Quantum Corp (QMCO) 2004 Q4 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the Quantum's Fourth 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 anytime 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, 3, May, 2004. 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 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. These forward-looking statements include our financial projections and prospects including our outlook for the first fiscal quarter of fiscal year '05, new product releases, their features and benefits, market share and expected ramp cycles, our business prospects, priorities and opportunities, expected improvements in our operational platform, and the general business environment. We would like to caution you that our statements are based on current expectations and involve risks and uncertainties that could cause actual results to differ materially. We refer you to the risk factors and cautionary language contained in our press release issued today announcing our fiscal Q4 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 51 to 62 of our most recent 10-Q filed on February 11, 2004. 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 obligations to update these statements in the future. 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 marked the end of a year of improved execution, including good progress in many areas, but with some continuing challenges. It also marked the mid-point of a business transition that we are enthusiastic about. We've defined our focus, we've restructured our operations, lowered our cost structure, integrated the company, and we've begun shipping three new best-in-class products. This sets the stage for continuing the improvements we've begun in capitalizing on the investments we've made. Since the beginning of the transition 18 months ago, we have focused our strategy on backup recovery in archive and exited businesses like the NAS business that fell outside this focus. We increased our Systems revenue by nearly 50%, reduced OPEX, streamlined our organizational and cost structures, and refinanced our debt to restructure, to reduce cost and to give us increased financial flexibility. We consistently increased tape drive gross margins, and finally we began shipping three new products at a time when storage needs are increasing and IT spending is expected to grow. This afternoon, I would like to talk about our fourth quarter results, provide some highlights for the full year, then close with our priorities for fiscal 2005. Michael will talk in more detail about the financials.

We are pleased with our results in Q4, which came in at the high-end of our expectations. We saw greater than expected revenue performance driven by the Systems business and a second quarter, a stabilized media pricing. We made significant product strides during the quarter, as we delivered the first full quarter of shipments for the SDLT 600, the MAKO PX720 and the DX100. Total revenue was $206m with non-GAAP profit of $0.01 per share flat with the previous quarter. On a non-GAAP basis, gross margin was roughly flat at 33% and operating expenses came in at $64m. As we indicated last quarter, we expected an increase in OPEX in Q4, due primarily to the launch of our new products. We will continue to work to reduce our expenses and anticipate getting to a run rate of below $60m, when our restructuring actions are fully implemented. GAAP loss per share was $0.05, which included $7m in restructuring costs net $4.4m in intangibles amortization. The GAAP gross margin rate was roughly flat at 31.5%, with GAAP OPEX $72m. Let me begin the business highlights with storage systems, where revenue increased 3% sequentially to $74m. This performance was driven primarily by service and OEM strength in enterprise-level libraries. For the year systems revenue increased more than 20%, and over the past 18 months revenues increased nearly 50% driven by broadening of our product line to encompass the entire mid range and significant OEM success. In fact one of those OEM's Dell, joined HP as a 10% or greater customer for the year.

The MAKO PX 720 enterprise level library has unmatched capacity and performance in its class and is the first to include state-of-the-art reliability features at no additional cost to customers. It is currently being offered by HP and the channel and has received very positive reduce from customers. The DX100, our second-generation disk-based backup solution provides scalable capacity, industry-leading performance and reliability all optimized, for backup and recovery. There is clearly customer demand for disk-based backup as evidenced by the significant customer interest we see on a daily basis, as well as the reset focus of many companies on filling this need. The DX is also allowing us to leverage the substantial interest into increased opportunities for library. There are many examples of customers who initially ask us about the DX, then expand their evaluation to include Quantum libraries. Revenue for these new products increased significantly over Q3, but the contribution was still small, as expected in these early stages. We expect them to continue to ramp over the coming quarters.

Our system business continues to exceed industry growth rates. This has been spurred by significant increases in data storage needs combined with our ability to provide a more competitive offering with greater breadth, new products addressing a larger segment of the market and value-added services. You may have seen the recent Gartner Dataquest report which shows Quantum moving from the number four to the number two position in tape automation in calendar 2003, and while we have taken steps over the past several months to improve the margin portfolio of the business, we know we that we still have room to improvement, and we see clear path to achieving that improvement. Our goal is to continue to drive the system business towards profitability. Part of this includes the development of more leveraged and cost effective platforms. These moves, plus a continued investment in leading technology provides solid opportunity to succeed. Now let me turn to Tape Drives in media. On the drive side, revenue decreased slightly sequentially from $88m to $85m primarily reflecting lower unit shipments of the older DLT 8000, and SDLT 220 drives. For the year, drive revenue increased approximately 4%. Unit shipments increased approximately 20% driven by both Super drives and by VS drives, which reflect both a full-year impact, a benchmark, and our migrating customers from our older DLT drives. And for the six straight quarter, drive gross margins increased reflecting the success of higher margin platform and continued focus on manufactured efficiency and product quality improvement. Our improvement over the last year and half is been dramatic. We're very enthusiastic about the introduction of the SDLT 600. The 600 has 50% more capacity and higher performance to the nearest competitor. Designed specifically for the automation environment, it is backward comparable with both the SDLT 320, and the VS 160 and include DLT stage, a suite of diagnostic tool, that enables customers to better manage, predict and prevent backup problems before they happen. While not yet material, the SDLT 600 shipments in the first full quarter of availability were greater than anticipated. Evelyn, Tandberg in our own system business are all currently offering the 600, and ADIC is expected to make it available to customers this month. The 600 will continue to ramp over the coming quarters as OEM's complete qualifications and begins shipping, and we anticipate that successful execution will allow us to gain share in the Super drive segment. We're very pleased with what we have accomplished in tape drives over the last year. With the acquisition of Benchmark, we augmented our road map to features unmatched augmented our roadmap to feature unmatched compatibility between Value and Super Drive and gained a lower cost platform to eventually replace our higher cost older DLT products. We also reduced our cost structure and improved our use of cash through outsourcing and manufacturing as well as through significant internal operational improvements. Having said that we continue to focus on improving our business model for drives. As an example, last month, we restructured the engineering organization, shifting more resources to advanced technology development, and further reducing our cost profile by adding more efficiency to our product development process.

Now to media. In Q4, media revenue was about flat at $52m reflecting a second quarter of a more typical pricing environment. Tape four units used for our value line of drives decreased significantly and expected. You'll recall that last quarter; we saw some inventory pull-in in anticipation of price increases announced by two media manufacturers. Media unit and revenue for SDLT drive increased sequentially and Quantum-branded media for the SDLT 600 was strong, reflecting the typical pattern associated with new drives. At the beginning of a drive cycle, we typically see Quantum brand strong first in showing availability of media for the new product. Overtime, units and revenues migrate more to royalty-based product. For the year, the media was clearly the most challenging part of Quantum's overall business. This was primarily a result of significant pricing pressure for the first half of the year as well as unit decline. For example, the inventory reduction we saw during Q1. Even with some of the difficulties we faced through the first half of the year, media continues to provide substantial cash flow, an attractive growth margin, and we will continue to work to make is even more robust. A key factor in that effort of course is that continued success in growing our drive shipments. Finally, we continued to make progress in building a solid efficient operational platform with a major emphasis on execution. On April 1st, we completed to move to a single ERP system. A significant accomplishment given our history of acquisitions and multiple systems. Our manufacturing operation sales, finance, IT, and HR organizations are now beginning to work in a new consolidated systems environment. This move will provide improved efficiency, leverage, and customer satisfaction overtime. At this point, I would like to turn the call over to Michael Lambert, who will review some of the additional financial details about the quarter and the full year.

Thanks, Rick. I won't go through all the numbers. See those in the press release and in the IR section of our Website, but here is some highlights. As Rick mentioned, Q4 revenue increased slightly, sequentially despite a typical seasonal impact and some favorable performance on the interest income line offset the expected increase in OPEX associated with our new products. Interest income performance was driven by several things including favorable FX, the sale of a small equity investment, and improved yield on our cash investments. For the full-year, revenue was $808m, a decline of 7% due primarily to lower media revenue. Excluding media, revenue increased 14% for the year. On a non-GAAP basis, gross margin for the year increased to 32.6% from 31.7% a year earlier. This is a significant accomplishment given the decline in high margin media revenue and demonstrated solid execution in improving our product cost profile for both tape drives and automation. Operating expenses declined approximately 10% to $250m, and the loss per share was $0.04 versus a loss of $0.07 in fiscal '03. On a GAAP basis, gross margin for the year increased to 31.1% from 30.7%. GAAP OPEX was approximately $100m lower due primarily to charges in fiscal '03 associated with goodwill impairment and our various restructuring activities as well as the benchmark integration, our move to outsource manufacturing, and the mass divestiture. GAAP loss per share from continuing operations was $0.36 this year versus $0.81 in fiscal '03. The reconciling items between GAAP and non-GAAP numbers for the year were as follows. We incurred $12.7m in special charges associated with organizational restructuring moves. We took a $2m non-cash charge to write down our former manufacturing facility in Malaysia to its apprised value. We incurred a $21.3m non-cash charge to increase a valuation allowance for our net deferred tax assets. We incurred $2.6m in charges related to the redemption of our 7% convert including a redemption premium, and a write-off of unamortized convert fees. We had a $1.7m gain related to our remaining obligations from our various discontinued operations, which are being lined up more favorably than originally expected. And we had amortization of acquisition related to intangibles totaling $18.5m. For Q4, the reconciling items were $7.4m in special charges associated with the restructuring we announced in November. A $300,000 valuation gain on our Malaysian manufacturing facility, a $650,000 gain related to our remaining obligations from our discontinued operations, and we had amortization of acquisition related to intangibles of $4.4m. During the quarter, we extended our $100m revolver credit facility for two years through March 2006 on terms that reflect our improved financial position providing us with financial flexibility as we continue our transition. We ended the quarter with cash and short-term investment balance of $265m, a positive cash flow from operations of about $12m. DSOs improved by one day to 54 days. Inventory levels were also down $6m such that turnover improved one full term. With that I'll turn the call back over to Rick, who'll provide the outlook.

Thank you, Michael. Fiscal 2005 is a very critical year for Quantum. We're pleased with the progress we've made over the last 18 months. But we're very focused on generating growth, and delivering improved profitability. The foundation on which to build on is much more solid including new products, our operational platform, and our organizational structure. In order to extend our momentum, we need to execute around a few key priorities. First, we need to drive growth through new products, market share opportunity and in improvement -- and in an improved more effective sales organization. We'll work very aggressively to build our branded business on a global basis with additional energy being applied to our DX offering. Next we need to improve our gross margins through greater operational efficiencies as a result of the many operational changes we made in fiscal '04 along with ongoing product platforms simplification. And finally, we need to continue to improve our cost structure as we drive for more focus, simplification, and resolution of our legacy issues. In addition to this, we understand the market shifts that are occurring back up recovery and archive, and we tend to capitalize on these opportunities with exciting product innovation. Q1 will be another quarter of transition as we focus our efforts on building volume of new products, and improving our branded business. While we'll continue towards improved margins, quarter-to-quarter shifts in customer and product mix can have an impact on absolute numbers. We continue to be cautious about media given what we've seen in the market, and finally many technology companies see typical seasonality in their business. We are expecting the same. With that backdrop I'll provide guidance for the fiscal first quarter ending in June. We expect overall revenues to be in the $195m to $205m range reflecting typical summer softness, and the fact that our new products are in the early stage of shipping. We expect non-GAAP gross margins to be roughly flat to slightly down with non-GAAP operating expenses in the range of $60m to $62m. As a result, we expect non-GAAP bottom line results to be in the range of $0.01earnings per share to a $0.03 loss per share. On the GAAP basis, we expect gross margins to be roughly flat, slightly down, with operating expenses in the range of $64m to $67m. The GAAP to non-GAAP difference reflects special charges of approximately $2.5m to $3.5m, primarily associated with the engineering restructuring that I mentioned earlier, and amortization of acquisition related intangibles of $4.4m. As a result, we expect a GAAP loss per share to be in the range of $0.03 to $0.08. Let me close by saying I'm enthusiastic about our future, and am pleased with the progress we've made in the past 18 months, and I'm confident in our direction focus and prospects. At this point I'd like to open it up for questions. Operator.

Thank you sir. Ladies and gentlemen, at this time we all begin the question and answer session. If you have a question please press the star followed by the one on your push button phone. To remove your question from the queue, press the star followed by the two. You will hear a three-tone prompt acknowledging your selection. If you are using speakerphone equipment you will need to lift the handset first. One moment please for our first question. Our first question comes from Glenn Hanus. Please state your company name followed by your question.

Good afternoon. Needham and Company. Could you maybe for the next quarter here give us a little color on -- by business segments -- where I mean -- your guidance is basically flat, where you kind of think you'll see some sequential growth or where things might be sort of flattish to down, and the sort of reasons why?

I think there are lot of moving pieces in our business and I think it causes us to be very cautious. As we look to the future to try to set the stage for any more aggressive growth. So if you break the business into individual pieces, clearly we think that on the strength of new products as we start to get some more traction with the DX100, and the new make of product and the 600 we think that there can be sequential opportunity there. Media always causes us the most uncertainty and concern. If you remember a year ago, we had a deep decline in media based on the pricing environment, which really did impact our results for two quarters right quite severely. So we're, as a result of that we are very cautious, but I'd say that I'm very enthusiastic about our product opportunities, and I think the reception that we've seen with all of our products has been very positive. I think there is just generally a good upside and good growth opportunities, but with the special concern around media, we want to be very cautious as we look to the future.

Are you seeing some indications in the market place? Maybe some renewed price pressure on the media, or is that an area where if we were to model flat to slightly down for the overall cartridge and royalty business combined -- is that what you are suggesting by your comment?

First of all if you go to media -- on many occasions we've talked about the complexities of model, that there are many different factors; install base, usage rate, seasonal patterns, pricing, behavior of OEM's and on and on and on. So, we watch all these things carefully but to be realistic, any one of those metrics can change in a matter of days and so as a result of that it's very difficult to make -- to have a solid part, solid view of that. It's the one part of our business that we in the short term have very little control over. We can control our product businesses, we have a difficult time in the media business which all the factors tend to be longer term or controlled by partners, and as a result of that we again think it's prudent to be very cautious and make sure that we're driving our business not expecting big upsides but really expecting that to be a challenging environment.

Could you talk a little bit about your -- you mentioned some changes you are making from a sales organizational standpoint. Could you layout where you see yourself today and what changes you are making in the overall OEM versus channel and etcetera. Mix in the sale side?

There are two things. One is structurally and organizationally, if you look at our organization chart it looks different today than it did six months ago and we have gone through a series of efforts to consolidate the sales organizations. For the two formerly independent businesses to one integrated sales force, and we are seeing some benefits of that in terms of more leverage with resellers, and more sharing of infrastructure etcetera. So we think that's all a very good thing and will benefit us over time. Secondly, on our branded business, I would characterize the work we are doing has been about - being very much more predictable and defined on the customer relationships we pursue. And I'll be frank here, it was over the last couple of years, we have been very bullish about the systems business, we set very high goals and the sales forces, they struggle to meet those goals would be very opportunistic in their region. We basically said, we will -- that's not a good way to build a long-term business or a sound business in terms of predictability. So, what we've been shifting towards is a much more defined customer engagement model where we pick X number of customers per region, per country, we pick them name, we deploy our resources to those customers, our services capability. So, we do a phenomenal job with those customers, and we build longer-term business and then allow our channel partners, OEMs, and others to cover the rest of the market at large. So, it's much more targeted, much more focused, it may take longer to build the overall business, but we believe that the relationships and the consistency will be much more effective than we've done in the past. And we've been doing that in some form for a couple of quarters, we still have a long way to go, but we are convinced that it's the right path to take and , we believe that, that business will continue to improve over time.

Maybe lastly, any color you can give us kind of geographically, by say, you know North America, Asia, Europe, sense of your business and sort of anecdotally what you are seeing about in the demand environment sort of IT spend and demand environment by those regions?

Glenn, this is Michael. The rough geographics split sequentially quarter-to-quarter was more heavily in favor of domestics and North America was up 65%, which left international all the other rest of world at about 35%. So, it was up a couple of points quarter-on-quarter. I don't know if, Rick, there was anything -- any international, you want to talk about?

Yes, I think our business through our OEMs is fairly diversed based on there the OEMs business and our branded business is definitely been historically concentrated in North America. We have become more focused in Asia Pacific and Europe; I think that's where we'll see the most improvement going forward. I was just in Asia and feel like our focus there is working and people are pretty positive about the opportunity there, but I don't think our branded business is driven as much by industry trends as it is in our hands to improve our execution, especially outside the US. So, I think there is lot of optimism about improving the business, but the numbers are small and it will take time to get to critical mass.

Okay, thank you.

Ladies and gentlemen, if there are any further questions, please press star one at this time. Our next question comes from Greg Kobrick, please state your company name followed by your question.

Lehman Brothers, Can you elaborate a little bit more on what the impact was on the quarter's results from foreign currency? And also a little more on the expected OPEX run rate that you mentioned below $60m in terms of timing? Thank you.

Okay Greg, it's Michael. So on the FX side, which I mentioned as one of the impactors on the interest income line. We historically run about $0.5m deficit or loss to $0.5m gain as foreign currency moves occur internationally where we have dollars -- sorry, where we have business denominated in foreign dollars -- foreign currency. So if you think about that move of $0.5m loss to roughly $0.5 gain, that's what we saw this past quarter, so that a $1m impact net on the interest income line. And then the second part of the question?

Just in terms of the timing of the OPEX, run rate of $60m, plus $60m.

Okay. So, now we mentioned during the discussion today earlier, Rick's discussion earlier the change in the approach that we are taking on the R&D side to move resources more towards advanced technology that plus the other restructuring activities that we have done, that we have announced historically will continue to play through over the next several quarters. And so as we get through the end of those over the next two, maybe three quarters is when you should start to expect us to see the room below $60m and start to drive toward that mark consistently in quarterly OPEX on a non-GAPP basis.

Great. Thanks Michael.

Our next question comes from Laura Guimond, please state your company name followed by you question.

Hi, Robert Baird. Couple of questions, first of all going back to the question about the channel sales, if you look at over the next twelve months or so, what percentage of your revenue do you think will be coming from that other channel, which is the net of right now I guess about 19%?

We have, you know and thinking about our systems business I know we've always start of a goal that we try to achieve is some where about a 50-50 mix between our OEM and systems business. I guess when you roll out all that up that probably gets you some where - I guess in the 20% to 25% range since the dry business is still OEM focused. So our model is very clearly that OEMs are really important in terms of building a foundation of our business to get critical math, they are very critical and we think then our responsibility is to cover other aspects of the marketplace with our branded business and have a different somewhat business model there were we can get better gross margins and where we have our ongoing services capability associated with that. So we'd like our branded business to be you know a bit higher as a percentage today, but what was most important is that we grow the total overtime.

Okay, and then your two 10% customers. Could you give the percentage of revenue from each of them, for the year?

Laura, it will be disclosed in the K.

Laura this is Lisa. I just don't have that number in front of me, so if you let me follow up.

Okay sure,

Thanks.

And then finally with some of the sort of ongoing cost reductions that you've been talking about for a while now, can you just talk a little more about where you think the greatest opportunities exist from a cost reduction standpoint?

Well, we've been working through the last year to put a lot of emphasis around our infrastructure cost, we did the big reorganization in November, where we took layers out and integrated the company we're still working the benefits of those that are not fully -- worked their way through the system, that was a big focus we talked about the systems integration, which is also a big savings a lot of that savings the work that we've done is been in kind of building the infrastructure all though we still think we have significant -- more work to there to continue to make progress. We have not made as many changes in our R&D and sales and marketing area the recent one that we referred to in the call here was probably the first where we have made some shifts because of changing the structure of how we're going develop products that have some impact. So, going forward I think that we'll continue to focus on infrastructure in G&A and work to get more efficient, we'll probably see less improvement in the R&D and sales and marketing area because we see those as important areas to deliver growth.

Yes, thank you.

Our next question comes from Peter Saint . Please state your company name followed by your question.

Advent capital, just want to know, what was the operating cash flow and free cash flow for the quarter?

Okay. So cash flow from operating activities for the quarter was about $12m, and then if you net just under $12m, and then we spent about $4.5m or so on property plant, and equipment, so if you take the net of those two you're down in the $7m to $8m range give or take.

For the quarter? That's for the quarter?

Yes, for the quarter. Right.

And then, I know you were talking about media and how difficult it was. But I mean, is there anything that changed in your sort of royalty agreement on top of that, that would cost the large difference in you know you went from 48 to 30, 16 to 10, its a big down almost 40%. Anything changed in sort of your royalty revenue agreements? That makes up for that or?

Makes up for that, I mean I would say that the royalty agreements in any impact there was -- did not have an impact or did not materially drive that decline.

So this was all, sort of -- now you were talking about pricing pressure. Did that effect your royalty stream on the ---

Yes, pricing pressure effects everything, both quantum branded products as well as the stream we are in on the royalty side.

Okay. So is the --

With by far this most significant impact on that revenue decline you referred to.

Do you get like a percentage of what they sell it for I take it?

That's a third -- that' right.

Okay. Okay.

Also before we go to the next question, to Laura who I know is still out there, you will see it in the queue, but HP is just over 25% customer, Dell is probably going to come in the 15% range give or take a couple of percentage points.

Okay. Thank you.

There are no further questions at this time. I would like to turn in back over to our presenters.

Well thank you for joining us today and we look forward to being back in a few months and give you another update. Again, thanks a lot.

Ladies and gentlemen, this concludes the Quantum Fourth Quarter Earnings release conference call. Thank you once again for your participation today, you may now disconnect.