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Executives

Jon Gacek - Chief Executive Officer, President and Chief Operating Officer

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

Shawn Hall - Senior Vice President, General Counsel and Secretary

Analysts

Brian Marshall - Gleacher & Company, Inc.

Shebly Seyrafi - FBN Securities, Inc.

Brian Freed - Wunderlich Securities Inc.

Alex Kurtz - Sterne Agee & Leach Inc.

Chad Bennett - Northland Securities Inc.

Glenn Hanus - Needham & Company, LLC

Eric Martinuzzi - Craig-Hallum Capital Group LLC

Quantum (QTM) Q1 2012 Earnings Call July 27, 2011 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Quantum Corporation First Quarter 2012 Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, July 27, 2011. Now I'd like to turn the conference over to Shawn Hall, General Counsel. Please go ahead, sir.

Shawn Hall

Thank you, and good afternoon, and welcome to our call. 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. It 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, opportunity and priorities, anticipated product launches and plans, and future financial performance. We'd like to caution you that our statements are based on current expectations and involve risks and uncertainties that could cause actual results to differ materially.

We refer you to the risk factors and cautionary language contained in today's press release as well as to our reports filed with the Securities and Exchange Commission from time to time, including our most recent 10-K filed on June 14, 2011. These risk factors are incorporated by reference into today's discussion, and we undertake no obligation to update them in the future.

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

Jon Gacek

Thanks, Shawn. Thank you for joining us today as we report our first quarter results. Let me start by saying, for the Quantum team, that we are not pleased with our revenue results and it's not the way we plan to start fiscal 2012. We are very focused on growing revenue, and we still intend to do so. This start puts us a little behind for the year, but we plan to make it up -- plan to make up for it as the drivers for revenue growth are there. To do so, it's clear we need to continue improving our sales and go-to-market execution, including our overall product and overall solution positioning. For today's call, I'm going to start with a summary of the revenue results and product developments for the quarter. Linda will provide more financial color and detailed results for the quarter and then I will come back and describe our Q2 action plans and our guidance.

Q1 revenue was $153.5 million compared to our guidance of $160 million. We grew our branded business year-over-year and had another strong quarter for tape automation. But both our disk systems and our software sales did not meet expectations for the quarter, so I'm going to address both. First, disk systems. While branded DXi, including related maintenance, grew 15% over the same quarter last year, we only achieved approximately 70% of our DXi revenue plan for the quarter. At a high level, we made progress in closing DXi8500 deals, resulting in DXi8500 revenue increasing over 80% sequentially. This was a significant improvement from the past 2 quarters, but we still fell short of our goal. Our DXi8500 product is very competitive and well positioned but we still need to do a better job of closing deals that we are working. What was more significant this quarter, however, was that we had a sequential decline in our mid-range DXi6000 family revenue. We believe our DXi results were impacted by 3 factors. First, overall sales execution by us and our channel partners. We had plenty of opportunities to meet and exceed our DXi revenue plan. We just didn't get the deals closed by quarter end. We still are not getting uniform and consistent results from our team or our channel partners. The second factor impacting our DXi6000 family revenue was product positioning and messaging. Our DXi6500 and 6700 products are very solid, and represent a good solution for customers, as reflected by the fact that Q1 was the best quarter for new customer acquisition that we've had since the products launched. However, they were not as good as we planned, but they were still the best.

In retrospect, I believe the introduction of DXi 2.0 software on the 6500 while the 6700 remained on a previous generation software for several months, made it more complicated for our channel partners and our own sales team to drive the intended level of sales velocity. With today's announcement of our new DXi6701 and 02 appliances which includes the DXi 2.0 software, this is obviously no longer an issue. I will say more about those new product in a moment.

And finally, our competition also impacted our overall DXi results. We have been winning large deals and gaining momentum with our branded DXi products. It's ironic that we rarely get mentioned by our competitors as a viable alternative in this product category because we clearly have their attention, as they fiercely compete with us in large accounts owned or when we are threatening to take them out of existing accounts. We saw a much more aggressive competition in Q1 and our win rate was reduced to approximately 45%. However, with today's launch of the DXi6701 and 02, we believe we have a disruptive solution that will get us into significantly more opportunities, enable us to increase our win rate and overall revenue.

The other main driver of the revenue shortfall was StorNext. Q1 was the first time in 5 quarters where we didn't grow StorNext either sequentially or on a year-over-year basis. While this fact has our attention, we do not think this is a start of a trend that will continue. Most of the shortfall was in sales and into installed base as we still added a significant number of new customers. Q1 also did not include any revenue contribution from our new StorNext partnerships or the new StorNext appliance products. We believe we will see material benefit from both of these in coming quarters and for the year overall. In summary, both our DXi and StorNext revenues were below our expectations for the quarter, but we are confident we can deliver better results and growth in these categories moving forward.

On the tape automation side, the story is much more positive as we delivered another strong quarter. We grew branded tape automation revenue 8% year-over-year, and we met our overall branded and OEM tape products and service revenue plan. We also continued the trend of new customer acquisition, adding approximately 120 new mid-range Enterprise tape customers. We believe tape is far from dead, and that our branded business will perform better than the overall tape market in the coming periods.

So to close on revenue, Q1 put us $6.5 million behind for the year, but we intend to make it up and achieve our growth objectives for fiscal 2012. Now let me talk briefly about product developments in Q1. Our goal is to be a leading specialist in providing unique solutions to customers for meeting their data protection and big data management and archive needs in both traditional and virtual storage environments. To do that, we need unique products, and we partners to get to market. We had a busy quarter on both fronts. On the product side, we launched our first StorNext appliance, the M330, targeted particularly at rich media environments where we currently have a strong presence, but not going to reach a broader range of customers. This is our first StorNext appliance, and there will be more to follow. We also announced the StorNext reseller agreement with NetApp, the combination of StorNext and NetApp and Genio-disk [ph], is a compelling product offering that provides access to a broader base of customers that either of us had previously been able to reach. On the tape side, we introduced our new Extended Data Life Management, EDLM, feature and our Scalar i6000 libraries. EDLM further enhances the long-term retention capabilities of our libraries by automating the integrity, checking the tape media and also integrates with our StorNext Storage Manager archiving software to automatically mitigate -- sorry, migrate content from the suspect tape based upon the results of an EDLM scan. In addition, we also announced a new OEM agreement with HP under which we will brand and sell a new enterprise tape library based on our Scalar i6000 platform. We expect this agreement to be contributing revenue in the second half of fiscal year. Although we had no DXi product launches in Q1, we were finalizing our new DXi6701, 02 products announced today. These products incorporate our DXi 2.0 software and provide industry-leading performance, twice that, the leading competitors, and scalability as well as a unique approach to distributed or hybrid deduplication. Offered at a new lower price point, as low as half that of leading competitors, with all the necessary software license included in the base price, it delivers an unparalleled value. The DXi6701 and 02 is designed to protect customers' prior investments and provide future flexibility and future backup archive decisions moving forward. We believe this is a unique offering that enables customers to get the full advantage of market-leading deduplication without having to make trade-offs other vendors require. In other words, deduplication without compromise.

Finally, we closed our first acquisition in almost 5 years by acquiring by Pancetera Software. We believe the combination of the Pancetera technology with both DXi and StorNext will give Quantum a larger market opportunity, and allow us to provide unique solutions for protecting and managing data and virtual environments. We expect to launch our first new product incorporating the Pancetera technology this quarter, and begin to see revenue from it, and the standalone Pancetera software this quarter as well. Now I'll turn the call over to Linda.

Linda Breard

Thanks, Jon. Now I will walk through our detailed financial results for Q1. 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 our first quarter ended June 30 was $153.5 million, compared to $163.2 million a year ago. The primary driver of this decline was the recognition of approximately $9.5 million in OEM software revenue in Q1 of last year. Year-over-year, our branded revenue was up 3%, we had 8% growth in branded tape automation revenue, 15% growth in branded disk revenue, inclusive of maintenance, and a decline of 9% in branded software revenue. Royalty revenue was $14.6 million for Q1, compared to $16.1 million in the same quarter a year ago. The primary driver of the decline was expected reduction in DLT royalties.

For the quarter, non-royalty revenue totaled $139 million, of which 80% was branded and 20% was OEM. That compares to non-royalty revenue of $147.1 million a year ago, of which 73% was branded and 27% was OEM. The decline primarily relates to the exclusion of a $9.5 million in OEM software revenue we recognized in Q1 of fiscal 2011. Looking further at various revenue classifications, devices and media totaled $21.1 million, compared to $20.5 million in Q1 of the prior year. Branded devices and media revenue grew $1.3 million but was offset by anticipated declines in OEM devices and media revenue of $700,000. As a point of reference, OEM devices and media revenue combined was less than $500,000 in the quarter. On the branded side, the most significant year-over-year increases were in sales of our LTO media. We are still experiencing higher-than-usual purchases of media due to the events in Japan and concern over supply disruptions. Tape automation systems revenue was $57.7 million, up $1 million from Q1 of fiscal 2011. Branded automation grew $2.3 million year-over-year, offset by declining OEM automation of $1.3 million. We experienced moderate growth in revenue related to our enterprise and entry platforms, while our mid-range was down slightly compared to the same quarter in fiscal 2011. As Jon said, we added approximately 120 new Enterprise and mid-range customers during the quarter. Disc systems and software products and related service revenue was $27.6 million in Q1, down from $34.7 million in the prior year. Last year's results included a $9.5 million of OEM software revenue.

As I mentioned earlier, we had a year-over-year increase of 15% in our Quantum-branded DXi revenue including the related maintenance. On a sequential basis, branded disk systems revenue was relatively flat. We thought increased traction for our DXi8500 over the March quarter but a sequential decline in DXi6000 family sales, as Jon discussed earlier. We expect to regain momentum in this segment of the market with the DXi6701 and 6702 appliances we announced today. We believe they will gain us entrance into more opportunities, further improve our win rate and help us grow our disk systems revenue.

StorNext revenue was down 9% year-over-year as we experienced weakness in license revenues across all geographies and a number of large deals declined on a year-over-year basis. On a positive note, our overall customer count for sales of software licenses was up significantly. With new customers increasing nearly 60% over the same period last year.

Moving to service revenue. It was $36.7 million in Q1, compared to $38.6 million the prior year. The primary driver of the decline was a reduction in both branded and OEM out-of-warranty repair revenue.

Turning to gross margin. Non-GAAP gross margin in Q1 was 43% compared to 45% in the prior year period. On a year-over-year basis, non-GAAP gross margin was negatively impacted by the decline in OEM software license revenue and royalties which contributed 100% gross margin. We're moving the margin contribution of both from the prior period would have resulted in a 200 basis point improvement in gross margin in Q1 of fiscal '12 compared to the same period last year.

Looking at expenses. Non-GAAP operating expense totaled $59 million in Q1, compared to $57.6 million in the prior year. In absolute dollars, research and development and sales and marketing contributed approximately equal amounts to the overall increase in OpEx. The primary driver of the increase in R&D expense relates to the salary and benefits cost as we continue to invest in our disk and software teams. On a year-over-year basis, the increase in sales and marketing also relates to incremental salaries and benefits from additional investments we made in headcounts throughout FY '11. G&A was relatively flat this quarter compared to the first quarter of fiscal 2011. Non-GAAP operating profit for the quarter was $7 million or 4.6% of revenue compared to $15.9 million or 9.7% of revenue in the same quarter a year earlier. The absence of $9.5 million of OEM software license revenue was the primary driver of the decline in operating profit compared to the same period last year. Interest expense for the quarter was $2.8 million compared to $6.1 million a year earlier. This included cash interest expense of $2.2 million and amortization of debt issue costs of $600,000. The current coupon interest rate for our remaining senior debt, $99 million at June 30 will be 3.75% for the quarter ending September 30, and the average interest rate for our total debt will be approximately 3.77% for the quarter ending September 30.

For the first quarter, we had other expense of $100,000 due to net foreign currency losses, and we recognized tax expenses, $600,000, primarily related to foreign and state taxes. Summing it up for Q1, we had non-GAAP net income of $3.5 million with non-GAAP fully diluted EPS of $0.01. This compares to non-GAAP net income of $9.3 million and non-GAAP EPS of $0.04 in the same quarter a year earlier. Focusing on cash flow for the quarter and the balance sheet at June 30, I would like to highlight several key points. Cash flows from operations for the quarter were $11.4 million. We paid down $5.3 million of our senior debt in Q1. At quarter end, the composition of our debt was $99 million of senior debt and $135 million of convertible debt. We ended the quarter with $75 million in cash.

Non-GAAP EBITDA for the quarter was $11.4 million. For purposes of computing EBITDA this quarter, the pre-closing net loss of Pancetera Software for the June quarter is included in the computation. We are in compliance with all debt covenants at June 30, and we expect to be in compliance with our debt covenants during the next 12 months. EBITDA for the last 12 months was $74.7 million. For purposes of computing EBITDA for the last 12 months, the net loss of Pancetera Software for the 11.5 months prior to the acquisition has been included in the computation.

On a sequential basis, manufacturing inventory increased $1 million, accounts receivables decreased $18.1 million, and we had an accelerated payment of $8 million from 1 customer. CapEx was $3.4 million and purchases of services parts inventories were approximately $500,000. Depreciation, amortization and service parts lower cost or market expense totaled $11.2 million for the quarter.

As we close on our first quarter of fiscal 2012, the underlying strength of our business model is solid. The year-over-year 200 basis point improvement in gross margins, when removing the $9.5 million of OEMs software and incremental royalty revenue from Q1 of fiscal 2011 is an indicator of the power of the model. Had we hit our disk systems and software target, we would have reported a higher-than-planned gross margin. And finally, we continued to make progress paying down our term debt which is now less than $100 million. We have paid down 80% of the debt from acquiring ADIC in less than 5 years, and we'll continue to utilize cash from operations to further pay down the debt this year. Now let me turn the call back over to Jon.

Jon Gacek

Thanks, Linda. We are one quarter into the new fiscal year, and while we are not pleased with the total revenue, generally, and our DXi and StorNext revenue results, specifically, we are confident that we will improve. Outside of DXi and StorNext revenue, we achieved growth in tape automation in Q1 and added new products, technology and partnerships that will contribute to revenue in Q2 and beyond. We also strengthened our team by adding Ted Stinson as SVP of Worldwide Sales, made changes in our engineering organization and CTO function to be more effective and efficient, and broadened the charter and resources of our 2 product groups. We expect to see benefits of this action as we move forward which is another reason we are confident about our ability to get back on track for the year. Our strategy and business objectives have not changed. We plan to grow revenue, we plan to grow branded revenue and plan to grow disk systems and software revenue this year. We also expect the Pancetera Software and the new products focused on virtual environments to provide revenue growth as well. Our product execution is solid, and our roadmap and direction is clear. We will focus on getting our new and broader solution message out to end users and the channel partners. Our business model is also good, and we will get significant operating leverage and cash generation as we grow. We will continue to be aggressive about paying down debt and strengthening our balance sheet over the course of the year.

So for those who have models, here's our guidance. For the year we have not changed our plans. Q1 put us behind, but we are driving to make it up for the year. We are not stepping back internally from our annual goals. For Q2, we are guiding to $160 million, slightly lower gross margin than in Q1 and total non-GAAP operating expense of $60 million. Interest will be approximately $3 million, and we still believe it is reasonable to model tax expense of $1 million for the quarter. Assumed weighted average shares outstanding would be 245 million, as our convert is not dilutive and our anticipated level of non-GAAP net income. Now I'll turn the call over to the operator for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Shebly Seyrafi with FBN Securities.

Shebly Seyrafi - FBN Securities, Inc.

So I would just like to know when you expect to turn your midrange disk business around? I've modeled it in my model, a decline occurred in the June quarter. You said slightly, but I have it down meaningfully, it was down from, with my model, with $17 million in March to $8 million in June. Maybe you can comment on whether that's roughly accurate. And then with the 6700, the new 6700 products, do you expect a meaningful growth in that segment of your business in the September quarter?

Jon Gacek

I'll try to address all this. I can't comment on your model, Shebly. I don't want to do revenue by product at that level. I can say that we were sequentially down and it was slightly so, if that helps. We need to prove that we can grow this business, and I think the new product is critical. I think I encouraged everybody on the call to look at the press release, follow the links. It is a dramatically different solution than we've had in the past. And I'm happy to talk more about that. We believe that we'll drive growth. It is in a sweet spot of our market and we need to execute on that. As everybody knows on the call, this is a growth year for us. We expect everything to grow, but we expect the bulk of the growth to be driven by DXi and then StorNext. So to answer your question, yes, we think we're going to grow this quarter. We have the start and we're putting a bunch of plans and actions, and we have a product to build around to do so. So we're excited about getting this out. We've actually been shipping it for a week or so. And we've announced it today in conjunction with earnings because we didn't want to get people ahead of it, but we are very excited about the product and the prospects. I'll say one other thing, I think that this product, part of the intention around this product is positioning some of the things that we're doing with the overall channel and with our own field is we need to be in more deals. So we don't get cherry-picked hard in specific deals. We're in some big deals and they are dog fights. We need to be in some other deals where the dogs are either smaller or haven't shown up yet and we think this product will definitely help us, and we really think it positions us very strong against all the other deduplication players besides just the market share leader.

Shebly Seyrafi - FBN Securities, Inc.

I just want to be clear. You said the high end grew 80% sequentially. And the 8500 has not come out with the DXi 2.0 software yet?

Jon Gacek

That's correct.

Shebly Seyrafi - FBN Securities, Inc.

That's amazing that you did that. And when do you expect that to occur?

Jon Gacek

I think it won't be this quarter. One of the things that we did and when you read the release, we made the decision during the quarter to really add more than just the software to this mid-range platform. 2.0 is on it, we expanded it to 80 terabyte, we put our new client side deduplication product accent on the product. So we ended up adding much more to it. So the result of that was we decided to push out the 2.0 on the 8500, probably it will be in the September, October, November into that quarter, I guess, that will be our fiscal Q3. Other reason is the current product is really well positioned. We're winning with that product. The way that software is architected is very good for that particular target market. So we decided to push it out and really bolster up the spot where we expect to get a lot of velocity and simplicity.

Shebly Seyrafi - FBN Securities, Inc.

Okay, last one for me. You said your midrange win rate was reduced to 45%. What was it before?

Jon Gacek

Actually it was our overall. And last quarter and the quarter before, it was 55%. And I think what we saw, we had some really big deals this quarter. Some that we won and some we didn't win. And I will say in the real large deals, our competitor got aggressive in a number of ways. And we'll be prepared for that this quarter. And we've already won some big deals this quarter. In fact, we had a couple closed today, which was good timing for my attitude, actually, because we are making progress.

Operator

Our next question comes from the line of Brian Marshall with Gleacher & Company.

Brian Marshall - Gleacher & Company, Inc.

Jon, I guess, we've obviously had somewhat of a serial issue with respect to execution on the disk-based backup business for many quarters now. And I guess the question becomes kind of seems to be the same problem every time, sales execution by the company, by the channel, et cetera. If we could dig a little bit deeper, I mean, what are we really talking about here. Is it just essentially the caliber of the sales guys, having a tough time transition to this type of sales, that lack the technical knowledge, et cetera? Can you tell us a little bit more, sort of granular, with respect to the issues and then how you're going to change that going forward?

Jon Gacek

Yes. I think the first issue, Brian, is uniformity of execution. Let's start with that. We have some channel partners and we have some sales people who absolutely are doing great. And we have channel partners whose business have grown, 400%, 500% year-over-year. We have salespeople who are way over their quota. So the #1 issue that I would say, is we don't have uniform performance yet. So that's the high-layer answer. If you dig down into it, there isn't any one thing. And Ted and I have both been on the road, well, since he got here, and I guess I was started a little bit before he got here, meeting with customers, meeting with the team, meeting with channel partners and it isn't any one thing. We have some partners who just aren't sufficiently trained on the product. We have some of our sales people who don't have enough opportunities. We have some sales people who are fighting a very tough installed base against an entrenched competitor. There's a whole myriad of things. And I think because we're smaller than some of the people we compete with, we have to be better at it than them. And I think one of the things that I feel like we've made a lot of progress on over the last 2 quarters and I think 6701 and 02 really symbolize that is we have to have a unique solution for the customer. And I think it's gotten better over the last 2 quarters. I think we make an incrementally giant step here with 6701 and 02. But Ted and I both will say, we've got to do better job on getting the deals qualified, getting the partners positioned right, getting the deal appeal off the street. There's a whole bunch of tactical things. And the reason why I think you still hear us being buoyant, I'm trying to be reflective of that we didn't get to our number, but I'm also trying to focus on what we needed to do differently. And it isn't just any one thing. There's a bunch of people who are doing very well and there's a bunch of people who need to improve, and we're trying to drive execution across all of that. I'll say this is a growth business and we're going to grow, but we have to start playing better to grow.

Brian Marshall - Gleacher & Company, Inc.

Can you gauge your conviction level with respect to your prior comments that you expect the disk-based backup to hit break even later in fiscal '12?

Jon Gacek

Yes. I actually think we'll still get there. I'm trying to be balanced here. I'm not happy about missing revenue. On the flip side, it's $6.5 million. And we're a $700 million company, it's 1%. And we have so many positive things going behind us around these partnerships, we're getting the products out, the new product position that I want to be for the shareholders and our team reflective of -- we didn't have the full quarter we wanted to but it isn't a complete disaster either. And part of growing is believing you can and part of growing is showing you can. And we have parts of the business that did execute that way.

Brian Marshall - Gleacher & Company, Inc.

Okay. Final question for me with respect to some of the OEM deals that we've signed. Obviously, we're getting tremendous amount of support from some of the world's best technology companies. In my view, Apple, NetApp, et cetera. Can you talk about when -- I mean, these are obviously large opportunities. When are these going to start to show up in the P&L?

Jon Gacek

I think we'll see revenue from all the new things except for maybe HP, and even that's possible this quarter. As far as meaningful goes, as you know, I'm not going to comment on everybody else's product, but the NetApp team has been really aggressive about promoting their new E-Series. That's great for StorNext. Active storage has gotten a lot interest around their product, we have a lot of interest around the M330. So I'm expecting revenues this quarter, it's just hard to gauge how much, since they're not ours and they're new. And then I think we'll have revenue this quarter from Pancetera as well. Both on their existing product. They do have an OEM agreement. And we'll launch a product this quarter, and we expect revenue from that as well.

Operator

Our next question comes from the line of Alex Kurtz with Sterne Agee.

Alex Kurtz - Sterne Agee & Leach Inc.

Jon, I was wondering is Ted in the room with you guys right now? Or is he not in the call?

Jon Gacek

No, we decided to spare him this first call.

Alex Kurtz - Sterne Agee & Leach Inc.

Fair enough. Just looking at the model, at this lower revenue run rate and what we were thinking about earlier before you guys came in with the $154 million number. Do you think about making some cuts to any of the 3 operating lines to sort of boost up operating margin in the back half? How do you think about that?

Jon Gacek

Yes, not yet. That's a good question. We talked about this a lot. And as you know, we feel like we're spending plenty of money in sales and marketing. And that would be the logical first play. Although you could say we spent less on R&D, too. I really feel good about the products, the roadmaps, the partners. And as you know, I want to meet everybody's expectations every quarter. Having said that, I have to take a little bit longer-term view to this, too. And I feel like we have a unique position in the market. We haven't quite hit our stride yet. We have a lot of positive things going on. I don't want to artificially restrict those. I think, though, if we were to continue a trend where we just can't perform with the products we have in the market, we'd have to think about some things differently. But we're not close to that yet.

Alex Kurtz - Sterne Agee & Leach Inc.

Okay. I think earlier on the call, you mentioned some kind of annual number that you're striving towards or similar -- you're sort of alluding to some kind of guidance. You guys haven't given an annual guidance before, right? I think you're just talking internally?

Jon Gacek

Yes. As you said, our internal plan. So what we said to you guys is what I reiterated was. We're going total revenue, we're going to grow branded revenue, we're going to grow disk and software revenue and we're going to outperform the market in branded tape. Those are -- that's all we've given to you guys.

Alex Kurtz - Sterne Agee & Leach Inc.

And last question for me. Why not pre-announce this quarter?

Jon Gacek

Yes. It's a good question. It's not an easy thing to answer. Basically, as we've had a 4% revenue mix and I feel like I'm in a spot where I need to tell the story not just that we are going to miss revenue and have a range, we still have debt. So to me and we talked about internally, it wasn't of a magnitude to pre-announce [indiscernible] those information.

Operator

Our next question comes from the line of Eric Martinuzzi with Craig-Hallum Capital.

Eric Martinuzzi - Craig-Hallum Capital Group LLC

The adjusted gross margin declining next quarter on the higher revenue. Can you go into -- can you explain that?

Jon Gacek

I think it's really around mix is what we're talking about. We have a plan, Eric, and when you're looking at performing around that plan, it's like what is the mix is going to be. So we give ourselves a little room in that concept. I think, if the revenue grows and it grows correctly, gross margin could be better. But we're trying to be conscientious/conservative on what we can see.

Eric Martinuzzi - Craig-Hallum Capital Group LLC

Is that potentially pricing pressures, competitive, give you more wiggle room and going up against your big competitors, especially in disk?

Jon Gacek

Not as much that -- it's really about -- we're going to do that, if we need to. But this was really mix related, mix-related discussion. We had some really nice -- we had some good profitable, large deals, too. So there's a whole bunch of cactus [ph] that goes in that. And I wouldn't take too much into -- I think I was pretty clear, it's slightly lower. We're talking slightly. I could have said the same and it would have been rounding somewhere.

Eric Martinuzzi - Craig-Hallum Capital Group LLC

And then in the quarter, you had a little bit higher cash flow than I was expecting. You talked about an accelerated payment. Can you explain, was that a special terms to get a new customer, was that sizable order that got special terms? Could you give some background there?

Jon Gacek

No. Actually, we've been doing this for a long time. We've been at every quarter I can think of, maybe for the last 10 or 12. We always feel, though, that we should disclose what it is. And it used to be, I don't know, in the $15 million, $16 million a quarter range...

Linda Breard

That's right. This quarter was pretty consistent with last quarter's acceleration as far as I know.

Jon Gacek

And basically what it allows us to do, is we provide a very nominal discount and we get money into the quarter as compared to the early in the next quarter. And it just helps us manage debt pay down, and et cetera. So you go back in the script, we've done it out probably for the last 3 years. Linda?

Linda Breard

That's right.

Operator

Our next question comes from the line of Glenn Hanus with Needham & Company.

Glenn Hanus - Needham & Company, LLC

Just to return a minute to the outlook for next quarter with -- I would expect to see decent growth with the disk and are you expecting to see sequential growth here with disk and StorNext? And then if so, I would have expected that to help your gross margin sequentially. Can you kind of address that?

Jon Gacek

Yes. We definitely believe disk and software will grow and those would be contributors to margin for sure. As you know, Glenn, we've got a number of different moving pieces in margin around the product. I don't want you to be, I was slightly -- and I mean slightly. You could model it flat, if we find it too exciting. You can even use approximately in there. I guess I'm trying not to be -- I'm trying to give you some direction but not be too specific. Because as you know, we don't really know where the mix is going to come in.

Glenn Hanus - Needham & Company, LLC

Okay. What would be the offsetting factors, given that disk and StorNext should grow that would put some downward pressure on the margin?

Jon Gacek

So you have the low-end stuff, media devices, we're seeing an uptick in media because of the Japan situation. That makes good change. Branded automation versus OEM automation, we've got a new OEM partner. There's just several different moving parts there. I think, Linda, in her piece, talked about the fact, though, that if we get the right level of disk and software growth that, that definitely is what will drive the margin and that's what she did, the what-if discussion.

Glenn Hanus - Needham & Company, LLC

Okay. Did you see some sort of large deal delays at the end of the quarter? I mean I know you're fairly back-end loaded, and I think you expressed some comments publicly about large deals and just the environment and the possibility of push outs? Did you experience much of that at the end of the quarter? Or was the mix related to the other things we discussed more?

Jon Gacek

So in my prepared remarks and Linda's prepared remarks, we've always stayed away from this concept of slipped deals, only because I think it provides confusion. Having said that, I think, I was pretty clear that we got to do a better job in getting deals closed. And I think Ted would agree with that, too. And I also mentioned we closed some big deals even some today. So we absolutely had some deals that carried over which is better than a loss. But I would say I'm closer to those deals, and we need to get those kind of deals closed. And then we need to add additional deals on top of that. So we'll have some and we've had some nice wins, actually, since the quarter started. And we actually got some pretty good start last quarter, to be candid. We just didn't close well. And I didn't expect this to be the result with a week to go in the quarter. I felt we'd be over $160 million. So we just didn't get stuff done.

Glenn Hanus - Needham & Company, LLC

Right, right at the end, okay. And you feel like -- do you feel like some -- there was any aspect of this, of customer delays waiting for the new release of the midrange there?

Jon Gacek

Yes. I'll tell you what Jon thinks. I think it has -- it is a factor in the partners that I talk to. And if you really -- I encourage everybody, the fall's going to be close, to really look at the messaging and the positioning of the new products. The prior products were fine, but I think it was a difficult selling when you had to sell 2 different software stacks in the same family, different pricing models, and I believe it did have an impact. I don't know how we'll ever quantify that, but I just think it needed to be -- having this incomplete family be simpler, I think, is important. But it remains to be seen. I -- nobody's more disappointed in the result than me. Having said that, nobody's probably more optimistic about the future than me, either. So I feel good about where we are, I really like these products. We just have to show we can do it. And I think consistency is what we're striving for, growth is what we're striving for, and we've got to prove to ourselves and everybody and you that we can do that. And that's the goal.

Glenn Hanus - Needham & Company, LLC

Okay. Maybe lastly, on the Tape business. It sounds like that came in pretty good, basically, I guess, met your expectations. Any broad comments there about demand in tape, the margins achieved, the competition, things you need to work on there to maybe get some growth?

Jon Gacek

I mean, the biggest thing to selling more tape is selling more disc, actually. I think our tape execution is really very good. I think our products are good, the roadmaps are well received. We grew 8% year-over-year. I've mentioned we were at our plan for the quarter. We added a new OEM channel with the i6K. We had ED-ON [ph] software. I like all of that. Tape is still the biggest part of our revenue, I don't want people to forget that. So to perform on plan or better than plan or better than market, that's a good achievement. And I'm going to reward our team for that. But we'll sell more tape as we sell more disc and software, too. Because we're tightly linking those products, and we're adding new customers. So even our accent software that comes on our target side dedupe, we're the only provider of target and source-based dedupe that can moved it over a WAN as well as a LAN and can do a passive tape, a completely integrated solution. So those types of successes will drive more tape, and I think we'll see that in the coming quarters as well.

Operator

[Operator Instructions] Our next question comes from the line of Chad Bennett with Northland Capital Markets.

Chad Bennett - Northland Securities Inc.

Just a couple housekeeping, I think, questions. Linda, what was the actual disc and software product revenue number?

Linda Breard

Our disc and software for quarter is $27.6 million.

Chad Bennett - Northland Securities Inc.

And that's product?

Linda Breard

That's -- yes. That's with the related services, Chad.

Jon Gacek

That's what he's asking.

Linda Breard

Yes, that includes the related services. So we put out our 5-quarter trend on our website, and it will have it there, too.

Chad Bennett - Northland Securities Inc.

And then without it, it was...

Linda Breard

Without, it was $23.5 million.

Chad Bennett - Northland Securities Inc.

$23.5 million, okay. And what is the -- on the convert, what is the net income level that kind of triggers the dilutive effects of that? Can you give us an idea there?

Linda Breard

It's just slightly below -- it's around the $7 million to $9 million range in net income.

Chad Bennett - Northland Securities Inc.

Okay, all right. Jon, I guess, on the StorNext side of things, it sounds like new customer ads were really strong, and from what it sounds like renewals with existing customers just didn't come in. I guess, is there anything, I guess, from a competitive standpoint, and I think is StorNext's pretty unique from a competitive standpoint, is there anything that has changed there or in the end market? I can't imagine your appliance product really affects the StorNext software business, but any more color there?

Jon Gacek

Yes. Chad, it's a good question. I think -- remember, StorNext has 2 components. It's got a file system component and then the storage manager component. And a lot of the big revenue deals -- I think Linda mentioned, we were -- had a fewer large deals in her piece. A lot of that is driven by storage manager. And storage manager, generally, we sell more into the installed base, and then we'll have some new net as well. So we had a lot of file system deals, and we had a number of file system and small storage manager, but we didn't have the sort of the bigger deals, and those are generally in the installed base, sometimes net new as well. So we're not really aware of anything. We've had lots of theories of what could've happened. It could be transition to the new partnership, the appliances, all that stuff. We're just going to keep our eye on it. It did -- it was a surprise compared to prior results, but nothing yet that we're -- think we have to dramatically change what we're doing.

Chad Bennett - Northland Securities Inc.

And I just -- on the channel side of the DXi biz, it seems -- you talk to your bigger partners, and they're just killing it. And your numbers don't reflect kind of what they're doing. I mean, we just don't -- I think it's a pretty simple answer. We just don't have enough of those. I mean, how are we getting channels -- how are we improving channel partner performance? What progress have we made in the last 3 months?

Jon Gacek

Yes, let me give you -- tell you a little bit of the problem that you're articulating, and then I'll tell you what we're doing. I mean, those channel partners that you're talking to generally are very technically and business tied into the product and to Quantum. So they're probably a NetApp primary disc reseller. Then maybe they used to sell data domain, and now they don't. They understand deduplication. They can deal with complex products. And we have, say, 50 of those kind of partners around the world. Well, we sell a lot of products through partners that are less -- that have less technical capability and are less business-aligned. And our midrange product, for example, was having 2 different platforms and having different configurations, and having to understand all that, it just makes it harder. And I think one of the things that's going to help with the channel will be this new product. We've been out talking to partners. There's going to be a -- there's hopefully still a lot of press coverage today. There's a lot of industry briefings over the last couple of weeks, and we've gotten, very, very good responses. So one of the biggest things is product. The second thing is this just ongoing training around messaging and how to sell it, how to size it, what to do. We're putting on -- we have a bunch of online training and sizing tools that are coming up, and I believe here shortly it's in our area for some people. And then it's our team working tightly with those partners. So I can't tell you the exact progress. I know more are trained. I've been out talking to channel partners, as has Ted. I think we're on the right track. Our think our message is right. I think people like this product. We're going to just keep working at things that are working at other places.

Chad Bennett - Northland Securities Inc.

Okay. I mean, is it safe to say -- because you obviously made some changes when you took over in terms of kind of the structure of sales, and now you've added Ted. I mean, are we making any more dramatic changes in kind of composition of sales or structure, organizational structure in support of sales? Any of that going to happen? And if it's not, do you think the changes that you implemented -- it's just we're still early to see, kind of reap those benefits?

Jon Gacek

I think there's a whole bunch of answers. I mean, I think one of the things that was a positive about Ted is Ted understands the uniqueness and complexity of the products and the solution set and the customers and the channels that we're selling into. So, I mean, he's very thoughtful about how we go to market, what it takes to be successful. And a lot of the changes we made, he and I were talking about during the recruiting process, if you will. Do I think Ted will -- I already know Ted has implemented some new things around inspection and sales force, and he's making or he's further putting focus on changes that we've made. So I think the biggest thing he's bringing is new perspective as well as focus. I expect him to have ideas of things he wants to do differently. And I also expect him to know that we needed -- we can't have a big disruption, either. And I will expect we'll do some things still. But I don't -- I think the overall changes we made are good, and I think we are seeing the impact of them. We just didn't seize the impact to the tune of $6.5 million, if you want to get really there and measure it, that we expected it to. But we think we will.

Chad Bennett - Northland Securities Inc.

Okay. Last one for me, on the NetApp partnership OEM agreement on StorNext. Can you give us any -- you alluded to within the call, but any better idea of where you are there in terms of training your sales people jointly, doing pitches and so forth and any type of quantification of progress?

Jon Gacek

Yes. Just a reminder: It's is not an OEM. It's a branded resell, which is important for us. Because when the customer is buying a tightly integrated solution, but it's their disk and our software. We have lots of activity. We have lots of field events. I believe that they've announced their first product. They have a series of products planned. I don't believe they're shipping any, have shipped the product yet, and I think that has to do with what disc platform they're run on, but I don't know for sure. I think that's a question for them. I expect there will be revenue from them this quarter, though. And I think it's been really well received in the field. And then one of the nice things you mentioned is, because it's a branded play and it's branded for them, too, both our field reps are going to get paid. And that always helps drive alignment in the field.

Operator

Our next question comes from the line of Brian Freed with Wunderlich Securities.

Brian Freed - Wunderlich Securities Inc.

A couple of quick questions. I guess the first is, when you look at the federal exposure you guys have in the September quarter, you have heard a number of folks in the IT ecosystem talk about softness in federal. Can you discuss kind of your outlook for federal on 2 fronts? One overall, and second, specifically with respect to StorNext, given that has a pretty big exposure there?

Jon Gacek

Are you talking about for this quarter, Brian, or for broader...

Brian Freed - Wunderlich Securities Inc.

Yes, for the September quarter, specifically.

Jon Gacek

Yes. So if you recall, last year we had a whole bunch of deals get hung up in this -- in the June quarter that popped out in September. That would be a good result this quarter. I think we're cautious about fed, just with all the budget discussions and the debt ceiling and all of that. Having said that, well, there are number of large opportunities that we are involved with. So I think we're cautious, but we're optimistic about some of the wins that we've had and some of the designs that we believe we are doing well in. And if you want to accuse us of being cautious about the quarter, that's certainly part of it for us. It also could create a bunch of upside. I think they probably have the biggest opportunity bucket of all of our districts or regions, how you want to think about it. But there's also risk to getting that closed. And it's all product. It's StorNext, it's tape, it's DXi.

Brian Freed - Wunderlich Securities Inc.

And generally, what is fed typically in terms of percentage of your September quarter for you guys, ballpark?

Jon Gacek

No. We never give it up separately because it's not big enough. The way I usually answer this: It's a little bit different now, the way we're configured, but if you think about the country being broken into 3 territorial sections, fed would be equal to 1 of those, generally. And then it's just -- it's primarily -- we don't do much of government, and the rest of the world, a little bit, but not like we do here.

Brian Freed - Wunderlich Securities Inc.

Okay. And my second question, with the launch of the new products today, how do you foresee the product cycle playing out in terms of the amount of time customers need for testing e-bell [ph] until you get it to the point of revenue recognition and installation. Do you feel like all things do it?

Jon Gacek

Yes. It's actually been -- one of the great things about this product is it's -- anybody who buys the product 6700 can upgrade to 6701, 6702. And we also expanded out the footprint that it covers. So we've got a bunch of that going on right now. We were working some orders last quarter, a couple of them came in already today. We'll expect more this week. SO we're -- we kind of have a jumpstart on that. But every deal is different. I think people who have -- we're encouraging people to take our product and compare it to anybody else's because we think, when we get people to do POCs, our win rate is way closer to 100% than it is to 50%. So I think there'll be a pretty quick uptake in the product. As I mentioned, we had a really strong -- we did pretty well in 8500 even though we didn't get to where we wanted to. We got a bunch of big deals there, too. So again, I can easily get excited about all the opportunity, but I'm trying to be balanced around -- we just delivered a quarter that was $6.5 million shy in a growth business that should have grown 50% and grew 15%.

Brian Freed - Wunderlich Securities Inc.

Okay. The third question I had, you mentioned the strength in new customer acquisitions in both StorNext as well as DXi. I guess, on one hand, I find that encouraging. On the other hand, should I be concerned that your installed base isn't adding at the same pace as new customers is?

Jon Gacek

Yes, I think that the buying activity is different between those 2 products. I think that the transition of customers from a 75 to an 85 or 75 to a 67, from 1-4 to 2-0, that's more complicated, actually, and more of a sales cycle extender. I think, on the StorNext one, at least what we know today is we just think that was just timing of big deals and things we're chasing and what's going on. I actually think it's more opportunity than concern, but for sure, I'm concerned about everything when we're short.

Brian Freed - Wunderlich Securities Inc.

Okay. And then on the sales force, I know you've done kind of a change in your quota whereby the StorNext folks are now selling the full suite of products and vice versa. Do you attribute that shift in your kind of available products set to any of the softness in StorNext in the quarter?

Jon Gacek

We talked about it a lot. We concluded that our change in model wasn't a factor. Having said that, we have high expectations for growth. So a change in model needs to be a factor but in a positive way.

Brian Freed - Wunderlich Securities Inc.

Okay, okay. And then, I guess my final question, around just kind of your thoughts for the year. Obviously, we don't have a specific full year target from a revenue and EPS perspective, as analysts. But in terms of your internal view not coming down, I can understand that. But I tell my kids, when they're eating their vegetables, sometimes it's better to eat them in one big bite and then nibble at them all night. In the last couple of quarters, it kind of felt like Street numbers have been trickling down. At what point do you look at it and say, "You guys just need to lower the bar," versus, "We think we can make it up?"

Jon Gacek

Well, I think one might argue that $160 million is lowering the bar since I think consensus is $170 million for Q2. I'm just being frank. Internally though, and I think somebody else asked this question too, we still see a path to numbers that are higher than that. And so we're trying to be thoughtful about the guidance, not be pollyannaish about it and execute well. And so when we start executing well, then I'd like to have a problem of talking everybody down. So we gave $160 million, we did $153 million. We've got a lot of positive things in the hopper. The said thing could be really positive. It could be potentially negative, that's works its way in there. So we're trying to give you direction for your models. We know what we're driving to, and we're going to keep driving to it.

Brian Freed - Wunderlich Securities Inc.

Okay. And then to end on a slightly more positive note, tape seems to be executing quite well. And as you look out in the industry, some of the new emerging technologies like LTFS and the like seem to be breathing new life into tape. And as you talk

to customers, one, how do you feel like you're positioned better than your peers? I think, to some extent, you've been a little ahead of the curve in refresh. But can you give a little sense as to how you feel you're stacking up versus your peers? And how long do you think the share gains you're currently seeing can perpetuate?

Jon Gacek

Yes, I don't know how long. I do think tape cycles go for a long -- go for a while, so I'm not -- I don't think this is a 1- or 2-quarter phenomenon. It's been going on for 4 or 5. I think it's going to go on certainly all through this year and maybe some even into next. And who knows? I think you're right, there are industry and technology things that are also making tape have unique offerings for customers. The thing that everybody forgets is data is growing at this incredible rate. And you just can't just put it all on spinning disc as much as you'd really like to. I mean, you can, but it's just -- it's cost prohibitive. I think one of the key -- other key things is we are selling tape in a lot of the instances where we're selling DXi. And a bunch of our net new tape customers actually come from DXi sales. We are, by far and away, we are the only tape company that has a disc-based backup. Now client's side, deduplication story, that comes. I mean, IBM doesn't, HP doesn't, Oracle doesn't. So that's easy. That's easy for us, and a lot of our configurations, when we put in that new tape, include -- we're putting disc in too. Because again, the linkage of the products, being a specialist having a new technology, I think that adds to the fact that we believe we have the best open system product. We believe our iLayer, going from small to medium to large, ease of use, vision software, over the top of everything, all of those solutions make us unique compared to the other tape competitors. The other thing, and while it's not tape-centric per se, but we haven't even scratched the surface of what we think we can do in data protection and management in virtual environments. That is all coming for us and that's going to drive more of our hardware products, too. So we've got, like I said, we've got a lot of positive things in the hopper. We just need to execute and demonstrate that in our results.

Operator

[Operator Instructions] I'm showing no further questions in the queue at this time. I would like to turn the call back to management for any closing remarks.

Jon Gacek

All right, thank you very much. As I said earlier, I encourage everybody to digest the positioning and the product release today. And just to reassure you that we know what the task and the challenge is, and we intend to meet those expectations. So thanks very much for being in the call, and we'll talk to you in October.

Operator

Thank you, ladies and gentlemen. This concludes the Quantum Corporation First Quarter 2012 Conference Call. If you would like to listen to a replay of today's conference, you can dial (303) 590-3030 or (1-800) 406-7325 and enter the access code of 445042 followed by the # sign. We thank you for your participation. You may now disconnect.

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