Quantum Corp (QMCO) 2005 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. (OPERATOR INSTRUCTIONS) As a reminder, today's conference is being recorded Wednesday, January 19, 2005. I would now like to turn the conference over to Ms. Lisa Ewbank, Vice President of Investor Relations. Please go ahead, ma'am.

Good afternoon, everyone, and welcome. With us today are Rick Belluzzo, CEO, and Ned Hayes, CFO. The webcast of this call, along with a quantitative reconciliation of any GAAP and non-GAAP financial measures discussed today, can be accessed in the investor relations section of our website, www.Quantum.com, and will be archived for 1 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 include our financial projections and prospects, including our outlook for the fourth fiscal quarter of fiscal year '05; our products, their features and benefits; market share expectation; new product releases and expected ramp cycles; our business prospects, priorities, and opportunities; our acquisition of Certance, including expected synergies and benefits of the transaction; and the general business and IT spending 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 today's press release announcing our fiscal Q3 results, as well as to our reports filed with the Securities and Exchange Commission from time to time, including pages 35 to 46 of our most recent 10-Q filed on November 3, 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 obligation to update these forward-looking 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. Over the past 2 years we have been aggressively pursuing four strategic priorities. First, expanding our leadership in tape drives and media, thereby enhancing our cash and profit generation from this business. Next, growing the automation business through product expansion, platform transition, and OEM success. Third establishing a new category, with disk space backup. And then finally, strengthening our business foundation by reducing costs and resolving past legacy issues, improving the balance sheet, and creating a strong, more streamlined operational platform.

With Q3 results, which by the way do not include Certance since the transaction just closed on January 5, we have demonstrated solid progress across virtually all of these priorities. Add to that the Certance acquisition and we feel very positive about continuing to make progress in all areas.

What you see in Q3 results are the continuation of many positive trends. We have the fastest-growing tape systems business in the industry for 3 quarters in a row, with Q3 revenue growing 17 percent over the same quarter of last year. The DX products are gaining momentum, with revenue nearly doubling year-over-year.

Our OpEx level has now been ahead of our interim quarterly goals for 3 consecutive quarters, with non-GAAP OpEx at $53 million, $20 million lower than we saw roughly 2 years ago. We have also made significant progress in closing down open legacy issues such as the Maxtor tax settlement. The tape drive and media business has stabilized, with momentum developing with the SDLT600 and recent VS160 wins.

The addition of Certance will expand our product line, broaden our end-user base, enhance our media business, provide greater economies of scale, and strengthen our revenue and cash generation foundation. And we have generated positive operating cash flow for 4 straight quarters.

All of this progress was evident in our solid Q3 results. Revenue improved to $201 million, with particular strength in systems and media. Our non-GAAP earnings per share of 5 cents is the highest in almost 3 years and demonstrates how success on the cost and expense side can provide excellent leverage as revenue grows. Gross margin remained constant, and expenses came in very close to meeting our 25 percent target operating goal.

Since many of these issues are behind us, I am taking an opportunity to further streamline our organizational structure. John Gannon, President and COO, will retire at the end of the fiscal year, after which that position will be eliminated, enabling a flatter organization with the business general managers reporting directly to me.

In addition, Louis Frauenfelder, general manager of the tape drive business unit, will also retire, although he will remain with Quantum for approximately 6 months to assist with the transition, roadmaps, and new technology investigation. Jim Wold, formerly VP of engineering at Certance, has agreed to lead that business unit.

Now I'd like to go through some of the business highlights, then Ned will cover the financials, and I will come back with going-forward priorities and guidance. Let me begin the business highlights with storage systems, which produced $84 million in revenue, a 16 percent sequential increase. We're very excited about this result, as the work we have done to introduce new products and improve the sales force is beginning to take hold.

Growth in the automation business occurred across all major product categories, with particular strength in the enterprise category, where the PX720 library unit shipments grew more than 40 percent sequentially. In addition, our L-series autoloader unit shipments and our mid-range M-Series tape libraries each grew approximately 20 percent sequentially.

I mentioned earlier the growth with our disk based backup products, both the DX100 and the DX30. We continue to see good demand in the government sector for branches of the Armed Forces, government contractors, and state and local governments. We are also experiencing an increased number of bids for large DX100 systems, bids that will be further supported by our next major software release this spring.

All of our OEMs had strong sequential unit growth, delivering on the expected December quarter seasonality and highlighting the continued criticality of tape automation to the backup, recovery, and archive strategies of small, medium, and large enterprises.

Our branded business again increased sequentially with growth in all geographic regions. Our high-volume business continued to benefit from the creation last year of a single global sales team and branded channel responsibilities for all product lines. And the addition of Certance will increase the scale and reach of our branded channel, helping to provide excellent opportunities in all regions.

System gross margin increased slightly and continues to be the primary focus for ongoing improvement. Our strategy for improving gross margins includes realizing the benefits of our outsource manufacturing model and major transitions to lower-cost product platforms in the coming year.

We are very excited about what we have in the pipeline over the next year in terms of both platform streamlining and new products. Last calendar quarter we transitioned our DX and TX-Series product lines to new lower-cost higher-capability platforms. Over the next year we will work towards completing platform transitions with our other remaining major product lines.

Our goal is to significantly lower product cost structures while delivering increases in core performance and capacity specs, overall feature set, and product reliability. Stay tuned for more detail as we move through the year.

Now let me turn to tape drives. Drive revenue grew 3 percent sequentially to $67 million fueled primarily by the SDLT600, with shipments more than doubling sequentially, and the DX160, with units increasing approximately 50 percent sequentially. We continue to see a ramp down of our older DLT drives as we transition to these newer products.

We expect two more major system OEMs to begin shipping the 600 in the March quarter, which we anticipate will enhance the momentum that we saw in Q3. And of course as a result of the Certance acquisition, we have added the LTO product line to our offering. On that front our first to market LTO-3 drives and autoloaders have been successfully launched into the worldwide distribution channel. In addition several OEMs are in qualification, and one is shipping.

We are also excited about our new tape drive products that we have in the pipeline for the next year. We expect to enhance our DLTape drive offering with products that will provide value added feature sets and extremely competitive positioning for both the Super and Value product lines. And we expect the inclusion of features such as DLT Sage for manageability and DLT Ice (ph) for compliance across both product lines, which provide an even more compelling solution.

On the LTO side we expect the LTO-3 drive and autoloaders to begin shipping in volume during the year; and with the LTO-2 half-height tape drive, which was first to market in its segment, we expect to add system and automation OEM wins and qualifications over the next several quarters with product ramping through the next fiscal year.

Now to media. Q3 revenue was $51 million, an increase of 19 percent sequentially. We saw strength across the board, but particular strength with SDLT media. Pricing in the quarter was roughly as expected. Unit shipments of SDLT media, both Super DLT1, used for the SDLT320, and Super DLT2, used for the SDLT600, increased significantly sequentially.

DLTape IV media branded and royalty volumes also increased. This increase was driven by a combination of seasonal strength, good underlying demand for SDLT media, and we believe some end-user pull-forward ahead of a previously announced price increase by media manufacturers. And as a result of the Certance acquisition we now add enhanced LTO media stream that we believe will support the cash and profit generation capability of the drive and media business.

At this point, I would like to turn the call over to Ned for some additional financial details.

Ned Hayes, Jr.: Thanks, Rick. Again we are very pleased with the Company's top-line results in the quarter, with revenue increasing 12 percent sequentially to 201 million. Strength was demonstrated in virtually all areas.

Non-GAAP operating expenses were about flat quarter over sequential quarter at 53 million, lower than our anticipated level, as increased Sarbanes-Oxley and legal expenses were offset by continued and rigorous expense control. GAAP OpEx came in at 55 million, down 4 percent sequentially.

Gross margin rates improved due primarily to strength in media. In Q3 non-GAAP gross margin was 31.3 percent, with GAAP gross margin coming in at roughly 30 percent. Our business model goal continues to be attaining a sustainable gross margin rate in the mid 30s, non-GAAP.

On a non-GAAP basis the Company earned 5 cents per share, a significant increase from breakeven last quarter. GAAP earnings per share were 8 cents versus a 3-cent loss in Q2. The GAAP results include a $12 million tax benefit related to the Company's settlement with Maxtor of tax issues associated with the sale of a hard drive business back in 2001. This by the way is a key development in our continuing efforts to eliminate legacy issues.

GAAP results also include 4.5 million in intangibles amortization and 600,000 in special charges primarily related to previously announced cost reduction plans.

The Company continued to generate cash, with positive cash flow from operations of about $3 million, and ended the quarter with cash and short-term investments approximating 290 million. In Q4 we expect to generate positive cash flow from operations again. At the same time our ending cash balance will be reduced due to the initial $37 million payment associated with the acquisition of Certance.

DSOs remained steady at 51 days; and inventory turns improved again from 10.4 last quarter to 11.7 this quarter. Payables declined slightly dollarwise quarter-over-quarter, and AP days declined from 47 to 40.

Over the next several quarters we will be focusing on integration following the Certance acquisition. While we have already disclosed our expectation that the acquisition will be accretive in the first year without synergies, we absolutely plan on identifying and implementing as many cost, expense, and revenue synergies as possible.

On the expense side, our goal is to reach 60 million in total Company non-GAAP OpEx over the next year, thereby realizing approximately 8 million in OpEx synergies. We anticipate continuing to invest in R&D, vigorously driving new technology development throughout the Company and focusing our expense synergies in sales, marketing, and G&A.

While the expense reduction work has already begun, we don't expect to see material results until fiscal Q2, beginning in July, after several important financial and operating system transitions have been completed. We also anticipate leveraging synergies on the COG side, but consider that more long-term in nature as we work through the integration and analyze the various alternatives available to the combined Company.

Also on the integration front we are quite pleased to have added quite a few former Certance employees to the team at both the management level and throughout the organization. We believe we have built the best team with a combination of talent from both companies, and are now focused on implementing best practices from each in many functional areas.

So with that, I will turn the call back over to Rick, who will comment on our near-term priorities and provide the outlook for the next quarter.

Thank you, Ned. Going forward we will continue to pursue the same strategic priorities with some refinement given the Certance acquisition. Our overall focus does not change, as we intend to stay consistent in those priorities. We are very pleased with the progress we have demonstrated, but remain committed to achieving our financial model.

We intend to capitalize on our unique position as the independent volume leader in tape drives. Our broad range of products and volumes will give us an opportunity to be a cost leader and be able to make R&D investments that allow for future success.

We will continue down on the path of transitioning our automation platforms to have an efficient, highly competitive set of products; and we intend to grow ahead of market rates as we make this transition. We will make selective investments to grow outside of our traditional tape products like the DX products. You will see more focus on these last two items over the next year.

Finally we intend to continue expense structure improvements with the synergies from Certance, but we will increasingly shift our focus to gross margin improvements and even more effective new product execution. It is here where, along with the recent efforts in improving our sales force, that we see the next big opportunity to expand profitability.

On that note, let me turn to guidance for Q4 for the newly combined Company. As is typical, we expect the March quarter to be seasonally weaker than the December quarter. We also want to be a bit cautious as we work to integrate Certance employees, systems, products, marketing, and sales efforts.

We expect overall revenues to be approximately 225 to $240 million. We expect non-GAAP gross margins in Q4 to be roughly flat sequentially. We expect non-GAAP operating expenses to be approximately 66 to $68 million with no material synergies from the acquisition expected in the first quarter of integration. As a result we expect non-GAAP earnings to be approximately breakeven to 4 cents per share.

We expect GAAP gross margins in Q4 to be slightly down sequentially, and GAAP operating expenses to be between 71 and $73 million. The GAAP to non-GAAP difference reflects estimated amortization of acquisition-related intangibles of $6.8 million, special charges related to restructuring of approximately $2 million, and a write-off of Certance in-process R&D estimated at approximately $20,000.

As a result, we expect GAAP bottom-line results to be in the range of breakeven to a loss of 4 cents per share.

So to close, we are very pleased with our strong Q3 and energized by the opportunity that we have provided as we integrate Certance and move forward with our product initiatives. I am looking forward to building on the success that we have and moving into next fiscal year with increased momentum. With that, I will open up for any questions that you might have. Operator?

(OPERATOR INSTRUCTIONS) Mark Moskowitz, JP Morgan.

As we look at the quarter just reported I was wondering if you could maybe weight out some of the key catalysts behind your broad strength in terms of your revenues. Maybe how much was really the model finally taking hold in terms of the new products, that you have really put a good effort around this past year?

Then maybe partly on the competitive dynamics, what type of market share shifts did you experienced?

And then thirdly, how much was that really attributed to maybe some of this compliance or Sarbanes-Oxley type catalysts as well?

I will maybe make a few comments. It really was one of those quarters where a lot of things seemed to work well. We had the positive experience of finally getting the momentum with new products. I think the 600 as we said was taking hold. The PX720 that we introduced a year ago was starting to get good momentum around that. I think there were those factors.

There were the seasonal quarter, which we saw the business environment to be reasonable relative to what we've seen over the last few years, certainly better than what we've seen recently.

We had I think the effect of our sales team, which we reorganized and brought together about a year ago, really feeling like there's been some rhythm with those organizations on a global basis. So we saw good strength in our branded business. Our channel business was much improved.

The media business I think was impacted as we suggested by maybe some seasonality and end of year activity. But overall I feel good about the competitive position that we found ourselves in.

I think if you take the systems business, which is easiest because there are independent companies to look at, there is no doubt that our growth rate of 16 percent is well above; I think most people are in the flat to declining area. So we know clearly that we have taken share in that part of the marketplace.

We don't believe that the SOX compliance issues have really impacted our business in either direction. We continue to hope that is the case, that people will put more rigor around backup and recovery and archiving. We still believe that is the case. But we really can't -- I can't even anecdotally say that we have seen a lot of activity around that.

Okay, and then looking to the guidance, can you break out for us the revenue that is directly related to Quantum, legacy Quantum, as well as Certance?

I think we file something.

Ned Hayes, Jr.: We file an amended 8-K 71 days following the close. That will be roughly March 6. In that 8-K we will be providing not only Certance historical financials, but also our pro forma.

Having said that, we will report as a combined entity and will not going forward break out Certance versus Quantum revenues. We don't want to run down a segmentation problem. This is the way we operate the Company internally. This is the way we view it in terms of the tape drive business versus the systems business; and that is what we will be doing going forward.

I think you have spoken in the past that the Certance gross margins for their fiscal year ended June was around 29 percent.

Ned Hayes, Jr.: Yes, that is correct.

Has there been any change to that outlook as you come to market now with it wrapped under the Quantum brand?

Ned Hayes, Jr.: Again, Mark, I am going to refer to the 8-K/A that we will be filing. I will just tell you that in terms of the last quarter they were within our expectations.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Glenn Hanus, Needham & Company.

I thought I'd give it a try. So, for fiscal '04 I guess Certance was 226 overall. And for next quarter can you give us any sense of any kind of revenue segmentation, for how we kind of get to the -- if I just took Certance divided by 4 and added it to roughly maybe 190 million for the Quantum business, you come out maybe at the high end of your range there. Any comment on that?

I would just say there are a lot of moving pieces. There is the seasonal factor. There is a strong media, which we think there might have been some extra strength.

So maybe media might be seasonally lower this quarter.

Yes, so (multiple speakers)

Could you maybe give us some color on the areas, just without giving numbers even, where we might sort of -- we've got this revenue segmentation right now; so in doing our models here over tonight or the next day, should we just hold off on any kind of revenue segmentation, I guess till you file your 8-Ks; and then we have the pro forma sort of look at the Company going together?

Ned Hayes, Jr.: It is difficult because we're really limited into how much segmentation information we can provide at this point. Even within those Certance numbers there is some media. We're going to basically take the Certance business, and it is going to flow like the way we look at the business in the way we report. So that makes it a bit hard to make the segmentation definition.

Maybe you could just talk sort of qualitatively about what you think might be stronger or weaker in the March quarter among some of the different pieces here.

Ned Hayes, Jr.: Glenn, this is Ned. Historically we have actually gone on record and described a little bit about the product revenue breakdown for Certance's most recent fiscal year, which ended in July, July 2, I believe. The rough breakdown there is 50 percent DDS/DAT and Travan. You can come to your own market conclusions in terms of what that market space is doing.

The other 50 percent of the revenue was -- again something that we are quite excited in -- in addition to that space, LTO, media, the heads business, services. Really kind of very interesting market points for us.

I think to reiterate Rick's point, we're going to be operating this as one company, not two. We have already integrated quite nicely the management team, especially with Mr. Wold's announcement, and taking on the new people across the board. We're looking to integrate brands. We're looking to integrate products. You have got some seasonal factors next quarter; and that is the best we can hope for right now.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Paul Carlen (ph), Lehman Brothers.

I was wondering if you could maybe give some color around the cost of goods sold synergies you guys expect longer-term; and possibly give some sort of time frame on when you expect to see some of those.

I will maybe take a shot at that. The reason we described it the way we did is the way operating things work. When you do the integration there's obvious expense, the synergies you can get; and our strategy was to get those quickly, and we have worked to do that.

On the cost of goods sold side, those involve factories and products and a bunch of different things. So we definitely see synergies there. We see synergies with the fact that Certance was vertically integrated with heads; and we're trying to understand potential that would exist there. But that involves product changes.

We see synergies in the fact that we have capacity that we can better utilize, and we can potentially integrate activities that get us lower costs in a number of areas. We have potential of parts pricing synergies etc.

So those have all been identified and teams are working those issues. We will in pretty short order I think have a view of the synergies we intend to capture quickly and those that might take longer, that we will continue to share over time.

So again in summary, in the short-term sales, marketing, G&A, we want to nail those quickly; and then longer-term we're going to make more strategic decisions about how we use the resources of both Companies to be able to gain more synergies over time.

We are really excited about it, and it's not in any way to suggest that there aren't any. In fact we think it goes to some of the bigger opportunities; but they are also some of the ones are more challenging in terms of getting a fast return.

Okay, thank you.

At this time I show no further questions. I'd like to turn the conference back over.

Thank you for joining us and we look forward to next quarter's call.

Thank you. Ladies and gentlemen, thus concludes the Quantum third-quarter earnings release conference call. If you would like to listen to the replay of today's conference, please dial 303-590-3000 and you'll need to enter the access code of 11-01-80-88 followed by the pound sign. Once again thank you for participating in today's conference. At this time, you may now disconnect.