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Executives

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

Jon W. Gacek - Chief Executive Officer, President, Chief Operating Officer and Director

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

Analysts

Ryan R. Bergan - Craig-Hallum Capital Group LLC, Research Division

Glenn Hanus - Needham & Company, LLC, Research Division

Catharine Anne Trebnick - Northland Securities Inc., Research Division

Cindy Shaw - DISCERN Investment Analytics, Inc

Brian Freed - Wunderlich Securities Inc., Research Division

Quantum (QTM) Q4 2012 Earnings Call May 9, 2012 5:00 PM ET

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Quantum Corporation Fourth Quarter 2012 Conference Call. [Operator Instructions] This conference is being recorded today, May 9, 2012. I'd now like to turn the conference over to Mr. Shawn Hall, General Counsel. Please go ahead.

Shawn D. Hall

Thank you, and good afternoon, and welcome. Here with me today are our CEO, Jon Gacek; and our CFO, Linda Breard. 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. Forward-looking statements include statements regarding our business strategies, opportunities and priorities, anticipated product launches and plans, and future financial performance. We'd like to caution you that our statements are based on current expectations and involve risks and uncertainties that could cause actual results to differ materially. We refer you to the risk factors and cautionary language contained in today's press release, as well as to our reports filed with the Securities and Exchange Commission from time to time, including our most recent 10-K filed on June 14, 2011, and our most recent 10-Q filed on February 9, 2012. 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 W. Gacek

Thanks, Shawn. Welcome to our fiscal Q4 earnings call. Today, I'm going to address several key business points from Q4 and the full year and Linda will walk you through the detailed results for Q4. I will then come back and talk about our market opportunity in fiscal '13 and beyond for data protection, big data management and archive and cloud solutions, describe our key achievements from fiscal 2012 that position us for overall growth this year and close with our guidance for the current quarter and fiscal '13.

In addition, today we announced in a separate press release a technology partnership with Amplidata that will allow Quantum to offer a unique and new category of storage solutions for big data management, archive and protection as well as cloud customers.

I will touch on this more at the end of the call, but I encourage you to read the release as it provides detail about the unique capabilities of the Amplidata technology and the power of tightly integrating it with our StorNext appliance strategy.

So let me move to the results. For Q4, we reported revenue of $160.3 million. This was within our guidance range of $160 million to $170 million, but clearly at the low end of that range. As we mentioned in our last earnings call, we entered the quarter with very positive momentum driven by our new products, specifically DXi and StorNext appliances. But we tempered that enthusiasm due to overall macroeconomic concerns generally, and specifically, concerns with Europe.

I'm going to address the geographic results first. We were very strong in North America, and specifically strong in StorNext, DXi, midrange tape automation and tape media. In Asia, this was the first quarter this year where we didn't exceed our plan and the shortfall was across all products. In Europe, like others in our industry, we were below plan overall and had difficulty closing the larger deals. More specifically, from a product perspective, we did okay in Europe on DXi and StorNext, but we were weak in Enterprise tape. There is no question that our revenue results being at the low end of our range were primarily due to geographic issues.

In terms of Q4 highlights, the most significant, from a product revenue perspective was disk systems and software revenue, including related maintenance of $37.6 million. This is a record, despite it being a seasonally weak quarter and the impacts from Europe and Asia mentioned earlier. This category grew 28% year-over-year and was up slightly compared to Q3, which is our seasonally strongest quarter. The growth was driven by record branded disk revenue, including approximately 100% sequential growth in DXi8500 sales and branded StorNext software and StorNext appliance revenue. We added 160 new Disk and Software customers, and we closed on a number of large deals with both new customers and existing customers that made follow-on orders. In short, we are very pleased with the overall result in disk systems and software product revenue category.

Another highlight of the quarter was the launch of our DXi V1000, which is our DXi product, and along with our vmPRO virtual protection software, the backbone of our cloud data protection platform. In addition, Xerox launched their backup and disaster recovery cloud services offering which is based on this platform. I encourage you to go to the Xerox website to learn more about how they use Quantum technology. That can be found at acscloud.com, under the Cloud Backup and Disaster Recovery as Service tab. We think this is a very important first step and you're going to see us do more of this going forward.

While this wasn't material in Q4, this platform in getting Xerox launched and then forming a separate product group for cloud-based solutions led by Henrik Rosenthal, who was the former CEO of Pancetera Software, were key accomplishments during the quarter. We believe that our cloud data protection platform is very important to our long-term strategy. To this end, we will be launching our own Quantum-branded cloud data protection offering next quarter.

We made a conscious decision during Q4 to increase spending in sales and marketing to get a jump on growing overall revenue in fiscal '13. The spending was focused on sales team members for StorNext and StorNext appliances, new domestic and foreign expansion territories and channel technical resources in addition to marketing and overall Quantum awareness campaigns. We wanted to get a number of these positions in place so we could start the year as close to full strength as possible. This additional spend put us $1 million over the high end of the non-GAAP OpEx range we expected for the quarter.

Finally, at quarter end, we aggressively paid down and refinanced our ADIC acquisition debt. This was a milestone achievement for Quantum. In less than 6 years, we paid down nearly all of this debt. And as of March 31, had approximately $50 million outstanding on our new $75 million revolver from Wells Fargo. Linda will provide more detail about the financing later in the call.

To sum it up, we had a decent quarter with strong performance in our key growth areas, in launching of new products and in further improving our capital structure.

On a full year basis, I feel like we also accomplished a great deal. We grew overall branded revenue for the second consecutive year. We also had record revenue in disk systems and software inclusive of maintenance, up 9% from fiscal '11. In addition, branded DXi and StorNext software appliance revenues were the highest they have been -- ever been, up 20% and 15%, respectively, over the prior year. Contributing to this growth were approximately 750 new DXi and StorNext customers. And even in the mature tape automation market, we added more than 500 new midrange in Enterprise customers this year. We made very good progress in getting our top channel partners trained on Quantum products and solutions, and we increased the number of partners selling Quantum products.

Fiscal '12 was also a year of continued technology and product innovation, as we enhanced our entire DXi product line, introduced a new family of StorNext appliances and added new management security and availability features to our Scalar tape libraries. Following the acquisition of Pancetera Software last June, we moved quickly to integrate the technology into our portfolio with the launch of the vmPRO virtual server protection solutions and laid the groundwork for our recently launched cloud-based data protection platform.

The strength and value of our products was recognized with numerous awards during the year, including the Product of the Year honors for DXi6700 and vmPRO, and a clean sweep of the Storage Magazine SearchStorage Quality Awards for both Enterprise and midrange tape libraries.

In summary, we made a lot of progress this year. And as we look forward to fiscal '13, we are confident in our ability to grow overall revenue, grow branded revenue and significantly grow our disk and software revenue.

Now I'll turn the call over to Linda, who will provide more detail and color on the results. Linda?

Linda M. Breard

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

Revenue for our fourth quarter ended March 31 was $160.3 million compared to $165.1 million a year ago. As Jon mentioned earlier, we reported record disk systems and Software revenue, inclusive of maintenance, totaling $37.6 million in what is typically a seasonally weak quarter. We grew branded DXi revenue, inclusive of maintenance, 26%; and branded software solutions, including StorNext appliances, were up 31% from Q4 of fiscal 2011. A decline of 21% in our branded tape automation business offset the disk and software growth. Fiscal 2012 revenue was $652.4 million compared to $672.3 million in fiscal 2011. The decline in fiscal year revenue was almost equally attributable to planned declines in OEM software revenue from EMC and royalties on tape media. Royalty revenue was $14 million for Q4, compared to $14.8 million in the same quarter a year ago. Expected reductions in DLT royalties contributed -- LTO royalties were slightly up from the same period a year ago.

For the quarter, non-royalty revenue totaled $146.3 million of which 82% was branded and 18% was OEM. That compares to non-royalty revenue of $150.3 million a year ago, of which 83% was branded and 17% was OEM. Fiscal 2012 branded business was 81% of non-royalty revenue compared to 79% in fiscal 2011.

Looking further at various revenue classifications, devices and media totaled $23 million compared to $25.2 million in Q4 of the prior year. The primary driver of the expected decline was branded media revenue, which was down $2.1 million year-over-year. In Q4 of fiscal 2011, we experienced higher than usual purchases of media due to the tsunami and related issues in Japan. As a point of reference, OEM devices in media revenue combined was less than $300,000 last quarter.

Tape automation systems revenue was $54.4 million, compared to $62.1 million in Q4 of fiscal 2011. Branded automation was down $8.8 million year-over-year, slightly offset by increases in OEM automation at $1.1 million, our first year-over-year increase in OEM automation in nearly 2 years. The largest decline in absolute dollars was in our branded Enterprise tape automation platform, where we saw weakness across all geographies. The opportunities are there. They just did not close in the quarter.

Midrange and entry platforms experienced modest revenue declines during the fourth quarter compared to the same quarter in fiscal 2011. We acquired 113 new midrange and Enterprise tape customers in Q4, as we continued our focus on making money and increasing our market share in this category. In our innovation business, the primary driver of the growth was in the midrange.

Over the past few quarters, we have continued to invest wisely in our tape automation portfolio

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and this new features and functionality in our products. We expanded upon that last month with the announcement of the Scalar Linear Tape File System appliance or Scalar LTFS appliance. The appliance offers new modes of portability and user accessibility for archived content on LTO tape. Disk systems and software and related maintenance revenue, which includes our DXi, vmPRO appliance and vmPRO software data protection offering, as well as our StorNext software and appliances for big data management and archive, was $37.6 million in Q4, up from $29.5 million in the prior year. As a testament to the number of new product releases we have completed over the past year in this category, revenue from these new products was the primary driver of the nearly $15 million in total new product revenue we [indiscernible] in Q4.

For the full year, disk systems and software revenue grew 9% from $125.5 million in fiscal 2011 to $137.4 million.

Looking more specifically at disk revenue, as I mentioned earlier, we had a record branded DXi revenue in Q4, a year-over-year increase of 26% including related maintenance. We added 120 new disk customers during the quarter and our overall DXi win rate was 56%. It is interesting to note that the reason for our win most commonly given by customers is feature advantage over our competition. While having DXi products that are best-of-breed reflects the investment and focus we have made in our disk systems over the past few years, we also continue to focus on increasing and in extending our DXi market reach and broadening the distribution of our products. The largest driver of the disk increase was growth in our Enterprise business

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year.

Big deals, which are defined as orders over $200,000, were key to the revenue growth in Q4 compared to the same quarter a year ago. In addition, our Enterprise DXi win rate for the quarter was an all-time high.

Midrange disk revenue was up slightly year-over-year. The increase was due to the strength of the DXi6701 and 6702 product driving a significant increase in new customers purchasing these appliances compared to our legacy midrange product offerings. Entry-level disk revenue increased 40% over Q4 of last year. The primary driver of the year-over-year increase was our DXi4601, the industry's first capacity-on-demand deduplication appliance, which we introduced in the prior quarter. In addition, we continue to see strong interest in our entry-level virtual data protection appliance, the vmPRO 4000. The strength of our disk space data protection offerings for both the virtual and physical environments was again reinforced in Q4.

As Jon alluded to, our vmPRO 4000 won the Backup Hardware Product of the Year award in Storage Magazine's SearchStorage.com 2011 Products of the Year competition. And our DXi6700 family of midrange disk backup was a finalist for the award. In addition, the DXi6700 was named Storage Product of the Year at the 2012 Network Computing Awards in London this past quarter.

Turning to StorNext software and appliances, revenue was up 31% year-over-year.

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Revenue increased in Q4 of fiscal 2012 compared to the prior year. We also continued to exhibit strength in our appliances, primarily driven by our Enterprise and midrange archive enabled library, which we have found makes StorNext much more competitive in places where we have not been successful in the past. Our StorNext M330 Metadata Controller appliance also showed strong sequential growth in Q4, and we will soon be introducing a larger version that will further expand our market opportunity.

In addition, this past quarter, we also announced the newest member of our StorNext appliance family, the StorNext G300 gateway appliance, which provides virtual highly-available access over an IP connection to large data sets managed by the StorNext file system. Our Q4 results do not include any meaningful revenue from our StorNext reseller agreements with NetApp or Active Storage.

Moving to service revenue. It was $36.4 million in Q4, down slightly from $37.4 million in the same quarter of the prior year. OEM out-of-warranty repair and branded contract revenue were the primary contributors to the year-over-year decline.

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is related to historical businesses we exited in the prior year. The reduction in branded contract revenue relates to legacy Enterprise automation service contract revenue declines year-over-year that were partially offset by increases in contract revenue associated with branded disk systems.

Turning to gross margin. Non-GAAP gross margin in Q4 was 42% compared to 43.7% in the prior year period. On a year-over-year basis, non-GAAP gross margin was negatively impacted by the overall decline in revenue, including declines in royalties which contributed 100% gross margin and a reduction of service revenue which declined more rapidly than the associated service support cost which included significant fixed component.

For the full year, non-GAAP gross margin was 43.4% down from 44.6% in fiscal 2011. This decrease was largely due to a change in the product mix, including lower OEM deduplication software revenue and royalty revenue.

Looking at expenses, non-GAAP operating expense totaled $65 million in Q4 compared to $59.9 million in the prior year. Year-over-year, we increased our investment in sales and marketing by $4 million. And the primary driver of the increase in sales and marketing relates to incremental salaries and benefits from additional investments we've made in the team throughout the past year. Additionally, to get a jump start on fiscal 2013, we invested early into some key headcount additions and marketing and awareness campaigns.

General and administrative expenses were up year-over-year due to benefits received during the prior year that were not repeated. Research and development expenses increased over the same period in the prior year due to additional investments in our disk and virtual assistants engineering teams. Non-GAAP operating expenses for fiscal 2012 were $243.3 million compared to $232.9 million in 2011. With the increase primarily due to incremental salaries and benefits from additional investments we made in the branded sales team throughout the past year.

Non-GAAP operating profit for the quarter was $2.4 million or 1.5% of revenue compared to $12.3 million or 7.4% of revenue in the same quarter a year earlier. For fiscal 2012, non-GAAP operating profit was $41.6 million

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$67.2 million or 10% of revenue the prior year. The largest contributors to the decline in operating profit on a quarterly basis were the overall revenue decrease, including lower service and royalty revenues and incremental sales and marketing spend.

On an annual basis, the largest drivers were the expected reductions in OEM deduplication software and royalty revenue and incremental sales and marketing spend.

Interest expense for the quarter was $2.6 million compared to $3.3 million a year earlier. This included cash interest expense of $2 million and amortization of debt issue cost of $600,000. The current coupon interest rate for our revolving line of credit, just $49.5 million at March 31, is 2.72% and the average interest rate for our total debt will be approximately 3.37% for the quarter ending June 30.

For the fourth quarter, we had other income of $300,000 due to net foreign currency gains. We recognized a net tax benefit of $500,000, primarily related to release of liabilities due to tax settlement and expiration of statute of limitations in various jurisdictions which more than offset our foreign and state taxes.

Summing it up for Q4, we had non-GAAP net income of $665,000 with non-GAAP fully diluted EPS of less than $0.01, compared to $10.3 million and $0.04 in the same quarter a year earlier. For the year, we had non-GAAP net income of $29.9 million with fully diluted non-GAAP EPS of $0.12 compared to $49 million and $0.21 in fiscal 2011.

Focusing on cash flow for the quarter and the balance sheet at March 31, I would like to highlight several key points. Cash flows from operations for the quarter were $12.6 million. We paid off our senior debt of $68.6 million in Q4, utilizing $20 million in cash and drawing on our new revolver. At quarter end, the composition of our debt was $49.5 million of revolver and $135 million of convertible debt. We ended the quarter with $55.5 million in cash. We are in compliance with all debt covenants at March 31, and we expect to be in compliance with our debt covenants during the next 12 months.

EBITDA for the last 12 months was $64.2 million. And on a sequential basis, manufacturing inventory increased $2.2 million, accounts receivable decreased $4.3 million and we had an accelerated payment of $9.1 million from one customer. CapEx was $2.9 million.

As we close on the year, we feel very good about our progress deleveraging the company and putting in place an improved debt structure. In fiscal 2012, we generated $46 million in cash from operations and paid down $55 million in debt. In addition, we successfully refinanced our senior debt into a revolver with terms that are financially more beneficial and provide additional flexibility to run our business. In fiscal 2013, we will continue our focus on generating cash from operations and further paying down the revolver. Now let me turn the call back over to Jon.

Jon W. Gacek

Thanks, Linda. As we leave fiscal '12 and enter fiscal '13, there are several key points I want to make. First, we're participating in strong storage market segments. Disk space backup, big data, virtual data protection and cloud-based solutions are all expected to grow close to or more than 100% in the next 3 years. As an example, IDC projects that the market for disk space, purpose-built backup appliances will grow from $2.4 billion last year to $4.6 billion in 2014. The only market that won't grow significantly is tape. We are projecting that the overall tape market will be basically flat over the next 3 years, with growth at the storage tier in big data and archive and declines in data protection. Our opportunity in tape is still to grow our share by offering innovative products and having excellent execution over the portfolio.

Second, Quantum's overall product portfolio has never been better. In tape, we have the industries' best products and remain the worldwide market share leader in open system tape automation. Our DXi products are all on our fourth-generation 2.0 software and deliver the industry's best performance and price performance. This is especially true when our DXi is compared to the market share leader. In addition, this quarter we will be making 2 significant enhancements to our Enterprise deduplication appliance, DXi8500. We will begin shipping systems with higher density 3 terabyte drives as well as adding high-performance hardware-based encryption technology. On the StorNext side, this year, we have confirmed that our strategy to add appliances to the StorNext portfolio is correct. We have aggressively added new appliances over the last 12 months, and we will continue to add more going forward.

In addition, as we announced today, we entered in a technology partnership with Amplidata, and our first implementation of this unique technology will be integrating it with Quantum's data management and policy tiering software, that will be StorNext, and expertise and come out with a new family of Quantum-branded disk solutions. These new solutions will enable customers to seamlessly manage and protect content across a variety of big data applications, both content and analytic applications, and across the full life cycle of the information. We believe these new integrated solutions will be very unique in the market, as customers look to manage and retain their digital assets forever and in the most cost-effective way possible.

Finally, our virtual and cloud-based data protection technologies and solutions are very unique. They are very easy to deploy. They are very easy to manage, and they provide superior value over the competitive offerings. Third, we have demonstrated improvement in our overall sales execution, predictability and sales utilization. This past fiscal year, we made great strides with our sales team, our channel team and our technical sales team. We start the year with momentum and energy and a stronger team and focus on data protection, big data and cloud solutions.

We recently hired Xavier GUERIN as our new sales leader in EMEA. He joins us from EMC Isilon where he has served most recently as area director covering Southern Europe, Benelux and the Middle East. During his 5 years at Isilon, Xavier grew sales from nothing to more than $50 million. Xavier has more than 20 years of experience in IT industry, leading international organizations and multinational teams and has made an example of being able to add talent as part of the recruiting process.

At our fiscal '13 worldwide sales kickoff last month, I was very impressed with our team, including the new people we've recently brought onboard, the focus and dedication of our sales leaders and the passion and energy of those in our sales, marketing and technical sales organizations. We are primed to deliver overall growth.

So looking to fiscal '13, our goal is to deliver total revenue growth each quarter over the same quarter the previous year and grow total revenue overall for the year. We expect the growth will be driven by revenue from DXi, including our virtual DXi v1000 and vmPRO and from StorNext software and appliances. We expect minimal growth in branded tape product revenue and for total tape to be flat overall. We expect a decline in the tape royalty similar to that fiscal -- that happened in fiscal '12 in absolute dollars. Better said, we expect a somewhere dollar decline. For this year, we expect non-GAAP gross margin will be in the mid-40% range and will depend on both product mix and overall revenue growth. We expect non-GAAP OpEx of $255 million to $260 million. The areas of investment will be sales team members, technical sales and in marketing. We expect interest expense of $8 million and tax expense of $4 million.

In total, the current Street consensus, $680 million for fiscal '13 and $0.17, is consistent with the aforementioned targets I described above. For Q1, we are guiding to slight year-over-year revenue growth of approximately $155 million. We expect non-GAAP gross margin of 42%, non-GAAP operating expenses of $63 million to $65 million, interest expense of $2 million and income tax expense of $1 million.

As a team, we are very excited about fiscal '13 and our overall opportunity this year and beyond. And we look forward to driving overall revenue growth this year and sustaining momentum beyond fiscal '13. We thank you for your support. And with that, we'll turn it over to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ryan Bergan with Craig-Hallum Capital.

Ryan R. Bergan - Craig-Hallum Capital Group LLC, Research Division

When you look at the growth -- when you break apart the different products and software and hardware you have within your disk line, which of those several products do you think is really truly driving the growth there?

Jon W. Gacek

Both. So you have to think about it and as you look forward this year, there's going to be 2 dynamics going on. One is DXi is now a -- we have a complete set of solutions. We have the industry's best product, and it's a market that's growing very quickly. And so that product is going to drive -- has been and will continue to drive growth. On StorNext, you have something else going on. Our StorNext appliance strategy is really about adding more solutions so that we can drive deeper in our focused markets and broaden out the markets that we can serve. So today, we're strong in StorNext, in rich media, the government space and then sort of general big data. So the appliances allow us to drive down further in those accounts or in those verticals. But they also allow us to focus more broadly. So this year, we'll also broaden our focus to focus on genomics and then general video and rich media management for corporate customers. People's commercials, training videos, the like. So they're both going to drive it. The strategy is a little bit different. I think what's always hard with the numbers is that we made a transformation from having this space be historically driven by an OEM relationship with EMC, and a software-only model for StorNext. And what we have now, as I mentioned, a complete line of products that are branded and then a much broader offering on the StorNext side. So both are going to be important going forward.

Ryan R. Bergan - Craig-Hallum Capital Group LLC, Research Division

I want to dive in a little bit into -- a little bit in the geography and on the verticals you cited weakness in Europe. Can you give any specific to the specific areas in Europe? And are you able to see kind of impact you're seeing early on in Q1?

Jon W. Gacek

So there's not -- we didn't -- for us the scale is not big enough. I mean, we were off several million dollars type range. And I can't -- I don't think I can speak of any specific geography in Europe. I can tell you that the bigger the deal, the more at risk it was. We had some deals that we thought were good, actually. In one case, I was in Cincinnati ready to fly to Europe to go pick up a PO of significant size, to get me to fly over there and that deal fell through for corporate -- the customer reasons. Bigger deals, I can't give you any geographies specific. I would say that the European unrest, similar to what it was in the U.S. several years ago, you just can't be sure that the deal is going to close. And so we do our best to work with the reseller and end-user, but we don't always have visibility that things are going on at more senior level. So the bigger the deal, the more risk we felt and we really saw that in tape. We all think there's anything fundamental going on with the tape market. We gave our stats on that. We just think tape was a struggle and some of the big deal closings that we had planned on, didn't occur. And then in Asia, I really can't -- I don't have anything to pinpoint on those. That team has been great all year. They've been over plan all year and they just really struggled across all the products getting things to close this last quarter.

Ryan R. Bergan - Craig-Hallum Capital Group LLC, Research Division

All right. And last one for me is I want to dive in a little bit on the -- your OpEx spend. It seems like that you rounded -- suddenly here or more suddenly than I would have expected in Q4. You talk about continuing into Q1 in next year. Is there -- you have a lot of opportunities in front of you, but is there a one specific opportunity that you're seeing that you didn't see 90 days ago or when we -- on your last earnings call, is there something that you decided now is the absolute time that we had to capture this opportunity or we might lose out? If you could address that more, I would appreciate it.

Jon W. Gacek

I would say that I would put 3 things into the urgency bucket. I think for sure the big data and archive opportunity, we feel the time is now. We think our solution is unique coming out with the tiered architecture. We knew that we are going to do something in this new space by adding this -- we looked at a number of technologies. We partnered with Amplidata. We knew we were going to do something here. We wanted to have the big data team ready to go. We have hired some unbelievably strong people in the group and we felt like we need to do it then, so that was number one. Number two, you're going to see -- and anybody who is at NAB saw previews of it - we also think now is the time to really raise end-user and channel awareness about who Quantum is, what we become and where we're were going. So we decide to launch our new awareness campaign. If you haven't seen it, you'll see it more. It's very -- I really like it. I think it positions us in great way. It's built around the concept of being certain about your data, your solution, your business, you’re going to see us as be much more aggressive about promoting who we are and so we spent a little bit early there. And then the last is we had some real good traction serving a few geographies both domestically and internationally in sort of a not full-on way -- I was going to use a different term -- but not on a full-on way and we were having success. And so we decided to staff those in a more complete way to be able to take advantage of the market opportunity. So vis-à-vis geographies in North America where there's major cities, but not as big as some that we serve in. And then places like the Middle East, Brazil, I'm trying to think one more, India. So we're starting to get traction some of these markets and we felt like we needed to staff them more fully, and we want to start the year that way.

Operator

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

Glenn Hanus - Needham & Company, LLC, Research Division

This is Glenn Hanus at Needham. Jon, maybe just walk us through the gross margin profile through the year. I think you were talking about a little bit of pause and then some expansion through the year. Can you talk us through that?

Jon W. Gacek

Let me start and Linda can jump in here and add any more color that I missed. At this revenue range that we're at right here, and at the $155 million level, we get impact just on scale. Our fixed cost start impacting our gross margin. So in this 42-ish percent range, that's kind of the bottom end. And then as we scale revenue, Glenn, we'll get up over 45%. As revenue growth happens, we'll be over 45%. We think we'll kind of settle in, in the mid-45% -- but you could just say 45% range for the whole year. But it's really a matter of mix and scale. The new products tend to have better gross margins, although as we sell StorNext appliance, for instance, it's better than our corporate margin, but it's not as good as selling software, overall, but the revenue is a lot better. So as those businesses grow, and we get a little more feel for the StorNext appliance piece. I think we'll be able to give you better guidance. I think you can safely say that as the business grows, margin will grow but it's not going to go from 45% to 60%. It's going to go up from 45% into the high 40s and then at a certain level, we should be close to 50% in future years.

Linda M. Breard

I was just going to add to that, as we talked about in the past, our business is very leveraged. And so to the extent we grow revenue, we drop dollars to both the gross profit line and in the operating profit line very nicely. So getting up above $160 million a quarter number really reflects well on our results. So being in the $160 million range keeps us down on the lower end of the 42% that we reported.

Glenn Hanus - Needham & Company, LLC, Research Division

You want to comment more broadly on kind of how far you think you've come in terms of your sales initiative in the -- for the channel, for direct sales, for the appliances? How -- where are you in where you need to be in and what changes or additions should we expect over the coming year?

Jon W. Gacek

Yes. I'm going to step back and answer that a little bit more broadly, Glenn. That reflects back on this year for myself and I talked about this on different calls, we're a specialist, or somebody that has a unique set of technology capabilities in big data and data protection. And for us to be successful, I don't care how good of a salesperson you are. We've got to give them differentiated, unique products that they can compete with the bigger system houses and the bigger storage guys like EMC. And I think today, our portfolio is that way, if I look at tape, I look at disk, I look at StorNext, I look at vmPRO and the cloud services, all the way down the line, and our sales guys will tell you this, our sales team, they -- we can -- we have great solutions. We stack up well, as Linda has mentioned, our win rate against the disk guidance is 56%. It's not about product anymore. And -- but, but you've got to have products to be successful. I think Ted and his team, we brought in a number of senior people this year. We are starting to get people calling into us from some of the name-brand companies that you hear, wanting to join because they like our message, they like our direction, they like our opportunities. So I would say we're in the spot now where our expectations of our team is high, our products are good. We think the channel -- we've done a number of things with the channel, both in technical training, business alignment, expansion. I think that's the line and so I think the way Ted -- Ted's not here today and I'll let him answer this. I think, he and I think we had a great team, but we've got a great opportunity. And so we're going to keep adding quality people within our budget to take advantage of that opportunity in both markets, products and just overall storage spend. I don't see -- we don't have to do a lot of drastic changes. I think Ted has put in a lot of -- a really good improvements. And as I mentioned, our team and the people we've hired are great. And so we're going to -- I'm comfortable spending more to grow this business and to really hit on the opportunities that I think exists. I mean our goal is to be a lot bigger 3 years from now than we are right now. So to do that, we're going to have to sell more and keep adding people.

Glenn Hanus - Needham & Company, LLC, Research Division

And maybe lastly, Jon. You mentioned introducing your own Quantum cloud offering. Can you just sort of elaborate on your expectations for that over the next year? And what we should look forward there?

Jon W. Gacek

Yes. So today, our DXi V1000 is the backbone for, as I mentioned, Xerox's cloud solution. So they're selling it through their 45,000 resellers and they're taking it to the old ACS corporate accounts. And if you think about it, they sell it as a Xerox-branded technology, and it's basically powered by Quantum. What we're going to roll out, first, will be a Quantum-branded solution powered by Xerox, if you will. And what we like about the solution at the customer level is we're going to give the customer choice or an additional choice that the competition doesn't, where they can go to replication between DXi to DXi, or DXi to another DXi with a copy going to the cloud, or takeout one of the DXis and just go from the source right into a cloud data protection solution. We think that this is going to be an important differentiator for us. We don't think that others can do it the way we do it. We think our solution is very unique. And so we'll -- we're going to promote that. In addition, what we will do is allow companies who don't want to have external clouds, but do internal clouds to use the DXi V1000 and the vmPRO software to create their own internal cloud. I think we're fairly modest in our expectations for this year, but that's only because -- and you know me for a long time, I just don't know how big the opportunity can be, but we have a lot of interest from the cloud providers worldwide. I'm actually going to be in Europe next week at a channel meeting, but then I'm going to go meet with some of the big cloud companies to talk about the uniqueness of what we're doing. So this is going to be a key part of what we do, and we think it's differentiated from anybody else we compete with.

Operator

And our next question comes from the line of Catharine Trebnick with Northland Securities.

Catharine Anne Trebnick - Northland Securities Inc., Research Division

Just a couple of quick questions on the channel. I know that was one thing you are working on and you also said on the last earnings call that you are looking to go downstream to the SMB. So could you provide more color on how you're developing that channel and how you see that helping you with growth in 2013?

Jon W. Gacek

Sure. It's a -- I didn't put in the prepared remarks, I had -- we talked about SMB last quarter. Let me start with that. Quantum, historically, we've had a very strong SMB business, with low-end tape drives, tape media, low-end tape devices. But what's happened over time is the market has migrated away from those type of products. And so over the last year, you can think of it as refilling, if you will, the product pipeline to sell to those kind of customers. So now we've got vmPRO. We have DXi4601. We have our low-end NAS box. We have our RDX removable cartridge. We have this cloud-to-cloud service capability, all focused on SMB. And so what we're really doing is dusting off a set of plays that we ran very successfully over the years and really putting focus behind that, and incentive and energy behind it to drive growth there. And I think it's important part of our strategy. We've gotten very -- some of the bigger players are really interested in what we can offer here. So we've kicked that off. I think it's important -- it's not the most important thing we're doing in '13, but I think it is a very important thing for us to be a growth company and to get to the kind of goals we have for the next 3 or 4 years. On the more middle of the pyramid, if you will, the small to big Enterprise but below the Fortune 1000 company. That's really our traditional channel and there's 2 things going on there. One is really making sure were tightly aligned, technically business-wise training-wise, with our key platinum partners, which I think we have about 50 or 60 around the world. And then making sure our next levels of partners are getting up to speed and able to grow into the expectations that we have for our platinum partners. The other thing and the last thing we're doing is with the StorNext appliance strategy, we have a lot of companies or channel partners who want to sell those products. It's a different go-to market than we've traditionally had. And so we're doing a lot around training and positioning with the StorNext appliance strategy as well. That one is probably the least far along, to be candid. And we're going to continue to push there. And then the third thing I would say -- or fourth, is we're trying to develop new routes to market. I think one of the things that I feel about the company is we have a great technology, great product, great solution, but we don't have enough customer access. So we're continuing to drive for that and it's one of our key initiatives this year. So the awareness campaign that we mentioned is part of driving demand. We are going to announce some more partnerships with people, no question about it. We have technology, we have unique sense, I would expect to see us continue to be aggressive with partners taking -- either new partners taking products or existing partners taking more products. That's going to be a key part of the strategy as well. So think of channel as access and segmented into those 4 groups.

Operator

[Operator Instructions] Our next question comes from the line of Cindy Shaw with DISCERN.

Cindy Shaw - DISCERN Investment Analytics, Inc

A couple of questions. One, as we look towards the coming fiscal year, if you can talk about some of the visibility and the factors that can really cause things to go into the low -- lower end of expectations or the higher end of expectations? And then I have some more questions after that.

Jon W. Gacek

So you want to know the downside risk versus the upside risk?

Cindy Shaw - DISCERN Investment Analytics, Inc

Yes. I think of upside is not being risky. Yes, we could drive it either way and if you can give us a sense for visibility?

Jon W. Gacek

Yes. So -- I mean our visibility hasn't really -- it hasn't really changed. Our OEM business is fairly predictable. Our service business is fairly predictable. Our royalty business is fairly predictable. The big variable for us always is the branded piece of the business. And that tends to be -- it's gotten less sold than the last little bit of the fiscal year, but it's still going to be back-end loaded. So the goal there, obviously, is to have more deals, more opportunities to get to where you want to get. At a risk level, I'm different than in other periods. I feel great about the products. I feel great about the sales team. I feel great about the channel partners. I just -- I want more. And so there's a lot of pressure inside of the company to have more products, have more channel partners, have more salespeople. And that to me, what I've been calling internally, that's the growth culture and growth challenges. We're going to embrace those as a company. The risk to me really is -- do the economic concerns hurt us getting to the growth goals that we have if you just asked me to focus on one. In the past, I would have said a lot other things, but I'm really more worried about the macro, and since I don't control it, I really don't worry about it. We just need to manage our way through it. We think we're in a great spot. We think our products are fantastic. We think our team is good. We have tons of energy. Our sales kickoff a few weeks ago was -- had tons of excitement and it was genuine excitement. So I'm -- we're bullish about where we're headed. And candidly, we have to show that we can grow and so this year, I mean, you can't get to $1 billion until you get the $700 million. And so we've got to get to $700 million or the next level and then we can keep growing from there.

Cindy Shaw - DISCERN Investment Analytics, Inc

And do you have any and...

[Technical Difficulty]

Jon W. Gacek

I'm sorry you're breaking up, can you repeat that? Can you repeat that question? Operator, I'm not sure if she's on a cellphone or if there's some other connection problem?

Operator

Actually she dropped off. Our next question comes from the line of Brian Freed with Wunderlich Securities.

Brian Freed - Wunderlich Securities Inc., Research Division

Jon, a couple of quick questions. First, delving a little more into the partner side of things, you announced the Xerox partnership. They won a very large deal with the state of Texas they announced in the March timeframe. They appear to have a pretty significant backup and data protection element. One, can you comment on if you are involved in that specific deal? And then the second question I have might be more for Linda. But if you look at the gross margin profile of both quarter just completed and your first half of the coming fiscal year, can you -- as you look at the mix, you had a bit of a shift towards higher-margin disk and software as a percentage of revenue, but you didn't see particular leverage at the gross margin line. Where was the mismatch? Was there some discounting or some tape -- if something that you can point to specific that led to that trend?

Jon W. Gacek

Let me start with that one, Linda. We'll start with the gross margin one because I'll forget exactly how you asked it, if I do that first, and then we can address Xerox. I think Linda touched on it. There are 2 things that will drive margin for us. One is mix. The other is just the amount of revenue. And business range right now, Brian, of $160 million, the volume variance, if you will, that runs through the factory is pretty high. The other thing, from a mix perspective, is we do have some high-margin revenue items, like the royalty, like service. So there isn't really anything underlying discounting or any of those operational things. It's really about scale and Linda's agreeing with me. It's scale and mix. So I don't feel a big change around that. Like [indiscernible] said all the time, if we have more revenue, we'll have higher gross margin. And most of our products, our new products in particular, but a lot of the tape products are over the corporate gross margin. So as they increase or in this case, in the case of tape, decrease, that puts pressure on the margin.

Linda M. Breard

Yes. I would just kind of add to that. There's nothing really unusual going on in the underlying cost structure of the business. It really is more around the volume and the top line revenue and where we ended up.

Jon W. Gacek

And the mix.

Linda M. Breard

And the mix.

Brian Freed - Wunderlich Securities Inc., Research Division

Okay, then Xerox.

Jon W. Gacek

And then on Xerox. I had a couple of people call me about that deal. And I have 2 reactions. One, I'm going to say I hope we're involved in it. I believe we're involved in it. But I don't know how big, it's a contract, over time our relationship with them is kind of a subscription model, if you will. It also -- they can also resell DXi. And so this feels kind of like the announcement phase of the transaction as compared to the implementation and execution phase. But as I -- but I think my team, I think we're in it, but I don't know how big or I don't know how much for us. But what I like about it is that's not a customer we're ever going to sell to, and they've got lots of them. And I am -- if you go -- I mentioned on the call, if you go to acscloud.com, look at their 3 -- or I think there are 5 now, 5 cloud offerings, 4 or 5, we're 2 of them. And we're data protection and we're backup and DR -- backup and DR. Sorry, I'm getting corrected. We're backup and we're DR. So I really like that deal. We're going to do a few more of those because we're going to get graphically spread and we'll probably get business model spread, too, with some other cloud providers. But I really like that as a channel for our data protection services.

Brian Freed - Wunderlich Securities Inc., Research Division

Great. And as you kind of think going forward just as a follow-on to that, if you look at partnership opportunity, do you think the cloud providers are probably a more likely a larger near-term opportunity than say the OEM side of things? Or do you think there's opportunities on both fronts?

Jon W. Gacek

I think there's opportunities on both.

Operator

[Operator Instructions] We have a follow-up question from the line of Cindy Shaw with DISCERN.

Cindy Shaw - DISCERN Investment Analytics, Inc

I apologize I got a bad cellphone connection and got dropped earlier. I'll move back on the milestone question, which appeared in the transcript but the other question I had were tape, in terms of the royalties being flat in the coming year, is that really a sign that you think it's bottomed and then will stay flat or potentially even go up?

Jon W. Gacek

No.

Linda M. Breard

No.

Cindy Shaw - DISCERN Investment Analytics, Inc

And also another safe question is I didn't see [ph] and you said that they're expecting midrange tape systems to grow and sort of disconnect between your slide outlook and theirs, the difference between the branded systems and overall? Or are you not going to [indiscernible] tape will grow?

Jon W. Gacek

So let me answer the latter one first. We actually think open system midrange and low Enterprise will grow. But when we talk about the tape market, we sell entry products, too. So we're looking at the market as a whole, not segmenting it down as narrowly as they did. So when we look at, there's parts of it that's going to grow, and there'll be parts of it that decline as the way that I would answer that. So we feel good about the growth pieces because that's where we're the market share leader. We also think it will grow because of a tier in big data and archive. There's some of the really big data companies and I mean, the guys who have big, big, big data solutions that think the world will become a flash and tape world as compared to spinning disk world. So I think that will be good for us. I don't know if I totally agree with that's where it will be. But certainly, there's people that are doing lots and lots of petabytes, see the flash heavy in the first year and tape being the second. So I think tape -- we're going to say tape is flat, some will be up, some will be down. On the royalty, it was probably what I said. So let me just be clear. We think that the royalty will decline this year at the same dollar amount which was...

Linda M. Breard

Around $8 million or $9 million.

Jon W. Gacek

$8 million or $9 million as it happened this year. And that's primarily a DLT-related and then timing of the LTO royalty rate changes are the 2 factors there. So model in $8 million decline on the tape royalty.

Cindy Shaw - DISCERN Investment Analytics, Inc

And on the low-end tape systems that are pulling down in your systems, gross rate on the tape side, is that a lower margin business or should we think about it as not really having as much margin impact as revenue impact?

Jon W. Gacek

That's probably right. I mean, we're -- what you said is right. I don't know if I can conclude for sure how all the math will work out. Our low-end businesses has come down. Remember, you're talking about an IDC report. And so we're seeing flat. We also -- we sell tape media, too, and tape devices. So we feel good about the -- I mean our midrange business was great this quarter. And we feel good about our Enterprise position. We added a new partnership with HP. We think there's opportunities to do some more partnering with tape. So we're going to push on things to make that better. When we talk about taking share, that's what we're talking about, but I think if you model the market flat, and just aren't negative about tape. I mean I would just love it if people were not negative about tape. Because I spent a lot in the last few years -- I wouldn't say defending, but explaining why the tape business is a good business. And I think IDC and others like yourself are saying, hey, tape's got a place in the architecture and we really believe that.

Operator

[Operator Instructions] There are no additional questions. You may continue.

Jon W. Gacek

Thank you very much. Well, things for participating in the call today. As a reminder, this was our fiscal year end. So we're a little later than normal in getting the call done. We expect to have our Q1 call in late July. Thanks for your support, and we'll talk to you in a few months. Thank you very much.

Operator

Thank you. Ladies and gentlemen, that does conclude the Quantum Corporation Fourth Quarter 2012 Conference Call. If you like to listen to today's replay, the phone number is 1 (800) 406-7325, access ID 4527777. Thank you for your participation. You may now disconnect.

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