Quantum Corp (QMCO) 2004 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Quantum First Quarter Earnings Release. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press "*", followed by the "0". As a reminder, this conference is being recorded today, Tuesday, July 22, 2003.

I would now like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations. Please go ahead ma'am.

Thanks. Good afternoon everyone and welcome. Here with us today are Rick Belluzzo, Chairman and Chief Executive Officer; and Michael Lambert, CFO. The webcast of this call along with the quantitative reconciliations of any GAAP and non-GAAP financial measures discussed today can be accessed at the Investor Relations section of our website at quantums.com and will be archived for one year.

During the course of today's discussions, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements we will make include statements regarding our financial projections and prospects including our outlook for the second fiscal quarter, our product roadmap, product pricing, customer demand, and expected market share gains, the nature and extent of the inventory burn issue with respect to our media resellers, the continued significance of our media business, and our efforts to continue to improve our cost structure. We would like to caution you that our statements are based on current expectations and involve risk 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 Q1 results as well as our reports filed with the Securities and Exchange Commission from time to time, including pages 43-55 of our most recent 10-K filed on June 30, 2003. That reports contain and identify important factors that cause the actual results to differ materially from those contained in our forward-looking statements. We undertake no obligation to update these forward-looking statements in the future.

With that, I will turn the call over to Rick Belluzzo.

Thank you, Lisa. Good afternoon and thank you for joining us. During the last year, we have been working to execute an aggressive plan to return Quantum to a position of sustained growth and profitability. Some of the changes include significant restructuring, acquisition, selling into NAS business and outsourcing manufacturing.

As a result, we have seen two quarters of solid momentum. But as we indicated earlier in the month, our recently completed Q1 was more challenging. Our performance was negatively impacted by the lower than expected media revenue and to a lesser extent, the slowing of tape drive momentum. While much of the underlying performance improvements remain, these two issues offset those gains resulting in disappointing Q1 results.

Consistent with our revised expectations, total revenue in the June quarter was $202m, about flat year-over-year and down 14% sequentially. We had a non-GAAP loss of $5m or 3 cents per share. GAAP net loss was $9m or 5 cents per share. Included in these results was a $3m negative impact from foreign withholding taxes. On the revenue side, we produced both sequential and significant year-over-year revenue growth in FSG reflecting the positive impact of our broadened product line and OEM win.

Tape drive revenue increased 31% year-over-year and showed strength even excluding the impact of the benchmarked acquisition, demonstrating the success that we've had with our second-generation super drive SDLT 320. We continue to improve gross margin even with a lower media revenue during Q1.

In tape drives, gross margins increased for the third consecutive quarter reflecting our successful outsourcing to manufacturing as well as quality and process improvement. SSG gross margins improved sequentially primarily due to the favorable shift in product mix. One of the things I am most pleased with is our progress in reducing expenses.

Over the tax tier, operating expenses have decreased 12% with G&A decreasing more than 35%. In Q1, our OPEX came in lower than our expected range on a non-GAAP basis and at the low end of the range on a GAAP basis reflecting our continued commitment to streamlining our cost structure.

With that context, let me explain a bit on the revenue drivers for the quarter. These drivers are the same ones as those indicated at the time we revised our fiscal Q1 expectations on July 10. I want to focus first on media results and the actions we are taking to improve that business. Media revenue which includes both royalties and Quantum branded media was $55m, which was lower than originally anticipated and lower than last quarter.

The decline reflecting impact on weakness in demand economically, especially in Europe. This weaker demand trend also resulted in lower than expected media prices, which have a dual effect of reducing royalties, which are based on revenue and causing a reduction of inventory levels by media resellers.

Our research indicates that media price erosion has been more rapid than expected by our reseller and these resellers reduced their inventories by about a week's supply to mitigate the risk of having an excess amount of higher price products. At this point, we believe that the end demand weakness will continue for the time being and that the inventory burn issue is one quarter phenomenon as resellers continued forward from their lower inventory levels. However, we are cautious about the revenue trajectory and anticipate moving forward from this lower base.

The media business model continues to be unique and very valuable to the company. You can be certain that we are driving aggressively to expand and strengthen this business. As you know, there are many factors that affect media; this include media prices, drive replacement cycles, media usage rates, performance of OEM, drive sales, and the relative growth in SDLT versus DLT media. While there are some factors that we cannot control, there are others that we can affect over the longer term, and I want to mention some of those actions, the actions that we are taking to make our media business more robust.

First, new product introductions including the third generation SDLT 600 tape drive, which is on track for summer qualification and general availability in the fall. With new medium for this product, we anticipate not only solid demand at the front-end of the product cycle, but also a higher initial price point. We also expect solid demand and higher price points for the new VS 160 media. The VS 160 drive is currently in qualification and will be generally available this quarter.

Next, we are expanding our installed base by aggressively driving our VS family of products into higher volume segment. This is an opportunity to increase the volume of media sold over the longer term. And, finally we are expanding usage rates by addressing new customer needs that needs new drive capabilities such as DLTSage, which we announced yesterday.

One of the DLTSage features actually alerts the user when it's time to replace the media cartridge. DLTSage will shift with all future Super Drive solutions, beginning with the SDLT 600. Expanded usage rate upgrades also means focusing our high-end automation and its significant media use. We are also pursuing more vertical market opportunities. We believe that media will continue to provide significant cash flow and profits in the future, and we are actively addressing opportunities for growth.

Now, for tape drives, after two very strong quarters, we saw slowing of momentum in fiscal Q1 with drive revenue coming in at $91m. You will recall that in fiscal Q4, typically a seasonally weak quarter, we saw a significant sequential growth in drive sales driven by success with both value and Super Drives. We had expected that momentum to makeup for a traditionally weak fiscal Q1 as well, but the economic pressures affected demand.

The Super Drive segment did well. Shipments of the SDLT drives were about as expected coming in roughly flat sequentially. The older DLT8000 drive showed an expected decline and shipments of our VS family of drives were down sequentially, primarily due to greater than anticipated seasonality in service sales.

On the positive side, even with a lower than expected revenue, this was the third consecutive quarter in drive gross margin. This reflects our efforts to improve drive, economics the outsourcing, and improve quality. The market landscape -- preliminary discussions with the industry analysts indicate that we maintain our brute share in the Super Drive arena in area in the March quarter, after gaining 5-8 percentage points of share in calendar year 2002.

We continue to develop exciting new products; we are on track to deliver our third generation SDLT 600 next quarter. With double the current capacity, better performance, and additional value-added software, we believe that the SDLT 600 should end the leapfrog nature of the technology development in the Super Drive category. We have refined our R&D processes to reduce the product time to market from 18 months to one year which we believe outpaces for our competitors.

In the Storage Solutions group, revenue in the June quarter was $56m up 7% sequentially and more than 30% year-over-year. This demonstrates the power of our broad product line and OEM wins that we have executed over the past year. In tape automation, OEM revenue grew again this quarter representing more than 60% of total product sale, and we continue to see strength in high volume solutions such as the ValueLoader and SuperLoader. We have continued to refine our sales model particularly the channel in Europe where we saw improvement over this last quarter.

As part of our efforts, we brought on board a new sales director for Europe who we will work to accelerate the transformation in that region. Where we still need to do more work is in the high-end branded business where we have seen slower growth than we'd like with the P Series and DX30. We are in the process of refining our go-to-market strategy by increasing the number of sales and sales engineer resources and upgrading our enterprise solutions capabilities.

We saw growth in the disk-based backup arena with DX30, although from a small base. We are excited about our second-generation disk-based backup products, the DX100, which is on track for delivery in the fall. We believe that the large enterprise market represents a sweet spot for this particular solution and future follow-on products. The attention paid recently by competitors to this emerging market gives us conformation that we are on the right track.

Finally, we have lowered our expense profile though restructuring actions and control discretionary spending; for example, we are making significant progress in the transition to a single operational and financial system, and in six months we made a Siemens transition to an outsource manufacturing model that is producing cost saving. But we still have a lot of work to do. We plan to accelerate our efforts to improve our cost structure, and we will make some organizational changes to that end. A recent example of our cost structure focus occurred earlier this month when we announced an organization restructuring at the executive level and eliminated few executive vice president positions.

With that, I will turn the call over to Michael Lambert, who will provide additional detail on our financials.

Thanks, Rick. Let me provide some additional quarter highlights. Gross margin for the quarter on a non-GAAP basis was 32.9%, slightly up sequentially even with lower revenue. This improvement is due to the increased impact of outsourcing manufacturing, a shift in product mix toward higher margin solutions, and quality and process improvements in each product segment.

Non-GAAP operating expenses for the quarter were $64m, down $2m sequentially and below our expected range of $65m - $69m. This decline reflects lower headcount, careful management of discretionary spending and just under $1m in bad debt expense in the March quarter that didn't appear in the June quarter. We remain vigilant and looking for ways to improve our cost structure.

On a GAAP basis, gross margin was 31.4% for the quarter with GAAP operating expenses at $66m in the quarter down nearly $9m sequentially and below our expected range of $68-71m. The difference between GAAP and non-GAAP numbers was $5m of amortization of acquisition related intangibles. A complete reconciliation is included in the press release and on our website.

We ended the quarter with a cash and short-term investment balance of $310m, down $9m sequentially. We were a net user of cash with a slight negative cash flow from operations of $5m. CAPEX for the quarter was $3.6m. DSOs increased to 59 days primarily reflecting that Q1's revenue was more skewed towards the end of the quarter and that collections did not quite reach Q4's high levels. As a result of our weaker than expected results, we amended our credit facilities this quarter to loosen one covenant and to provide for the incremental restructuring we expect to implement.

And a couple of miscellaneous items; first taxes, our results included as Rick mentioned a $3m negative impact from foreign withholding taxes that does not have a corresponding offset as it did historically. Because we were in a net loss position, we thought it prudent to not allow our deferred tax asset to grow. We expect to see a similar impact in fiscal Q2.

Second, costs, as Rich mentioned we are continuing to look for additional ways to reduce costs. At this point, we anticipate that we will incur restructuring charges totaling approximately $10m in the next three quarters, of which 1-2m will be incurred in fiscal Q2. Virtually, all of the $10m is expected to be cash based and we will provide additional detail as appropriate in the future.

With that, I will turn it back to Rich, who will provide the outlook.

Thank you, Michael. As we look forward to the remainder of fiscal '02 and beyond, our priorities are clear. One, drive revenue growth through the new products. As far as our fiscal Q2 priorities and beyond, our goals are clear. One is to drive revenue growth through new products and enterprise sales efforts. Two, we are to reverse the media trend we saw in Q1 through new products and expansion of our target market. And three, continue to focus on improving gross margins and reducing expenses. The economic environment is still difficult, but I believe that we are taking the right action to position Quantum for success.

With that backdrop, I would like to provide guidance for our fiscal second quarter ending in September. You heard me talk earlier about the actions we're taking to make our media business more robust. Having said that, this outlook does not assume an immediate increase in media revenue in Q2. We expect overall revenues to be flat or slightly up sequentially. Both GAAP and non-GAAP results are expected to include a $2.5m negative impact of the foreign withholding taxes.

We expect non-GAAP gross margins to be roughly flat with non-GAAP operating expenses in the range of $63m - $66m as we continue to manage discretionary spending. As a result, we expect a non-GAAP loss per share to be in the 1-3 cents range. On a GAAP basis, we expect gross margins to be roughly flat with operating expenses in the range of $67m - $70m.

The GAAP and non-GAAP difference reflects amortization of acquisition-related intangibles. It also includes restructuring charges in the range of $1m - $2m. As a result, we expect a GAAP loss per share in the range of 5-7 cents.

In closing, we continue to be confident and excited about our product program and the change that we've put in place. We are stronger, more efficient, and a more focused company than we were a year ago. We have expanded our product line, improved product development processes, and streamlined of our cost structure. We still have lot of work to do, but I believe we are on the right track. This is a tough environment, but I have not wavered in any way of my excitement about the opportunity that we have to keep moving forward.

At this point, I'd like to open it up for questions. Operator?

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 "*" followed by the "1" on your touchtone phone. If you would like to decline from the polling process, you may press the "*" followed by the "2". You will hear a three-tone prompt acknowledging your selection. And your questions will be polled in the order that they are received. If you are using speaker equipment, please lift the handset before pressing the numbers. One moment please, for the first question.

Our first question comes from Sabrina Ricci with Deutsche Bank. Please go ahead.

Hi. I have a couple of questions on guidance and a separate question. In terms of the guidance, does that include the charge that you mentioned, the ongoing cash charge that you are expecting?

Yes, Sabrina. The guidance we gave does include on the GAAP side the $1m - $2m in restructuring that we expect to take in Q2.

Okay. On the GAAP side and to consider non-GAAP, you are going to -- and then in your pro forma guidance, it sounded like [inaudible].

That's correct.

Okay. Then in terms of the guidance side, on one hand you are mentioning that what happened this quarter within media was a bit of one-quarter phenomenon but it looks like, based on the revenue guidance, that this clearly going to take some time to get some traction again. First of all, what can you do to get the traction get going and kind of prevent more of a slide on pricing? And do you then see everything kind of knee-jerking backup or it's going to have to be gradual for the rest of the year?

Well, the most important thing we can do to improve media sales in the short term is to ship more drives. All of the other factors that improve short-term media results are not necessarily healthy. I mean lead-in inventory levels rise up again. I don't think that's something we are going to move towards. We don't control pricing. So some of those impacts really are impacts that are longer-term things that we work.

So in the short term, it's getting our new products out with new media products, the VS160, SDLT 600 have new media that's a very positive experience as people started to deliver those products and deliver the associated media, as well as seeing our overall drive business continue to move forward to ship more units at the low end, do the work we need to do on installed base. So we are working on both short and long-term initiatives, and I think that makes us feel like we are positive about the longer-term momentum but cautious given the environment that we're in.

And you would say the improvement, once you get it, would be gradual nature you would expect?

I would think so. I mean it's hard to say certainly that this improvement we saw this quarter was not gradual. And so, you could take a view that said it would be a rebound. We just haven't taken that view because we just don't think it's wise to do that.

Okay. And then two just short questions. One on, I know that you mentioned Europe was tough but when you look at revenue by geography, it actually looks like international bounced up a lot this quarter versus previous quarters. I just wanted figure out what was going on there. And then on the balance sheet for March, it looks a little different from what we saw last quarter, when we had the March balance sheet, and now you've got the comparisons of June and March. Am I looking at something wrong here? It looks like it's a little different.

Let me take the first question. I will let Michael work on the balance sheet one. Europe was strong primarily through our OEM partners. The media business, the weakness was highlighted in Europe, and our channel business in Europe continues to be a challenge. I think why we emphasized Europe was largely because of our focus are on discussing the media issue.

Okay.

So Sabrina, it's Michael. On the balance sheet side, it could be just a discontinued ops, which I know we have reported historically, although I am not sure exactly what item are you referencing, so.

Well, I am looking at the March 2003 balance sheet from when you reported last quarter. And it looks like the current assets number is a little different from what is now in your release today.

If you remember back, we made a couple of adjustments post quarter-end, both of which we announced in the press release. It was the inventory correction, which we made and then there was also the DSI bankruptcy, Sabrina. Both of those items would have impacted the balance sheet slightly from what we reported in the last set of numbers.

Okay, good thanks.

Our next question comes from Bill Lewis with JP Morgan. Please go ahead.

Thanks. I guess I have a question on two parts. Just first, on cash flow, what's your expectation for returning the cash flow breakeven or positive? And then, could you help us think about the media business now going forward, given the reset you saw in pricing and inventories that your customers -- I think given the big decline in the media business, I guess could you try to size what you think the cash generation capability is now versus a couple of quarters ago, as we think about the contribution from the media sales?

Okay, so Bill, it's Michael. I will take the cash flow outlook for you. So as we think about go forward basis, we will stick with I think consistency. So in terms of thinking about Q2, we expect cash flow from operations which were slightly negative this quarter around $5m. At next quarter's revenue level, we expect the cash flow to be roughly flattish to possibly slight improvement in fiscal Q2. And that really is dependent of course on driving with the guidance that Rick mentioned on the top line. So not a huge change from where we just closed this past quarter.

On the media question, I don't know if we can have specific numbers. Now your question was what is it now versus what was it a few quarter ago. Well clearly, there have been two trends that have gone on in the last year. One was a shift from our revenue line to gross margin, as more media went through partners, that has always put pressure at least in the last year on our topline results, but was neutral at the gross margin level. That event occurred over the last year, which is why you see such a marked difference when you look at product revenue growth versus media growth from year to year.

From a gross Margin perspective, I mean based on this quarter, the media business is clearly contributing less to our overall results and going forward as we have really accelerated our work to understand opportunities, I feel very, very good about the basic model of the strategy and opportunities we have, but we have to do a bunch of things to be able to have that media business grow and generate more gross margin, which includes being incredibly successful in the automation at higher end space for people who use more media, which includes pursuing vertical markets, which includes taking up VS80 drive into the lower end of the marketplace to have larger installed base.

There are a number of initiatives like that, that are all under way, that are being driven aggressively, that if you look at models, at forecasts, and speaking about where that can go, it has a healthy view. But we have to work through the here and now, which is less positive, certainly in this recent quarter.

So also Bill -- Michael, as we work through the media side of it, as Rick said, and it's the inventory piece I think you expect it to -- we expect to be a one quarter issue or so. The other thing to keep in mind is that, and Rick mentioned this earlier on the call, a part of what's happening in our mix and we are working through the media side now, but at the same time we are doing that. We are continuing to drive improvement on the gross margin side in the core tape drive business, which is driving gross profit dollar contribution -- increases that at least this quarter and for the last couple of this quarter, in particular off-set some of the media decline. And so we are improving the rest of the business even as we speak.

And what was the split between the media and the royalty?

Let's see, the exact split between media and royalty on the revenue side -- Quantum branded media was $20m top line, royalty was $35m.

Great, thanks.

Okay.

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

Hi guys, this is actually Henry Naah for Harry here. I got two questions for Rick and one for Michael. Michael, could you talk a little bit about the amendments -- regarding facility, what you guys exactly did? And Rick if you could talk a little bit about the competitive landscape between TLT and LTO? It seems like they StorageTek, put up a good number and IBM said their LTO business was strong. And if you could talk a little bit about the restructuring, I know its little bit early, but if you could give us some commentary as to what we can expect on that? That would be great. Thanks.

Okay. So I'll get started, Henry. So, on the amendment side, we did amend the credit facilities related to accounts for both the incremental restructuring we expect over the next three quarters which was not addressed there. And also I also mentioned to lose on covenant. Really, I think the commentary I would leave you with on that is that we have had and continue to have a very good working relationship with our banking group and as I think everybody is aware because we talked about it in the last 24 months or so.

We have periodically made changes during that timeframe to respond both to the changing needs of our business as well as to changing industry dynamics. So this quarter's result, I would characterize as one more change albeit, you know, I think in the overall scheme of things a very small dollar one.

Though on the competitive environment, a lot things are going on. First of all, if you look at the SDLT performance versus LTO. If you remember the end of last year we were on the strength of the 320, we were gaining share. I think if you look at the first part of this year now, we are basically holding our own. I think that the fidelity of two has been shifting. We don't have the same product again as we had before, but we are continuing to work to gain new qualifications and make good progress and get well positioned for what we think is a very exciting announcement, which is the 600, which will be in qualification shortly and is on track.

In fact yesterday, we introduced a very unique element to that product called DLT stage, which is a set of intelligent feature within drives. It really makes it even better suited for higher-end environment and higher-end application. So we feel like held our own and we're about to move forward with the next opportunity to gain share and every time we make change, we are kind of closing the gap or improving our time to market position by pursuing this 12-month product refresh versus the competition to longer period of time. So that's kind of what we see happening. We have been holding our own. We intend to continue to grow in net gains. We do need new products. That's the 600; that's coming up shortly so we are preparing for that.

All along, we expected the first half of this year to be a little more difficult because of the way the products cycles would work so that's how we see things. On the IBM comments, IBM within the LTO Consortium is gaining share. So the fact that IBM was positive about their share is a reflection that they have been gaining relative to HP from at least the external data we see from analysts and we've seen from analysts and we run our numbers carefully through analysts and feel pretty good about the information I just gave you.

On the restructuring side, all along we have said that we did our restructuring across the company, you know, just around a year ago that from here on now we are going to work on specific initiatives, specific areas and that's what this restructuring reflects. Areas we will continue to improve our cost structure, our management levels, and efficiency. We've already made some of the changes, in the last few weeks as we've been pursuing and continuing to make the company more efficient. So the restructuring really resides in a lot of individual places. It's not one big major announcement that we can make, but it involves a lot of initiatives to just continuously improve the productivity and competitiveness of the company.

But Henry, I did mention on the earlier noted, we do expect it to be mostly cash basis and by implication that turns into severance and the related, as well as facilities and things like that.

Okay great. Thanks guys.

Our next question comes from. Laura Guimond with Robert W. Baird. Please go ahead.

Hi I was wondering if you could talk about whether you saw in regards to the price decline in the media, was there a difference between DLT and SDLT?

Yes. We saw price declines in both. I think as a general rule, the higher volume more mature products declines the most and that was the case here where our tape for our DLT media was under the most price pressure in the quarter.

Okay. Can you quantify that at all?

Not really. I mean it is very hard to have, you know, the exact data that we sample points and actually there is a continuous trend of reduction. So it is not like this quarter. Prices went down and they haven't gone down other quarters; they go down frequently, but I think this quarter they went down a bit more. I can't give you the exact percentage, but they did go down more than planned and a little bit below the trend line if you look at the trend line so it was a difference.

I'd also say, as I traveled around the industry, read other reports, etc., there seems to be a general theme about inventory reduction in channels and I find many places where people are taking about that and I cannot say that -- I think the channel players are very, very sensitive today. It has been a tough competitive environment and I think they are dealing a lot more aggressive than we do see in the inventory levels.

Okay and then another question, could you give headcount and depreciation?

So Laura , headcount I think -- let me find here. So headcount is right around 2,050, Laura -- just over 1,400 U.S., just over 600 international and then on the depreciation side, the depreciation profile this quarter was running about just over $ 7.2m give or take.

Thank you.

Alright.

Ladies and gentleman, for any additional question please press the "*" followed by "1" on your touchtone phone. One moment please, for the next question. Our next comes from Jim Chi (ph.) with BB&T Capital Market. Please go ahead.

Good afternoon. Hi. First question regarding to that receivable from Maxtor Store Corporation $95.8m, [signed bond and issue]. We understand the Maxtor just had a new deal in May, so they should have enough cash. Do you expect that they are going to pay you in near term or are they going to pay you when the debt due?

They will pay us when the convertible debt is paid out either in August '04 when it's due or if it's redeemed earlier based on an earlier redemption date. But it does link up with our repayment of our convertible debt, which shows on our right hand side of the balance sheet. It's about $288m, of which Maxtor owns $96m, which is the receivable you referenced.

Okay. How much CAPEX you had in last quarter?

$3.6m this quarter

Thank you.

Ladies and gentlemen at this time, we have no further questions. I would like to turn the conference back over for Rick Belluzzo for closing comments. Please go ahead sir.

Well, again thank you for joining us today. I continue to be enthusiastic about the opportunities that are before us. This quarter was one that was not very pleasing to me and to the management team. We are dedicated and focused on offsetting some of the effects we saw this quarter in the coming quarter and really positioning the company for good success going forward. So, thanks again for joining me.

Ladies and gentlemen, this concludes the Quantum first quarter earnings release. If you would like to listen to a replay of today's conference, you may dial 303-590-3000 or 1-800-405-2236 with access code 546-402. Thank you again for your participation on today's conference. You may now disconnect.