Quantum Corp (QMCO) 2003 Q3 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the Quantum Corporation Third Quarter Earnings Release Conference. At this time all participants are in a listen only mode. Following today’s presentation, instructions will be given for the Q&A 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 today, Tuesday, January 28, 2003.

I would now like to turn the conference over to [Lisa Eubanks], Vice-President of Investor Relations. Please go ahead ma’am.

Thanks [Rob]. Good afternoon everyone, and welcome. With us today are Rick Belluzzo, CEO, and Michael Lambert, CFO. The Web cast of this call can be accessed through our Web site at www.Quantum.com, and will be archived for one week.

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 will include statements regarding our financial projections and prospects, including our outlook for the fourth fiscal quarter, our product roadmap, and market share.

We would 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 our press release issued today, announcing our fiscal Q3 earnings results, as well as our reports filed with the Securities and Exchange Commission from time to time, including pages 44-54 of our 10K filed July 1, 2002, and pages 53-64 of our most recent 10Q filed on November 13, 2002.

Such reports contain and identify important factors that could cause actual results to differ materially from those contained in our forward-looking statements. And finally, we undertake no obligation to update these statements in the future. With that, I will turn the call over to Rick Belluzzo.

Well thanks [Lisa]. Good afternoon, and thank you for joining us. The December quarter was a critical quarter for Quantum, as we continued to transition our business to improve the cost structure and deliver future growth. In the face of continued weakness in the IT spending environment, we executed our plan very well, and returned to pro forma profitability in fiscal Q3, a full quarter ahead of plan.

Over the past several months we have defined a strategy focused on four priorities for strengthening Quantum’s leadership in data protection products and services. The four priorities are first, to be the undisputed leader in tape drives; next, to double the tape automation business. Third, we intend to build an enhanced data protection business; and finally, to create a highly efficient operational platform.

During Q3, we set out to implement a long list of changes to improve our business performance, and begin to get more focused on executing the four strategic priorities. These include completion of the restructuring efforts we announced last Fall, closing the Benchmark acquisition, which involved completing the integration and introducing an integrated roadmap that incorporates the [DS] [ph] family of products.

We completed the outsourcing of transition to [Jadel] [ph], the closing of the [NAV] sale to Snap Appliance. We renegotiated our credit lines and shipped the DX30, our first product in the field of enhanced data protection. All of these changes have been essential to making sure that we improve our competitive position and begin to move our performance to targeted levels. While executing this ambitious plan, we were also able to convert these and other efforts into excellent results.

In Q3 we produced solid revenue growth, reduced operating expenses ahead of plan, bringing us to our short-term target one quarter earlier than previously announced. We gained market share in both tape drives and tape automation. And we nearly doubled tape automation sales to OEMs.

Now for some details. Total revenue for the December quarter was $229m, driven by sequential revenue increase in both the DLT Group and the Storage Solutions Group. Pro forma net income was $4.2m or three cents per share, excluding discontinued operations, restructuring charges, and amortization of intangibles, that Michael Lambert will explain later in the call. The GAAP net loss was $15.5m, or nine cents per share.

We accomplished a lot in just one quarter, a testament to our focus on improving our financial performance, and careful attention to execution. While we are proud of the way we executed, we also know that we have much more work ahead of us. On a product side, let me review some of our highlights for the quarter.

First, the tape drive and media business. Revenue for the DLT Group, which includes tape drives and media, was $173m, a 6% sequential increase. Tape drive revenue was $92m. While we will not be disclosing Benchmark results separately going forward, I will tell you that this contributed approximately $12m in drive revenue in the period following the close of the acquisition on November 13.

Total media revenue was $81m - $33m from direct sales of Quantum branded media, and $48m from royalty revenue. Total media revenue declined 14% sequentially, primarily as a result of a shift from media purchase through Quantum to royalty media purchased directly from our licensees. This is an expected trend in the purchase cycle, as system OEMs purchase directly from our licensees, once there are multiple sources of media in the market. However, gross profit contribution for media was similar to last quarter.

Price declines were also a component of the media reduction, due to additional media manufacturers entering the market.

Overall tape drive unit shipments increased 55% sequentially, including Benchmark’s contribution. Even without Benchmark, drive shipments increased 14%. In the Super DLTtape segment, shipments increased 36% sequentially, which we believe represents a second consecutive quarterly gain in market share. You may recall that Super DLTtape shipments in the September quarter increased 20%. And IDC numbers show that we gained two points of share in the Super drive category.

For calendar year 2002, an analysis issued last week by [Freidman] reports estimates that SDLT gained more than four percentage points of share during the year, all of this during the second half. This tells us that we have not only neutralized the LTO’s initial time to market advantage, but we have gained momentum. Driving the strength of Super DLT is the increased momentum of the SDLT 320.

The SDLT 320 is now shipping through all major system OEMs and tape automation partners. And it is the only Super drive with this level of customer commitment and engagement. We will build on this support going forward, through the integrated DLT technology roadmap we announced last month. Under this roadmap, Quantum will not only extend the industry’s broadest family of tape drives, but also provide compatibility between the Super DLT and Value DLT product lines. This will enable customers to protect their past and future investments across the DLTtape family.

Now let me turn to the performance of our storage solution business, which includes tape automation and enhanced data protection appliances. At the end of October we closed the sale of network attached storage business, to help build a newly formed independent company, Snap Appliance. This move has allowed us to focus exclusively on data protection.

For the December quarter, Storage Solutions revenue was $64m, a 26% sequential increase. Revenue from Benchmark’s ValueLoader product was approximately $3m. OEM sales nearly doubled, reflecting the stronger position we have established over the last several quarters, with wins at Sun, IBM and HP. We now sell to HP and EMC at the high end, Sun in the mid range, and HP, IBM and Dell at the low end.

Tape automation grew primarily as a result of the momentum behind our newer products, the ATL 4000 and 7000 at the high end, the modular ATL M25 in the mid range, and the SuperLoader and ValueLoader at the low end. Quantum offers customers a complete solution from desktop to data center.

Also driving growth is better access to end users, through the transition to more a channel oriented sales strategy. We saw continued evidence of the effectiveness of this move, with channel sales in Europe, where we recently reorganized around our new channel strategy, where those sales increased almost 30%.

Fiscal Q3 was the first quarter in which the Quantum DX30, our disk-based back-up product, was generally available in the United States. Our goal with this family of products is to solve critical problems customers face in backing up and restoring data quickly, reliably, and cost-effectively. [Inaudible] is part of a new category of data protection. We do not expect this to make material revenue contributions for a while. However, we are seeing substantial interest in the DX30 from customers in both the US and Europe.

One example of how customers are using the product is a large government customer using two DX30s. One unit is a back-up device for their email exchange server, holding two weeks of data for quick restores. And the other unit is a back-up accelerator for a number of key servers that they are unable to get backed up in a short time window.

Another is a document management company that uses a DX30 to generate revenue by allowing customers to back-up their data to DX30 over a dedicated network for a fee. They store customer data on their system, and charge extra for back-up and restore services. Our pipeline is strong, with more than 200 potential opportunities such as these. And stay tuned for additional announcements on our enhanced data protection strategy and products in the coming months.

With that I will now turn the call over to Michael Lambert, who will provide you with additional details on our financials.

Thanks Rick. I am also very pleased to report that we are executing in all phases of our financial strategy. Most notably, operating expenses, where we reached our target zone – $65-70m in pro forma operating expenses – a full quarter ahead of schedule. I would like to provide a few highlights for the quarter, discuss reconciling items between pro forma and GAAP numbers, and update you on our bank activities.

All numbers I reference are pro forma, and exclude discontinued operations, restructuring charges, and amortization of intangibles, unless otherwise identified.

Quantum had a solid quarter, characterized by strength in dry sales, both from the Benchmark acquisition and organic growth, and strength in automation. Overall revenue was $229m, up 12% sequentially, with earnings per share of three cents, both exceeding the guidance given last quarter.

GAAP loss per share was nine cents. Gross margin was 32.6%, up almost three percentage points sequentially, solidly meeting guidance expectations, and showing progress toward our mid-thirties target. Our progress is largely attributable to restructuring activities, lower tape drive cost, which improved margins in Quantum drives, and the favorable impact of Benchmark’s value segment tape drive margins.

Operating expenses were $66m, down seven million sequentially, again reaching our target range of $65-70m ahead of schedule. This success was a result of our restructuring actions, including downsizing, R&D site consolidation, and the divestiture of the NAS business.

Our balance sheet remains strong, with an ending cash balance of $316m, up $7m sequentially, and DSOs steady at 54 days, holding last quarter’s seven day improvement, even with the addition of Benchmark receivables. We had positive operating cash flow of approximately $11m, up from a negative $6m last quarter, driven primarily by the sale of inventory to [Jadel].

We expect to be a consumer of cash next quarter, due to a convertible debt interest payment of approximately $7m, and severance payments resulting from our phase one and phase two restructuring activities. Diluted share count increased in the quarter to 165 million shares, due to the Benchmark acquisition.

Now to the reconciling items between our GAAP and pro forma income statements. We have provided a complete reconciliation in the press release for your reference. But I will mention a couple of items specifically.

Restructuring charges total $9.4m, and included employee severance cost related to our benchmark acquisition, our manufacturing outsourcing, and our R&D site consolidation efforts. The restructuring total also included facilities related charges for site consolidation, and a charge for refinancing the synthetic lease related to vacant facilities.

Most of these charges are cash-based, and will be paid out over the next several quarters. Amortization of acquisition-related intangibles totaled $3.8m. There was a $4.9m income tax benefit associated with the items just mentioned, and a $1.9m income tax expense relating to shifting international IP rights to our European subsidiary.

We also had a $9.6m discontinued NAS operation loss, net of tax, including operating losses before the sale was completed, severance activities, and vacant facilities associate with the NAS business. Fiscal Q3’s reconciling items totaled $19.8m after-tax.

Finally, an update on our bank activities. We successfully renegotiated both the existing revolving credit facility, and our synthetic lease, at a total of $150m combined. The revolver consists of an 18-month 100-million facility. And the synthetic lease is a five-year 50-million facility. Both facilities are on terms that are more reflective of our recent restructuring efforts, and our current outlook.

With that I will turn it back to Rick, who will provide the outlook going forward.

Thank you Michael. I would like to circle back for a minute to the current environment, and the impact it has on [clodom] [ph], and then discuss the outlook for the current quarter. The economic environment is clearly still difficult. While the total IT spending environment remains challenging, we are seeing that storage and data protection are areas that will become a leading priority as the economy improves. Therefore, we remain cautious, but believe that we are well positioned.

With that backdrop, I will provide guidance for our fiscal fourth quarter ending in March. We expect overall revenues to be flat to slightly up from the $229m in the December quarter, reflecting the continued difficulty in the economic environment, and limited visibility of our customers. We expect pro forma gross margins to be roughly flat, with operating expenses remaining in our targeted zone of $65-70m. As a result, we expect pro forma earnings per share to be roughly flat.

In closing, I am very pleased with the progress we made this quarter. Of course we still have a lot of work ahead of us to continue to gain share, improve margins, and shift investments to deliver growth in the future. Today we are very focused around a few key strategic priorities, that will allow us to build an exciting business in data protection. The entire organization understands these priorities, and we will continue to focus on executing in this very challenging environment.

Well thank you. And now we would like to take a few questions.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Caller Instructions.) Our first question comes from Kimberly Alexy with Prudential Securities. Please go ahead with your question.

Yes. Thanks. My first question surrounds the guidance on the March quarter. I know your history has certainly not been the best indicator. And Quantum’s seasonality in the March quarter has been volatile. But I guess my question stems – and you can look at least at the last couple of years. And if you look at the broader enterprise server market, calendar Q1 is typically down.

So I am trying to get a sense as to what you might be seeing that would buck industry seasonality, and even your own seasonality, at least the last couple of years, and some confidence in that. And then I have one or two follow-ups if I could.

Well let me respond to our view of that. There are a couple of forces that affect our guidance for Q4. One on the positive side is that we have a full quarter of Benchmark revenue that did not exist last quarter. We closed in the middle of the quarter. So that is a positive result.

And then beyond that, certainly we feel like we have some momentum in some categories. But we are very, very cautious, and certainly do recognize the fact that it can be a seasonally challenging quarter, which led us to the guidance of roughly flat to slightly up.

The second questions stem from the tape unit growth up 55%, I think 14%, ex the Benchmark. Can you just talk about what is happening in terms of ASP pressures? I imagine a lot of that is the Benchmark. But just in terms of what is happening with the underlying DLT ASPs? And then maybe separately, if you could just comment on having achieved your op ex target a quarter early. Where do we go from here? And what kind of time frame can we expect?

Well Kimberly, on the tape side, I think your question was more a pricing question. This is Michael.

Yes.

I will describe it probably best this way. The price take-downs we have continued to see in the quarter just ended are not too dissimilar from what we have seen historically. So it doesn’t represent any significant change one way or the other in the trended pattern. And then as far as the op ex view goes, I think Rick mentioned this a little bit. But let me talk a little bit more around that.

So we did reach the op ex profile target zone in the $65-70m range a quarter ahead of schedule. So we came in at 66 and change this quarter. We do expect that at least in the short to medium term we will continue to be executing within that range. And the idea here is that we are trying to redeploy some operating expense to what we believe was its most efficient use.

In this case, we are trying to fund some investments we want to make in the enhanced data protection arena, by managing offsets elsewhere. And then of course we are always looking towards, from the medium term on, the next opportunities that you might be able to take to drive below the target range. We don’t have anything to talk about today in terms of specifics related to that. But of course, it is something we are working on.

And those are longer term questions about how we bring about systems consolidation at a company level, things like that.

Okay. For now it is fair to assume that is probably a base that we should think about extrapolating into fiscal ’04 for modeling purposes?

Yes.

Okay. Thanks.

Our next question comes from Clinton Vaughan with Salomon Smith Barney. Please go ahead with your question.

Great. Thank you very much. This is actually [Brian Hitside], calling in for Clinton Vaughan today. I have got a couple of questions. First of all, could you give us kind of a quick update on the Benchmark products and the OEM relationships? You mentioned HP and Dell, the OEM relationships on the low end of the market, and specifically, if Benchmark would be very helpful.

And number two, on the software side of things, can you give us some indication of what the strategy you have contrived revenue from? I guess specifically the DX30, how that is going to progress. It seems like it is a bit more of an educational process with customers and end users and what not. So and then I think I have got one follow-up after that.

Okay. This is Rick. First of all, the DX products, the Value segment products, are OEM today at HP, Dell and IBM. And those relationships continue to be good. And those products continue to be a valuable part of their back-up offering. So we feel very good about that.

On the DX30, are you referring to what to expect going forward?

Exactly. How are you going to drive revenue from that product?

There is a couple of ways to look at that. I mean first of all, we have done extensive research to understand how customers deal with the back-up and restore archiving process. And we believe there are many, many contributions that can be made to be able to improve that process. And the DX30 was really the first step of that process, of which there will be further work in terms of expanding both the breadth and the depth of that product, so that we can continue to make contributions in that area.

It is a long-term investment view for us. I mean any time you establish a new product category and you innovate in these areas, the positive side is we are innovating, doing new things in the market. The negative side is it takes a long time to generate the kind of critical mass in revenue. But we really are very enthusiastic about the potential of the market and the contributions that we can make to grow that business over time.

Great. Thank you. And then on the gross margin side, you had, obviously, a nice up-tick, I think 2.6% sequentially this quarter. With the target in the mid-30s, when do you expect to get there? And then additionally, how much of a significance were the Benchmark margins in the quarter?

So let me talk to the front half of that. And then if Rick has any additional comments, I am sure he will provide them. So in terms of how we bridged this quarter, we were up 2-1/2% roughly over last quarter. Benchmark contributed probably not quite a third to that improvement, based on the fact that their gross margins on their take drive business are in the – and we had talked about this last quarter – are above 20%. And then have continued to improve. In fact, they are running ahead of our own expectations for them.

In terms of timing as to how we migrate back to the target gross margin, we are on current course and speed, as we mentioned, to be essentially flat this quarter, and maybe slightly up, somewhere in that zone. So we are continuing that migration back towards our target mid-30s next quarter. Although we have not put a stake in the ground out in the future around we will be back here definitely by X, Y, Z date.

And really the reason for that is what Rick had talked to a bit earlier in terms of the overall cloudiness and lack of visibility on the top line, and the issues that surround that.

I would just add on the overall structure, in going back to an earlier question about op ex, on op ex we believe we can continue to make improvements. But at the same time, we want to shift investments so that we can build growth and build new business opportunities moving forward. So while there are improvement opportunities, the impact on the bottom line is not that huge, given the progress we have already made.

So that gets us back to the gross margin, which is really the big factor. And we do feel good about the progress we made this quarter. I think we have a lot of ideas and initiatives underway to continue to move towards our targeted level. But just to reinforce what Michael said, I don’t think we are ready to call when that is going to occur. But we continue to be focused on changes to get us to that targeted level.

And we are certainly, in summary, happy with the progress that was made. But let me just reinforce for next quarter we are expecting roughly flat.

Okay great. Thank you very much.

Our next question comes from [April Henry] with Morgan Stanley. Please go ahead with your question.

Hi guys. A couple of questions. I hate to go back to the op ex thing. But I was just referring to some old notes I have, where you said your R&D target on a percent of revenue basis was about 10-11%. And I was just wondering if you still feel like that is part of your long-term goals, given that you also plan to redeploy resources, as you had mentioned.

Yeah [April], it is Michael here. So this quarter we closed at about probably just slightly over 12% on a pro forma basis on R&D. And that of course was down net full op ex view to 29%, down six, seven points. So we feel like we made very good progress there, a combination obviously of reduced spending and the improvement on the revenue profile.

From a long-term target model basis, we still do see R&D in the 11% range give or take. Now there will be some lumpiness and bumpiness to that. It will cycle around. But even with enhanced data protection and some of the investments we want to make there, we still do see it as an 11%, give or take, R&D stream, a 10% give or take marketing and sales stream, and a 4-5% G&A stream, gets you to mid-20s.

Thank you. That is great. Could you talk a little bit about the make-up of the media revenue decline in the quarter? In other words, how much of it related to price declines, versus solely the increased number of licensees, rather than direct purchases that you saw?

You got clipped off a little bit. Can you repeat that question?

Sorry. How much of your – if you could describe the make-up of the media revenue decline better for me. In other words, how much of it was price decline related entirely versus the increased number of licensees, rather than direct purchases? I know there is overlap. But I just need to get a better sense, I guess, of the trend line going forward.

Yeah. So far and away the biggest piece of this quarter’s revenue reduction on the media side was the transfer from Quantum branded media to royalty media. So if you look at that profile, and I think Rick talked to this earlier on the call, the gross profit contribution in the dollar terms basis was only slightly down. It was similar to last quarter, although there was a dramatic change in the mix.

We saw a large reduction in Quantum branded revenue. But we saw the up-tick of that, or the benefit of that, on the royalty side. So that really was the dominant factor here. Pricing competition quarter-to-quarter was not materially different from recent history.

Do you expect a continued transfer at the same pace in the coming quarters? Or was this an unusual quarter?

Yes. We had been anticipating, and we had been talking about it for three to six months now, the anticipated drop off some in the Quantum branded, now that we have got multiple suppliers out there, and now that our OEM partners feel more comfortable that they have the multiple sources, and no longer feel like they have to buy straight from us.

So we do think that there could be some smaller reductions on the Quantum branded side. But we do anticipate offsets there on royalty today. So we could still see some shift there.

But not the same magnitude?

Not the same magnitude. No.

Okay. Thank you very much.

Our next question comes from [Lilian Zrake] with [Muzanich]. Please go ahead with your question.

Yes, hi. A few questions regarding some housekeeping items. Depreciation/amortization for the quarter, cap ex, and working capital please? And also, if you have any projections for next quarter.

Yes. Sorry. Can you identify yourself again? I didn’t hear who it was?

[Lilian Zrake] with [Muzanich] Company.

Okay. So let me talk to the depreciation numbers. Depreciation for the quarter was just under $9m. And amortization for the quarter was just under $4m. And then cap ex for the quarter was $2m. So we have continued to manage that very carefully, in a constrained environment. And it came down again this quarter. We would actually expect cap ex to bounce back up a bit next quarter.

And then that was the first two pieces. What was your third?

Working capital? I am wondering if you have any – was it a positive or a negative number, working capital? And also if you can help me with next quarter. You said cap ex was going to be up. What do I expect next quarter please?

Yeah. I mean cap ex will be up two, three, four million – somewhere in that zone. And working cap is a little bit difficult to give you the full layout on this quarter. And that is really, the reason for that is part of what Rick talked to earlier. We made a significant sale of inventory to [Jadel], where in essence we sold almost $16-1/2m worth of inventory, as we completed the outsourcing of our manufacturing.

So that was a good buy that helped us in a material way from a working capital standpoint. On the other side of that equation, our working cap numbers were impacted this quarter by the addition of Benchmark, which came in part way through the quarter, but adds to the net balances.

So when you look at it all net/net, we were neutral to positive on Quantum only working capital. But when you add in some of the Benchmark acquisition, we were slightly negative. And then that was offset, of course, by a very large benefit associated with the sale of inventory and the outsourced manufacturing strategy. But we will be cleaner, with all those puts and takes this quarter, we will be cleaner going forward as a result.

Great. Thank you very much.

Actually, let me offer one other quick thought on that, which will really get you to a little bit better answer too. On the receivables side, from a DSO standpoint, we were 54 days, which again consolidated the seven day improvement we made last quarter. So we were managing very well there. And that includes the benchmark numbers. So if you exclude those benchmark numbers, DSO actually improved from there.

From an inventory turns basis, we were in the six turns range in the prior quarter up to an eight, ex roughly, turns range this quarter, benefiting again from the outsourced manufacturing strategy. But of course, that had Benchmark impacts in there too. So improvement in key working capital items essentially across the board on the asset side.

Great. Thank you very much.

Sure.

Our next question comes from [Paul Lee] with Howard Hughes Medical Institute. Please go ahead with your question.

Hi. You mentioned about you just completed a renegotiation of the $100m revolver, and the $50m synthetic lease. Have you filed an 8K for that? I just wanted to look at the details.

Yeah. There will be some detail coming in with the Q, which will be filed in mid-February.

Okay. What is your long-term plan for the Colorado Springs facility?

Well, in our Colorado Springs facility, you know there are three buildings up there.

Occupied, only one.

We use one of those buildings today, and have an expectation to continue to fully use that building. Over time, we will pursue one of two actions. And it really depends on the strength and timing of the economy improvement. So if the economy improves, we will look to sell that facility, as the economy improves. And if it does not, we will pay it off in cash.

Okay. Going back, if I may, the tape media question, in the SDLT tape media, who are the licensee partners for making SDLT, apart from Fuji Film?

Yeah. So the traditional or historical partner licensees who have been producing for a long time, i.e., many years, are Fuji and Maxell. And then more recently Imation has entered, on tape four, not on SDLT, but on the older tape products. And then Sony also.

And for the SDLT, right now it is really Fuji Film?

Yeah. It is only Fuji and Maxell today on SDLT tape.

Okay. All right. Thanks a lot.

Our next question comes from Harry Blount with Lehman Brothers. Please go ahead with your question.

Hi everybody. Just a couple quick questions. I apologize if I missed some of these. But did you guys give any sense at all in terms of a rough mix break between the SDLT and the DLT?

You mean in terms of units?

Right. And I know you kind of gave kind of the sequential growth in terms of units. But I am looking for more, if we look at it from both a media standpoint and from a drive standpoint.

Yeah. We haven’t, and don’t plan to disclose that mix. We try to provide relative changes. But we don’t disclose the unit mix.

But clearly Harry, given the growth profile on SDLT, right?

Right.

If you think about it relative to just the Quantum only, i.e., before Benchmark, a very dramatic growth on the SDLT front, which would raise its piece of the total there.

Right. I was just trying to get also some sense on the media side as to the rate of decline of DLTtape media royalties versus the SDLT. And another question was on the service revenue. You have the breakout between product and royalty. And then you also have kind of the group breakout later in the supplemental financials. But I guess I am not seeing a recurring revenue line or indication, to give a sense of whether the service revenue was sequentially or year over year.

Well service revenues were up in the quarter. If you remember last quarter Harry, we had talked about a decline quarter to quarter, which was really driven by the OEMs doing spare parts fulfillment. And we had mentioned at the time that we expected that to get back on track in a quarter or two. So in essence, it is back on track now. Our services business, although we are not reporting it publicly, it is part of SSG, was up in revenue quarter-to-quarter sequentially.

Okay. So if we look at SSG, you had the DX30 in there, which performed well and was ramping. And services was up sequentially. What other qualitative comments can you make within the components of SSG at that point then?

Yeah. And so let me bring you back to a comment that I know we have talked to externally. We had talked to the services business being on a $65m, give or take, annualized run rate. It is on that run rate, or in essence back to that run rate. Although, as I mentioned, we are not going to disclose really that piece going forward. It will be part of SSG proper.

In terms of comments on tape automation, I think I would go back to what the comments Rick made. OEM sales really was a big part of the story this quarter. OEM sales nearly doubled. And that was on the heels of, of course, the wins we have had at HP, Sun and IBM. And then also improved channel strategy this quarter in Europe certainly, which I think Rick mentioned. And really as a result of both of those factors, and a result of the expansion of the product line, we are much broader and much deeper from a product standpoint than we were, as you know, just 12, 15, 18 months ago.

Right. Okay great. Thanks.

Our next question comes from William Lewis with J.P. Morgan. Please go ahead with your question.

Great. Thank you. A couple things if I could. On the outlook for next quarter, could you just talk about what might be some of the growth drivers? Which areas do you expect to be strong, and which areas weak? And any thoughts, since this is the end of the fiscal year, of what we might expect overall in fiscal ’04?

Well first of all, with fiscal ’04, we are not prepared to provide guidance on that yet. And so I really can’t comment any more than that. For the fourth quarter, I guess we will probably see very much a continuation of what we saw in the third quarter - the tape drive business benefiting from the Benchmark acquisition, continued growth, hopefully, in the automation line of products.

So that is where we see probably the most strength. But otherwise I think the nature of the business in our fourth quarter will roughly mirror the trends that we saw in the third quarter. We don’t see anything substantially different.

Okay. Can you also give us an update, as best you know, on what is going on with LTO competitive, and in general with that consortia?

Well that can be a very long discussion. But let me just summarize what has been occurring. In the last couple of quarters, on the strength of the SDLT 320, and the fact that it has now been qualified and included in every significant product in the industry, we have gained share. And according to most of the market research reports that come out, it has us approaching 38-40% share of the Super Drive category.

So we feel very good about that momentum. I think the challenge moving forward of course is the effective execution of our roadmap. We launched the roadmap, or announced the roadmap in this previous quarter. It has been very, very well received, which in that roadmap includes new products, with the value line the S160, and in the SDLT space the 600, which will be in qualification in the summer time frame.

So all of that has us feeling today better about our relative competitive position, based on where we have been in the last couple of years. We believe that we are gaining traction. We have a good roadmap. We are getting good feedback. The 320 is positive. We now will need to face the [LPO 2] class of products that will be in the market soon. And we think we understand this product. In fact, interestingly, even though their specifications are better on the recently announced HP product, we have actually won one product review with the 320.

So again, we feel pretty solid about that. I am not sure I can tell you where the consortium is going. We continue to reinforce and remind people that LTO is not a company. It is three companies, with three different product designs, three different sets of economics, and three different business models. And that long-term, that as we continue to improve our market share, the other portion of the market will be shared by three companies. And we don’t think those economics work very well. And that is something we will just have to see what happens.

Our whole strategy is really about execution, improving our products, lowering costs, building market momentum, reinforcing our compatibility story. And we think that is a winning formula going forward.

Okay. Thanks Rick. And one last question for Michael. On the renegotiated bank lines, have you drawn down on any of them? And how should we model interest expense going forward?

So we have not drawn down anything on the revolver, although we do use it for its stand-by LC capability – letter of credit capability. But we have not drawn down formally on it to borrow against it.

In terms of thinking about interest expense going forward, we have typically run on that other income expense net line in the $4m or so range. And we have bounced around between $4m and $2m net expense there. We expect we will be running in the $3-1/2m range for the foreseeable future in terms of net expense, Bill, which is a combination of interest in, expense in, and some other items.

Great. Including in the fourth quarter?

Yes.

Okay, great. Thank you.

Sure.

Our next question comes from [Karen Payne] with Pacific Edge Investment Management. Please go ahead with your question.

Thank you. I just wanted to make sure I understood the Benchmark numbers correctly. Can you please, number one, give us the exact date that the acquisition closed? And then also, by my notes you said that Benchmark had contributed $12m in drive revenue, and $3m in storage solutions revenue. Is that correct? For a total of $15m for the quarter?

Yeah. It was mid-November, give or take a day or two, was the close date of the acquisition. And then from a revenue standpoint, what we talked to earlier on the call was $15m total; $3m of that on the tape automation side, with the blade product from Benchmark. And then on the tape drive side, $12m in the BS products.

Okay. So is it fair to assume, since this was roughly half a quarter, that the contribution next quarter would be in the range of $30m? Is there any reason why that wouldn’t be the right assumption?

Yeah, other than the factors of seasonality, etc., we really can’t project the specific revenue range.

Okay. Thanks.

And part of that is the story we are going to talk to going forward – tape drives, without breaking Benchmark out.

Mmm-hmm. Okay. Thanks.

Ladies and gentlemen, if there are any additional questions, please press the star, followed by the one on your push-button phone. As a reminder, if you are using speaker equipment, please lift the handset before pressing the numbers. One moment please for the next question.

Our next question comes from [Adam Branch] with Charlotte Capital. Please go ahead with your question.

Yes. Good afternoon guys. Michael, I was wondering if we could put a ballpark dollar figure, when we are talking about consuming cash in the fourth quarter. You mentioned severance payments and interest payments. Roughly what should those two items come to?

Sure [Adam]. And I will leave you and the rest of the analytical community to make the judgments about the rest of the working capital, which you all do so well. But on those two particular items, on the convertible interest expense payment, which you know – remind everybody – is every six months for us. It is a $10m gross payment. And then we get a reimbursement from [Max Store] of about three. So we are about $7m out of pocket there.

And then from a severance standpoint, regarding the restructuring charges, that will be on the order of $12-15m, give or take, in terms of payout in Q4.

Is that the end of the severance payments?

So [Adam], it is the end of the vast majority of the severance payments. There are some small carry-overs we will make in the beginning of next calendar year. And that is just for a few key people. We do have them on extended transition periods. So that is really the severance statement.

We do of course have facilities related charges that will continue, that are cash basis, that will continue out in the future, over the lease terms. Okay?

Thank you.

Sure.

One moment please for the next question. Our next question comes from [April Henry] with Morgan Stanley. Please go ahead with your question.

I just wanted to clarify that last point on the charge. I know you are saying these are cash-based going forward. Does that mean that for the income statement they have been fully reflected? Or we will still see charges on the income statement as well?

We have taken the income statement restructuring charges. And so we will be paying out cash associated with that. The only thing that will show in the P&L is the item I mentioned, which is a small, limited number of people, who will be in a transition phase for the next couple quarters.

Okay.

Those are the ones that have an extended transition. The vast majority of it is just a cash out.

Great. Thanks a lot.

Sure.

And the next question comes from [Paul Lee] with Howard Hughes Medical Institute. Please go ahead with your question.

Hi. I am sorry I am coming back again. A question about the discontinued operations, because [inaudible] the business with Snap, did you recognize any gains or losses? And if there were, where is the gain or loss number? Is that in the net number, $9.6m?

Yes. It is all wrapped up in the $9.6m. And so in that number we have, if you remember, we closed that acquisition at the end of October. So in that number we have the October loss for the month, as well as the final special charges. And they are netting out against all the other assets, and against the consideration we received. So it all loads into that line. That is the 9.6, labeled as discontinued ops.

Okay great. Because I just don’t want some number in the SG&A that could cloud the whole picture. Okay, that is great. Thanks.

Okay.

Our next question comes from [Karen Payne] with Pacific Edge Investment Management. Please go ahead with your question.

Thanks. And just kind of in follow-up to that one, did you have any NAS revenue in the quarter?

There is no NAS revenue reflected in our pro forma results. Any NAS revenue which was received, which I think was a very, very small amount, not even worth discussing, in essence rolled into the discontinued ops line.

Okay. Thanks.

Sure.

At this time we have no further questions. I would like to turn the conference back over to Mr. Belluzzo for closing comments. Please go ahead sir.

Well thank you for joining us today. We appreciate your questions. And we look forward to the next call. Thank you.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. And you may now disconnect. Thank you.