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Quantum (NYSE:QTM)

Q2 2013 Earnings Call

October 24, 2012 5:00 pm ET

Executives

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

Jonathan W. Gacek - Chief Executive Officer, President and Director

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

Analysts

Cindy Shaw - DISCERN Investment Analytics, Inc

Brian Freed - Wunderlich Securities Inc., Research Division

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

Glenn Hanus - Needham & Company, LLC, Research Division

Operator

Good day, ladies and gentleman. Thank you for standing by. Welcome to the Quantum Corporation Second Quarter 2013 Conference Call. [Operator Instructions] Following the presentation, the conference will be open for questions. [Operator Instructions] This conference is being recorded today, Wednesday, October 24 of 2012. And I would now like to turn the conference over to Shawn Hall, General Counsel. Please go ahead, sir.

Shawn D. Hall

Thanks. And good afternoon, and welcome. Here with me today are Jon Gacek, our CEO; and Linda Breard, our CFO. The webcast for this call, our earnings release and a quantitative reconciliation of any GAAP and non-GAAP financial measures discussed today can be accessed at the Investor Relations section of our website at www.quantum.com and will be archived for 1 year.

During the course of today's discussion, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements regarding our business strategy, 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, 2012, and 10-Q filed on August 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.

Jonathan W. Gacek

Thanks, Shawn. Welcome to our fiscal 2013 Q2 earnings call. Today, we reported revenue of $147.3 million and non-GAAP loss per share of $0.02. While total revenue was slightly below the guidance we provided due mainly to lower than expected OEM and branded tape automation revenue, we had record disk and software revenue and met EPS consensus. I'm going to address the key elements of the quarter's results. Linda will give more detail on the results, and I will come back to address our second half fiscal 2013 plans.

The clear highlight in Q2 was our disk and software revenue of $42.4 million, up 18% year-over-year and 38% sequentially, and the result of record quarters for both DXi and StorNext. The record DXi revenue was driven by our DXi8500 enterprise product family, which increased 30% year-over-year and 129% sequentially. Our win rates against the reference competitor increased to 55% as well.

What we see when we compete and win is the customer sees that we have a better product from a performance, ease of use and a value perspective. We also provide a better solution for the customer if they are using tape in their architecture, which most customers still do. We are happy to have customers try and use our products and compare them to the competition. Generally, when we lose a deal, it's when the reference competitor is successful in selling their size and scale, market share position, financial condition and broader overall storage portfolio. In particular, they focus on our size, our market share and our financial statements and not really on our products. We have been much more proactive in competitive deals, making sure that we sell the value of Quantum DXi solutions and proactively addressing the competitors' selling tactics. We are also seeing success because of our increase in end-user awareness about our DXi solutions.

We will never be as big or as broad as EMC, but we believe our DXi solutions are better than theirs, expect our market share will grow and we don't mind competing. In addition, we will be opportunistic in reviewing and improving our capital structure, making their use of our financials as a competitive tool a non-issue.

Our success in Q2 reflected on our focus on getting deals closed early in the quarter, qualifying deals early, making end-user contact at senior levels to tell our story and making sure that they understand it -- understood, sorry, our key product features and price differentiation. Finally, we have a lot of new salespeople who've come on board over the past 6 months, and we saw the impact of them becoming more productive as well. The market for purpose-built backup appliances is expected to reach $5.3 billion in 2015, more than doubling from 2011, and we think we are well-positioned to increase our share of this growing market. We also believe we offer end users the best overall solution including performance, manageability and value. Our win rates continue to improve and our funnels continue to grow.

Turning to StorNext. The record revenue result was due to solid sales of standalone StorNext software and record appliance quarter, and the first sale of our new wide area storage solution, which leverages the next-generation object storage technology and our StorNext expertise. We launched our first StorNext appliance a little over a year ago. And through today, we have introduced 9 StorNext appliances in total, including the M330 and M660 metadata appliances, the Q series disk storage appliances, and archive-enabled libraries or AEL appliances.

We continue to hear from our StorNext end-user customers that they want to buy more from Quantum. They like the appliance strategy as it makes it more cost effective and easier to procure. They also like having a single vendor to call on to provide overall solution support. In other words, Quantum can provide better support and better overall experience when customers buy appliances versus buying software from Quantum and hardware separately from other vendors.

Finally, the unique and differentiated attributes of StorNext are what the customers' buying, and the server and storage hardware is really just a commodity. So an integrated appliance solution is the best overall customer solution. We will continue to add appliances to our big data management and archive portfolio over the balance of this year and next.

We're very excited about the momentum in our disk and software business. We expect sequential growth in the Q3 quarter or the December quarter, and we believe we have a shot at exceeding $50 million in this category in Q3. There is no question that growing the disk and software business is key to driving higher revenue and profitability for Quantum. We intend to grow it and we will continue to invest in it.

Offsetting our strong disk and software performance in the areas that challenged us in Q2 were OEM tape, standalone tape drives and branded tape automation. OEM and branded tape automation were both off the same percentage on a year-over-year basis. We believe this was likely due to customers holding off on purchases as they wait to see LTO-6 drives and library, which will enter the market this quarter. Linda will discuss this in more detail. But before I turn the call over to her, I want to address several other business highlights from Q2.

First, we launched our own Q-Cloud backup and disaster recovery subscription service, which brings together our DXi and vmPRO technology to provide business class data protection at customer cloud storage price, as little as $0.01 per gigabyte per month. Multisite enterprises using Q-Cloud can economically replicate directly from remote sites to the cloud, eliminating the use of primary resources for backup NDR, while single-site enterprises can enjoy the benefits of a second site for a new lower cost approach to backup and disaster recovery. In addition, with an on-premise DXi appliance, Q-Cloud customers can enjoy the speed and convenience of local recovery with the security of cloud-based backup. Our solution contrasts with many cloud services that typically require customers to buy additional expensive hardware as data grows or abandon prior investments as part of a rip and replace cloud-only approach.

Second, as I briefly mentioned above, we sold our first wide area storage solution this quarter to a major government customer that chose to adopt prior to general availability. We will have more to say about this solution and our product lines in coming weeks, but the underlying storage hardware incorporates next-generation object storage technology from our OEM agreement with Amplidata. We believe the attributes of the technology, which integrated with StorNext or into systems managed by StorNext, provide a very unique solution for addressing customers' evolving big data needs in a way the alternatives cannot.

Third, as we broaden our solution set and capabilities with StorNext, leading organizations increasingly look to us to help meet their business needs. In September, a NASCAR video project in which StorNext played a central role won a prestigious innovation award at the IBC Conference, last month actually. In fact, of the 3 project finalists for the award in content management category, StorNext was a key enabling technology in 2 of them, the other being a Turner Sports project. This recognition continues to speak to the power of the Quantum technology in high-profile accounts.

Fourth, we continue to expand our partnerships and routes to market. In August, we announced that Teradata had selected our Scalar tape library and Scalar Key Management encryption software as standard elements in its enterprise solution offerings for data analytics and warehousing customers. We also announced an extension of our partnership with Qwest, which was recently acquired by Dell to provide joint data protection solutions for virtual environments. Our DXi V1000 virtual deduplication appliance became the latest product in the DXi portfolio to be certified with Qwest's vRanger Pro software.

Finally, our aggressive product releases continued in Q2. We launched StorNext 4.3, which brings new intelligent features, greater performance and increased scale to managing big data, including support for up to 1 billion files and dozens of petabytes of tier storage. We also announced enhancements to DXi8500 including 3-terabyte drives which enabled us to provide the industry's highest storage density and power efficiency for enterprise disk backup and deduplication. We were the first in the market to incorporate 3-terabyte drives in backup and deduplication solutions.

Finally, we began shipping vmPRO 3.0, the only backup application for virtual environments that backs up data in native format, enabling drag and drop, restore file or entire VMs from any location.

With that, I'd like to turn the call over to Linda to provide more detail and color on the results and then I will come back and address our plans and guidance.

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 second quarter ended September 30 was $147.3 million compared to $165 million a year ago. The primary driver of the year-over-year decline was in branded and OEM tape automation revenue, which was down $13.6 million. Devices and media revenue also declined $5.8 million. And as expected, royalties declined $2.5 million over the same quarter in the prior year. Offsetting these declines, we grew total disk and software revenue, including related maintenance, by $6.6 million to $42.4 million, an all-time record. Royalty revenue was $11.6 million for Q2 compared to $14 million in the same quarter a year ago. Expected reductions in both DLT and LTO royalties contributed almost equally to the decline.

For the quarter, non-royalty revenue totaled $135.8 million, of which 84% was branded and 16% was OEM. That compares to non-royalty revenue of $151 million a year ago, of which 82% was branded and 18% was OEM.

Looking further at various revenue classifications, devices and media totaled $15.5 million compared to $21.3 million in Q2 of the prior year. In absolute dollars, branded media and devices each contributed to approximately half of the decline. We expected year-over-year declines in media due to the events of the prior year, which caused higher-than-usual purchases of media. The decline in devices was driven by overall market declines and to some extent, continued softness in Europe.

Tape automation systems revenue was $48.8 million compared to $52.4 million in Q2 of fiscal '12. On a percentage basis, both branded and OEM were down approximately 20%. Branded automation contributed to approximately 2/3 of the decline, with OEM accounting for the other 1/3.

In both our branded and OEM automation business, enterprise, midrange and entry revenue were all down year-over-year. Enterprise and entry automation product revenue declined at a lesser rate on a branded versus OEM basis, while branded midrange product revenues declined at a higher rate.

As Jon mentioned, we think our tape automation results in Q2 and the past couple of quarters before that may have been partly impacted by the anticipated introduction of LTO-6 tape drives and libraries which will take place later this quarter. Historically, we have seen declines in our tape automation business prior to release of new technology as customers hold off on purchases. Also contributing to our lower-than-expected branded tape automation revenue was a 50% decline in such revenue from the federal sector over the same quarter last year. On the positive side, we acquired approximately 140 new midrange and enterprise tape customers in Q2, which we believe is an indicator of our continued market share gain in this category.

Disk systems software and related maintenance revenue, which includes our DXi, vmPRO appliance and vmPRO software data protection offerings, as well as our StorNext software and appliances for big data management and archive, including wide-area store solutions, was $42.4 million in Q2. This was up 18% from $35.9 million in the prior year. This is a record for the category and a key milestone as we surpassed $40 million in a quarter. Disk and software revenue from new products, defined as products released in the past 12 months, contributed $15 million in revenue for Q2.

Looking more specifically at disk systems revenue, it was up 14% year-over-year to a new record. In addition, we added 120 new disk customers during the quarter and our overall DXi win rate was 55%. Strong results in our enterprise business, which was up 30% over the prior year was the primary driver of our overall disk systems revenue growth. Big deals, which are defined as deals over 200,000, drove the growth in enterprise business. As we have mentioned in the past, big deals coming in and falling out of a quarter can make the wide revenue swings in our disk systems business.

Midrange disk revenue was down 6% year-over-year due to more big deals in the same period last year. In addition, we have now shipped more than 1,000 DXi6701 and 6702 units in just over a year since their introduction into the market. Designed to eliminate the trade-offs customers have to make with other deduplication solutions, the DXi 6701 and 6702 has received several Product of the Year honors and other industry recognition.

Entry-level disk revenue increased modestly over Q2 of fiscal '12, and we saw notable shifts from single unit standalone sales to multiunit sales that are part of a larger midrange and enterprise disk deal. In fact, the number of entry level DXi sales attached to such deals nearly quadrupled in Q2 and demonstrates the advantages of our comprehensive portfolio.

And turning to StorNext software and appliances. Revenue increased nearly 30% year-over-year and was also a new record. We added approximately 65 new StorNext customers in Q2, and announced that we have surpassed 70,000 shipments of the StorNext file system, representing an increase of almost 20% in less than 9 months. Standalone StorNext software continues to contribute in this category, along with the strength we continue to exhibit in our appliances. Our StorNext archive-enabled libraries, M330 and 660, and G301 and 302 appliances, along with our Q series disks, all contributed to the strong results this quarter.

As Jon mentioned earlier, we also sold our first pre GA wide-area storage solution. We expect to make the product generally available in the next few months. And as Jon said, we'll have more to say about our product plans in the coming weeks.

Moving to service revenue. It was $35.7 million in Q2, down slightly from $35.9 million in the same quarter of the prior year. Branded service revenue increased, primarily driven by growth in service contracts associated with our StorNext appliances but partially offset by a decline in OEM out-of-warranty repair compared to the same period in the prior year. The OEM repair decline was related to both timing of repair requests and business we exited in the prior year.

And turning to gross margins. Non-GAAP gross margin in Q2 was 41.4% compared to 45% in the prior-year period. On a year-over-year basis, the decrease in non-GAAP gross margin was primarily due to the decline in product revenue. As we have mentioned in the past, our business is leveraged, and an increase or decrease in revenue will have a material impact to gross margin. In addition, the year-over-year decline of $2.5 million in royalty revenue, which contributes 100% gross margin, impacted the results.

Looking at expenses. Non-GAAP operating expense totaled $63.6 million in Q2 compared to $58.7 million in the prior year. Year-over-year, we increased our investment in sales and marketing by $4 million. The primary driver of this increase relates to incremental salaries and benefits from additional investments we made in the team throughout the past year. In addition, we have increased our marketing program spend to drive greater awareness and demand. Research and development spend increased approximately $600,000 over the same quarter last year due to an increased investment in headcount primarily associated with our StorNext big data strategy.

Non-GAAP operating loss for the quarter was $2.6 million compared to operating profit of $17.1 million in the same quarter a year earlier. The largest contributors to the decline in operating profit on a quarterly basis were the overall revenue decrease, including lower royalty revenues and incremental sales and marketing spend. Interest expense for the quarter was $1.8 million compared to $2.9 million a year earlier. This included cash interest expense of $1.5 million and amortization of debt issue costs of $300,000. The current coupon interest rate for our revolving line of credit, $49.5 million at September 30, is 2.61%, and the average interest rate for our total debt will be approximately 3.33% for the quarter ending December 31.

For the second quarter, we had other expense of $100,000, primarily due to net foreign currency losses. We recognized tax expense of $400,000, primarily related to foreign and state taxes.

Summing that up. For Q2, we had a non-GAAP net loss of $4.9 million, which is a non-GAAP loss per share of $0.02, compared to non-GAAP net income of $13.7 million and $0.06 in the same quarter a year earlier.

Focusing on cash flow for the quarter and the balance sheet at September 30, I would like to highlight several key points. Cash flows used in operations for the quarter were $13.4 million. 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 $33 million in cash. We are in compliance with all debt covenants at September 30, and we expect to be in compliance with our debt covenants during the next 12 months. EBITDA for the last 12 months was $32.9 million. On a sequential basis, manufacturing inventory decreased $8.8 million. Accounts receivable increased $12.7 million, and we had an accelerated payment of $7.3 million from one customer. CapEx was $2.7 million.

Over the past year, we have invested in multiple areas of the business, specifically sales and marketing to expand our penetration of Tier 2, SMB and expansion markets. We have also increased our investment in big data and marketing and awareness campaign. Our product portfolio is solid, and improving our distribution and reach is key to growth. However, due to the headwinds in revenue we have faced in the first half of the year, we are reevaluating our overall investment in several areas with a critical view. In addition, we will also be opportunistic in reviewing and improving our capital structure, given the number of options available on the market. Through both of these, we expect to return the company to generating cash from operations and strengthening the balance sheet.

Now let me turn the call back over to Jon.

Jonathan W. Gacek

Thanks, Linda. As we stated at the beginning of the fiscal year, it's our intention to grow the company. We believe we are in the right markets with big data, virtual data protection, cloud and deduplication. However, as we said in our Q1 earnings call, we need to be in more deals, have more channels to market and have more end-user and channel awareness. At that time, we talked about what we would do to address this. So let me review some of these key points and context of what we did in Q2 and what we must do moving forward to grow and meet our financial objectives.

First, we must drive hard on our unique value proposition with end users and channel partners specifically, enabling customers to maximize the value of their data by protecting and preserving it over its entire life cycle, in any environment and at any scale. The includes offering performance, ease of use and tight integration of Quantum solutions at a price point that provides more value than competitors. We think Q-Cloud and our wide area storage solutions are just 2 examples of how we are integrating different technologies to provide unique solutions to customers. I would also point to our recently announced investment in Nerve Technologies, which provides extremely fast, highly scalable and automated video indexing and search capabilities and offers tremendous benefits in combination with our StorNext software.

Second, we must be more aggressive in building our pipelines and doing so earlier through a combination of targeted marketing and broader awareness activities directed at both install base customers and new prospects, as well as the channel. As I said, we have added some key new solutions that provide unique value to end users. And we need to make sure they are aware of and interested in these solutions, so that our channel partners see end-user demand. This is why end-user awareness is so important and why we continued to make progress on this front in Q2. For example, we had a significantly larger presence at VMworld in August, that generated a 70% increase in sales leads over the prior year. In addition, we have increased our traffic to our website by more than 50% in the first half of the year and created more than 100 million online impressions through our Be Certain marketing campaign.

Third, we must continue to broaden our routes to market, including aligning more deeply with our partners, adding additional partners and pursuing additional strategic or OEM partners for our tape, disk and software products. The new partnership with Teradata and the expanded DXi relationship with Dell Qwest speak to this point. And we are working on additional partnership activities related to StorNext and cloud data protection, and we expect to move forward in the next few months.

Fourth, we must continue to inspect big deals more closely and try to get them closed earlier in the quarter, as well as get closer to the end-user financial decision-makers to better understand the deal dynamics. We did a better job of this during Q2, as evidenced by our record disk systems and software revenue and particularly enterprise DXi8500 results. As this illustrates, when we get to senior levels inside of an end user and tell our story, our success rates improve.

Finally, as we begin the second half of fiscal '13, we must adjust our spending to be more in line with revenues that we are delivering. We are still focused on building the growth business and creating long-term shareholder value. But we have to be smart about our spending and capital structure, given the economic environment, as well as balanced in our decisions and spending for growth and the need to make money. With this in mind, we will reduce our spending over the next 2 quarters, specifically in areas where we are not getting the return on investment or have changing business requirements that allow us to pull back on spending and still support our strategic initiatives. We are targeting reductions of approximately $1 million and $6 million in Q3 and Q4 respectively.

So now, let me turn to guidance. For Q3, we expect revenue of $160 million, non-GAAP gross margin of 42%, non-GAAP operating expenses of $60 million to $64 million, interest expense of $2 million and income tax of $500,000. For the fiscal year, we expect revenue of $600 million, non-GAAP gross margin of 42% and non-GAAP operating expenses of approximately $250 million.

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 Cindy Shaw with DISCERN Group Inc.

Cindy Shaw - DISCERN Investment Analytics, Inc

Several questions if I may. One, as the guidance implies a nice uptick in gross margin in the fourth fiscal quarter versus the third fiscal quarter. And I'm wondering, did I get that correct? And if so, what's going to be driving that sort of gross margin improvement sequentially?

Linda M. Breard

Cindy, there are a couple things. One would be an uptick from the revenue we had this quarter of $147 million up to the $160 million that we're guiding to in the December quarter. And then as Jon talked about during the call, the target of getting to 50 or above 50 in the disk systems and software business would also be a driving impact to that as far as growth.

Cindy Shaw - DISCERN Investment Analytics, Inc

And I was actually looking at the March quarter, which in the -- the guidance implies that the revenue will be down in the March quarter and it sounds a little surprising, it's also implying that the gross margin would be up as the revenue declines.

Jonathan W. Gacek

Yes. So I think you're going off of the 42%, Cindy, that we gave for Q3.

Cindy Shaw - DISCERN Investment Analytics, Inc

Exactly [indiscernible]

Jonathan W. Gacek

Yes, that I think will be in that 42% range. As Linda points out, there's some variability based upon how great revenue is. But if we look across the year and we think about some of the spending things we're doing as well, we think we'll get benefit in that kind of range.

Cindy Shaw - DISCERN Investment Analytics, Inc

Okay. And it sounds like, I know you said in the past, that there's a breakeven point that's in the $35 million to $40 million for the disk systems and software. So it sounds like you are past that and expecting to keep going past that and really expecting that to start contributing as well?

Jonathan W. Gacek

Yes, I mean, I think there's multiple things going on. You're teeing up a great question. And we're super pleased with the results around disk and software, to finally crack $40 million and to have a line of sight to $50 million, and we think there's a lot of positive reasons for that. At the same time, the decline in overall revenue puts pressure on margins and other things because of the fixed-cost nature of some of that. So we've got like 2 things going on at once. There's no question that growing the disk systems and software is the key. But we also need to make sure we pick up every tape dollar that we can. And the branded ones for us are things under our control, and we intend to do that. We think LTO-6 coming will help. And getting our salespeople that are new up to speed is helping. I can comment less about the OEMs. So as always with us, there's never any one simple thing. For sure, the growth business is starting to show signs of growth, and we think sustained growth in this quarter.

Cindy Shaw - DISCERN Investment Analytics, Inc

And then kind of a change of direction. You said in the past, really before the economy started to drop, that when budgets start to get tight, that Quantum's value proposition actually can be a plus in terms of your run rates, even though the pie might be getting smaller, that you can get a bigger share of it. Is that starting to play out or do you anticipate that playing out if it's not?

Jonathan W. Gacek

No. I think, every quarter is made up of a whole bunch of deals. And I think, for sure, we see that happening. The basic premise that you're touching on is that just because the economy slowed down, data doesn't slow down. In fact, sometimes it gets more important to understand what's going on in your business. And people ran out of places to store, manage it and protect it. And our solutions tend to have a value element to them whether it's tape versus disk, whether it's our dedu versus a reference competitor, whether it's a tiered architecture compared to a double replication system like some of the disk companies like to sell. So we do think that helps us. But I think what we've learned in the last couple of quarters is our -- having those solutions is great, but really being able to tell your story, have the end user be asking for your technology and be able to touch the end user at the decision-making level is super important. And we think that showed positive signs this quarter.

Operator

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

Brian Freed - Wunderlich Securities Inc., Research Division

I got a couple of them for you. First, congrats on your first wide a** storage deal. But on the [ph] product line, can you give a little color in terms of the size and scale level of what those deals are looking like relative to a typical phase StorNext deal?

Jonathan W. Gacek

Are you going to moonlight as a comedian with your wider storage comment? So these systems, they start at 500 terabytes, and that's where you really start getting the value of the technology. What's interesting is we don't really know where the limit's going to be. And Linda's not going to let me buy a big enough demo system to figure it out. I mean, there's not any real reason why it can't be in excess of 10 petabytes based upon the technology. We believe we'll have some customers who will scale to that level and test it, especially now with the increased capabilities of StorNext, which will be part of one of the offerings at any rate. So these are -- I think we're very excited about the opportunity here, and these are going to be multiple petabyte-type systems to start for sure. I know there are some that are greater than 5 that we're talking to as well. And customers are super excited about the value that the combined solution set and our ability to both manage and sell this kind of solution, they're very excited about the opportunity.

Brian Freed - Wunderlich Securities Inc., Research Division

Okay. My second question, you've made, I think, 2 references to your capital structure. By that, do you mean you're operating but your -- kind of your OpEx structure? Or you're talking about specific plans to alter your capital structure, i.e. debt equity?

Jonathan W. Gacek

We're talking about both. And as we're -- as we grow, we generate cash and are more profitable. We're also going to opportunistic around the market. I think one of the interesting things, and I mentioned this in my comments, as part of trying to get higher up into accounts to close deals, it was amazing to me how much our sort of big reference competitor uses our size and their size and our capital structure and the like against us. And I think it's interesting that they don't talk about products that much anymore. And so we're pretty confident in our ability to compete on a product basis and getting in front of the end user. We'll be opportunistic about -- opportunistic and focused about taking away from anybody the ability to talk about our capital structure.

Brian Freed - Wunderlich Securities Inc., Research Division

Okay, great. And then I guess the third area I wanted to touch was just the royalty outlook with LTO-6. Should we expect any sort of bump up with the rollout of LTO-6? Or do you think we should see royalties kind of on a continued slow decline from the LTO side?

Jonathan W. Gacek

Yes. So a couple things are going to happen there. The rate will go up with LTO-6. And I believe -- I don't even know where we are in the scale anymore of the declines, because they're not in concert anymore because of the timing of the drives coming out. So I think the rate will go up. The question will be do units go up? And because there is a lot more capacity in an LTO-6 versus an LTO 5. One thing that I believe that all 3 of us who are in the LTO consortium, so IBM, HP and ourselves believe is that there wasn't as much movement from 4 to 5 as in some of the past year, in past generations. And so there's a lot of people on 4 who we think are candidates to move to 6. And that will be a better overall solution for them and obviously better from a royalty perspective as well. So we'll see. We're on schedule to get that out. We started seeing interest this quarter a lot, and we do think that LTO-6 coming probably impacted a branded and OEM tape number.

Brian Freed - Wunderlich Securities Inc., Research Division

Okay. And then just drilling in on capital structure a little bit more. It sounds like you might be looking at an opportunities to increase your scale potentially. Should we think of your opportunistic look at capital structure being a blend of potential partnerships and/or acquisition, as well as financial restructuring?

Jonathan W. Gacek

I wouldn't -- the former, I wouldn't put under the same category. I definitely think that there are more and more partnership opportunities available for us as people see now how good the technology is. The improvements that we've made in DXi moving to the new 3-terabyte drives before anybody else, the new StorNext 4.3, the over 1 billion files, all of that is much different than others can provide. Similarly around vmPRO. So we are definitely focused on adding access to end-user customers. We're going to do that wisely. We think there are places where we could help other companies who have a common set of competitors. And we're having more channel exposure, end-user exposure would help us as well. I think, as far as M&A activity goes, for us, we need to prove that we can grow these businesses. I think we've got enough to work with right now. This -- the investment we did with Nerve is fairly nominal, but it is a really interesting technology combined with our StorNext file system, that has interest in both our government customers, but in our rich-media customers as well. So I think we're going to be judicious about how we spend. We're going to be aggressive about how we partner because we think now is the right time to do that.

Operator

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

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

Just wondering if you could touch on the macro, what you saw in Europe specifically, and what you saw in the United States and even in Asia during the quarter?

Jonathan W. Gacek

Yes, I was waiting for somebody to ask that since we didn't hear it last time. So we did better in Europe than we did the quarter before. I think the environment is still super choppy. I think our execution was better. I mentioned that we've made changes to our team. We've done some things just to focus on the issues that we saw, so I think we did better there. In Asia, I think we were about the same as last quarter. We had a little higher expectations in Asia, so I would say that's kind of neutral. In North America, we did, I would say, fine, based upon our forecast, still room for improvement. The thing that, I think, surprised us a little bit is we feel like we're in sort of the best programs inside the government space. And I think Linda mentioned that around our tape business was off about half. But all the government business was off about half. Maybe, Linda, it's a little less than that, maybe 40% off? And we still think we're in the right programs, we think those will pop out eventually. But it was not a robust fed period for us for sure. And we expected to do better than that, but we did some other things well, So those kind of offset. Does that answer your question, Ryan?

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

Yes, it does. Looking at the sequential improvement in the disk sales, what can you point to specifically that was such an improvement from Q2 to Q1 in DXi and StorNext? I know you highlighted the 8500 systems, but what about the environments? What about execution with such a dramatic improvement in the quarter?

Jonathan W. Gacek

I tried to talk about some of the things that we did and what we're going to do. I mean, I think we did a better job of getting deals closed when they were ready to be closed early in the quarter. I think we did a better job of scrubbing the pipeline to make sure we are focused on deals we could win. I think our pipeline has improved. I sometimes don't talk about this enough. You have to have -- to be a specialist like us, you've got to have good products. And I think the appliance strategy and even getting DXi off on the 2.0, all of that is less than a year old, so -- or about a year old. So we've really starting to get the benefit out of that. Some of our salespeople got more productive for sure. And then the last thing I'll say is there's nothing like end-user customers asking partners to talk to them or sell to them the Quantum solution. And I really feel like our awareness campaign in the areas that we are doing around getting to end-user so that they understand our value proposition is helping us. The number of accounts that I talked to, that Ted talked to, that Linda talked to at senior levels, where we could tell our story and respond to some of the fud that we hear from competitors, I think, is helping us. And we're going to do more of that and we feel good about the product portfolio. In fact, we feel great about the product portfolio. It's really about end-user demand and having more opportunities in the funnel because our win rates keep going up. I think we're up again on DXi, I'm looking at Linda.

Linda M. Breard

That's right.

Jonathan W. Gacek

Yes. So I think we're up to 55%, which was an increase from last quarter.

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

I want to follow-up on that because if you're getting higher up in the food chain, if you will, and talking to higher-level folks to make buy decisions, what efforts have you done? Or specifically, is it you? Is it Linda? Is it Ted getting in there and talking to these people more than you have before? What is it about Quantum being able to step up and actually talk to the buyers, the ones that make the larger decisions now than in the past?

Jonathan W. Gacek

I think it starts with the problems that we're solving, the solutions that we're providing are more relevant. So I'll give an example. In the rich-media space, I was down in LA and spent time with the big media companies at fairly senior levels. It's because our technology is so important to what they do everyday, and it's part of their business flow. And movies don't get produced, content doesn't get encoded, TV shows don't run if our stuff doesn't provide the kind of solutions that they want. So that's one. I think, two, we've talked about this in the past. We're getting the bigger deals. And we've got buzz words, if you will, around solving customers' problems. We have cloud solution. We've got a virtualization solution. It's a lot different going into getting an appointment with a CIO and saying, "Hey, we have a cloud solution," as compared to, "Do you want to upgrade your tape library to LTO-5?" It's just a different level of solution set that we have today. And then I think, finally, the deals are bigger. As we get into these bigger deals, people like making connections with people when they're spending a lot of money with them.

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

Great. That's helpful. Also talking about specifically in the investments that you're going to scale back, can you say specifically where you expect to cut back in those areas that aren't getting the return on investment that they -- that you like to see that you're going to scale back on? Did you give an amount earlier too in your prepared remarks? I'm not sure.

Jonathan W. Gacek

Yes, we're targeting -- we're going to target at $1 million this quarter and...

Linda M. Breard

$6 million.

Jonathan W. Gacek

$6 million next. And basically, we think about 2 things. We've got a broad portfolio of products. Some of them are more strategic, some of them more profitable than others. We've got a worldwide organization. And so what we'll do is look at the investments that we're making, what kind of returns we're seeing and then look at the infrastructure that goes to support those businesses. And so we'll look at all of that. The -- as you can tell, by being 1 and 6, we're not going to do much this quarter as we see how the quarter unfolds. But we definitely see a need, at this kind of revenue level, to pull back and generate cash and improve profitability and still think we can fund the places where we're doing well and growing. I mean, it's really it comes down to where we're performing well, we're going to spend more and where we're not, we're going to spend less. And that, we're going to look at it all the way down to specific products and even locations.

Operator

[Operator Instructions] And our next question comes from the line of Glenn Hanus with Needham and Company.

Glenn Hanus - Needham & Company, LLC, Research Division

I think you hit on most of my questions there. Could you touch on Teradata, what you're seeing in terms of starting to get some traction there and your expectations over the next few quarters?

Jonathan W. Gacek

Yes. So what we -- Teradata sells an analytic solution that includes a whole set of hardware and software products. And when the customer purchases data protection as part of that, our libraries are now -- and our encryption are now part of that solution. We announced that right, I believe, it was in September or late August, so pretty late in the quarter. I think we actually did have a deal that closed in that transition period. I don't think it's material, but I do think we -- it starts off designed in. And then the nice thing about it is that we think that we provide them a better solution for the customer than their prior supplier, and it has our name on it, it's Quantum-branded. And it's obviously in a space where we have a lot of expertise. So we haven't given any number yet, Glenn. You know me, how I am on this. Once I understand how big it can be and we get some water under our bow, I'm happy to talk about it. I think what's important about it is it's a -- there will be revenue and there will be noticeable revenue. But it's what we have to do to expand our go-to-market capability, because our technology is just too good to be constricted in just the independent channel or just pigeonholed as a backup only, in this case, type of product.

Glenn Hanus - Needham & Company, LLC, Research Division

And one more way or try on the -- with DXi and StorNext, I mean, you significantly beat my expectation this quarter. What surprised you most there? What sort of came in that perhaps we hadn't really modeled for?

Jonathan W. Gacek

Well, I'm not going to -- I don't want to sound cocky the other way. But my biggest surprise was it wasn't higher actually. I mean, we're in a lot -- we have a lot of deals and opportunities. And I think what's happening is in StorNext in particular, the appliance strategy is working, and we should be getting even more than we're getting. And as our sales team, our channel partner and the customers see it all, I think that's going to accelerate. On DXi, probably with them what I'm surprised both positively and negatively on is that the 8500 in particular, which a lot of people would say is our reference competitor's sweet spot, we did really well. And I mean, I think we're up 130% sequentially. And we're still not getting as much momentum even though we just launched -- sold our 1,000th unit. Still in the midrange, but I think there's more that we can do. So overall, I think there's more for us there. I think we're going to keep growing here. vmPRO is a key part of the messaging. That new piece of software is -- we just launched is going to be very interesting as well. So I feel good about the disk and software space. Probably the biggest surprise, if you wanted to have a surprise, was just that tape result. And I think we've identified what the issues are, both internally and externally. But to really grow like we want to, we have to be hitting on all cylinders including tape. And our team needs to focus on that and then hopefully, our OEM partners will as well.

Glenn Hanus - Needham & Company, LLC, Research Division

And you mentioned sort of a good shot at 50 this quarter. Should we expect both StorNext and DXI to be up this quarter? And what sort of visibility do you have on that 50 at this point?

Jonathan W. Gacek

Yes, so we're not -- when I say shot at, we're not forecasting that high yet. But we're close enough for me to say shot at. I want the sales teams that are listening to know that I said that. I think both DXi and StorNext will both be up. And it's a combination of deals we have in the pipeline, deals we didn't get all the way over to the goal line, budget flush, kind of all the usual culprits. But that business feels like we've hit a spot now where we've got more work to do for sure. And we'll -- we need to keep doing the things that we did pretty well this quarter. It's interesting, if you just look at the competitors, if you look at the primary storage vendors, it's still really about EMC. I mean, there's some of the other primary storage vendors who just don't have solutions here. And I think I talked about the fact that business is going to more than double from last year. It's going to be difficult for the share leader to keep that share in a doubling market, and we think we're in the best position. But we still are constrained at up -- for opportunities. I know that the sales team on the call, we can do more if we have more to work with and we're going to -- so we're going to continue to drive on the awareness and drive on growing this business because we think we're in a good spot for that.

Glenn Hanus - Needham & Company, LLC, Research Division

And you have an overlay sales team on, I think, on the StorNext or call it the big data side. Is that kind of making a big impression here now?

Jonathan W. Gacek

I think it is the focus on that problem set for customers. I will tell you, we've hired some really great people in both the data protection but on the StorNext side. Candidly, one of the things that we're finding is when we're hiring people from NetApp, EMC, HDS, Symantec, we got to make sure they know how to position and sell tape, too. And so we're spending a lot of effort on that. But we're hiring good people. People like our story, and they think it's a very interesting set of solutions that we have. And I think we're getting good high-quality people.

Glenn Hanus - Needham & Company, LLC, Research Division

And on StorNext, should we -- if you kind of look at you have the software, which has been out for a while, then you have the appliance side. Is it like the pure software side is -- I know that could be a little lumpy. But that's sort of steadier business and we're really seeing the growth on the appliance side. Is that how to think about it?

Jonathan W. Gacek

Yes and no. I mean, we had -- I think, I said in my prepared remarks, I did say that we had a strong software period to compare to what we were forecasting. But we had record appliance. So the reason the appliance matters is that it's an integrated solution. It's higher revenue because we're selling hardware and software. There's -- it's easier for the customer in the channel to -- channel to sell than the customer to implement, so it broadens our market out. So I think appliance is, for sure, just by the sheer math, will be the driver of revenue. But I believe we added -- I think we added like 60 some, 65 new...

Linda M. Breard

Customers.

Jonathan W. Gacek

New customers, which is about on par with what we've been doing. And if you think about the dollar size of each deal going up, that's how you're going to see the growth.

Operator

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

Jonathan W. Gacek

Well, thank you for joining us today and I appreciate the comments and the questions. I hope you can tell from the call, we're excited about the opportunity with the growth businesses. We think our bread and butter tape business needs to continue to -- it needs to improve from here for sure. And we do those things, we think the company will grow overall. And enjoy the holiday season and we'll be back to talk to you in late January. Thanks very much.

Operator

Thank you. Ladies and gentlemen, that concludes the Quantum Corporation Second Quarter 2013 Conference Call. If you would like to listen to a replay of today's call, please dial (303) 590-3030 or 1 (800) 406-7325 and enter the access code of 4569698 followed by the pound sign. We thank you for your participation. You may now disconnect.

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