared to say where we think we’re going to end up in the quarter for any of those subgroups. Just it’s too difficult to do.

Joe Feshbach – Joe Feshbach Partners

Got it. How about just the one quick question which is, on the 8500, you mentioned you had a few deals, several or whatever, already in the bag, are those the same kind of magnitude as kind of enterprise 7500 deal that you’ve closed in the past where you see low to mid six figures up to seven-figure deals –?

Jon Gacek

Yes. That’s right.

Joe Feshbach – Joe Feshbach Partners

Okay.

Jon Gacek

They’re bigger, lumpier deals, for sure.

Joe Feshbach – Joe Feshbach Partners

Bigger, lumpier deals. Just to make sure I got. Okay, well, great. Excellent.

Jon Gacek

Thanks.

Richard Belluzzo

Thank you.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Brian Freed with Wunderlich Securities. Please go ahead.

Brian Freed – Wunderlich Securities

Hey, guys, good afternoon.

Richard Belluzzo

Hey, Brian.

Brian Freed – Wunderlich Securities

I wanted to get one little bit of clarification. Rick, you’ve mentioned the doubling comment and said it meant different things to different people. And in the context of your guidance for $700 million to $750 million, what I took it to mean was that that was a target, not guidance, somewhere of a goal than guidance, and two, that you’re looking to double the product piece of your branded disk and software year-over-year. Am I in the ballpark of what you mean –?

Richard Belluzzo

Yes. That’s right. I mean we have a lot of different – when you look at our guidance range, we have a lot of different things going on there. And clearly, to perform well there, we have to have very strong disk and software. So that is true. And yes, it is a goal that we have other factors that we’re driving revenue. I mean we have more opportunity today around tape and other things than we’ve had for a while. So we’re pushing on all of those.

But to have a good year, and relative to that range, we have to have very strong disk and software and we have to take that branded DXi business particularly, and get to run rates that are doubling and moving beyond that. And that’s the focus that we have. So I think your interpretation is correct.

Brian Freed – Wunderlich Securities

Okay. And then my second question, you guys have talked a bit about your focus on the channel and obviously there have been a few channels out there such as Datalink who’ve been pretty public about their shift in emphasis toward you guys, there’s been disruptions both on the storage tech and data domain side of the thing. Can you give any kind of context in terms of the numbers of material channels, and by material, I would say VARs doing $60 million in total revenue a year and up, who you feel you’ve kind of added? Not necessarily perfect numbers, but just kind of some sort of metric that would give us a sense what’s the groundswell there.

Richard Belluzzo

I’m going to start. We have a number of Quantum channel partners today who had Scalar tape products and they were selling data domain disk products. And our first goal is to get them to sell our disk products instead of that. It’s obviously the easiest place to go if they’re a NetApp partner, selling NetApp as primary storage. So we’re focused on those. And then the next group is other NetApp partners who don’t sell any Quantum products and we’re also focused on those.

But in addition to that, we’ve got a lot of tape partners that sell are very close to some of our competitors in the disk space, and we’re very pleased to work with tape with them as well. So the problem with the question is that it becomes again sort of like talking about our product.

We have a group of partners that we’re – we call our focus partners and we have a set of those worldwide and we’ve made a penetration into all of them and we’re tracking our progress with all of them and that is somewhere in the 50 range worldwide I would say, I’m looking at Bill.

Bill Britts

Yes.

Jon Gacek

And they’ll call us focus partners. There’s probably a 100 partners that matter at a revenue level if you will and we’re working with them too. And then we have lots of partners who are also very important that sell our tape product that aren’t going to sell an 8500, but they might sell a 4500 or 6510 or 6520, and actually we’re focused on them as well on the – boy you can be which is really around marketing material and programs and the like. So it’s a real mortise thing for us to thing to talk about. We really measure based upon revenue to be candid and how we’re doing. And we’re trying to share that with you guys. Internally we manage it much more, much more closely than that.

Bill Britts

I guess, so the only thing I would kind of add to John’s comments is really around these focus partners, these are partners that have pretty large addressable market. So I’m not kind of pending it down to say we’re looking at all partners above $50 million in revenue. It really it depends on kind of what is their product portfolio, how do they line up to go to market.

And if they have – if they’re competing against EMC on a primary disk basis, those are very good profiles for us to go after and that’s where we’re getting the traction where people are looking for what’s a really good disk based backup with the deduplication alternative to Data Domain, EMC, that’s where it fits very well. The second part is really around making sure that they really understand our products and that they are trained that they’re enabled to be able to carry on that campaign more independently from us and that’s where we’re also focusing a lot of energy.

The one to many types of marketing activities, if you think about it in terms of – we call it Quantum Alliance, these are people that they have access to all of our marketing materials, they get light touch in terms of sales support. If they have a project they get as much support as they need. But we’re also focusing on being able to make sure that what we’ve got in terms of this totally refresh product line that they know how to position those products to at least identify opportunity.

So really the channel if you think about the segmentation that makes sense it varies depending on their go-to-market and their product portfolio. But the unique opportunities that we didn’t have go back a year-ago when EMC was our primary OEM partner, unique opportunity is really to be very, very strategic and important to these partners that have fairly significant primary storage businesses that compete against EMC.

Operator

Thank you. And our next question comes from the line of Shebly Seyrafi with Capstone Investments. Please go ahead.

Shebly Seyrafi – Capstone Investments

Thank you very much. I just want to elaborate on that prior question about the doubling target of your disk systems and software segment. And to achieve that target which would mean hitting about 167 or so for the year and that’s just a target I know. It would imply basically spiking that segment from $30.6 million in the September quarter to like nearly $50 million I think in the December quarter. That’s like a 60% plus sequential growth. I’m wondering what could get you there to hit that target? Now, mentioned that the mid-range with the 6500 continuing to do well, the channel is doing well, the 8500 and you have EMEA growing well for you again. Maybe just elaborate on how you can achieve that target.

Jon Gacek

Well, I think that we’ve said all along that our plan was going to be a second-half driven plan. And in fact when we look at what we’ve done in the last six months building up to this, we’ve built the channel, we are – have been very aggressive in creating opportunities and leads and funnels. All of these things, products have all significantly moved in the right direction.

And you’re right, if you do various amounts of math and look at growth, you can say there is a lot of progress that needs to take place, that’s a true statement. At the same time, when we look at all the opportunities in the size of the funnel and the size of the markets, we say that those things will support that kind of growth, and that’s what we’re doing.

But you’re right, we have to really drive that business. We have to see results. We think this is an important quarter, because of seasonality, because of the product line, because of the work we’ve done, we really have felt it’s going to be a largely a second-half phenomenon and that means this quarter. And that’s where our attention is. I don’t know Bill if you wanted to add to that.

Bill Britts

I think it’s about product, it’s about converting pipeline, it’s about getting leverage from the channel, and there’s lots of action underneath that to make that happen.

Jon Gacek

Yes, we don’t sit here and look at number and say, we’ve got to close every opportunity that comes our way. We have a large amount of opportunity that you can do various amounts of math that shows you how you can get to those kinds of numbers. I would also say though in the other side is we found that a lot of these deals, because of the competitive environment take a lot of effort to close. And we’re putting every ounce of energy into making that happen. But they’re it’s very, very competitive. There’s a lot of dynamics underway that often make it take longer to get things done. But that’s – we have to get scale in the business that we’ve started to build.

Shebly Seyrafi – Capstone Investments

Okay. Thank you.

Operator

(Operator Instructions). And management, I show no further questions in queue at this time. Please continue.

Richard Belluzzo

Okay, great. I’ll just close by thanking you again for joining us. And I think that we’ve had a really good discussion on this transition for the company that started with a business that was declining for a variety of reasons, we’ve moved into a business that’s now first half was roughly flat on revenue.

And we’re really looking at the second half to be the half that we now start to drive growth around a number of the initiatives that we’ve talked about here today. So, with that, we look forward to reporting on that at the end of the current quarter. And I’ll look forward to talking to you then. Thanks a lot.

Operator

Ladies and gentlemen, this concludes the Quantum second quarter 2011 teleconference. If you’d like to listen to a replay of today’s conference, please dial 1-800-406-7325. For international participants, please dial 303-590-3030, and enter the access code 4371388 followed by the pound key. The replay will be available until November 3rd. ACT would like to thank you for your participation. You may now disconnect.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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