Quantum Corp (QMCO) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Quantum third quarter earnings release conference call. 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 should need assistance at any time during the conference, please press the star followed by the zero and an operator will assist you. As a reminder this conference is being recorded today, Monday, February 2, 2004. I would like to turn the conference over to Ms. Lisa Eubank, 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 reconciliation of any GAAP and non-GAAP financial measures discussed today, can be accessed at the Investor Relations section of our website at quantum.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 our fourth fiscal quarter; new products releases, their features and benefits; market share, and expected ramped cycles; and business prospects, priorities, and opportunities. 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 announcing our fiscal Q3 results as well as our reports filed with the Securities and Exchange Commission from time to time, including pages 43 to 55 of our most recent 10-K filed on June 30, 2003, and pages 50 to 61 of our most recent 10-Q filed on November 12, 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 forward-looking statements in the future.

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

Well, thank you, Lisa. Good afternoon and thank you for joining us.

As you can imagine, we are pleased with our fiscal Q3 results and the progress we have made toward executing on our business objectives. It was a key quarter in terms of beginning shipments of our new products and in shifting to our new organizational structure. We are particularly pleased with the growth in the systems business, our operating expense reductions, our continued progress in improving tape gross -- tape drive gross margins and the increase in media revenue. I would like to walk you through some of our highlights for the quarter and then turn it over to Michael for some financial details.

Revenue and earnings in Q3 were better than anticipated. Total revenue increased 5% to $205 million, with non-GAAP profit of one cent per share, compared to a loss of four cents per share in the previous quarter. Revenue increased sequentially in all areas: drives, media, and systems. We continue to improve our gross margin rates which rose sequentially from 31.4% to 33.1% non-GAAP, driven by continued improvement in drive margins and an increase in high margin media revenue. And we continue to reduce our operating expenses with non-GAAP Op Ex in the quarter decreasing from 62 to $60 million. Our goal is to have an Op Ex run rate below $60 million once the restructuring is fully implemented. GAAP loss per share was 3 cents, which included $4.6 million in restructuring costs and $4.4 million in intangibles amortization. The GAAP gross margin rate increased from 30% to 31.7% with GAAP Op Ex at $66.5 million.

Now let me begin with business highlights with Storage Systems, where revenue increased 9% sequentially to $71.3 million. This excellent performance was driven primarily by OEM strength in the SuperLoader product, M-Series libraries, and by service, and we continue to build momentum in disk space backup with the introduction of our second-generation solution, the DX100. We increased our Quantum-branded business, particularly in the M-Series and high end P-Series libraries primarily through the improvements we have been making in our branded sales efforts and solution selling capability.

One of the important changes we made in November was the reorganization of the sales force, specifically combining the former DLTG and SSG sales organizations into one OEM sales force and one Quantum-branded sales force. In addition, we have emphasized a consultative account team that are committed to help our customers analyze and plan for their long-term storage needs. We have taken a number of concrete steps in the early stages of the reorganization, including hiring key additional sales talent and shifting people to areas where they can make the most impact.

The most exciting milestone in the systems business was the shipment of two new key products: the MAKO PX720 enterprise library and DX100, Enhanced Backup Solutions. MAKO has unmatched capability and performance in its class, and it is the first to include state-of-the-art reliability features at no additional cost to customers. The DX100, our second-generation disk space backup solution, provides scalable capacity, industry-leading performance and reliability, all optimized for backup. By emulating a tape library, the DX seamlessly integrates into a customer's existing backup process using industry standard backup software application. With scalability to 64 terabytes and transfer rates of up to two terabytes per hour, the DX100 is targeted squarely at larger data centers and larger accounts. Even in its early stages, we have been seeing very strong customer interest, particularly from the telecommunications industry. While, of course, the numbers are not material at this early stage, we expect MAKO and the DX100 to ramp over the next several quarters.

Our system business has come a long way in the past year and a half. In the summer of 2002, we were in the process of broadening our product line and building a better OEM business. We were successful in those endeavors and are now focused on adding to that success with a more solid-branded business. Since last summer, we have increased revenues from $50 million per quarter to $71 million. It is excellent progress and a solid base for even more improvement going forward.

Now the Storage Devices or the-tape drive business. Revenue increased sequentially to $87.6 million, while units increased in the high single-digit percent range. The largest increase in units was in the VS Value Drive segment as we continue to emphasize this lower-priced, higher-margin drive over our older DLT drives. All drives showed sequential increases in unit shifts except for the older SDLT 220 and DLT1 drives.

For the fifth quarter drive gross margins increased, reflecting the success of higher margin platforms including VS and continued focus on manufacturing and quality improvements. Our improvements have been dramatic and while -- and yet we still have a lot of work to do, I feel very great about the progress we have made to date.

The most exciting tape drive development during the quarter was a shipment of the highly anticipated SDLT 600 Super Drive. The 600 has 50% more capacity and higher performance than its nearest competitor. Designed specifically for the automation environment, the 600 is backward compatible with both the SDLT320 and DS160, the newest drive in our value line of products, providing for an easy upgrade path for customers. It also includes DLTSage, a suite of diagnostic tools to better manage, predict and prevent backup problems before they occur. While not yet material, this -- at this very early stage, we expect the SDLT 600 to ramp over the coming quarters as OEMs qualify and begin shipping, and we anticipate the successful execution will enable us to gain share over the competition.

We are enthusiastic about our device business. We have the highest performing mid-range super drive in the industry. Our super drives are compatible with the value line of drives that feature a low-cost, high-margin type of platform and add to that our new drives have just begun to penetrate the market and we see some great opportunity.

In the media business, revenue increased 7% sequentially to $52 million, reflecting both the moderation of pricing pressure and some inventory pull-in ahead of price increases and now by some media manufacturers. Media cartridge pricing declined sequentially, as expected, but not as significantly as the previous two quarters. Tape four units, used for our value line of drives, increased significantly, reflecting we believe some inventory pulling. You may recall the two media manufacturers announced price increases for tape four cartridges in the late November, early December time frame. We believe that some customers accelerated purchases ahead of those price increases. We cannot precisely determine how much of the media revenue was due to this pull-in, but we believe it did have an impact on Q3. Separately, media units for SDLT drives also increased sequentially.

Looking forward to next -- the next quarter we do expect is sequential decline in units shipped and revenue due to this Q3 pull-in. Even with some of the difficulties we faced in the previous couple of quarters, the media business continues to provide substantial cash flow and attractive gross margins and we'll continue to work to make this even more robust. A key factor in that effort, of course, is continuing the success in growing our drive shipments.

Finally, we continue to make progress in building a solid, efficient operating platform with major emphasis on execution. In November, we announced that we were restructuring the company to combine what used to be two separate business groups into one organization. This will enable us to eliminate redundancies and reduce cost. But the move was about much more than that. It was also about -- about making us work in a much more effective way, from how we interact with customers to how we work within our own organization.

We already talked about the change in the sales force. Another key element was some invigorating change in the leadership ranks. John Gannon has assumed the position of president of all Quantum operations. He has moved George Kregeler from the drive business to the systems business in order to leverage George's operational experience and expertise. To lead the storage device which is, John has brought in Lew Frauenfelder, a industry veteran who most recently was president and CEO of Benchmark Storage Innovations. We've also asked Jess Parker, formally ahead of the DLTG operations group, to lead the now consolidated device and systems operations group, thus leveraging his proven expertise at developing lower cost and more leverageable product platforms. Those are just a few of the examples of changes we are making to more -- to be more effective and to better position ourselves for the future.

Over the past five quarters, we have reduced quarterly non-GAAP operating expenses by about $12 million with G&A decreasing 25%. We are integrating multiple financial and operational systems. We have outsourced manufacturing, and I am further -- and we are further streamlining our organization. I am pleased with our progress to date and I am confident we will be able to continue to improve. At this point, I would like to turn the call over to Michael Lambert, who will provide some additional financial detail about the quarter.

Thank you, Rick. I, too, am pleased with our solid Q3 results and progress. Particularly the continuing success we have had in reducing expenses. Let me begin with the reconciling items between GAAP and non-GAAP numbers. You will find a complete reconciliation in the press release and in the IR section of our website.

We incurred $4.6 million in special charges associated with the restructuring that we announced in November. We now anticipate a total charge related to that and previously announced restructurings of approximately $8 million to $12 million, with about $6 million already incurred and the remainder to be incurred over the next couple of quarters. We had a $1 million gain related to our remaining obligations from our various discontinued operations, which are being wound up more favorably than originally expected. And finally, we had amortization of acquisition-related intangibles totaling $4.4 million.

We finished the quarter with a non-GAAP Op Ex run rate of approximately $60 million. This represents substantial progress, and we have operated well below our $65 million to $70 million target zone for three straight quarters now. The team has made very solid improvements here during this fiscal year. We ended the quarter with a cash and short-term investments balance of $255 million, and we were a net user of cash from operating activities in the quarter. This use of cash primarily reflects a change in the timing of inventory purchases from contract manufacturers, resulting in lower AP balances as of this quarter end. We expect to be break-even to slightly positive cash flow from operating activities in Q4. DSOs were at 55 days, and we improved our inventory turns by about half turn.

With that, I will turn the call back over to Rick who will provide the outlook.

Thank you, Michael. Looking forward, Q4 will be another quarter of transition as we begin to see our new products begin to ramp and our new organization structure gel. We have three clear priorities for the quarter. First, to ramp our new product successfully. Second, we need to continue to build momentum especially in our Quantum branded channel business where there is lots of opportunity. And finally, we need to continue to move toward a more streamlined operational platform that leverages synergies and reduces costs.

While we are very pleased with this past quarter, we will continue to be cautious about our outlook given the many forces that are in place. How well we execute and how quickly new products can ramp, the complexity of the media business, and the typically seasonal softness in the March quarter. But we believe we are making the right moves, taking the right steps to move forward, to move toward sustaining growth and profitability.

With that, I will provide guidance for the fiscal fourth quarter ending in March. We expect overall revenues to be in the $190 million to $205 million range, reflecting typical seasonal patterns and the fact that our new products are in the very early stages of shipping. We expect non-GAAP gross margins to be roughly flat, with non-GAAP operating expenses in the range of $62 to $64 million. This slight increase primarily reflects an increase in sales and marketing activities surrounding the launch of our new products, as well as a typical small seasonal impact. As a result, we expect non-GAAP bottom-line results to be in the range of one cent earnings per share to three cent loss per share.

On a GAAP basis, we expect gross margins to be roughly flat, with operating expenses in the range of $67 to $70 million. The GAAP to non-GAAP difference reflects the special charges of approximately $4 million to $5 million associated with the previously announced restructuring and amortization of acquisition-related intangibles of approximately $4.5 million. As a result, we expect GAAP loss per share to be in the range of 4 to 8 cents.

I feel very positive about what we've accomplished and where we're positioned. [INAUDIBLE] companies appear to be a bit more optimistic about the economy, Quantum has just introduced three new best-in-class products. I am confident that with solid execution, we are well positioned to benefit from the opportunity that this will provide us in the next fiscal year. At this point, I'd like to open it up for questions. Operator?

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 1 on your push-button phone. If you would like to decline from the polling process, press the star followed by a 2. A three-tone prompt acknowledges your selection. If you are using speakerphone equipment, lift the handset before making your selection. One moment please for our first question. Our first question comes from Mark Moskowitz with J.P. Morgan. Please go ahead.

Sure, thanks. First, can you give us a sense of your revenue contribution? I know it is kind of early, but your revenue contribution from new products introduced in the last year, in the December quarter and if you can quantify it, that would be great. Secondly, can you provide an update as far as the LTO versus the DLT competitive landscape. And what are your expectations as far as how the SDLT 600 will be helping the coming quarters? And lastly, comment please, if you could, on the current activity levels from your customers relative to the December close. Thanks.

Okay. Let me -- let me take those questions. First of all, on revenue for new products, we are really immaterial in our third quarter. So, you know, we have not quantified them because the numbers aren't material. We -- we are really starting the production ramp for those products, sales ramps, et cetera, during this quarter, and it is a fairly ambitious undertaking introducing those numbers of products. So they really weren't -- you know weren't material in the quarter.

To make a comment about the LTO and the competitive -- the competitive situation I mean, we have -- you know, we have a pretty good track record of understanding that the -- the product and technology that has -- you know, has the advantage, functional advantage in the marketplace, you know, tends to do -- to do better when we were in the lead with the 320, we gained share at the end of the last -- the calendar year before this last year. Then LCO2 was introduced and more tough competitively, you know. We don't have any precise data, but we are either flattened or could have lost a point or two during this time period. And now that we begin to shift the 600, we expect to have a similar impact that we had when we introduced the 320, which puts news a position to -- to, again, gain market share. That's the way the market is worked. The 600 is -- you know I feel very, very good about that product. It is the best product we have ever done at Quantum in terms of reliability and performance and functionality. And so -- so we really feel that, along with the fact that a longer lead relative to the competition that we are well-positioned over the next -- over the next year or so.

And the last question on activity. In the quarter, I mean, I think we have seen activity increase. I am not sure this is exactly your question, but I think we have seen more interest by customers to invest in their infrastructure, especially around data protection and disaster recovery and some of the areas that have been put off during the tougher economic environment. I think it is still very early to say that it is a trend, but I think that the level of activity, especially as we see it with our new products, talk more and more with DX customers, I think there is a good amount of energy in the marketplace.

Great, thanks.

Next we have a question from Dan Renouard with Robert W. Baird. Please go ahead.

All right, thanks. Couple of questions. First, can you give us a sense of where you are at in the outsourcing to Flextronics. When will that be completed so you kind of get a run rate in terms of your cost model is the first question. Second question is related to the media. I was wondering if you could give us some sense in terms of quantifying the decline or at least giving us a ballpark range around what your expectations are in terms of a sequential decline we should be expecting in the media and presumably royalty revenue streams.

Okay, I will take the first -- the first part of the question on outsourcing and let Michael respond to the media question. You know, we have had implemented, you know, the vast majority of outsourcing with -- with our outsourcing partners, including [INAUDIBLE]. We are doing more transitioning out of our facility in the U. K. with the M-Series. That is in process. So I think you will -- we will continue to see some benefits from our outsourcing move in smaller increments over the next, you know, few quarters as we fully move a variety of things around. Frankly, to try to optimize our cost structure and improve our overall -- our overall performance. So we haven't reached the end of that, but we have, you know, seen most of the benefit of that so far.

Dan, it's Michael. On your second question. Which I want -- want to make sure I understand, I think you were looking for some sense of what the media pull-in impact would be on our Q-4. So as I know many are aware, the media view and access for us, in essence, being able to touch and get a handle on all that end data from a customer standpoint is not always the easiest thing for us. So we have not quantified the precise impact and I cannot give you a precise number on that, you know, at this time, but we do know as a result of that pull-in, there was some effect, we just can't -- we can't get our fingers or hands on that perfectly. And, again, you should also remember we have got some seasonality that plays into this coming quarter also.

So I guess -- the question I guess is just looking forward, I mean, you obviously have some kind of a expectation as to what range you would be expecting in terms of sequential decline. Should we be thinking in terms of a 10% plus decline, is it something less than that, or just give us some sense so we are not shocked come April what your media numbers look like.

You know, Dan, we are not going to put out that specific guidance at this time. You know, it really is sort of bounded and is combined with as Rick mentioned on his outlook, a range in the 190 to 205 range. So, you know, anything that would happen there could be -- could potentially be a portion of that.

Okay. And then just last question if I might. On your Op Ex guidance, $62 to $64 million, you came in I think right around 60 this quarter. What is the -- and maybe just help me understand, you know, why your Op Ex will go up $2 million to $4 million sequentially and the seasonal part I guess I don't understand. I would think seasonally since your revenues would be slightly lower that would actually reduce -- you know reduce your Op Ex slightly in the sales and marketing I could see that --

Sure, let me talk to that a little bit. And I will start there with the fact that I do think we have made substantial progress over the course of the last 12-plus months, and we are very focused, I think, as we communicate to everybody on trying to continue to make that progress. Now, in terms of thinking about the quarter, that's about -- you know that we have just started, I think we have mentioned that the increases are around -- generally around marketing and sales surrounding three new products. So we are on the front end of a ramp, and it is really the front end of the ramp. As Rick mentioned, the -- you know while we shipped units in the Q3, '04 time frame for us, you know, they weren't substantial or material to the profile. We are still on the front end of some of the marketing and selling expenses associated with those, and, you know, I will point out one of the significant expenses for us, related to that is the customer qualification activity. So we have got multiple OEMs, right in the middle of qualification, and tape automation vendors right in the middle of qualification, even as we speak. And so, you know, that's really the predominant driver in -- in the increase that we'll see quarter to quarter. You also -- I think we -- I think we mentioned a small seasonal impact also. You know, at the beginning of the year, you do get small adjustments when FICA and some of these other things reset for the beginning of the year.

Yeah, I would just maybe add to that -- I mean don't -- to reinforce what Michael said, don't get at all confused that we are letting off our emphasis on expenses. We are very, very clear about that, what we need to do and a lot of transition occurs in this quarter because of our restructuring and a lot of uncertainty about how fast things will come down, but what there is certainty about is that we have market development funds to put -- to launch the products. We have -- we have product qualification. We pulled our channel programs together and have relaunched our new combined channel program. We have a lot of good things that we think are discretionary spending. They are one-time charges, one-time expenses, so to speak, for -- they are not people additions, to really make sure we are positioned well and can -- can grow going forward and get longer-term benefits. So that's really what this is all about.

Okay, but bottom line we should expect expenses to trend back toward sub-60.

Absolutely.

-- after your fiscal Q4.

Yes.

Yes, and Dan, as part of that too, through the restructuring we have recently announced and taken, we have got targets to try to -- as we finish the implementation of that restructuring over the next quarter or so, try to drive below the 60 million a quarter range. In essence it resets the target zone.

Great, thanks.

Our next question comes from Glenn Hanus with Needham and Company. Please go ahead.

Maybe you could talk about OEM qualifications on the new -- on the MAKO product, and is there a substantial effort -- you just discussed the question I was going to ask about the 600 drive. Maybe you could sort of address the same thing on the -- on the high-end MAKO product and whether there is a big effort going there as well. And then I have a follow-up.

Well, I can address that. I mean we -- we let our customers announce their new products, and so we -- you know, we are limited really in how much we can say about what we are doing with some of these products because our system customers are very sensitive to that, because they want to make those announcements. Let me just say, though, on MAKO, where we are in qualification with -- with OEMs. We are working opportunities there. And on the -- on the 600, I mean, it's just -- it is a traditional pattern of everyone at different phases working through their road map getting the testing done, and this is occurring, and you will start to see that this quarter, where people will come out shipping that product. And so we don't see anything unusual there, except a normal kind of qualification round with -- with the product.

Okay. And on the revenue guidance range, can you maybe talk about some of the things that if it happened right would sort of push you toward the higher end of the range and how we might think about what -- what might happen that you would end up at the lower end of the range. A little -- a little bit broader range than I have seen you give in the past. Thanks.

That's right. Let me tell you one reason it is broad: media. We had this potential impact that we talked about of some -- of some pull-in and what that is, you know is something and seasonability factors are something that we need to be careful with, and we need to be cautious about that. Secondly on the new products, the old product shift. I mean, do people -- as you are ramping up new products, do they stop buying the older products and so there are all of those transitions that we are managing that cause us to -- to have that, you know, range especially in a quarter that typically does drop off sequentially.

So a lot of good things can happen. I mean, we could ramp products, you know, very well and give good traction with those products, you know OEMs could -- could get out on schedule with -- with good uptick, the media decline might not be what we -- you know, what we feared it might be. All of those factors, you know, really come to play here during -- during this real important quarter of transition. And that's why we establish a broader range, because we have to make a lot of right bets this quarter and about our expenses coming down and all these product transitions. We think we are on top of them all. We are feeling good it, but there are some variability.

Also to piggyback a little bit on what Rick said, from a positive aspect, one of the things that he mentioned a little bit earlier on in the call, so there has been very, very keen interest around the DX100 product, and from our advantage point, the DX30, which was a very good product and we had reasonable success with it, you know the DX100 we believe is sort of targeted at the heart of a larger enterprise sale. So if we can translate some of that early substantial interest out of the customers, I think particularly in the telecom arena, into sales this quarter, that can be one of the things that could help push us toward the high end.

Anything unique about the telecom sectors that this product is particularly useful for?

Yeah, I think it is a customer that is price sensitive that has lots of demand for capacity and is very system performance sensitive. So their desire to be able to do -- to do fast backups and recovery at an affordable price, which is what we do, I think, you know, makes the payback and the investment in the technology seem like a -- like a pretty smart move.

On the 600 drive, any sense of when that really starts to kind of -- you are in the qual stage. What quarter should we think about in our heads that you might really be -- be ramping that product aggressively?

Well, we have said the next several quarters. And so to go beyond that, again, we will start to see products. I mean, we are shipping our stand-alone drives and we will start seeing more products launched this quarter, and I think you will start -- you know you will start to see it move up from there. So I think it's a -- it's a few quarters as it fully ramps up.

Okay. Thanks.

Our next question comes from Greg Kobrick with Lehman Brothers. Please go ahead.

Yes, this is Greg for Harry Blount. Can you give us a sense of how headcount breaks out among sales, services, and R&D and more specifically with respect to the sales force, where you expect that to be ramping over the next year or so. Also, if you can just talk a little bit more about DX, I understand you're transitioning or adding the DX100 but a little more detail on what you consider the reasonable success. Thank you.

On the head count front, Greg, I can give you the aggregate numbers. I think we ended this past quarter somewhere around the 1900-employee mark for Quantum as a whole. I don't have actually the breakout by income statement classification handy there. So I really can't give that to you here -- to you at this time. I didn't hear the second question.

Also, if you can qualitatively give us a direction in terms of whether you are going to continue to expand the sales force.

We're working on a model to -- to look at -- at how we would expand should we expand. We are very, very cautious. I mean, the model that I like to work is that we have a certain set of revenue goals for per person, and in each geography when people achieve a certain level, we can hire more. We want a model like that that pays as you go. At the same time, we need more feet on the street to tell our story. We have taken a lot of costs and want to continue to take cost out of -- out of our -- you know out of our management layers and infrastructure to put more people on the street and recognize that all the work we do, we do in cooperation of our channel partners. So -- so we have a highly leveraged model that has our -- our people alongside, but our ultimate goal to get our channel partners up to speed and get them comfortable promoting new technology like the DX.

And then the question you asked about DX, I think that is something we can address a little bit better next quarter. You know when we introduced DX30, it was a very new -- important new concept. We had some good takeup with customers, but a lot of customers said they wanted more scalability. They wanted to go to larger solutions and that's where the DX100 came from, which takes us up, as I mentioned in the call, in my script, up to 64 terabytes. So we believe now that we have, you know, what -- what we learned from our first-generation of product, along -- you know along with the first generation product which will be in the cost-sensitive segments. We now have a highly scalable, you know highly enterprise-class product. So everything changes. The ASPs change. The whole model changes, and I think we are going to -- you know we are going to really focus on that over the next quarter or two. And I hope to be able to provide more details as we get to DX100 out in the marketplace and really validate the positive feedback we have received so far.

Great, thank you.

And Alan Worgowski with CIBC World Markets has our next question. Please go ahead.

I read through the complaint that MAXOSHITA filed against Quantum and MAXSOR, can you comment on that at this point, can you give us an estimate of the range of the potential liability and who might be responsible for -- for at least kind of cuff whether it is going to my great toward MAXSOR or toward Quantum.

This is Michael. I will take a shot at it and Rick can fill in --

I know it is tough. It is still early.

Rick can fill in anything that I am missing. So MK has made essentially two claims, one that IP created by Quantum before the sale of the drive business to MAXSOR actually belongs to MKE. The second claim was that Quantum should indemnify MKE for part of the settlement they made several years ago with PATS licensing, PATS sued MKE and MAXSOR sometime back. To be candid the suit doesn't specify how much money really is sought at all, so really it is impossible to get a handle on that piece of it, but I will be very clear with you from our vantage point, there is really a dispute between MKE and MAXSOR. It does not affect any products that we -- that Quantum currently has. We also believe that the suit generally is -- is without merit. But really not something that is or will be attached to our company. I think it will end up having to be worked out between MKE and MAXSOR.

Okay, even though MKE alleges that these patents were filed by you prior to the transaction. What you are saying that basically the MAXSOR's due diligence should have brought it to MAXSOR's attention so ultimately it is their issue. Is that kind of the logic?

It is their issue based on how the merger agreement was structured. Okay. Great. That's terrific. Thank you.

Ladies and gentlemen, if there are any further questions, please press the star followed by the 1 at this time. We have a question from Laura Guimond with Robert W. Baird, please go ahead.

I was wondering if you could talk about your services strengths. You mentioned that services were strong in the quarter, and I don't think you have talked about that too much previously, so I am wondering if you are expecting it to be a larger percentage of your revenues going forward?

There are -- yeah, let me make a comment. There are three components to our services business. One is on our systems business, we have replacement parts that we provide to people who provide service. Two, we do service on Quantum-branded products. We have contracts, et cetera. And three, we have some drive repairs, as some of the tape drives that have been out in the market now come out of warranty. We have a -- a business and an operation that repairs those products. I just would say that in all of this, its service is a positive part of our business. And it's something that, you know, we expect to continue to be a strong component of Quantum for -- for some time into the future.

Okay.

Also, Laura, the -- the through business, which is that parts business Rick talked about, you know, that is a little bit of a lumpy business. And so as a result of that, it is not easily predictable quarter to quarter. What we can tell you is that next quarter from a forecasting standpoint, we have assumed that it doesn't have the same strength next quarter of Q4 that it did this past quarter.

Okay. And then one other question about your M-Series business with Sun. Sun talked about seeing strength in their volume shipments within storage, and I am just wondering if you guys saw some benefits there as well.

I know the M-Series was strong. Sun is an important partner for that, so I don't have the specific numbers in front of me but we saw strengths for the M-Series both for our branded product and OEM, and OEM is Sun. So I expect we have -- we have seen some benefit from that.

Thank you.

In fact we were up -- I don't have the exact percentage, but we were up in double digit growth on the M-Series overall.

There are no further questions at this time. Please go ahead.

Well thanks again for joining us, and we look toward to the next call.

Ladies and gentlemen, this concludes the Quantum third-quarter earnings release conference call. Thank you once again for your participation today. You may now disconnect.