Quantum Corp (QMCO) 2004 Q2 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the Quantum Corporation Second 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 question and answer session. If anyone needs assistance at any time during the conference, please press star, followed by the zero. As a reminder, this conference is being recorded today, Thursday, October 23, 2003. I would now like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations. Please go ahead ma'am.

Thank you. Good afternoon everyone and welcome. With us today are Rick Belluzzo, CEO; 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 www.quantums.com and will be archived for one year. During the course of today's discussion, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements we will make include statements regarding our financial projections and prospects including our outlook for the third fiscal quarter, new product releases and their timing, features, and benefit, the media business results and cross back, and our priority and initiative going forward. 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 fiscal Q3 results as well as our report filed with the Securities Exchange Commission from time to time. These include pages 43 to 55 on our most recent 10-K filed on June 30, 2003 and pages 45 to 47 of our most recent 10-Q filed on August 13, 2003. That report 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. With that I'll turn the call over to Rick Belluzzo.

Thank you. Good afternoon and thank you for joining us. Just over a year ago we began pursuing a number of aggressive changes intended to transform the company and deliver consistent growth and profitability. During the past year we decided to focus squarely on the data protection market, which led to the divestitures [Inaudible] business in a series of decisions to improve our core product line. Prepare for new growth opportunities and build historic competitive position. The many changes we've made resulted in some significant gains including improved market share, higher product gross margins, lower operating expenses and a very exciting set of new products. While these have been positive changes we have been confronted with new challenges including a steeper than anticipated decline in media prices. This began to negatively affect our Q1 results and continued to affect our recently completed Q2. While clearly a disappointing setback we have undertaken efforts to mitigate the impact where possible and accelerate our performance improvement. Bottom line, I am pleased with what we have accomplished in many areas, but not satisfied with our current results. Consistent with revised expectations that we announced earlier in the month total revenue in the September quarter was $195m, down 3% sequentially and 4% down year-over-year.

Product revenue excluding media has increased 26% year-over-year reflecting our focus on improving and broadening our product offering. We had a non-GAAP loss of $6m or $0.04 per share. GAAP net loss was 38m or $0.22 per share driven by several accounting charges that Michael will discuss shortly. Non-GAAP gross margin was 31.4%, reflecting lower media and service revenue in the mix, and a higher concentration of OEM sales and SSG with GAAP gross margin did approximately 30%. In the tape drive business, revenue was a $135m with $49m in media and $86m in drives. Media revenue declined as a result of continued pressure on media cartridge pricing. Media unit shipment increase in the high single digit range over the previous quarter. Drive revenue was down slightly sequentially, reflecting an expected mix shift in our value segment to lower priced and higher margin DS drives. As a result drive gross margins increase sequentially for the fourth straight quarter. Drive revenue increase approximately 25% year-over-year. Drive unit shipments were about flat sequentially and up more than 50% year-over-year. SSG revenue was $65m, about flat sequentially with a decline in services revenue driven by lower spare part sales offsetting an increase in enterprise library. SSG gross margin decreased slightly as a result of a heavier OEM mix and decline in high margin service revenue. We continue to reduce cost across the company during the quarter with non-GAAP operating expenses at $62m, below the range indicated at the beginning of the quarter. GAAP OPEX was $68m and over the past year, we have reduced non-GAAP operating expenses by approximately $11m on a quarterly basis with non-GAAP G&A declining more than 25%. If you include the expenses from the NAS business, which we divested last fall, we have reduced non-GAAP OPEX by $16m on a quarterly basis over the past year. With that introduction, let me expand a bit on our results for the quarter, first with media.

The continued price pressures were significantly more pronounced than expected and affected both Quantum branded and royalty media, and both Older Tape 4 and Super one media (ph) . The impact is not confined to Quantum and DLT, based on the data we have seen, we believe as an industry wide issue in mid-range tape. Unlike last quarter, media cartridge units increased sequentially in Q2 and we have not seen further signs of reseller inventory reductions, something we saw in Q1. Well, of course, we do not control the price of manufacturers and resellers' charge, we continue to introduce new drives in media to the market like the SDLT 600 and VS160 to add robustness to our media business. We're also working to offset media pricing pressure with improved gross margins from tape drive and the number show that we are making progress. Next, tape drives unit shipments were roughly flat sequentially with VS drives up and older DLT drives down, and Super drive virtually the same as last quarter. We are particularly excited about the general availability this quarter of the SDLT 600. As we announced last week, this third generation super drive provides performance and capacity that outpaces the competition. As featured the recently introduced DLT Sage Technology an architecture based suite of predictive and preventive maintenance diagnostic tools that enable users to more simply manage tape storage environment.

The SDLT 600 is also our first tape drive to feature an optical fiber channel interface which gives us access to a broader selection of the market. Qualification of the 600 have begun and we will be completed over the next couple of quarters with all major system and automation OEMs. The VS 160 is now shipping both Quantum branded and OEM, they will begin shipments this month and three of the four major system OEMs had committed to the product. Next storage solutions, overall revenue declined slightly 1% sequentially but increased 27% year-over-year. In tape automation sales of our enterprise libraries increased sequentially primarily due to higher OEM sales. In addition, the efforts to refine our sales model in the enterprise sector are continuing. During the quarter we completed an intense training program and an upgrade of our solution selling capability, while we still have work to do here, the initial results are encouraging with channels sales of enterprise libraries up sequentially. Our disk-based enhanced backup solution, the DX30 gained momentum sequentially of course from a small base, but positive momentum nonetheless and an indicator of customer acceptance 20% of customers have repurchased the products and 50% of the sales agreements in Q2 were from multiple units. Our newest solution the DX100 for enterprise customer is on track for release this quarter. And earlier in the month, we announced our next generation enterprise library the 'MAKO' PX720. MAKO provides customers with unmatched features and value, including the ability to scale the solution as needs increase. Industry and customer reaction have been very positive and we believe the combination of this [Inaudible] product and our disk-based backup capability will be mean (ph) differentiator for us. Finally, we continue to streamline our cost profile to reduce the restructuring actions and control spending. As I mentioned earlier we've reduced quarterly non-GAAP after-tax more than $10m over the past year. With that I'll turn the call over to Michael Lambert , who will provide additional detail on our financials.

Thanks Rick. Let me provide some additional information about the various accounting charges included in GAAP results. You'll find a complete reconciliation of GAAP to non-GAAP numbers in our press release on our web site. We incurred a $21.3m or $0.12 per share non-cash charge to increase the valuation allowance for our net deferred tax assets. Accounting guidance says the cumulative losses in recent years make it difficult to rely on forecast of future income in order to realize the DTAs. A weaker than expected first half of FY04 combined with our previous operating losses led us to take this action now. We took a $2.3m non-cash charge to write down our former manufacturing facility in Malaysia to its appraised value. We incurred approximately $2.6m in charges related to the redemption of our 7% convert, including a redemption premium and the write-off of unamortized convert fees. The completion of this transaction has enabled us to improve and simplify our capital structure, extend maturities on our debt, and also lower our interest expense. We incurred approximately 800,000 in restructuring charges related to actions we discussed last quarter and initial plans to eliminate a manufacturing site in the UK. And lastly we saw amortization of acquisition related intangibles of $4.8m. We ended the quarter with a cash and short-term investments balance of $273m, down $37m sequentially due mainly to the redemption of our 7% convert during the quarter.

We redeemed our portion a $192m through a combination of the new $160m convert and cash. Our cash flow from operations was roughly break even, an improvement over last quarter's $5m consumption even with this quarter's lower revenue. In addition, contained within that breakeven cash result is about $2m in cash cost associated with the early redemption of our convertible debt. CAPEX for the quarter was $3.7 m. DSOs improved by six days to 53 days primarily reflecting better management of our customer receivables and collections, we also improved our inventory turns by nearly half a term through improved execution by SSG in managing their inventory balances. With that I'll turn it back to Rick, who will provide the outlook.

Thank you Michael. Looking forward, we have a clear set of priorities that will build up to many initiatives that we began during the past year. These include new products, sales programs, continued cost reductions and more. We will also pursue a set of structural changes that will allow for more synergy across the company, lower operating expenses, and generally improve our ability to execute. We'll communicate more details over the next 30 days or so, but I'm committed to the changes we need to make and I'm enthusiastic about the benefits that these changes will deliver. With that I'll provide guidance for the fiscal third quarter ended in December. During Q3, we expect overall revenues to be roughly flat sequentially, while we have typically seen an uptick in business in the third quarter due to seasonality impacts, continued uncertainty in media pricing and the fact that we don't yet have a full contribution from new products introduced in the quarter causes us to be cautious with our expectation. We expect non-GAAP gross margins and operating expenses to be roughly flat, and as a result expect the non-GAAP loss per share to be roughly flat as well. We are unable to quantify our GAAP expectations at this time, as a result of the structural changes we are evaluating, we do expect restructuring charges during Q3. These charges could be material depending upon the final decisions reached. We will provide an estimate of those charges and GAAP expectations once those plans are finalized. What we can't quantify at this point is amortization of intangibles, which we expect to be in the $4m to $5m range. In summary, while we've experienced two challenging quarters, we have many of the central changes underweighed (ph) or to return the copy to the improvement trajectory that we were experiencing during the second half of last year. We've just begun to launch some exciting new products that continue to improve our costs and expense structure, and we have a set of additional activities that I believe will accelerate our progress. At this point, I'd like to open it up for questions. Operator?

Thank you Sir. Ladies and gentlemen at this time, we will begin the question and answer session. If you have a question, please press star followed by the one on your push-button phone. If you would like to decline from the polling process, please press star followed by the two. You will hear a three tone prompt acknowledging your selection. Your questions will be polled in the order they are received. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment please for our first question. Our first question comes from Craig Krobic (ph) with Lehman Brothers. Please go ahead with your question.

Hi. This is Craig Krobic (ph) actually for Harry Blount. If you could please talk a little bit more about the nature of the market share gains that you referred to. Also if you could talk a little more about the competitive landscape with LTO. Thank you.

Yes, let me first respond to the market share gains that I referred to both, let me first start with tape drives. In the tape drive market at the end of last calendar year, the external data suggested that we had picked up several points of market share in the mid range tape market. And some of that momentum continued on earlier into the year, and then it's been roughly stable and we expect now with the launch of the SDLT 600 where we now significant competitive advantage to pick that momentum up, and I think that's most appropriate relative to LTO. The SDLT 600 has 50% more capacity, it's the highest performance mid-range drive, it has its break-to-do technology (ph) called DL Sage is built into it, and this product is going to strengthen our position where we have been weak in the past, which is in the high-end automation part of the business and this product is designed for automation, more capacity, higher performance fibre channel capability and these management tools. So, that's really - we have been really keen along with some of the gains we've made recently in the value segment from the VS drives that we acquired. In the automation area, our primary gains have been in auto loaders where we have regained a number one share position. That's been the most significant gain that we've seen in the automation segment.

Great. Thank you.

Our next question comes from Joel Ingman (ph) with Robert W. Baird. Please go ahead with your question.

Yes, hi. Could you talk a little bit about the causes of any pricing pressures that you've seen. Any signs that that pressure might be easing with improving demand?

I don't think we see our product business. Media is another story which we discussed quite a bit, but on the product part of our business, I don't think we see anything unusual from a price competitive position. It's always been tough and we think it is roughly the same. We think it's both true for drives as well as the systems in automation part of the business. Our media of course isn't something that over the last couple of quarters we have seen quiet a bit of pressure, it's been mostly see a supply demand impact from companies that have lots of capacity for media and that has driven prices down. I will also add to that on the media side that to just to reinforce again, last quarter we talked about unit decline because of the inventory contraction in the channel. This quarter we have seen continued price declines, but units were up for us and we think it reflects back with that adjustment will occur, which is what we had referred to in the previous calls.

Okay, and then also can you talk a little bit about the DX30 sales?

The DX30 sales we had our best quarter for sure, still a small part of our overall business is to reinforce that message but we definitely saw increased momentum as I mentioned in this script we turned customers and I think there were, we are feeling positive about the progress that we have seen. I don't want to give you specific numbers at this point but it has been a good uptick and we're shipping the DX100 this quarter, this quarter or the quarter we are in, and that product really extends the leadership in terms of our competitive position and we think it is a reflector all the things we learned in the DX30 about what we needed to do improve and continue to gain opportunity.

Okay, thank you.

If there are additional questions, please press star followed by the one at this time. At this time there are no further questions please continue.

Thank you. Well thanks, thanks again for joining us, I appreciate you taking the time, I hope you get a good sense for the progress, and the set of priorities and work that we have a head of us. Thanks a lot.

Ladies and gentle men this concludes today's Quantum Corporation second quarter earnings release conference. If you would like to listen to a replay of today's conference please dial 303-590-3000 followed by access number 552742. Once again if you would like to listen to a replay of today's conference, please dial 303-590-3000 followed by access number 552742. We thank you for participating, you may now disconnect.