Quantum Corp (QMCO) 2003 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Quantum Corporation's fourth quarter earnings conference call. At this time, all participants in listen only mode.

Following today's presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time, please press the star for the phone operator. As a reminder this conference is being recorded today, Monday, April 28th, 2003.

I'd now like to turn the conference over to Vice President of Investor Relations, Ms. Lisa Eubanks. Please go ahead.

Thanks, Rachel. Good afternoon, everyone and welcome. Here with us today are Rick Belluzzo, Chief Executive Officer, and Michael Lambert, Chief Financial Officer.

The webcast of this call, along with a quantitative reconciliation of any GAAP and pro forma which we now refer to as non-GAAP financial measures can be accessed at the investor relations section of our website at www.quantum.com. It will be archived for one year.

During the course of today's discussion, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements will include statements regarding continued execution and improvement of our business in fiscal 2004, our financial projections and prospects, including our outlook for the first fiscal quarter, our fiscal year 2004 tax rate, our product road map and expected market share gains.

We'd like to caution you that our statements are based on current expectations and involve risks and uncertainties that could cause actual results to differ materially. We refer you to the risk factors and cautionary language contained in our press release, issued today, announcing our fiscal Q4 earnings results as well as our reports filed with the securities and exchange commission from time to time. Including pages 44 to 54 of our 10K filed on July 1st, 2002, and pages 59 to 71 of our most recent 10Q filed on February 12th, 2003.

Such reports contain and identify important factors that could cause actual results to differ materially from those contained in our forward-looking statements. We undertake no obligation to update these statements in the future.

And with that I'll turn the call over to Rick Belluzzo.

Thank you, Lisa. Good afternoon, and thank you for joining us. The March quarter brought to a close a very challenging year for Quantum. During the first part of the year we confronted a number of issues, including loss of share in the tape drive market, the need to restructure the business by downsizing, reducing expenses divesting certain businesses and of course adapting our programs to the worst industry downturn in decades.

Since then, we've executed a very ambitious agenda, and it produced improvements in virtually all areas of the company. The result, three consecutive quarters of sequential revenue increases and two consecutive quarters of non-GAAP profitability.

Underlying our momentum has increased market share, gross margin improvements and significant expense reductions. The global environment made the March quarter particularly challenging in terms of closing business and extending the momentum we began last quarter. But in spite of that environment as well as a tough comparison with seasonally strong December quarter, we were able to generate growth and continue the improvement trend we established in fiscal Q3.

In the March quarter, total revenue it was $235m, up both sequentially and year over year. Driven by gains in the tape drive business, including a full quarter of this have product line and solid automation OEM growth.

Non-GAAP net income also increased year over year to $5.4m dollars or 3 cents per share, excluding charges for discontinued operations, restructuring, in recess R&D and amortization of intangibles. The GAAP net loss of $5.2m or 3 cents per share. Michael Lambert will provide more financial detail later in the call.

I want to emphasize the progress that we've made on improving gross margins and reducing operating expenses. Over the past two quarters, we've increased gross margins nearly three percentage points through a number of changes, including moving to an outsource manufacturing model, and a shift from the DLT 8000 to higher margin VP S drives.

We've also reduced operating expenses significantly over the past year to reach our target range and as a result we have seen non-GAAP GNA moving from 11% to approximately 6%. We've also made fundamental improvements in our R&D processes and our sales and marketing structure and focus. We expect to continue this focus on improvement in 2004.

On the product side, let me review some of the highlights from the quarter. First, for the tape drive and media business. Our tape drive and media business continues to show strength with revenue for the DLT tape group at $184m, a 6% sequential increase. Tape drive revenue was $105m, up 13% sequentially.

Total media revenue was $79m. $31m from direct sales of Quantum branded media and $48m from royalty revenues. Media revenue declined slightly, primarily as a result of the shift from media purchased through Quantum to royalty media and continued price pressure. However, gross profit dollar contribution for media was similar to last quarter.

Overall tape drive unit shipments increased 27% sequentially, driven primarily by growth in VS 80 shipments, as well as underlying growth in VS 80 volumes. We remain the clear leader in the midrange tape secretary with DLT holding approximately 60% share.

In the Super DLT segment, total shipments were essentially flat sequentially with significant growth in the SDLT 320 offsetting and expected to decline in the older SDLT 220s as customers shift purchases to the 320. For the year, SDLT shipments increased more than 60% over fiscal 2002. Driven by the tremendous success of the 320 in the second half of the fiscal year.

As a result of the success of the SDLT 320, Quantum gained 4 to 5 percentage points of share versus LTO in calendar 2002, with current market share estimates ranging up to 38%. This tells us that we've not only neutralized the LTO's initial time to market advantage but also that we had momentum. A preliminary analyst report indicates that while the overall superdrive market grew about 50% year over year in the December quarter, SDLT grew almost 100% and LTO grew only 31%.

And that momentum should accelerate after we release the SDLT 600 in the summer. We believe that this next generation technology will enable us to end the leapfrog nature of the business as our technology advances outpace our competition.

In the value drive category, in addition to the success of the VS 80, we shipped qualification units for the new VS 160 to two major OEMs. The compatibility between the value and performance category has been a compelling feature for customers as they work to protect their past and future investments in DLT tapes.

Now let me turn to the performance of our storage solutions business, which includes tape automation, service, and enhanced data protection appliances. For the March quarter, storage solutions revenue was $62m, a 4% sequential decrease.

In tape automation, OEM revenue grew again this quarter, representing more than 60% of total product sales. Offsetting that strength was a decrease in branded revenues, driven largely by a continued softness in larger enterprise capital spending that affected our enterprise segment. And a continued effort to refine our international channel model.

Product strength was primarily with the low-end ValueLoader and SuperLoader products and with midrange m series, particularly the M1500. For the year Quantum gained 6 percentage points of unit based market share in the total automation market according to the recently released garner report.

The fact that shipments grew while the overall automation market declined 11% in 2002 shows a significant impact of our new products. And for perspective, that share gain reflects only Quantum branded products and does not take into account the significant ramping of our OEM relationships during the year.

In the emerging disk based data protection area, fiscal Q4 was the second quarter in which Quantum DX30 was available. We had several customer wins, including a large global investment bank which has selected the DX30 to standardize its backup and a large system integrator who has selected a DX30 as a basis for its branded data protection offerings. While we do not expect material revenue contribution until later in the year, we will be making some significant technology announcements over the next several months.

With that, I'll turn the call over to Michael Lambert, who will provide additional details in our financials.

Thank you, Rick. I'm pleased with the financial performance this quarter, and for fiscal 2003. It was an intense year for Quantum. As we undertook and made progress on significant restructuring efforts to improve the operations of the company. And as you can see from our solid results, those actions have had a positive impact.

Total revenue for the quarter was $235m, up 3% sequentially, with non-GAAP earnings of 3 cents a share. GAAP loss per share was 3 cents. For the full fiscal year of 2003 total revenue was $871m, with a non-GAAP net loss of 6 cents a share.

The GAAP net loss was $1.62 a share. Which includes charges for restructuring, losses on discontinued ops, equity investment write downs, a FAS 142 cumulative effect of an accounting change, goodwill impairment, purchased, tangible amortization and other items.

Gross margin for the quarter on a non-GAAP basis, which excludes intangibles amortization, was 32.9%, up slightly sequentially. An increased in tape drive business gross margins was partially offset by lower SSG gross margins driven by a mixed shift to OEM ps in the low end auto loader part of the business.

For the year, non-GAAP gross margin was 31.9%. Non-GAAP operating expenses for the quarter were flat at $66m, again within our target range of $65m to $70m. This is a significant accomplishment, given that the quarterly non-GAAP run rate reported just three quarters ago was $82m.

As you may remember, we accomplished these reductions through a combination of restructuring head count facilities, selling the NAZ business and continuing our focus on managing the variable components of our cost structure. We worked hard getting our cost structure in line and will continue to do so going forward so that we're able to shift spending to areas critical to our future growth.

Non-GAAP operating expenses for the fiscal year were $278m, down 2.5% over 2002. This reflects a higher level of first half spending on our continuing businesses, which, of course, excludes NAZ, relative to our Q3, Q4, exit run rate. On a GAAP basis, gross margin was 31.6% for the quarter, and 30.9% for the year. GAAP operating expenses for $76m in the quarter, down 2% sequentially. For the year, GAAP operating expenses were $374m, down 11% from '02.

Reconciling items for the quarter totaled $10.5m after tax. The largest component was a $7.8m IP R&D charge related to our acquisition of Sandlight a company whose product development efforts have not yet reached technological feasibility.

Amortization of acquisition related intangibles totaled $4.7m. And several smaller items, mostly income tax effects, combined to make up the remaining $2m benefit. A complete reconciliation of both the quarter and fiscal year is included in the press release and on our website.

We ended the quarter with a cash and short-term investment balance of $319m, up $3m sequentially. We also generated positive cash flow from operations of $7m, despite significant severance and scheduled convertible debt interest payments. DSOs dropped by one day to 53 days, continuing the improvement seen last quarter.

Finally, let me make a comment about the tax rate going forward. Our tax line includes the impact of withholding taxes on royalty income. This relatively constant tax has had an impact on our tax rate, particularly at lower levels of net income.

The effect reduces our tax benefit rate and increases a tax expense rate. For example, the effect resulted in a relatively low non-GAAP tax rate of 30% in fiscal 2003. Lower than the combined federal and state tax rate. The withholding tax effect is expected to result in an approximately 40% non-GAAP tax rate in fiscal 2004.

This rate reflects that we expect Quantum to be profitable in fiscal '04 and accordingly record income tax expense rather than benefiting losses as we did in fiscal '03. In effect, the withholding tax is additive to our reported tax expense, resulting in what may on a relative basis appear to be a higher tax rate.

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

Thank you, Michael. As I look forward to fiscal 2004 and beyond, I see the continuation of the kind of strategic execution that has been evident over the past two quarters. Fiscal 2003 was the year of stabilizing the business. Fiscal 2004 is say year of continued execution, with significant new products, infrastructure initiatives, channel programs, continued cost structure management and more.

All of this positions us for further momentum into 2005. Make no mistake, we still have a lot of work to do. The economic environment is still difficult, putting a damper on IT spending worldwide. But I believe we're doing the right things to position Quantum for success.

With that backdrop I'll provide guidance for our fiscal first quarter ending in June. We expect overall revenue to be flat, slightly down from the $235m in the March quarter, reflecting continued weakness in IT spending. We expect non-GAAP gross margins to be roughly flat with non-GAAP operating expenses in the range of $65m to $69m, driven mostly by higher legal expenses.

As a result we expect non-GAAP earnings per share to be roughly flat sequentially. On a GAAP basis we expect gross margins to be roughly flat, with operating expenses in the range of $68m to $71m. The GAAP to non-GAAP difference reflects mostly amortization of acquisition related intangibles. As a result, we expect GAAP earnings per share to be approximately break-even.

In closing, I am very pleased with our progress this quarter and for the fiscal year, particularly in light of a weak economy, and the amount of effort placed on the many actions we took to regain momentum. We have improved in virtually every area over the past several quarters - cost management, product development, and market performance. Of course, we still have a lot of work ahead of us. But we believe that we have a lot of opportunity to continue to execute on our strategic priorities.

With that I'll turn the call over to the operator for questions. Thank you.

Thank you, sir. Ladies and gentlemen, at this time we will 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 please press the star followed by a two. You will hear a three-tone prompt acknowledging your selection an your questions will be pulled in the order in which they are received. If you are using speaker equipment it will be necessary for you to lift the handset before pressing the numbers. One moment please for our first question.

Will Lewis with J.P. Morgan. Please go ahead with your question.

Great. Thank you. Could you comment on your outlook on what your expectations are from the different lines of business between tape and the Storage Solutions Group, if you could at least qualitatively, thanks?

Well, thank you. I think that it's a combination of factors, with the diversity of our business. If you really look at the underlying part of our business, we have the media business, which has a certain set of dynamics. The tape drive business, the tape automation business, which we, you know, we see growth in our OEM statement as we continue to gain traction with OEMs. So it's hard to lay out in this dynamic environment some of the specific elements that we see. Because any particular change in an OEM behavior, or in a channel circumstance or a big deal really can influence the way our numbers and our performance develop.

So, we tend not to provide specific guidance on those specific details. Mostly because it's a very dynamic environment. We manage it day-to-day, week-to-week, to really ensure that we can deliver the company results. But really, aren't as specific about our specific guidance in a quarter.

Okay. And the second question, in your outlook, it looks like at least for operating expenses, you allowed for the possibility that operating expenses could increase next quarter on flat revenue. Kind of reversing the trend of cost savings. And so my question is, as we look into the next fiscal year, what expectations could we have for increased profitability in a flat environment? Or leverage returns on the bottom line when revenue does begin to grow?

Well, I would, in looking at our operational priorities, across our business, you know, operating expenses we feel like we made the big reduction. We know we have a lot of work still to do in operating expenses to both improve our bottom line, but also to be able to shift spending and other aspects of the business that will deliver growth.

So, given that, plus the additional legal charges we have we're, you know, we need to be cautious about saying that our expenses would come down further in Q1. But we are very, very focused on our expenses, focused on shifting the way the money is spent, and also focused on gaining productivity over time. We're just reluctant to say more than that in Q1, given how far we've come the last couple of quarters. And some of the additional legal expenses that we have.

Okay. All right. Thank you.

Our next question comes from Sabrina Ricci with Deutsche Banc.

I have a question pertaining to the Storage Solutions Group. You talked about how the OEM side of the business was a bit stronger bit that you saw softness on the enterprise level with your direct business. Can you contrast for us maybe, are the OEMs addressing a different sort of business? Or how did the dynamics work that they were seeing more traction than your direct sales was?

Sure. The way I would describe it in a couple of cases, where in the early stages of building the OEM relationship, and ramping volumes, and so, I think the results in the OEM business were stronger because we are in the early stages of building, to go to markets, alignment and all the things that you do to gain the kind of momentum that you get with OEMs. And we're in the early stages with some people. With some companies and I think that was reflected.

Even though the quarter generally was a challenging time from my perspective to close business and to close deals. People tended to delay more than usual. The impact of the environment was very much, as I talked to other of our channel partners and other people in the industry a lot of people seemed to experience difficulty in seeing that close rate. And I think we offset some of that because of the growth that we saw in OEMs because we were just ramping that business.

Okay. I understand. Thank you.

Our next question comes from Dan Renouard with Robert W. Baird.

Thanks. A couple questions. One, can you just give us any sense of what currency may or may not have meant both to the top and bottom line, if at all? Secondly, any trends within the quarter that were noteworthy, particularly in the second half of the quarter? And then any just sort of qualitative comments on what you've seen with April almost over? And then the last question, can you somehow give us a sense of what you think the organic growth was sequentially just so we can get a sense for what, if you stripped out the Benchmark, what we're looking at? Thanks.

All right, Dan. This is Michael Lambert. I'll take the first one, and then we'll address the other two after that I think between Rick and I. So, on the currency side, we had a relatively small affects impact this quarter. It was probably just over about 300K. That slows course into our income expense net line. When you combine that effect from this quarter with last quarter's favorable impact, which was out on the order of a million, this leads to a swing quarter-to-quarter of just over $1m. So it's an unfavorable swing if you look at it sequentially.

All right. And what about to the top line? Maybe on a year-over-year basis?

Yes, the top line year-over-year don't have that right in front of me. But it's very small.

Okay.

I think so much of our business is in dollars.

Yes. The OEM relationship, et cetera, that there isn't a big foreign currency affect on our business. The organic growth rate, again, it was a very difficult quarter to be able to manage and understand all of those trends. I realize that with Benchmark we were dealing with substituting products, as well, because we actually were happy to see some of our business go down like the 8000 and replace the VS products for that.

So we were really focused on working around the mix of our business and getting the right profile of business moving forward. So coming off the seasonally strong calendar Q4, and delivering what we did, I'm pretty pleased with those results. And, there were again lots of changes underneath that. And a very tough environment that makes it hard to step back and say that there's some easy way to calculate some fundamental organic growth rate, given the fact that it was a seasonal transition that I think most in the industry saw as being a slow Q1 versus Q4 of last year.

Also, Dan, Michael, let me offer a couple other thoughts, too. And I'll speak about it without you defining it this way, as sort of pre-Benchmark. So if we look at everything else as relatively organic from that perspective, so we saw on the SuperLoader side, we saw the continued steady trend of growth quarter on quarter, and that product continues on a good constant path, similar to the way it's been the last two, three quarters. Of course, I think Rick talked on the call about the 320.

On the superdrive side, which saw very rapid growth but, you know, from that perspective was supplanting some 220 growth on our side. And then I think Rick also hint or mentioned the strength in the m-series, particularly the M1500. So without talking to organic specifics for the businesses, you know, what I would describe as the new organic product announcements over the last twelve months, we're continuing to see good growth on them. Again, SuperLoader and the M-series as examples.

And then my middle question there, trends within the quarter and also what you've seen in April, if anything, and maybe even qualitatively if you're uncomfortable quantifying any of it.

This is Rick. As far as April goes, there's nothing much to say. I mean it continues to be a challenging environment, and as we improve our product offering and our execution, we feel like we've made the market share gains that we can continue to deliver performance. And as far as the trends within the quarter, I think that most people you talk to said that January started weak, because of the strong December. I think that was just a general view in the industry that certainly applied to us.

But overall, there was nothing else that was really that distinctive in the quarter except it just being a quarter that was difficult on the side of closing end user related and channel related business. Because of the uncertain global environment and people were more cautious about making decisions.

Okay, thanks.

Ladies and gentlemen, if there are any additional questions, please press the star followed by the one at this time.

Our next question comes from Ethan Johnson with Lehman Brothers.

Hi, guys. Just a quick question, on Benchmark, if there was a contribution of approximately $15m for half quarter last quarter could we assume there's a roughly double this quarter? And second, if you could provide any color on what you guys are seeing these days relatively to LTO constitution?

Ethan, let me talk to the front half and I'll let Rick tack to the back half of your question. We are not, and I think we had commented on this on last quarter's call, we are not going to talk to Benchmark specifically in terms of its contribution in any dollar terms. So rather than give out those numbers what I will say is that qualitatively, Benchmark and the products that we acquired had a very strong quarter this quarter. And that's probably the best characterization we can give you.

On the comments about LTO, I mean, as I said in my comments early on, we finished the second half of the calendar year with quite a bit of momentum, with the SDLT products. And that was a result of the advantage we had with the 320, the 320's been well accepted. It worked its way through qualification during the second half. And I think has really started to hit stride in the marketplace. And so I think we, you could look at any number of broad market data, and see that we did gain share and became the number one player in the superdrive segment in the quarter. At the end of the fourth calendar quarter.

So that progress isn't something we're very pleased with. But certainly it continues to be a tough competitively battle. We will be shipping our next generation the SDLT 600 in the summer time frame. So it has been a tough competitive environment, and we believe that with the 600, that we are making our most fundamental product contribution since this competitive battle began. Because, we will introduce quite shortly after LTO-2 is shipping, we will be shipping with significant advantage in product and we intend to be very aggressive at taking that product to the marketplace and really cementing the leadership that we have and continuing to make progress as we move forward.

So, again, I would just say short term good progress. We feel like we've gained some momentum, but we recognize that there's still a lot of tough competitive challenges moving forward. And we have to execute our product program and some of our partnerships to get us there, so that we can again, during the end of this calendar year, accelerate that momentum.

Also, Ethan, Michael again. A couple of other color comments that I probably left out on that first pass-through with you. A couple of thoughts, on the Benchmark drives. If you remember, and we've talked about this in the past, the Benchmark drives and the value segment had a better gross margin structure than some of our older DLT products. And so we have, of course, have been trying to migrate customers over to that platform where it makes sense for them, and certainly does because of that make sense for us. That's part of the driver behind my mentioning that they were also particularly strong this quarter. And as that, of course, happens, we get a gross margin benefit on the tape drive side of our business. And so, that's part of what's behind some of our gross margin improvement this quarter. And the other thing to remember about the Benchmark product, and that value segment, it is a low-cost platform, and because of that we also think that we can take it to other arenas, other segments, and we'll be talking about that more in the future.

Okay, thank you.

At this time we have no further questions. Please continue with any closing comments you would like to make.

Well, thank you again for joining us. I hope you get a good sense for the consistency and the progress and the focus that we have in Quantum. And in the results that we've announced here today. And we look forward to your continued support. Thank you.

Ladies and gentlemen, this concludes the Quantum Corporation Fourth Quarter Earnings Conference call. If you would like to listen a replay you my dial 303-590-3000. Or 800-405-2236 with an access code of 534836. We thank you for your participation and you may now disconnect.