Quantum's (QTM) CEO Jon Gacek on Q1 2015 Results - Earnings Call Transcript

Jul.23.14 | About: Quantum Corporation (QTM)

Quantum Corp. (NYSE:QTM)

Q1 2015 Results Earnings Conference Call

July 23, 2014 05:00 PM ET

Executives

Shawn Hall - General Counsel

Jon Gacek - Chief Executive Officer

Linda Breard - Chief Financial Officer

Analysts

Eric Martinuzzi - Lake Street

Chad Bennett - Craig-Hallum

Operator

Good day, everyone and welcome to the Quantum First Quarter Earnings Conference Call. This call is being recorded.

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

Shawn Hall

Thank you. Good afternoon, and welcome. Here with me today are Jon Gacek, our CEO; and Linda Breard, our CFO. The webcast of this call, our earnings release and a quantitative reconciliation of any GAAP and non-GAAP financial measures discussed today can be accessed at the Investor Relations section of our website at www.quantum.com and will be archived for 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 and future financial performance. We would 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 June 6, 2014. These risk factors are incorporated by reference into today's discussions, and we undertake no obligation to update them in the future.

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

Jon Gacek

Thanks, Shawn. Welcome to our Q1 fiscal 2015 conference call. Overall, we had a good start of the fiscal year with total revenue of 128.1 million, which was above the mid-point of our May guidance range and non-GAAP net income of 2.4 million which was above the high-end of the range.

Scale-out storage and related service revenue was particularly strong going 41% year-over-year to a new record and we saw a lot of momentum of those products throughout the quarter. We also continue to general cash from operations ending the quarter with nearly a 110 million in cash.

Before I turn the call over to Linda to walk through the details. I wanted to expand on these positive results to highlight several key points that speak to our continued progress and executing on our strategy driving growth in our cure business and increasing profitability. First looking at our overall financial results, we had solid revenue performance with very strong momentum at quarter end, particularly around our scale-out storage solutions and DXi. That momentum has carried over in the current quarter.

In addition, despite implementing significant expense reductions over the past year, total revenue in our core business was only down about $5 million or 4% from Q1 of fiscal 2014. When I talk about our core business, I am excluding the one-time $15 million payment we received from Microsoft related to an intellectual property agreement in Q1 of last year. Even with approximately $5 million less revenue, we increased non-GAAP operating income by $6.3 million and non-GAAP net income by $6 million year-over-year, again factoring out the Microsoft payment.

It’s also instructive to look at our results on a sequential basis. Despite a $1.5 million decline in royalty revenue which is essentially 100% margin, we generated roughly the same level of revenue, increased non-GAAP gross margin by 220 basis points and reduced operating expenses by $2.3 million to deliver increases in non-GAAP operating and net income of $5.4 million and $4.5 million respectively.

Second point I want to highlight is the strong growth and momentum in our scale-out storage product line which includes our StorNext and Lattus offering. After increasing scale-out storage and related service revenue 12% year-over-year to a new all-time high for fiscal 2014, we more than tripled that growth rate in the first quarter of fiscal 2015, generating $18.1 million in scale-out storage and related service revenue. We continue to see strong scale-out storage growth in North America; and in EMEA this quarter,, we grew more than 100%. We continue to build on our leadership in media and entertainment with significant customer wins that included StorNext deals of more than $200,000 at a major studio, a top international broadcaster and a large follow on Lattus sales at a multinational TV shopping network.

At the same time, we are seeing significant interest in our new StorNext Pro Solutions. These are high performance store systems specifically configured to meet the requirements of post-production facilities and smaller broadcasters for refreshing aging Xsan environments, meeting new 4K workflow demands and supporting end-to-end content production and archive.

In Q1, we also continued to expand our growing customer base in sports video, highlighted by a four-year deal with BBC Sport to provide content and workflow management of its new production library and video archive. In addition, during the quarter, we announced a new joint solution with Telestream, providing ingest, instant review and storage of video from multi-camera, live sporting events. This offering enables sports leagues and teams to improve the viewing experience, as well as repurpose and remonetize their content, all at a fraction of the cost of large, live sports broadcast solutions.

Beyond our growing footprint in M&E, we also saw continued momentum in addressing workflow needs in other areas. One of the highlights of the quarter was a scale-out storage deal for more than $3 million at a leading consumer electronics company with one of the most recognizable brands in the world. The customer purchased a full suite of Quantum StorNext and Lattus products that they will be deploying to managing video workflows with approximately half of the revenue being recognized in the first quarter, and the remainder to be recognized in the upcoming second quarter or the current quarter.

In addition, this week we announced a joint solution with FireEye, a leading cyber security provider to enable customers to more easily investigate and combat the proliferation of cyber attacks. StorNext provides the high-performance scale-out storage repository that allows users to keep more network traffic data for forensic analysis and incident response.

Third point I want to highlight is the continued expansion of our product portfolio. In Q1, we introduced our new 6900 backup and deduplication appliance on a limited availability basis. That product is now generally available and this enterprise offering is part of our newly simplified DXi series reduplication family which has been designed to service the foundation for next generation data protection work flows.

The DXi6900 is powered by our DXi software with StorNext 5 technology at its core which provide industry leading scalability and faster backups which store and replication while even strength on network bandwidth and reducing overall operating expenses. The DXi6900 also features capacity on demand licensing enabling users to scale from 17 terabytes to 510 terabytes by simple licensing key and thereby eliminate then certainly predicting future growth requirements.

Like the other products in our DXi series family the DXi6900 can be combined with Quantum's Q-Cloud protect services to enable customers build data protection work flows that extend across sides into the cloud.

A final point I want to emphasize with regard to Q1 is our progress in increasing our access to end user customers through both ecosystems and channel partners. The joint solutions with Telestream and FireEye as I mentioned are examples of this and demonstrate ways we can leverage our strong product and technology portfolio to extend our market reach and opportunities.

I believe there are additional partnerships available to Quantum and that we can further extend our end user access and grow revenue. While we don't have anything to announce today I want reemphasize that adding strategic partnership and extending our access to more customers is a key part of our strategy this year.

In summary, this is a strong start to our fiscal year. We have demonstrated that the business model and strategic changes we've implemented over the last five quarters are delivering the intended results and looking forward we see significant opportunity to grow revenue profits and most importantly shareholder value.

Now I’ll turn the call over to Linda.

Linda 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. I also wanted to say upfront that in making the year-over-year comparisons for total revenue, total royalty revenue, gross margin, operating income and net income I will exclude the $15 million one-time payment from Microsoft we received in Q1 of last year.

Total revenue for our first quarter ended June 30th was $120.1 million compared to $132.8 million a year ago, a decrease of less than 4%. Branded revenue grew year-over-year to a $102.3 million. Scale-out storage and related service revenue was up 41% year-over-year, driven by revenue growth in EMEA and North America. Offsetting our scale-out storage growth was a decline in OEM tape automation revenue of approximately 24% year-over-year.

For the quarter, non-royalty revenue totaled $118.7 million, of which 86% was branded and 14% was OEM, up from 83% branded and 17% OEM a year ago. Royalty revenue was $9.4 million for Q1 compared to $10.5 million in the same quarter a year ago. The primary driver of the decline was the decrease in LTO royalties for LTO generations 1 through 5, which were partially offset by LTO’s fixed royalties which more than doubled year-over-year.

Looking further at various revenue classifications. Devices and media totaled $17.7 million in Q1 compared to $18 million in the prior year. Devices and media were each relatively flat compared to the same quarter a year ago. Tape automation systems revenue was $37.9 million compared to $44.7 million in Q1 of fiscal 2014. Branded tape revenue declined 2.4 million or 9% year-over-year primarily due to a decline in revenue from our mid-range tape automation systems, which was slightly offset by year-over-year growth in our enterprise tape automation systems and relatively flat entry level revenue.

Revenue from large deals those over 200,000 was up 16% in the same period in the prior year. While branded tape automation was down 9% from the prior year, we believe we performed better than the market in open systems automation. Despite the year-over-year revenue decline, we acquired nearly 90 new branded mid-range and enterprise customers in Q1.

From an OEM perspective, tape automation revenue was down 24% or 4.3 million from Q1 '14. The decline in OEM tape automation revenue was driven primarily by reductions in mid-range tape automation sales. Disk systems software and related service revenue was 35.8 million in Q1, this was up nearly 15% from the prior year. At the 35.8 million, approximately half with from disk systems and related service revenue and half with scale-out storage and related service revenue.

Looking more specifically at disk systems and related service revenue, it was down approximately $900,000 or 5% from a year earlier. Revenue in our over 80-terabyte systems was up moderately year-over-year where we saw our year-over-year decline was in our lower than 80-terabyte systems. In our recently introduced DXi4700 products, we have been seeing good traction with nearly 60% of these customers being new to Quantum. We had nearly 70% increase in revenue from big deals and our overall DXi win rates continue to be strong nearly 55% in the quarter. We also added approximately 90 new customers in Q1.

Turning to scale-out storage solutions, our product and related service revenue increase 41% year-over-year to an all time quarterly record of 18.1 million. In addition, revenue from big deals increased by more than 100% of the same quarter in the prior year. The number of worldwide partners selling our StorNext products increased 12% compared to both the same quarter a year ago and from last quarter. And we continue to experience strong win rates in our solution offerings.

As mentioned earlier, we executed on revenue growth in EMEA and North America over Q1 of fiscal ‘14 and revenues were lower year-over-year in APAC. In general we saw solid growth across the board in our scale-out storage offerings including revenue from our Lattus product. Overall from a customer acquisition standpoint, we added approximately 75 new StorNext and Lattus customers in Q1.

Moving to service revenue it was 38.5 million in Q1, up 6% from 36.5 million in the same quarter of the prior year. The increase was primarily driven by growth in branded contracts related to our StorNext to client strategy. We also had increases in service revenue in our data center and OEM business but to a lesser degree. Turning to gross margins, non-GAAP gross margin was up over 200 basis points at 44.1% in Q1 compared to 42% in the first quarter of fiscal ‘14 this reflects the positive impact of the changes we have driven in our operations, repair and service business models.

Looking at expenses. Non-GAAP operating expenses were down 5.1 million or approximately 9% totaling 51.1 million in Q1 compared to 56.1 million in the prior year. Year-over-year our sales and marketing cost decreased by 2.3 million the primary driver of the reduction relates to lower salaries and benefits resulting from the headcount reductions we have implemented as well as lower marketing programs spend. Similarly, research and development spend decreased approximately $2.1 million, primarily as a result of lower headcount. General and administrative costs declined by approximately $800,000 primarily related to lower facility cost.

In Q1, we had a gain of approximately $460,000 on the sale of blocks of IP addresses we have the exclusive rights to use. Q1 non-GAAP operating income was $5.2 million compared to an operating loss of $1.1 million in the same quarter a year earlier. This resulted in a 490 basis points improvement in operating margins due to the business model changes we have implemented which were some what offset by lower overall revenue.

Interest expense for the quarter was $2.4 million, which is the same as it was a year ago. This included cash interest expense of $2 million and amortization of debt issue costs of $400,000. The average interest rate are $203.7 million of convertible debt is 3.99%. For the first quarter, we had other expense of a $125,000 primarily related to foreign currency losses. We recognized tax expense of $250,000 primarily related to state and foreign taxes.

Summing it up for Q1, we had a non-GAAP net income of $2.4 million or $0.01 per share, compared to a non-GAAP net loss of $3.6 million and a loss of $0.01 per share in the same quarter a year earlier. On a 4% year-over-year revenue decline, our bottom line improved $6 million due to the changes we have made in our business model over the past year, which were focused on driving profit and cash flow.

Focusing on cash flow for the quarter and the balance sheet at June 30, I would like to highlight several key points. Cash flows provided by operations for the quarter were $6.3 million. We have generated cash from operations for three consecutive quarters and six from the last eight quarters. We ended the quarter with $107.2 million in cash and cash equivalents, our highest cash balance in over four years. At June 30, our debt consisted of $203.7 million of convertible debt with no covenants. There were no amounts drawn on the revolver at quarter end therefore we have no financial covenant compliance requirements.

EBITDA for the last 12 months was $31.3 million. On a sequential basis manufacturing inventory decreased $1.7 million to $33.1 million. Accounts receivables decreased $11.1 million and CapEx was $1.4 million.

As we talked about in May, we ended our fiscal year with over $100 million in cash on our balance sheet and a $75 million line of credit which along with the cash we expected to continue to generate over the next year and half would effectively enable us to [receive] the November 2010 bonds when they become due in November 2015 or earlier that makes economic sense for Quantum.

Having started off our first quarter with significantly improved operating profit, continued strong cash generation and increased cash balances demonstrates that the improvements in our business models continue to come to fruition. As we stated in the May earnings call and will reiterate again today, we feel very confident in our ability to continue to execute on our plan throughout fiscal 2015 and to further strengthen our financial position. All of this reinforces the management team's commitment to driving shareholder value.

Now let me turn the call back over to Jon.

Jon Gacek

Thanks Linda. Before I turn the call over to questions, I want to reiterate and expand on a few key points that Linda and I discussed today and provide guidance for Q2. The first point is around our strategy and financial model. Over the last seven quarters, we have lowered our cost structure, focused our R&D investments on solutions where there is market demand and leveraged our market leading tape automation position to drive profitability and cash flow while leveraging our customer install base to sell our new products.

This quarter is the fifth consecutive quarter that we have met or exceeded our guidance. We expect to grow revenue in our core business for fiscal ‘15 and expect year-over-year growth in this current quarter ending September 30, 2015. Our growth will be fueled this year by gaining share in the tape automation market, maintaining share in the growing purpose-built backup dedupe appliance market and significantly growing our scale out storage product revenue. We expect to continue to launch new products and we’re very focused on adding new partners.

The second point I want to discuss is about scale-out storage. As our record scale-out storage revenue indicates, there is significant opportunity in this market. Managing the ever growing volume of large unstructured data files, particularly in a cost effective way while meeting increased demands for monetization or otherwise leveraging these digital assets is becoming more challenging. Quantum has long been at the forefront of addressing these types of workflow challenges where StorNext provides the unique combination of industry leading performance and scale-out tiered storage for lower cost.

As workflows have changed and the range of customers and industries dealing with scale-out storage issues has expanded, we’ve taken StorNext to the next level with our StorNext 5 platform and continued to build out our Lattus Systems.

In fiscal ‘15, we’re focused on media and entertainment and federal government intelligence and surveillance vertical markets. For media and entrainment, we have dedicated sales and marketing resources as well as specific product combinations in our StorNext Pro Solutions to drive growth. We’re focused on expanding our footprint among large broadcasters, studios and new cutting edge content creators as they implement 4K and 8K workflows.

StorNext 5’s performance capabilities combined with Lattus create unique solutions. In the post-production facilities and small broadcast market, we are focused on using our Pro Solutions to replace or add to existing Apple Xsan environment, leveraging StorNext a 100% comparability with Apple products.

This market is growing dramatically as content is being created by increasing number of entities and demands of 4K workflows create a large opportunity for Quantum.

On the government side, we continue to be designing the solutions because of our install based and strong product portfolio. One particular area of growth we see is in helping companies manage their growing media files. These workflows are very similar to those in the media and entertainment market and we are leveraging our install based of data center customers to offer scale-out storage solutions for this particular use case.

As I mentioned earlier, our largest deal in Q1 was to a company with this exact profile. All of this has positioned as well, our established customer see us meeting their evolving needs while new customers and partners realize the unmatched power and business value of our scale-out storage offerings. We saw this momentum grow towards the end of Q1 and extend into this month and we will continue to capitalize on it.

With that said, the increased momentum we've experienced over the last months isn't limited to scale-out storage. We've also seen it with DXi. As Linda mentioned, our DXi4700 appliance continued its strong ramp in Q1 with nearly 60% of those purchasing at DXi4700 being new Quantum customers. We are also excited about the DXi6900 now being generally available and the benefits that incorporating StorNext 5 technology delivers.

Along the way, we simplified our DXi portfolio and optimized it from modern data protection workflows including extension to the cloud which we believe this will be attractive to customers and partners moving forward.

Regarding partners I want to reiterate what I said earlier about our focus on increasing our access to end users through strategic partnerships this year. As we continue to introduce innovative solutions that can applied to new used cases and involving customer needs we will further enhance the value we can provide to partners as we have seen with Telestream and FireEye.

Let me now turn to guidance for Q2 we expect revenue of 130 million to 135 million reflecting the uncertainty around U.S. Federal government spending, we expect non-GAAP gross margin of 44% to 45% non-GAAP operating expenses of 53 million to 55 million, interest expense of 2.5 million and taxes of 500,000.

At this time we are not making any changes to our annual guidance given that we are only one quarter into the year. However we are very excited about our momentum, product pipeline and our new partnerships.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And first we’ll go to Eric Martinuzzi with Lake Street.

Eric Martinuzzi - Lake Street

Thanks for taking my question and congratulations on the good start to FY15. Curious to know you made a comment in the press release and in your prepared remarks Jon talking about momentum of the existing Q1 carrying over into Q2. Is this standard, is there a normal stair step as you enter your fiscal year, is there anything different about this year and if so why?

Jon Gacek

Yes we have talked different times about our linearity in the quarter and we have an OEM business that's pretty consistent over the course of the quarter. And then our branded business tends to be more back end loaded. This quarter was particularly active at the end of the quarter and early in the quarter we just started. And not so that we pointed it out, we don't report bookings and backlogs and those sorts of things. But for sure, I think it has a lot to do with the timing of the product releases as well as just sort of our momentum in the marketplace.

The one deal that I mentioned that was fairly large came in late in the quarter and we're going to see the benefit of that in both quarters.

Eric Martinuzzi - Lake Street

And then -- I think the day you talked about was a scale out opportunity, what was your commentary momentum across all product lines or just in the scale outside?

Jon Gacek

Scale out, sure. You can see it in the results, but also DXi, I specifically called out DXi with the 4700 and 6900. We're seeing real good tractions with the 4700, candidly it was quite a bit above our forecast, just customers really, really like it. So, we'll take advantage of that.

And then 6900 really consolidates the 8500 and 6800 space and provides even better performance and it's better cost position and it's utilizing StorNext 5. So, I think people like all those messages.

Eric Martinuzzi - Lake Street

Okay. And then on your last call you talked about scale-out growing at a 50% rate or better than 50% rate in FY15, it grew 41%, which is still terrific growth, but less than what you expected for the year. Do you expect that to recover or accelerate in the out quarters and if so why?

Jon Gacek

Yes we do. I mean traditionally Q1 is just, is not our best quarter coming off of the fiscal year. I will tell you that to scale our revenue this quarter was above our expectations when we came to 50%. We were not expecting it to be as high as it was so actually in our plan we're ahead. I think one of the key elements for how that momentum continues will be the fed spending. As you know we do quite a bit of scale out business in the federal government so this will be an important quarter for that.

December quarter is always our largest and again there is a time and deal that go with that. And then I think the other element is just product, product launch and timing. StorNext 5 the Pro Solutions, the new entry level (inaudible), 6900 all those things are relatively within the last three to four months.

So we're actually ahead of our internal plans on scale out. I just want to make sure, I am right. Yes, we're ahead of our plan on that.

Eric Martinuzzi - Lake Street

Okay. And then last one from me just on the operating expense side. I had roughly 52 million or so for Q1 you've given an OpEx expectation at the mid point of 54 million in Q2. Is there anything on the fixed, relatively fixed side of the OpEx that’s going on there or is this tied to the variable the sales variable as far step up.

Linda Breard

So Eric it's primarily tied to the sales variable, there is a little bit of project spend from an R&D perspective that is in Q2 then a couple of headcount in the sales area, but primarily it’s a variable compensation.

Eric Martinuzzi - Lake Street

Okay. Thank you.

Linda Breard

Thank you.

Operator

Moving on to Chad Bennett with Craig-Hallum.

Chad Bennett - Craig-Hallum

Hey good afternoon.

Jon Gacek

Hey Chad.

Chad Bennett - Craig-Hallum

Couple of questions for me. I think you indicated Jon in what you needed to do to really hit the ‘15 forecast that you gave last quarter and just take share in tape and then I think it was maintained share in the disk back up or dedupe market. Do you think you maintain share in the June quarter?

Jon Gacek

It’s hard to say, nobody measures it that way. I think from our own internal plan we’re again either right out or slightly above our plan. So pretty consistent with what we were expecting. The quarter the place where we didn’t hit the plan was around OEM and we mentioned that it was down 24% I believe year-on-year and that’s tape-based products. As you know we don’t control those deals and so we’re in contact with those entities and so what’s going on with them. But all of them have had their own things they’re working on within their business models. We’re really set up quite well. So our branded business was up year-on-year and the combination of StorNext and scale-out StorNext and DXi being at or over plan what drove that. So, we definitely met our objective of growing at the market something a way to measure that so we get in the year.

Chad Bennett - Craig-Hallum

Okay. So, and you still believe if you grab the market you’ll be growing your disk back up business kind of mid teens, is that still kind of the forecast from you guys’ standpoint?

Jon Gacek

That's definitely where we're targeted. As I talked about on the last call, our strategy there is really to not spend more money to achieve that, but to add channel and partnerships to get more leverage on that. As you know, we’ve made spending choices over the last year and a half and we're just not going to spend heavily to drive growth at an unnatural rate in DXi unless we get some help us from partnerships.

Chad Bennett - Craig-Hallum

Okay. And I think if you look at the September quarter, nothing is an easy comp in this business. But I think your disc and software business was down kind of high-teens year-over-year overall revs last year and then product wise was even down kind of mid-20s. So I guess considering the momentum in StorNext and considering the kind of product launches with DXi, we should expect fairly healthy growth, is that fair to say in the September quarter from that segment?

Jon Gacek

Well, so couple of things. That was, that particular quarter as we made, we took a lot of cost cutting actions a year ago that impacted revenue. I think as you recall, revenue was down but profitability was quite a bit up in that quarter. I think what we'll see this quarter; I believe we did about 131 last year. So we've guided to overall growth quarter with a lot less OpEx and it will be absolutely will be the result of scale-out, DXi, I mean everything has to contribute to do that, but scale-out is the place where we see the most growth and we think there is an opportunity with the momentum around DXi as well.

Candidly branded tape, we see opportunities for us there too, so I don't want to deemphasize that. The OEM tape, I mentioned just because we are product supplier there and we can’t really influence the result but we can certainly work with the companies to help improve it.

Chad Bennett - Craig-Hallum

Yes, okay. And that’s what kind, I am glad you hit on the branded tapes. So your kind of expectations, kind of last piece from my standpoint on the branded tape side haven’t changed from kind of what you expect this year. I think you talked about kind of mid single digit declines, maybe that was overall tape including OEM but just kind of reiterate your thoughts there.

Jon Gacek

Yes. So since then, you are right mid single digits is what we think. The OEM tape of as I look at the year, total revenue for the year, the OEM tape makes me the most concerned because we don’t control it. On the flip side, I think as we mentioned, we are quite pleased and ahead of plan on the branded stuff on the growth opportunities. So, if I had to trade those two off, I would them off that way but I surely like to have all of it.

Chad Bennett - Craig-Hallum

Okay. Couple of more from me.

Jon Gacek

And Chad, you can see, I was going to say as you can see the benefit we get in the margin with some volume and especially as we look forward. So our business model will be very, very good as we grow here. I mean we really set ourselves up for good profitability with the changes that we made over the last year and half.

Chad Bennett - Craig-Hallum

Yes. Couple of more questions from me, maybe for Linda. So the gross margin guide for next quarter of 44 to 45, just did I think a little over 44 in this quarter. As scale-out grows which is I think still pretty healthy margin business relative to the other products. And I don't know that we've fully kind of appreciated the benchmark, kind of cost savings. I guess, should we expect that 44% to 45% to stay in that range going forward or continue to kind of tweak out throughout the year, all else equal?

Linda Breard

Right. So I mean in our May call we guided for the year for 45% to 46%, any quarter it's going to be dependent on revenue volume that’s because of revenue as you get into September and December, obviously the better margin growth you'll see there. And then obviously highly impactful, Chad, as you know is the mix of our products. You could have device to the media which have a low margin contribution all the way up to royalty with the 100%. So that is some influential on a quarter-over-quarter basis.

Jon Gacek

Hey Chad, in my comments we talked about -- I talked about the Q4 to Q1 comparison on margin. If you look at those two periods, the revenue is about the same the [0.28ish] but this quarter we are in and we were $1.5 million lower in royalty. And we were still 220 basis points higher. So, if you thought about that as we're roughly 350 basis points better just on the changes that we made. So, I think Linda's comments about growth and mix are the key factors and it should tick-up quarterly that's directionally what should happen.

Chad Bennett - Craig-Hallum

Okay. Last one from me, fed. Jon you've talked about when you gave the guidance for next quarter fed uncertainty. I guess maybe I missed it on the call, how did kind of fed performed this quarter or government overall performed this quarter? And then I guess kind of why -- I guess you’re uncertain because may be you're not seeing it yet. But as I talked to other bars that sell into the Fed and we've heard from some storage companies in the last 24 hours that actually saw pretty decent Fed business and expect an improvement next quarter are you just being conservative or you are just not seeing that yet?

Jon Gacek

No, we actually had some nice spread deals in the period. The reason that I framed it the way that I did is because I would describe Fed is having a high data. We feel a lot of opportunities and we know about a lot of deals that we be the one or expect to win. But being sure as of now if they are going to be pop out in September is what we're really alluding to. I think if I (inaudible) was here he would say that of all the sort of entities that we track or measure with inside the company Fed has by far the highest data. And we try to be pretty always conservative that's not exactly reasonable and how we thought about it. There is definitely plenty of upside opportunity in fed.

Chad Bennett - Craig-Hallum

Okay.

Jon Gacek

That's really why we pick the words that we did. We did see, I use the words starting that's starting to fall and if you look at the pipeline you fit more than thought. I am just nervous about a popping out at the end.

Chad Bennett - Craig-Hallum

Yes, no I hear you good thing. Thanks guys.

Operator

Thank you. We have no further questions.

Jon Gacek

Okay. Well thanks for joining we appreciate your support and we look forward to speaking with you in October. Thanks very much.

Operator

This does conclude today’s conference. Thank you all for your participation.

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