Quantum Corp (QMCO) 2012 Q4 法說會逐字稿

Welcome to the Quantum Corporation fourth quarter 2012 conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(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.

Thank you. And good afternoon, and welcome. Here with me today are our CEO, Jon Gacek; and 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. The forward-looking statements include statements regarding our business strategy, 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.

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's 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 system 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 system and software product revenue category.

Another highlight of the quarter was the launch of our DXiV1000 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 tabs. 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, and getting Xerox launched and then forming a separate product group for cloud-based solutions led by Henrik Rosendahl, 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 2013. 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 six 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 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% over fiscal '11.

In addition, branded DXi and StorNext software and appliance revenues were the highest they have 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 and 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?

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 fiscal of 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 to the [year-over-year decline. 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 and 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 of $1.1 million, our first year-over-year increase in OEM automation in nearly two 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 OEM automation business, the primary driver of the growth was in the midrange.

Over the past few quarters, we have continue to invest wisely in our tape automation portfolio, and have introduced 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 system 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, 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 generated 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, with 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 a win most commonly given by customers is feature advantage over our competition.

Overall, having DXi products that are best of breed reflects the investment and focus we have made in our disk systems over the for 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 [which was up 80% year-over-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 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 the Storage Magazine/SearchStorage.com 2011 Products of the Year competition, and our DXi6700 family of midrange disk backup and deduplication appliances 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. [StorNext standalone] software 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 libraries, which we have found makes StorNext much more competitive in places 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. [The decline in OEM out of warranty repair] 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 decline year-over-year that were partially offset by increases in contract revenue associated with branded disk systems.

Turning to gross margins, 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 the reduction in service revenue, which declined more rapidly than the associated service support cost, which included significant [fixed] components. 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. The primary driver of the increase in sales and marketing relates to incremental salaries and benefits from additional investments we made in the team throughout the past year. Additionally, to get a jump start on fiscal 2013, we invested early into some key head count additions in 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 systems engineering teams. Non-GAAP operating expenses for fiscal 2012 were $243.2 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, [or 6.4% of revenue gone from] $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 reduction in OEM deduplication software and royalty revenue, and incremental sales and marketing spent.

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, which is $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. 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 over back to Jon.

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 three 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 three 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 industry's 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 two 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 into 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 would 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're very easy to deploy. They're 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 the EMC Isilon, where he has served most recently as area director covering Southern Europe, Benelux, and the Middle East. During his five years at Isilon, Xavier grew sales from nothing to more than $50 million. Xavier has more than more than 20 years of experience in the IT industry, leading international organizations and multinational teams and has made an example of being able to add talent as part of his recruiting process.

At our fiscal 2013 Worldwide Sales Kick-Off last month, I was very impressed with our team, including the new people we've recently brought on board, 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 the decline in the tape royalties, similar to that happened in fiscal '12 in absolute dollars. Better said, we expect a similar 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 sustain momentum beyond fiscal '13.

We thank you for your support; and with that, we'll turn it over to the operator for questions.

Thank you. (Operator Instructions) One moment please for our first question. Our first question is from the line of Ryan Bergan with Craig-Hallum Capital. Please go ahead.

When you look at the growth -- first I want to say congratulations on the great disk quarter. That was very nice to see. 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?

Both. So you have to think about it and as you look forward this year there's going to be two 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. The StorNext appliance strategy is really about adding more solutions so that we can drive deeper in our focus markets and broaden out the markets that we can serve. So today we're strong in StorNext and rich media, the government space, and then 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-enriched media management for corporate customers, people's commercials, training videos, the like.

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've 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 is, 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.

I want to dive in a little bit into the geography and the verticals. You cited weakness in Europe. Can you give any specifics, to these specific areas in Europe? And are you able to see impacts your seeing early on in Q1?

For us, the scale's not big enough. We were off several million dollars type range. I can't speak of any specific geography in Europe. I can tell you 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 the customer reasons. Bigger deals, I can't give any geographies specific. I would say that the European unrest, similar to what it was in the US several years ago, you just can't be sure that the deal is going to close. And so, we do our best to work through the reseller and the end user but we don't always have visibility of things that going on at more senior level. So the bigger the deal, the more risk we felt. And we really saw that in tape. We don't think there's anything fundamentally going on with the tape market. We gave our stats on that. We just think tape was a struggle in some of the big deal closings that we had planned on and it didn't occur. And then in Asia, I don't have anything to pinpoint on those. That team has done great all year. They've been over plan all year and they just really struggled across all the product, getting things to close this last quarter.

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

Yes, that's good. I would say, I'd put three 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 a tiered architecture. We knew that we're going to do something in this new space by adding in this -- we looked at 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 that group and we felt like we needed to do it then. So that was number one.

Number two, anybody who was 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've become, and where we're going. And so, we decided to launch our new awareness campaign. If we haven't seen it, you'll see it more. I really like it. I think it positions us in a great light. It's billed around a concept of being certain about your data, your solution, your business. You're going to see us be much more aggressive about promoting who we are. 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 a not-full-on way. I was going to use a different term but not in 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 opportunities. So these would be 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 of one more -- India. We're starting to get traction in some of these markets and we felt we needed to staff them more fully and want to start the year that way.

Thanks, Jon.

Thank you.

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

Hello?

Hello. Okay, the phone was really weak there so I didn't hear. This is Glenn Hanus of Needham. Am I on the live line? You are, Glenn. How are you?

Okay. Sorry. Okay, Jon, so 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?

Let me start and Linda can jump in here and add any more color that I miss. At this revenue range that we're at right here, and at the $155 million level, we get impact just on scale. Our fixed costs start impacting our gross margin. So in this 42%-ish range, that's 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 settle in, in the mid-45%, you can 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's a lot better. 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 from 45% into the high 40% and then at a certain level, we should be close to 50% in the future years. Anything to add?

I was just going to add to that, as we've 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 to the operating profit line very nicely. Getting above that $160 million a quarter number really reflects well in our results. So being the $160 million range keeps us down in the lower end of the 42% that we reported.

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

I'm going to step back and answer that a little bit more broadly, Glenn. If I reflect back on this year for myself, and I've talked about this on different calls, we're a specialist or somebody who 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 product 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 -- we have great solutions. We stack up well. As Linda's mentioned, our win rate against the disk guys is 56%. It's not about product anymore but you've got to have products to be successful.

I think Ted and his team, we've brought in a number of senior people this year. We're 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 aligned. So I think the way Ted and I -- Ted's not here today and I'd let him answer this -- I think he and I think we've got a great team but we've got a great opportunity. We're going to keep adding quality people within our budget to take advantage of that opportunity in both markets, products, and overall storage spend.

We don't have to do a lot of drastic changes. I think Ted has put in a lot of really good improvements and as I mentioned our team and the people we've hired are great. I'm comfortable spending more to grow this business and to really hit on the opportunity that I think exists. Our goal is to be a lot bigger three years from now than we are right now. So to do that we're going to have to sell more and keep adding people.

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

Yes, so today, our DXi V1000 is the backbone for, as I mentioned, Xerox's cloud solution. So they're selling it though 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. 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 into the cloud, or take out 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. You don't think that others can do it the way that we do it. We think our solution is very unique and so 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've known 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.

Okay. Thank you.

Thank you. And our next question comes from the line of Catharine Trebnick with Northland Securities. Please go ahead.

Hi. I'm having -- this happens all the time with you guys. I hope you can hear me.

We can hear you.

We can hear you fine.

Okay, great. Thank you. Just a couple of quick questions on the channel. I know that was one thing that you're working on and you'd also said on the last earnings call that you were 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? Thanks.

Sure. I didn't put it in the prepared remarks. 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 types of products. And so, over the last year, you could think of this 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 capabilities, all focused on SMB. So what we're really doing is dusting off a set of plays that we've 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 an important part of our strategy. 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 three or four years.

On the more middle of the pyramid, if you will, the small, the big enterprise, but below the to the Fortune 1000 companies, that's really our traditional channel. And there's two things going on there. One is, really making sure we're 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. 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. So we're doing a lot around training and positioning with the StorNext appliance strategy as well. That one's probably the least far along, to be candid, and we're going to continue to push there.

And then the fourth thing I would say 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 great technology, great products, great solutions, 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 [things]. 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 in those four groups.

That was very good. Thank you so much.

(Operator Instructions) One moment please. Our next question comes from the line of Cindy Shaw with DISCERN. Please go ahead.

Hi, can you hear me?

Yes, we can.

Great because I can barely hear you. Couple of questions. One as we look toward the coming fiscal year, if you could talk about the visibility and the factors that could really cause things to go into the lower end of expectation or the higher end of expectations? And then I have some questions after that.

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

Yes. I think the upside is not being risky. [We] could drive it either way.

Yes.

If you could give us a sense of visibility.

Our visibility hasn't really changed. Our own 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. It's gotten less so in 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 another periods. I feel great about the products. I feel great about the sales team. I feel great about the channel partners. I just 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 a growth culture and growth challenges. We're going to embrace those as a company.

The risk to me really are, do the economic concerns hurt us? Getting to the growth goals that we have, if you just ask me to focus on one. In the past, I would have said a lot of 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 good spot. We think of our products are fantastic. We think our thing team is good. We have tons of energy. Our sales kick-off a few weeks ago had tons of excitement and it was genuine excitement. So we're bullish about where we're headed. And candidly, we have to show that we can grow and so this year -- you can't get a billion until you get to $700 million. So we've got to get to $700 million or the next level and then we can keep growing from there.

And do you have (inaudible)

I'm sorry, you are breaking up. Can you repeat that? Can you repeat that question? Operator, I don't know if she's on the cell phone or there's some other connection problem.

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

Hey, 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. It appears to have a pretty significant backup and data protection element. One, can you comment on if you're involved in that specific deal?

And then the second question I have might be more for Linda. But as you look at the gross margin profile of both quarters just completed and your first half of the coming fiscal year, as you look at the mix, you had a bit of a shift towards higher margins, disk and software as a percentage of revenue. But yet, you didn't see particular leverage at the gross margin line. Where was the mismatch? Was there some discounting or [is tape] something that you can point to specific that led to that trend?

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 could do that first and then we can address Xerox. I think Linda touched on it. There's two things that will drive margins for us. One is mix. The other is the amount of revenue. And in this range right now, Brian, with $160, the volume variance, if you will, that runs through the factory is pretty high. The other thing from a mix perspective, 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. I tease Ted all the time, if we have more revenue, we'll have higher gross margin. 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 of pressure on the margin.

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

And the mix.

And the mix.

Okay. On Xerox?

And then on Xerox, I had a couple of people call me about that deal. I have two 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 a subscription model, if you will. They can also resell DXi. And so, this feels like the announcement phase of the transaction, as compared to the implementation and execution phase. As I [ping] my team, I think we're in it but I don't know how big or 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.

I mentioned on the call, if you go to ACScloud.com, look at their three -- or I think there are five now -- five cloud offerings, four or five. We're two of them and we're data protection. And we're 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 geographically 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.

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

I think there's opportunities in both.

Thank you.

Thank you. (Operator Instructions) We have a follow-up question from the line of Cindy Shaw with DISCERN. Please go ahead.

Hi, I apologize. I had a bad cell phone connection and got dropped earlier. I'll [move] back on the [milestone] questions which I'm sure will be in the transcript. But the other questions I had were, [tape. In case] of the royalties being flat in the coming year, is that really a sign that you think it's bottomed, and will stay flat, or potentially even go up?

Also another tape question is, IDC has said that they're expecting midrange tape systems to grow and is the disconnect between your flat outlook and theirs the difference between the branded systems and the overall? Or are you not in agreement with IDC's view that tape will grow?

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 are going to grow and there will be part of it that decline, is 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'll 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 a spinning disk world. I think that'll 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 [being] a first tier and tape being a second. We're going to say tape's flat. Some will be up and some would be down.

On the royalty, it was probably what I said so let me be clear. We think that the royalty will decline this year at the same dollar amount which was --

Around $8 million or $9 million.

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

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

That's probably right. 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 business has come down. Remember, you're talking about IDC report. And so, we're saying flat. We sell tape media, too, and tape devices. So we feel good about -- our midrange business was great this quarter -- and we feel good about our enterprise position. We added the 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 talked 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 would just love it if people were not negative about tape because I spent a lot of the last few years -- I won'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.

Right. Thank you very much.

Thank you. Thanks for calling back in.

Thank you. (Operator Instructions) There are no additional questions. You may continue.

Thank you very much. Thanks for participating in the call today. As a reminder, this was our fiscal year-end so we were 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.

Thank you. Ladies and gentlemen, that does conclude the Quantum Corporation fourth quarter 2012 conference call. If you'd 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.