Quantum Corp (QMCO) 2003 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Quantum Corporation first quarter earnings conference call. At this time, all participants are in a listen-only mode. Following the formal presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press the Star, followed by the Zero. As a reminder, this conference is being recorded, Wednesday, July 24th, 2002. I would now like to turn the conference over to the Investor Relations Manager, Audrey Pratt. Please go ahead, Ma'am.

Thank you. Good afternoon, and thank you for joining us. Joining me for the call today are Michael Brown, Quantum's CEO, and Michael Lambert, Quantum's CFO. As you know, during the course of this discussion today, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events for the financial future performance of Quantum Corporation. We would like to caution you that such statements reflect only our current expectations, and that actual events or results may differ materially.

The forward-looking statements that we will make include statements about our financial outlook with respect to the second fiscal quarter of 2002, including anticipated revenues; gross margins; operating expenses; and loss per share; the expected negative impact on sales from continued weakness in IT spending; the introduction and expected market acceptance in contribution to revenue of our new product introductions; the expected improvement in our financial results and market positions; the expect return to profitability; positive cash flow and growth; reduction in our cost structure and operating expenses, including a potential restructuring charge; and our expected ability to modify aspects of our credit lines and synthetic lease facilities.

Our statements are based on current expectations, forecasts and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. These risks and uncertainties include the length and severity of the current economic downturn overall, and in our DLT tape and store solution sectors; our ability to successfully introduce new products; competitive pricing pressure in the market for our DLT and Super DLT products, and a resulting impact on our margins; reliance on major customers; changes in technology; unforeseen technological limitations; the ability of our competitors to introduce new products that compete more successfully with our products; risks associated with international sales and operations; the ability to retain key personnel; and the impact of the recent Hewlett Packard-Compaq Merger on sales of our DLT and Super DLT products.

We refer you to the risk factors and cautionary language contained in our reports filed with the Securities and Exchange Commission from time to time, including, but not limited to, those risks and uncertainties listed in the section entitled Management Discussion and Analysis of Financial Condition and Results of Operation, Trends and Uncertainties, Pages 44 to 54 in our annual report on Form 10K filed with the SEC on July 1st, 2002. Such reports contain and identify important factors that could cause actual events and results to differ materially from those contained in our projection for forward-looking statements. We undertake no obligation to update such projections or forward-looking statements in the future.

I'll now turn the call over to Michael Brown, Quantum's CEO.

Thanks, Audrey. Good afternoon, and thank you for joining us. Before I discuss the highlights in each of our businesses, let me provide a brief overview of our fiscal Q1 financial results. Quantum ended the quarter largely as expected when we made our June 24th pre-announcement. Total revenue for the quarter was $211 million, at the high end of the 200 to $215 million range that we anticipated at that time. The overall pro forma loss for the quarter was $14 million, or 9 cents per share diluted, at the better end of the range of a 9 to 13 cent loss we projected in our pre-announcement.

As we said then, our fiscal Q1 revenues were negatively impacted by sales at one major OEM being lower than their forecast, which affected our tape drive, tape media, and tape automation revenues. In addition, as other technology companies and analysts have reported, customer-buying behavior remains sluggish, with increasing levels of senior management approval required for many purchases. As a result, there was no counter-balancing sales strength to offset the effect of the changes in this OEM's forecast.

Given our revised revenue profile, and the fact that we do not expect a rapid recovery in IT spending, we recognize the need to further reduce our cost structure and operating expenses beyond what we have already done this past year, and we are exploring a range of options to accomplish this. We will comment further on this later in the call.

In the meantime, there were positive aspects to fiscal Q1 that help explain why Quantum is well positioned for the long run. First, even in the difficult, icy spending environment, Quantum continued to benefit from the recurring revenue stream provided by our DLT tape media sales and record Storage Solutions Group service revenues. Together, they totaled $108 million in the June quarter, which again represented over 40 percent of Quantum's overall revenue.

Quantum also launched four new products in fiscal Q1. All of these products began to contribute revenue during the quarter, and although the contribution was small, we expect it to grow as these products gain traction towards the end of this calendar year. I'll highlight these products as I discuss the performance of Quantum's businesses in the June quarter, beginning with our Storage Solutions Group.

Storage Solutions Group revenue in fiscal Q1 was $59 million. This included record service revenue, which closed this quarter at an annualized run-rate of over $71 million. Despite the difficult economic environment, we also began shipping three new Storage Solutions Group products in the June quarter, all on schedule. These products are the ATL M2500 Super Loader and Guardian 14,000. First, the ATL M2500 modular tape library will help further solidify Quantum's existing strength in the mid-range tape automation market. The ATL M2500 offers enterprise class features with pricing for the mid-range markets, as well as the highest density, scalability and flexibility in its class. One major OEM will begin ramping this product in the current quarter. Others are expected to due so in subsequent quarters.

Second, the Super Loader is an autoloader that extends Quantum's tape automation reach to the low-end segment of the market. This product ramped at several million dollars in the first quarter of production, with HP, IBM, and Tanburg all shipping. Additional OEM ramps are also planned for the current quarter.

Third, the Guardian 14,000, our first mid-range server, has enterprise class features, and will enable us to extend beyond our leadership position in the work group, or entry level segment, into a much larger segment of the market. This product was so well received, that we increased production to meet demands for the quarter.

Another highlight of the June quarter was the channel sales of both new and existing products. This was an encouraging sign, given the establishment of one integrated sales organization within the Storage Solutions Group that we announced in April. We are also pleased that we have been able to extend the strong relationship we had with Compaq prior to the HP merger, to the new HP. After selecting Compaq enterprise tape libraries for its product road map shortly after the merger, HP recently selected Quantum as the enterprise tape library supplier for all of the company going forward, which we expect to benefit us in future quarters.

Now I'll discuss the performance of our DLT Tape business in fiscal Q1. June quarter revenue for the DLT Tape Group was $160 million. Revenue from tape drives was $70 million. In total, tape media revenue was $90 million, up 11 percent on a year-over-year basis. Of the $90 million in total media revenue, $45 million was from direct sales of Quantum branded media, and $45 million was from royalty revenue.

The highlight of fiscal Q1 in our DLT Tape business was the first shipment of Super DLT Tape 320, our new Super DLT tape drive. It offers 60 percent greater capacity, higher performance, and a lower cost per gigabyte than any LTO drive in the market. In addition, it is the only super drive to offer backward read compatibility to previous generations of DLT tape, which is particularly important to end users with large amounts of data archived on DLT tape media. With SDLT 320 shipping, Super DLT tape drives represented 36 percent of Quantum's tape drive shipments in the June quarter, and we expect this percentage to increase, as additional customers complete qualification and begin shipping SDLT 320 in the current quarter.

Last week HP began shipping this product, joining and Tanburg, which, along with Quantum, began shipping last month. Qualifications for SDLT 320 are underway at all other major server OEMs and tape automation suppliers. In addition, we are working closely with our customers on joint marketing activities to capitalize on the time-to-market advantage we have with SDLT 320.

DLT tape technology remains the leader and de facto industry standard in the mid-range server market, with 72 percent market share in calendar 2001, according to IBC. This has enabled Quantum and our DLT tape drive partners, to create and install base of nearly 2 million DLT tape drives and Super DLT tape drives, with over 80 million media cartridges having been sold.

Now I'll turn the call over to Michael Lambert, who'll provide some additional details on Quantum's fiscal Q1 financial performance. Michael.

Thanks, Michael. Excuse me. First, I'll provide some comments on our fiscal first quarter pro forma results and on our balance sheet, and then I will cover the reconciling items between our GAAP and pro forma income statements that were sent out in addition to today's press release. As Michael Brown stated, overall revenue for fiscal Q1 was $211 million, consistent with the 200 to 215 million-range we estimated in our recent pre-announcement.

Our pro forma loss per share was 9 cent diluted, and GAAP loss per share was 84 cents diluted. Pro forma gross margin, excluding amortization of intangibles, was 31 percent, down slightly from last quarter, as expected. Pro forma operating expenses for fiscal Q1 came in at $82 million, the result of carefully managed discretionary expenses during this continued difficult economic environment.

We exited the quarter with 306 million in cash and short-term investments, down 38 million sequentially. The reduction in cash balances from fiscal Q4 can be primarily contributed to the pay-down of M4 debt, totaling 39 million. During the quarter, we generated 6 million in cash from operations by reducing working capital. We also took positive steps towards reducing our capital expenditure run-rate, by bringing the number down an addition 5 million from last quarter, to 6 million.

Our performance for the quarter resulted in our violating two covenants, both on our credit line facility and on our synthetic lease facility. We are currently working with the banks, and believe we can secure a temporary waiver, which we believe is common in these situations, as we work through our costs and op ex restructuring efforts. Once our operating expense work is completed, we expect to re-engage with the banks to try and amend or redo the two facilities. If for some reason, we are unsuccessful in securing a temporary waiver, by the time we file the Form 10Q for the June quarter, we would be required to report the synthetic lease facility as an asset, and the full 63 million residual value guarantee as an obligation on the balance sheet.

In addition, we could lose access to the 38 million standby letter of credit by letter of credit contained within our credit line facility, and have to restrict 38 million Quantum cash to cover our existing letter of credit. Either or both of these items could material impact our liquidity. We have described this risk more fully in our recently filed 10K under the section Liquidity and Capital Resources with the headers Forward-Looking Statements and Capital Resources.

Now, I'd like to spend a couple of minutes describing the reconciling items between our fiscal Q1 GAAP and pro forma income statements. For your reference, these items are outlined in the table included in our pro forma Consolidated Statements of Operation, as well as in the table included in our press release.

Fiscal Q1's net charges totaled 117 million after taxes. We incurred a non-cash charge of 94 million this quarter, relating to the change in accounting associated with our adoption of FASB-142. As discussed last quarter, this new accounting standard discontinues goodwill amortization in favor of periodic testing for impairment.

This quarter, we decided to discontinue our QTB venture activity, and took a 17 million non-cash charge for the difference between its carrying value and the estimated liquidation value in the secondary market. While we have built a promising venture portfolio, current business conditions require us to focus our cash flow on operations, rather than continuing to finance these early stage ventures.

Additionally, during this quarter, we incurred a restructuring charge of just under $5 million associated with our previously announced plan to consolidate the sales and marketing efforts within our Storage Solutions Group.

The last reconciling item between our GAAP and our pro forma financial statements before taxes is 4 million in amortization of acquisition-related intangible assets, consistent with our previously announced move to a new pro forma earnings and EPS definition.

I will now turn the call back over to Michael Brown, who will discuss the outlook for fiscal Q2.

Thanks, Michael. As the September quarter begins, the continued sluggishness in the customer buying behavior, and overall uncertainty that has characterized the broader IT environment for some time now, has led us to set a wide range for our fiscal Q2 revenue expectations. In effect, we are trying to balance our excitement about being at the beginning of a new product cycle with the four products that began shipping in fiscal Q1, against what clearly continues to be a difficult IT spending environment.

Therefore, while we currently expect Quantum's fiscal Q2 revenues to be relatively flat on a sequential basis, they could be as much as 5 percent above, or 10 percent below, this level. We expect both gross margins and operating expenses to be relatively flat sequentially. As a result, we expect a pro forma loss per share for fiscal Q2 in the range of 8 to 13 cents, excluding amortization of intangibles and special charges.

As we stated at the beginning of the call, given our revised revenue profile, and the fact that we do not expect a rapid recovery in IT spending, we recognize the need to further reduce our cost structure and operating expenses beyond what we have done in the last year. Therefore, we will be targeting ways to improve our underlying cost structure, and expect that we will return to profitability and positive cash flow by the end of the fiscal year. These steps are expected to result in a restructuring charge in fiscal Q2.

In closing, let me reiterate some of the reasons why Quantum is well positioned for the future. We have a solid recurring revenue stream from our DLT Tape media sales and service revenue. In addition, over the past year, we have been building on our leadership positions in tape drives, tape automation, and network-attached storage, to provide customers with an even broader range of data protection and network storage solutions and services.

We have invested in research and development to strengthen our existing product line, to improve price performance and to expand into new addressable markets, such as low-end tape automation, disk-based enhanced backup, and mid-range . These investments have resulted in the most aggressive series of product launches in Quantum's history. Although it will take some time for these products to fully ramp and make a significant revenue contribution, they provide a strong foundation for future profitability and growth, particularly when IT spending recovers.

Thank you very much for joining us, and we'll now open the call up for questions.

Thank you, sir. Ladies and gentlemen, at this time, we'll begin the question and answer session. If you have a question, please press the star, followed by the one on your push-button phone. If you would like to decline from the polling process, press the star, followed by the two. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment please, for the first question.

Our first question comes from Kimberly Alexi with Prudential Securities.

Yes, thanks. One clarification first, and then a couple of questions. When did you guys start breaking out the inventory for product versus services on the balance sheet? I just might have missed that.

Yeah, Kimberly, this is the first quarter we've done that.

Okay. And then my question, I guess along those lines is, it strikes me as high, I guess, over 100 days in aggregate. So maybe you could just give a little more color on that, how it has historically trended. I know you had the prior quarter compare, but if we could just talk about that for a few minutes? And then with respect to your guidance, it struck me that the downside in the June quarter was related to this one OEM, and presumably, you know, some of those problems might be working through. So I was trying to figure out why we might not be seeing sort of a better uptake, at least from that OEM, which would, you know, theoretically lead to some sequential growth in your business. Maybe you could just talk about that? And then, lastly, any kind of specifics you could give us on some of the cost actions and, you know, really what we could expect to get the break-even by year-end. Thanks.

Kimberly, let me take the services piece, and then I think Michael will probably talk to the OEM, and some of the cost actions and how we're thinking about that. So the services inventory; obviously, the reason we did it is to start to bring and give more transparency to our business. So that's really the purpose for the change. The inventory levels there were essentially flat, quarter-to-quarter; so no dramatic tick up or down there. And it split, essentially, across both DLT and the SSG business; covers both in warrantee and out of warrantee repair.

Is that a normal or targeted level from your perspective? It's over three months, I guess?

Yeah. I mean, we're comfortable with the current level. And of course, we do monitor it, and reserve against it when we think that's appropriate.

Kimberly, in terms of the guidance, clearly, what we've done with respect to the OEM that we talked about, which was the reason for the pre-announcement, is we've significantly flattened out the ramp. So, as we talked about during the pre-announcement, it was not our expectation at the time, nor would it be conservative in projecting, to assume that we made up that lost revenue, or that it comes back on, on quarter. So, we would like to be surprised, as I'm sure many of you listening would like to be surprised positively as well, but that wouldn't be a conservative way to forecast the business.

We don't see any deterioration in what we're experiencing today. However, like many technology companies, we've been surprised with the worsening conditions, and recognize that it's probably a broader set of uncertainty, in terms of the overall economy's direction and the broader geopolitical environment, that we wanted to provide a range that would be conservative and broad enough.

So, that's why you seen some asymmetry in this quarter's guidance. I'd say we're also nervous about what has traditionally been a weak quarter seasonally. So, at this point, we decided to go with a rather broad range and one that has some asymmetry into it that hopefully, would include effect of things we might not be seeing right now, as we get further in the quarter. But the forecast we're looking at, the state of business that we see for the quarter, has it being relatively flat quarter-to-quarter.

Okay; and then the cost?

In terms of the cost, yes. Well, you can imagine that we're well in process now. We'll look at a number of different actions to improve our cost structure. I'd say that it starts with the recognition that clearly, we need to be scaled from a cost structure and operating expense standpoint, closer to our current level of revenue, rather than a projection of rapid growth. While we do see growth for our business as we move to the latter part of the year, we want to get the cost structure sized for something closer to current levels, of course.

We're looking at three different categories: first, tightening discretionary spending even further than what we've done already; second, looking at ways to improve the efficiency of our current operations; that would include such things as outsourcing manufacturing; and third, pruning a number of future opportunities that we are currently investing in. And that would involve taking a look at which opportunities where we've invested for the future deliver the biggest impact, soonest. So, we have different items in each one of those categories. We're now going through a process of deciding which ones we need to implement. And obviously, as we make those decisions, we'd be communicating them.

But what's the range in dollars that you think, at the low and high end, that some of these areas could expect to save you?

It's pretty wide at this point. So I think rather than getting into that, we should wait to make the decisions, and then provide an update for you.

Okay. But you feel confident about the break-even. Or maybe you could just talk about then what you think that revenue run-rate would be, to the extent that you get to break-even by the end of the fiscal year?

I think it's fair to say we believe that there's enough opportunity that we see that we'll be able to confidently get to a break-even and profitable position by the end of this fiscal year.

Okay, thanks.

Our next question comes from Dan with R.W. Baird.

Hi, thanks. I guess a couple questions somewhat related to the last, and maybe you could just tag a little bit on to your last comment. I mean, you're expressing a fairly high amount of optimism. And you've, you know, clearly, things haven't turned out as you've thought if you look back over the last six months. And just -- you know, what exactly are you sort of hanging your hat on, to say we've got a lot of optimism in the business? Are you talking about on the growth side with the new products? Or are you saying just looking at the cost structure, you feel comfortable with all the costs you think you can take out, and you can hold the line steady on the revenue side, and that's how you're going to get to the EPS or -- excuse me -- profitability in Q4?

Dan, I think the optimism comes from a number of things that we talked about during the call. First of all, we start with a base of recurring revenue that clearly helps us from a cash flow and profitability standpoint. That clearly gives us an advantage versus other technology companies. Second, we've already made the investment to be at the front-end of a new product cycle. And as a couple of quick examples, you know, in the tape drive business, obviously, we've got a significant time-to-market advantage now with Super DLT 320; 50 percent more capacity than any other product in its class, and expected to have that time-to-market lead for many months now. Everyone is in the process of qualifying that product going forward.

We have a design effort underway to reduce the overall cost of the Super DLT tape platform. We didn't expect to get the benefit from that in the current fiscal year, but we do expect to receive benefit from that as we look into next calendar year. We've also made investments to expand our market reach, as you've seen. The tape automation market, where our strongest position was at the high end, we now have a full range that starts with the Super Loader, goes through the mid-range and all the way, including a new product line on the high end.

And then, clearly, with the business, we've expanded into a much larger market with much higher selling prices, where we have the mid-range product. That's where the Guardian 14,000 is, and it's just coming to market now. We feel confident that at, or near, the current revenue levels, there's enough opportunity in terms of our cost structure, that we'll be able to take the steps -- and I broke those out in Kimberly's question in three broad categories, that we'll be able to take the steps required to return us to profitability.

Okay, that's fair enough. On the -- your guidance for this current quarter, you guided to basically flat gross margins and also flat op ex. Is this just being conservative assuming that you won't be able to get any of these cost initiatives underway, or why would we not look to a little bit better op ex controls this quarter?

Yeah, Dan. It is exactly as you suggest. I mean, we're partway through the quarter, and as Michael said, we've -- you know, we're actively engaged around it as a management team. It's not yet finalized, but we're already partway through. So we'll be looking to update people when all that work is completed, and I think, as Michael mentioned, that will result, in all likelihood, a special charge in this quarter.

Okay, just trying to keep the cart before the horse here. The last question here, on the mid-range , you mentioned you still have a fairly health demand there. Is there any way you can either quantify that, or else give us a little more detail around what you're seeing in that area, and maybe in the market in general?

Sure. I think what we're seeing is a new entrant into a much larger space. For us, this is the first time we've sold a product, a server, that really goes well beyond the 10,000 to $15,000 price class. So now we're moving up into $20,000, $25,000 price class of systems. So, for us, that's an untapped market. We think, in general, as do folks at Gartner Group, that this is an under-served class of product in the market. In other words, there's been a bit of a split between low-end , where Quantum has had 60 to 70 percent market share for a few years now; and then very high-end products, where you'd see Network Appliance and EMC. So you have a bit of a gap, a few players there; you know, ProCom as an example, small players, some of whom are still private in that space, but to a large extent, that category waiting to be developed.

So this mid-range market is one where you can start to bring some of the enterprise class features for serviceability; manageability; the ability to aggregate so these products are easier to manage; security features that are required when they're going to be used across an enterprise. You can start to bring some of those features in at a much more compelling price point than where high-end has been. And there's a lot of excitement about that.

Okay, thanks.

Yes.

Our next question comes from Clint Vaughn with Salomon Smith Barney. Pardon me, Clint Vaughn?

Hello. I'm sorry, can you hear me now?

Yes, sir.

Thank you; sorry about that. Could you tell me a little bit -- give me a little more detail about the Storage Solutions Group? Revenue looks like it just continues to decline there. Can you give us some of the areas of strength, and what's going to turn that area around? Then I have a couple of other housekeeping questions. Thanks.

Clint, in terms of the revenue for the quarter, I think we were disappointed at the end of the quarter. We saw some fall-off in the business quarter-to-quarter, related to some product transition. So while we saw particularly strength for the Guardian line, which we just introduced -- which we just introduced in the quarter, we saw some fall-off in terms of the other products in the market. So, the tape automation business remained as we expected it to, kind of at the time of the pre-announcement.

We are seeing strength obviously in the new product areas we talked about. Super Loader is ramping; M2500 has begun to ramp; and we expect further OEM strength in that during the September quarter. And then, we're very excited obviously, about the high-end wins at the enterprise tape library level for all of HP. Of course, just winning that in the past quarter meant that we did not have any revenue from that incremental business in the June quarter, but we'd expect over subsequent quarters for that to start to fold in.

Okay, yeah --

That gives you a picture as to why we believe there's some positive forward momentum there.

Right. And then as it relates to HP, now that they've merged with Compaq, obviously HP has the LTO technology, which is their own, and you guys have supplied to Compaq. And, you know, from what I understand, they're obviously both -- they're supplying both to the customer, kind of letting the customer decide. But, given the differential and margin structures on the two products, have you had any further conversations with them about how you could continue to keep your product on parity with the sales reps, make sure that there's not any favoritism away from you, and perhaps getting favoritism towards you. And then also, as it relates to LTO, are there any plans internally to potentially join the LTO consortium, and become an LTO manufacturer and just become more neutral? Thanks.

Well, let's start with the last question. There are no plans internally to join the LTO consortium. One of the problems with LTO, as you know, is that it's a format that is now shared three ways. So whatever market share -- you know, as we talked about last year, if you look at the IDC numbers, the LTO market share for 2001 at 16 percent of the mid-range market. That's now split among three suppliers and with a much -- what we believe to be much less rich media model than what we enjoy with DLT and Super DLT. So we wouldn't find it nearly as attractive to go in and share that market as what we enjoy with DLT, Super DLT; which we also share with a couple partners who are producing the drive, although all of the media revenue, as you know, benefits Quantum.

In terms of HP's posture, I'd have to say that we have seen no change in that from the completion of the merger. I mean, they've represented externally that they're going to be using both technologies. We've seen that reflected in their forecast, meaning they continue to be excited about what we're doing on the DLT, Super DLT side, because their customers continue to ask for it. And as we commented earlier this afternoon, they, in fact, are one of the first server OEMs to qualify Super DLT 320.

Well, I think they're more interested in enjoying the time-to-market advantage that comes with Super DLT, benefiting from the -- what we believe were very positive economics they enjoy. It's not clear to us that there are not better economics for them with Super DLT than there are with LTO, once their development costs are factored in. But we've seen that they've continued to act just as they've talked, which is to continue to support both standards, and not a bias against Super DLT.

Great, thank you. And just two quick follow-ups. Can you please give us the number of Super DLT units that were sold in the quarter, and also talk a little bit about the Super DLT 320 drives and their margin structure, relative to the prior generation? Thank you.

Well, Clint, as you know, we're not really breaking out the units. I think we said that Super DLT tape drives were 38 percent -- if I remember the number, 36 percent. It's in that range of what we shipped for the quarter. I'm going to look it up for you.

Thirty-six percent.

Thirty-six percent for the quarter, and that the 320 obviously, would've been off a very small base. Most of what we would've shipped during the quarter would be the 220, although we do expect a rapid ramp, as our customers get more enthused about the time-to-market advantage that they can enjoy with the 320. As I'm sure everyone knows on the call, when we introduced Super DLT Tape 220, the first generation, we did not have a time-to-market advantage. Back to the backward-compatible version, we were a bit late to market, relative to the first LTO entries. So, we're excited about the fact that now in the marketplace, the 320 enjoys a significant time-to-market advantage with much more compelling price performance, as well as the backward compatibility; a lot of advantages with the 320.

And Michael, the margin structure on the new product versus the older model?

The margin structure is not a whole lot different than the old one. We've benefited from all of the improvements that we've made along the way, in terms of the cost structure and yields for the product, but as it stands today, the -- so in other words -- another way of saying that, we're a lot better off from a cost structure standpoint than when we introduced Super DLT 220, but pretty similar in cost structure between the 220 and the 320. And we've put a lot of the cost improvements into the platform design that I mentioned earlier, which we should enjoy the benefits of into next calendar year.

Great. Thank you very much.

You bet.

Our next question comes from Kevin with Stanford Bernstein.

Yeah, hi. First of all, the year-ago operating expenses, what's the difference between GAAP and pro forma in that period, in terms of the operating expenses?

Kevin, the -- well, we moved to a new -- are you talking about -- which set of numbers are you talking about?

Well the R&D, sales and marketing, and G&A. The numbers are quite a bit different; the pro forma versus GAAP.

For -- I don't have the last year numbers right in front of me, Kevin. I'm sorry.

Do you know why -- you have any idea that would be? You know, they're quite higher, quite a bit higher, in -- under GAAP than they are in pro forma.

You're talking about comparison last year-to-last year, Kevin?

Yeah, last year-to-last year; so for the period ending July 1st, '01, in both periods.

Kevin, I think there were still some transition expenses included in our cost structure from the hard disk drive transaction in the June quarter. That was the first full quarter which we were separating the businesses.

All right. Well, if I look at pro forma expenses -- you mentioned that you brought down expenses a lot over the last year, but if I look at pro forma expenses, operating expenses, I don't really see them coming down. They seem to go from like 83 down to 82 million.

Yeah, Kevin. We've -- of course, we've bounced up a little bit in the meantime in there too, in order to get back down to our current level of 82, but Michael is right. You know, the -- part of the driver there is separation of the hard disk drive business, and we've had expenses, transition-related expenses, in there.

I'm taking now the pro forma expenses, right, from the year-ago period.

Yeah.

So presumably, you've taken those expenses out of that and you have basically flat year-over-year.

Yes.

So you really haven't done -- you know even though your sales were 32 percent higher a year ago, your expenses are flat. It just seems to me that you would've had -- you know, you would've taken more expenses out over the last year.

Well, expenses are down again slightly, although to, you know -- a little bit of context setting on this too. We have absorbed two acquisitions, and the operating expenses associated with those acquisitions. We clearly have had also some offsets that we have talked quite publicly about, the automation expenses associated with the lawsuits et cetera. And of course, we have continued to invest -- I think we've talked about this too. We've continued to invest on the marketing and sales side, as we've brought numerous new products to market, which, you know, have just reached market, but have continued to require some investment, Kevin.

There's probably been a --

Well -- go ahead --

It's more of a shift, Kevin, in the composition of what's in there that is not reflected in the total, as we've worked to reduce, for example, some of the SG&A expenses to account -- to accommodate the amortization that Michael talked about from some of the acquisitions, as we work to increase the productivity of our R&D investment. As we've talked about before, we're now developing three products with the same R&D investment in our tape drive business as we were a year ago.

Yeah, but you know, the other side of this is that you, you know, you go back to, you know, you go back two years ago. Your G&A was 18 million, when your sales were 366 million. Your sales were 73 percent higher two years ago, and your G&A has only gone up in that period. You know, that's looking -- it doesn't seem like you're sizing this -- your business to the realities of kind of the -- you know, of what your revenues are now.

Kevin, you know, I obviously don't have in front of me a reconciliation to two years ago, but you know, what I would suggest on this is, you know, we'll -- we're working through the cost and op ex activity now, as Michael said, to try and get size to our current revenue level. And you know, obviously, when we have all that work finalized, we'll get a communication out to everybody so that they can understand, you know, how well we're doing against that.

Well, you'd said in the past that your model assumes that operating expenses to sales is 25 percent. So adjusting it to current revenues, that would assume -- I know you can't be real specific yet, but that would assume that you take 30 million out of operating expenses. Is that in the ballpark of what you can do, which would be about 35 percent of operating expenses?

Kevin, I think it would be unrealistic to think we could get there in one fell swoop without dramatically reducing our opportunities for the future. Having said that, we are looking at some fairly dramatic changes, in our view, to the current op ex structure. I think the discussion here just reinforces what we talked about as a priority for us right now. Nothing is more important in our mind, as a management team, than taking a look at what we need to do from a cost structure and operating expense standpoint to get the business back in line, to return it to profitability. Being able to return it to profitability is the first step towards achieving our target model, which, of course, is an operating margin of 10 percent.

Okay.

And we fundamentally agree with you --

Yes.

-- that we need to now take more steps, given the fact that the revenue has declined. And I think we'd all consider ourselves, you know, somewhat poor forecasters from the standpoint of not seeing a recovery in IT spending a little sooner. I think everybody who followed this market was a little bit surprised as the continued downward revisions come for IT spending. So, this probably started March in the year 2001, and we've kind of lived -- or 2000, and we kind of lived through successive revisions downward in the marketplace; last year being the worst year ever in terms of server decline in unit terms year-over-year. We saw 25 percent decline in server units year-over-year. That's the major market that we're selling into.

Right. No, I do recognize that it did take everyone by surprise. It just doesn't seem like it's been sized correctly. Let me just ask two other items. You said cap ex is 6 million. What's your depreciation this quarter?

Kevin, the depreciation this quarter was about 9.5 million.

Nine-and-a-half. And then, finally the -- I'm sorry, two more questions. Accounts payable jumped fairly significantly in the quarter. What was that related to?

Yes. Kevin, if you remember last quarter, we were undergoing a systems conversion to Oracle 11-I, and in order to make sure that we were not going to miss any vendor payments, we actually prepaid a chuck of vendor payments last quarter. This, you know, the uptick in AP here has returned to what I'll call a more normalized level of AP.

But it isn't to a more normal -- it's higher than normal. It's 12 percent of sales, and it's typically 9 or 10. So it's still a big jump compared to what it used to be.

I mean, I look at it and think about it as days payable, essentially, days payable outstanding, Kevin.

Yeah. Well, I didn't do that calculation, but it would be the same. It would tell you the same thing, that it's higher than it has been in the past.

It's actually -- days payable is slightly down quarter-to- quarter.

Okay.

Kevin, it's -- hang on one sec. I'm going to give you those numbers. It's down from 54 to 48 roughly. But again, the real driver here was the bounce associated with the systems conversion last quarter, which was returned to normal, or a more normalized pattern this quarter.

Right. All right. Thanks, guys.

Our next question comes from Bill Lewis with J.P. Morgan.

Thanks. I'd like to ask about the disk business. Essentially, could you give a breakdown, some kind of breakdown, in Storage Solutions between the library systems and snap? Also, could you talk about what BX30 sales were for the disk-based backup? And lastly on that subject, yesterday made some comments about their business, saying they were seeing some extreme commoditization in components of that business. Could you address, you know, kind of how the segments are doing, and if part of your future opportunities have to do with exiting certain portions of that business? Thanks.

Okay Bill, in terms of the breaking down the Storage Solutions Group revenue, we probably have the service -- Michael, you can help me with the service revenue on that. We have the business at about 10 million, the service business --

The service business was 17 in the quarter.

The remainder would be tape drive, tape automation, or tape library hardware. You asked about DX30. DX30 is still in a beta site program for us with 40 customers. So we were not expecting that to be contributing in any material way for the quarter, and that really starts to ramp for us in the fall. So that really is going to start contributing in the December quarter.

In terms of the market, I'd say we do see commoditization of the market, particularly with the lower-end segments, which of course, underscores our market move-up into this mid-range area, which again, we feel is faster growing, much higher value of the servers obviously going into that, because the price point is much higher, and obviously, more of a margin opportunity there, as well. It's also expected to be a larger segment in an absolute size standpoint.

Okay. And just as the follow to that, does that imply that you will kind of cut back your participation in that low end?

You know, I think it's too early for us to give you a picture of where we see the business going. Once we get through this period where we're looking at our cost structure -- I'll just reiterate. One of the categories of the three that we talked about was taking a look at the opportunities for the future, where we've invested for the future, pruning those somewhat to take a look at what delivers the most opportunity soonest. So, as you can imagine, there's quite a few things that are -- that could be in that category, and I think we need to take the time to make the decisions, and communicate that to all the parties who are affected by those decisions.

Great, thanks.

Our next question comes from Harry with Lehman Brothers.

Hi, guys. Good afternoon. Two quick questions, one related to -- Michael, you've said in the past, and you also highlight it in your press release here, that you guys have been spending a lot of money on R&D to launch a series of new products. Do you have any sense this quarter -- can you tell us what the contribution from kind of the new/fresh products are, versus kind of the old, historical products? You gave us a little bit of a sense of that on the breakout between the DLT and SDLT drives. But if we're looking at the broader revenue, do you have a better sense on that?

No. Unfortunately, we are looking at that more by each business, than we are kind of in total. I haven't added that up. But I'd have to say in general, it'd be relatively small for the June quarter for fiscal Q1. Of course, all of these product lines just started shipping in the June quarter. So that's, I think, going to be a much more important number for us in the September quarter.

Okay. And then just with regard to , I think you said roughly 10 million this quarter. And just by the looks of my notes, that would be down meaningfully sequentially from last quarter. You indicated some commoditization, but you know, is there some other factors at work there, because it looked like about a 4 or $5 million drop in rough numbers?

There's some product transition issues for us while we're introducing the Guardian 14000. There was quite a bit of pressure on some of our older product lines there, the Rack Mount 4100, 4300 Series. So given the product transitions, our revenue declined sequentially, and we'll have to see how that works out when we're dipping more of the Guardian into the mix in the September quarter.

Okay. And then, as it relates to the balance sheet, one other item I wanted to ask about was under long-term assets, the other assets category dropped from about 42 million to 25 million. What was responsible for that?

Where are you, Harry?

HARRY BLOUT: Under long-term assets, it looks like that number dropped from 42 million, down to 25 million?

Yes. So essentially, Harry, if you think about the comments we made earlier, that is essentially the write-down associated with the QTB investment portfolio.

Got it. Okay, great, thank you.

Ladies and gentlemen, if there are any additional questions, please press the Star, followed by the 1, at this time. As a reminder, if you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment, please, for the first question.

Our next question comes from Adam Franz with Charlotte Capital.

Yes, good afternoon, guys. Is it possible to put a range of revenue around the Hewlett Packard business win? What could that potentially mean?

Adam, are you talking about the new win that we received?

Yes.

Well, obviously, given their high-end server business, that could be quite substantial for us. So I think you could say that certainly could be tens of millions. But as we talked about, that will be business that ramps over subsequent quarters. So I wouldn't expect a one-quarter jump to reflect all of that business. We are excited that we're seeing, even since the win, increased attention from their sales people, on our high-end tape automation line. So, training, focus on some new wins with customers and so forth. So, we seem to be working quite well together to get engaged with this part of the product line and there a lot -- quite an extensive direct sales force that they can bring to bear with this product. Of course, for us, that positively influences our product mix, because there, you're talking about much higher priced tape automation systems, and obviously, we had some very good margins.

Yeah. A second question for Michael Brown. Michael, if you just do some basic calculation in terms of what the market is valuing, just your royalty EBITDA stream is something ridiculous; under three times, let's say. We bought stock at much higher levels; we aren't burning that much cash. Any thoughts on getting after the buy-back down here?

First, let me agree with you. I think the -- from my standpoint, the valuation doesn't really bear much resemblance to the ongoing business, especially when we're trading between book value and cash value per share at this point. Let me share with you our thinking relative to share repurchase at this time. So, we've taken a look, obviously, at what we've done historically, and our posture's been, when we've been in an excess cash generation mode, which we certainly were last year. There's been significant share repurchase.

I think it's well known that we've repurchased, probably over the last couple years, over $500 million of our own stock. Now, our business conditions have changed. That's been highlighted in this call as well, and we're not generating what I'd call excess cash flow. But we did generate 6 million in cash from operations for the current quarter. This has been a little bit volatile, and we've had, in the past couple quarters, a few where we've generated cash, and a few that we've used cash from operations. So that's our situation.

As we look outside at the environment, I think I've said before, I don't think we've ever experienced an environment that has presented more uncertainty. That's both from the business cycle standpoint, as well as, you know, broader concerns geopolitically. So, there's a lot of uncertainty right now. And then we've got the exercise underway, which we've talked about, to improve our cost structure to return to profitability, and as we would all imagine, there will be some usage of cash involved in the restructuring charges.

But what we're doing right now is taking a step back, while there's a compelling value out there in terms of our share price, from my standpoint, we need to put this total picture together in terms of our cash flow, the restructuring activities that we're doing, how much cash that we use, where will that leave us, and so forth. That'll be the time that we would be back considering share repurchase.

Thank you.

You bet.

Our next question comes from Rob Moses with Private Capital Management.

Good afternoon. I guess a question on discretionary investment. I mean, I guess if following, to some extent, on the last caller's point, if you look at the royalties, which I know bounces around a little bit; to annualize that at, say, 180 million, you take your own tape media. And assuming that's a 30 percent operating margin, you're talking in total, about $230 million in operating profit. Now, clearly, I know you look at business differently, and you take into account drive and media together. But when you're looking at some of these potential cost-cutting measures, how much of it relates to discretionary investment?

In other words, things like , where you may be losing 40, 50 million bucks because you don't have the revenue base yet, and some of the up-front R&D, versus permanent changes you can make, which I'm thinking more like outsourcing production, could you just -- I guess you're looking at both, and so you're going to have to cut some programs that are discretionary in nature. But could you do outsourcing as well on things other than tape drives? You know, use a or or some others? And is that something you're prepared to do, perhaps within the next six months or so?

Rob, in terms of the variety of actions, you're right. We're looking at all three of those categories that we've talked about, and some activities involved in each one. So the range of things that you talked about would certainly be within the realm of what we would consider. And I think to say more, really means we need to wait until we've done the work to be able to be more explicit about both what the actions are, as well as what the impact for us is going forward.

What I can share with you after looking at the numbers is I do feel confident that there's enough opportunity for us, without sacrificing long-term opportunity in our core businesses, to be able to make changes and return the company to profitability by the end of this fiscal year.

If you were to rank the discretionary investment, or whether it's R&D or engineering, or just, you know, not having enough revenue to fit the current base, like in , would you say you're losing, or more an investment mode, would the whole market be the biggest; then followed by, you know, product introductions? Just from a magnitude standpoint of, you know, where things are in investment mode.

From a magnitude of the loss standpoint, you would be correct. The number you threw out for the loss of the business is much higher than the loss we're experiencing today. We've already taken significant actions to reduce the losses in the system.

Okay. And --

But not as dramatic as what you pointed out.

Okay. And could you tell me in terms of production, I know you -- I believe you manufacture drives over in , Malaysia?

Right.

What about the other business in the hardware centric? The ATL and business --

Right. For tape automation, we're doing our own manufacturing. Some of that has been moved to as well. And for the business, it's already outsourced. So we're not really involved in the production of , and it's, as everyone's well aware, pretty straightforward since it's really an assembly business. The real value in is obviously the software.

Okay, so you could have an opportunity, both on the automation side as well as the drive side, if you decide to go the outsourcing route?

That's right.

Which would lower your asset intensity and perhaps your expense structure?

That's correct.

Thank you.

Mr. Brown, I'm showing there are no further questions at this time. Please continue.

Thank you very much for joining us. We appreciate your time this afternoon.

Ladies and gentlemen, this concludes the Quantum Corporation first quarter earnings conference call. If you would like to listen to a replay of today's conference call, please dial 1-800-405-2236, or you may dial 303-590-3000, and enter the access number of 482050. Once again, if you would like to listen to a replay of today's conference call, please dial 1-800-405-2236, or you may dial 303-590-3000 and enter the access number of 482050. Thank you for participating. You may now disconnect.