Quantum Corp (QMCO) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Quantum first quarter 2006 earnings release conference call. (Operator Instructions). I would like to turn the conference over to Shawn Hall, General Counsel for the company. Please go ahead, sir.

Good afternoon and welcome. Here with us is Richard Belluzo, CEO, and Ned Hayes, CFO.

The Webcast of this call and the quantitative reconciliation of any GAAP and non-GAAP measures can be accessed at the investor relations section of our Website at www.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 prospects including target metrics and our outlook for the second quarter fiscal year 2006 and for the second half of fiscal year 2006; new product introductions, their features, competitive positions, and expected ramp cycles; our business prospects, goals, priorities and opportunities and anticipated actions to improve the operational platform. We would like to caution you that our statements are based on current expectations and involve risks and uncertainties that can cause actual causes to differ.

We refer to you the risk factors and cautionary language contained in our press release issued today announcing our fiscal Q1 '06 results as well as to our reports filed with the Securities and Exchange Commission from time to time including pages 32 to 42 of our most recent 10-K filed on June 8, 2005. Such reports contain and identify important factor that is can cause actual results to differ materially from those contained in our forward looking statements, all of which risk factors are referenced in today's discussion. We undertake no obligation to update the forward looking statements in the future. With that, I turn the call over to Richard Belluzo.

Good afternoon and thank you for joining us for our fiscal first quarter earnings call. As we shared with you in the last earnings call, fiscal year '06 represents a critical year for Quantum. After two years of improving our competitive fundamental, addressing the series of legacy issues, our goals this year are squarely focused on executed a series of initiative that is will result in a solidly profitable business model. In order for us to achieve this, we said we would be focused in the first half of the year on completing the integration of the Certance business and introducing significant new products.

We also said we expect the second half performance to benefit from improved margins and lower costs as we deliver on these programs. Our performance in Q1 is largely consistent with this direction and we remain focused on completing this transition successfully. However, it is clear that we are still operating in an environment that remains highly competitive and challenging.

Let me provide you with some details. Our first quarter performance came in with lower than anticipated revenues of $206.6 million which was lower than Q4 by $33 million and was below guidance. The reasons for shortfall can be attributed to the following.

First, the Q4 to Q1 transition created a once a year comparison challenge as a result of the difference in the length of the two quarters, 95 days in Q4 versus 88 days in Q1. But most importantly, the lack of a calendar quarter end in Q1 impacting us more significantly than we expected. Our quarter began April 1 and ended on June 27 which meant that we were unable to fully account for the increased sales volumes we typically see at the end of the calendar quarter and in Q1, the lost volume was greater than expected. These two factors accounted for roughly half of the revenue decline from Q4.

Second, there's a series of product transition issues that resulted in lower than expected revenue levels, including SDLT 600 sales not offsetting the decline in the SDLT 320, the maturation of older products and delayed purchase by customers awaiting new products. Third, we saw an overall seasonal weakness within our OEM channel, particularly some softening from a couple of OEMs in both the sale of tape drives and automation. And finally, pricing pressures continues to increase.

Now to gross margins. We continue to focus on improving margins and did make progress in our operations organization. However, the combination of pricing pressure, which was further impacted by product transition, a mix of lower margin products sold, and a shift to more Quantum-branded media sales offset these gains. As a result, non-GAAP gross margins were sequentially flat at 30%. GAAP gross margins were 28%.

A major highlight for the quarter was operating expenses, reduced legal fees related to outstanding litigation, a decrease in R&D expenditures in both storage systems and storage devices and to a lesser extent, lower Sarbanes-Oxley expenditures significantly reduced non-GAAP operating expenses for quarter. In Q1, non-GAAP operating expenses were at $60.5 million or approximately 11% below the previous quarter. We are moving solidly towards our goal of $60 million -a $60 million OpEx run rate. GAAP operating expenses were $61.7 million.

In spite of the revenue weakness, we were able to perform breakeven performance on a non-GAAP basis which was at the low end of our range, GAAP loss was $0.03 a share.

Now let me delve deeper into some of the business segments and Ned will follow this with further analysis of the financials before I return to provide guidance. Let me begin with the business highlights of the Storage Systems which generate $68 million in revenue or almost a 13% decline from the previous quarter. In addition to a seasonally weak quarter and the results of this segment were heavily impacted by product transition timing as we prepare to bring to market a new set of automation products in the coming quarter. On a year-over-year basis, revenue for Storage Systems was up slightly.

The most significant shortfall occurred in the value and super-loader product line which are approaching maturity. Within our enterprise category, sequential product revenues decreased in part due to lower sales of our PX 720s than in Q4, which was our strongest quarter for the product. However, on a year-on-year basis, the PX 720 experienced a 76% increase in unit sales.

This past quarter we launched the PX 510, a data center class library designed to meet evolving needs in the growing yet underserved 100 to 400 cartridge slot midrange automation market segment. The PX 510 offers enterprise class reliability, high availability features, scalability and functionality comparable to Quantum's flagship PX 720 enterprise library and is set at a price point well below the competition. We expect to introduce additional products that are just as compelling and competitive as the PX 510 in the coming months.

Service revenues were strong during the quarter as the impact of our efforts to increase connect rates and to expand services continue to deliver positive gains. We saw a pickup in the sales of our DX series disk space backup products. We continue to believe the new and differentiated features such as the Optyon hardware compression and partitioning capabilities will drive customer interest in these products.

We are continuing to see excellent customer traction, especially among larger financial and government institutions. We also received two very positive industry analyst profiles this quarter focusing on our unique Optyon hardware feature. ESG Lab completed a thorough evaluation and validation report for our DX 100 and Optyon and Tenata (ph) group completed an in-depth Optyon technology profile. Both reports can be found on our Website.

Gross margins were under considerable pressure this quarter as a result of strong pricing pressure and the impending shift to the new product platforms. As a result, gross margins on both a non-GAAP and GAAP basis were lower than in Q4. However, we do expect margins to improve as we continue our platform transitions over the next few quarters.

The strategy in our storage systems business over the last two years has been to lead improved performance through product line simplifications, expense reductions, and new products. Previous to this quarter, we had experienced several quarters of positive growth and growth ahead of the competition. As we begin the transition to new products, we believe we now have all of the ingredients to accelerate our move to profitability in this business.

Now let me turn to tape drives and media. Tape drive revenue was disappointing, decreasing to $84 million in fiscal Q1. This was a sequential decline of almost 17%. The lower than expected revenue reflects lower unit shipments of almost all drives and the Q4 to Q1 transition timing difference that I mentioned earlier.

On a year-to-year comparison, revenue grew almost 37%, mostly as a result of the addition of Certance. Also, revenue for legacy Certance products performed well for the quarter, especially with strong unit sales of both DAT 72 and the LTO-2 half height drives which had sequential increases of 16% and 30% respectively.

Looking at DLT tape drive category, sales of older VS 80 and SDLT 320 products declined significantly as these products mature and our newer replacement products such as the DX-160 and the SDLT 600 have yet to gain enough traction to make up for this decline. Nevertheless, despite the slowdown, the SDLT 600 continued to gain momentum as shipments rose 11% sequentially. During Q1, two new vendors started shipping the product.

On the gross margin front, non-GAAP margins increased three percentage points with GAAP margins improving four percentage points. The improvement in margins was driven mostly by a more favorable product mix and higher service margin. Despite some of the revenue challenges in the quarter, we're confident in the competitive position of the products that we expect to introduce later this year.

On the media side, revenue for the first quarter was $54 million. This is a decrease of approximately 11% sequentially and was mostly driven by the decline in DLT Tape IV volumes. This DLT Tape IV was due primarily to channel inventory adjustments to compensate for buy-forwards in the previous quarter in advance of several vendors' price increases as well as the overall effective decline in the installed base of the DLT Tape IV consuming drives.

Certance products performed relatively well as compared to our expectations. Revenues grew about 24% compared to the first quarter of last year, mostly due to the addition of non-DLT products. LTL royalties, and the ramp of Super DLT Tape II and DLT Tape VX1 offset by the declines of DLT Tape IV.

So at this point, I'd like to turn the call over to Ned for some additional financial details.

Thanks, Rick. Let me start by providing a little more color on the revenue picture. The drop-off in revenue from last quarter was particularly pronounced with our OEMs. OEM sales as a percentage of total revenue fell from 51% in fiscal Q4 to 41% in this fiscal Q1. As in prior periods, 10% plus customers included HP at 21% of total revenue and Dell at 18% of total revenue. We also saw international sales decline quarter-over-quarter, an 8 percentage point decrease in percentage of sales, to 34% of sales mostly due to slower activity from our European customers. 56% of sales in the quarter were from our domestic U.S. customers.

We continue to be very pleased with the performance of our Certance acquisition. While we did not break out results separately for Certance, I can tell you the sales from the Certance portfolio products were up marginally quarter-over-quarter. Certance products continue to exhibit traction in the marketplace and we are pleased with the sales execution we have both with the OEM partners and in the channel.

As Rick mentioned earlier, our non-GAAP gross margin was 30% for the quarter, in line with the provided guidance. Gross margin in absolute dollars was impacted by unit sales shortfall and STLT drives and our low end automation products and a shifting in mix between branded media and royalty. Our GAAP gross margin percentage was roughly 28% due to amortization of intangibles, and was slightly better than guidance.

One highlight of the quarter was our management of operating expenses. In fiscal Q1, we reduced the operating expenses to a little under $61 million, about an 11% sequential decline in OpEx quarter over quarter and well ahead of our internal schedule of delivering a $60 million quarterly OpEx run rate by the end of the fiscal year.

As Rick mentioned, most of the sequential increase was to reduce legal fees relating to litigation., R&D expenditures coming off of a high relating to the platform transitions previously referenced and lower spending on SOX compliance coming out of the year-end audit. GAAP OpEx was just under $62 million. Both of these measures were significantly better than provided guidance for the quarter.

While Rick will go to greater detail when he provides the short term outlook, the company continues to hold firm to the first six months-second six months characterization we provided in our last earnings conference call. We characterized the first six months as being a period of important transition both on the new product platform fronts and on the infrastructure front in integrating Certance's operations into the company with roughly breakeven non-GAAP product reforms.

We characterized the second half of the fiscal year as benefiting from the progress made in the first six months of the year with improved margin performance, thanks to new more cost effective product platforms and better OpEx performance due to realization of synergies and reduced investment.

To the extent we cannot deliver the acquired improvements in revenue margin, we remain steadfastly committed to achieving an operating expense level necessary to deliver non-GAAP operating margin of 8% to 10% of the intermediate term. That's a long-winded way of communicating that work is currently under way to reduce our year-end OpEx quarterly run rate below the previously communicated $60 million target and that this work is being performed presently with the appropriate sense of urgency.

On the non-GAAP earnings per fully diluted share basis, the company was breakeven this quarter, compared to $0.02 per diluted share in the fourth quarter of fiscal 2005. And within our provided guidance range, albeit at the lower end. GAAP EPS per diluted share was a loss of $0.03, versus a loss of $0.02 last quarter, again, within our provided guidance range. The company's GAAP results included $5.3 million in intangibles amortization.

For the sixth consecutive quarter, our focus on working capital management delivered positive cash flow from operations. In fiscal Q1, we generated almost $8 million of cash from ops. At the end of the quarter, with $238 million worth of cash and equivalents down from the previous quarters ending balance of $250 million. The decrease in the cash position last quarter was entirely attributable to the second installment payment of $14 million for the Certance acquisition made during the quarter.

Additionally on a working capital front, DSOs decreased to almost 53 days from 48 days we saw in Q4. Inventory turns slipped to 8.7 in this quarter from 12.1 in the previous quarter due to the shortfall in revenue. Inventories increased about $3 million quarter-over-quarter.

Days payable increased 47 days in Q1 versus 38 days in Q4, last fiscal year. So we continue to manage our DSO-DPO arbitrage appropriately. So, again, work being accomplished during this important first half of the year transition period setting us up for improvement in the second half of the year with a critical eye placed on meaningfully improving gross margin rate and even further reduced operating expense level performance between now and the end of the fiscal year.

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

Thank you, Ned. In summary, this quarter's results were largely consistent with the themes and priorities we mentioned in the last earnings call. Our performance, particularly in the top line underscores the competitive and challenging environment we operate in. While we're not immune from external market trends, we're committed to execute - executing against the priorities we outlined in our last earnings calls. We are driven to capitalize on our unique position as a tape drive and automation provider to deliver a very competitive product offering and infrastructure.

I'm very excited about the opportunities that we have before us. We will maintain focused on new product execution and lowering our cost structure. In addition, we'll focus on delivering top-line performance. We intend to take advantage of the opportunities afforded us by competitive new products and new product categories. We believe that these new product programs will begin to have positive impact on our results over the next few quarters, both on the top as well as the margin lines.

We will also harvest the synergies from the Certance operations to further drive down expenses and increase efficiency for the combined company. We expect that as we complete the integration process, we may well see better than expected benefits from this acquisition.

Now let me turn to guidance. As we have said, the first half of the year is dominated by a series of transitions in many elements of the business. It is these transitions that create the core opportunity to improve the business model starting in the second half of the year. However, in the short term, these efforts create incremental costs and risks that are reflected in the performance in Q1, many of which will continue in Q2. We remain committed to delivering a quarterly non-GAAP operating expense run rate of less than $60 million and believe that there are still areas for improvement, especially as we ramp down investments in R&D following the completion of the product transitions.

So for the second quarter guidance will be as follows - we expect overall revenue from $210 million to $220 million. We expect the non-GAAP gross margin rate in Q2 to be roughly flat. Non-GAAP operating expenses are expected to be in the $62 million to $64 million as we still have an increased level of expenses related to the integration of Certance, R&D, and product transition. As a result, we expect non-GAAP earnings per share to be roughly in the range of a loss of $0.02 to a profit of $0.02 per share for the second fiscal quarter.

As we proceed with the integration of Certance and finish the transition to our new product program, we expect to incur restructuring charges of approximately $9 million in Q2. This is the result of facility and site rationalizations and as well as reduced investments following platform transition. We expect GAAP gross margin in fiscal Q2 to be roughly flat sequentially and GAAP operating expenses to be in the $72 million to $74 million. The GAAP to non-GAAP differences reflect estimated amortization of acquisitions-related intangibles of $5.4 million and the aforementioned restructuring charge.

As a result, we expect GAAP EPS for the second fiscal quarter to be in the range of a loss of $0.10 per share - diluted share, to a loss of $0.06.

In summary, Q1 was a tough quarter for us. As I said before, we believe the progress we've made over the last two years in improving the competitiveness, along with the investments that we have made in expanding and enhancing the product offering and the benefits of the Certance acquisition will provide us a unique opportunity to achieve solid profitability on a consistent basis.

With that, I will open it up to any general questions that you might have. Thank you. Operator?

Thank you, sir.(Operator Instructions)

Our first question is from Glenn Hanus with Needham & Company. Please go ahead.

Good afternoon, guys. Just to make sure I understand, the revenue was about $25 million, $30 million short on my model. And you're saying half of it is this sort of time in the quarter issue and half of it would be product transition issues? I mean, the time of the quarter-type issues, maybe you could - you knew how long the quarter was going to be. So maybe you could just tell me what surprised you to miss the top line this much?

Let me start with the quarter adjustment. You know, it's a tricky thing. As you go back over our history, every first quarter we tend to have challenges with this - the fact that the - you know, the big ramps you tend to have at the end of the quarter, we didn't have one of those in Q1 because of the way it started on a calendar quarter day and ended early. So we didn't have that. Now, as we go through it, we always think we -we have some of that mitigated. We put a lot of emphasis in trying to make sure revenue flows earlier. So we try to account for that end - but, this quarter - it was - it was more pronounced. I mean last year, we didn't talk about it because if you remember last year, it was such a bad year for the industry that that - that reason seemed to dominate.

The other thing that would point this out is the business we had less impact on is our OEMs. They pull products through the quarter. And so it was one reason why our OEM business was particularly low because of their, quarter-end push that tends to occur. And if you lose a few days and are unable to get that forward, it has an impact. That really is the message on - on the unusual aspects of the quarter.

On the transition issues -- we have a lot of transition. We have a lot of product transitions, some of which will become more clear in the coming weeks and months. And product transition issues, of course, creates tremendous opportunities for you, but also the ramp down and ramp up is always something that's difficult to manage.

I think one reason the Cenrtance products did well quarter-to-quarter is because we're not going through product transitions there in terms of anything significant, where on the legacy Quantum side, we have product lines that in the case of automation are four years or so old that really need to be replaced and are being replaced. And, it has a pronounced impact as we get to the final months of these product launches.

And the tape - the 600 ramp was --didn't quite make up for decline in 320?

That's right. That's one of the ways to measure. Plus, when you take - it's particularly negative when you consider this quarterly phenomenon. And then on top of that, you look at the transition - we still should have done better. I can't - I would love to be able to do some analysis and tell you this three-day thing was really -- that is profound as the decline looks. I can't do that.

So the linearity didn't quite pick up at the end there like you had hoped?

That's right, that's right.

And on the G&A, that's where you really had some savings, at least relative to the models I was keeping. That was the Sarbanes-Oxley and legal expenses going away?

It was predominantly legal expenses, Glenn. There was some benefit coming out of the year-end audit in terms of first quarter spend. But we really had a bit of cessation in the activity around the litigation that we had that was very pronounced in the second and third quarters and fourth quarters of the previous years.

Yes, we said in other calls that our legal spend rate was abnormally high and it impacted our results negatively in previous quarters. That was true. And this quarter was more close to normal level.

And just lastly, then the little bit of sequential growth in the OpEx this quarter, you'll have some - a little bit of incremental R&D, take me through that again?

A good portion of it, Glenn, is actually going to a quarter with more days in it, so you've got more days of payroll. But we do have a bit more in terms of R&D, making sure we complete those platforms. We're going to continue to try to manage those investments as best as we possibly can. Part of the restructuring that we're seeing is ready for that particular platform change. We'll start once again spending some money on SOX as we get into the second quarter. And with the higher revenue base, your sales and marketing expenses will be increasing a little bit. But hopefully we'll try to manage that as best we can going from quarter to quarter.

And you think after this quarter, well, maybe you won't answer this - you think the revenues, then, would see more - a little more sequential growth come the December quarter? That's usually your stronger quarter. And maybe - give us sort of roughly what timeframe do you have in mind for this intermediate - what is - how are you defining intermediate term?

In terms of what, revenue?

Well, you made comments about getting to 8% or 10% operating income intermediate term. So should we assume that means, you know, sometime, I don't know, second half of next year? Or what's intermediate term?

I would characterize intermediate term as sometime in the next fiscal year, Glenn. I think we've got a lot of work to do to get our operating expense down below the $60 million. We've already considered that. We're moving hard on that. I hope to be able to see that in the fourth fiscal quarter exit rate. Our platform transitions afford us some significant COGS efficiencies with the new standardized platforms. That should largely be in place across the - the several products that we will transition during the course of the fiscal year. We're hoping, of course, that those have the bump necessary on the top line carrying it through there as well. Gross line and OpEx performance hopefully getting relatively close to 8% to 10% in the next fiscal year.

And can you give a comment on the sort of little bit more sequential growth in the December quarter than you've modeled for September here? Would that be reasonable?

Everything we see, Glenn, is that we consider December will once again, on a seasonably adjusted basis will probably be our strongest quarter.

In looking at the revenues, always a lot of moving pieces. Clearly as we look forward, our business has been very much first half lower seasonally than second half. That's been true for several years. So we have seasonality working for us. We have the product investments we've made that should improve the competitive position. And so generally what we saw last year, for example, was a tough revenue Q1, improvement in Q2 and then continued improvements from there.

So I can't tell you that's what's going to happen this year. But we're really focused on increasingly, as we get through product transitions, we're really focused on top line. We think we have products that create really interesting contributions in the market, as we've referred to the PX 510 which will hit a very important sweet spot in the market. We haven't had these things in our automation business for quite sometime because of the age of our platforms.

And so we intend to use the investments that we made in these product positions to really work to establish segments of the market that we think are underserved and will give us an opportunity to gain market share. And that's what we're preparing for through all of the work that we're doing.

OK, thank you.

Thanks, Glenn.

The next question is from Mark Moskowitz with JP Morgan. Please go ahead.

Yes, thanks. Hi, Rick, hi Ned. A few questions if I could. I would like to get back to one of Glenn's questions as far as the timing of the revenue in the June quarter. Can you give us any sort of clarification or just in terms of the magnitude of the timing of the last few days of the June quarter? That spilled past June 27 in terms of - I take in the context that revenue - are you really flat to down sequentially here in September?

Are we really flat to down? We were down.

No, I'm looking at the September quarter. Your guidance suggests you're going be 2.10 to 2.20. How much of that revenue guidance takes into account the revenue that's spilled in late in the month of June?

It takes it all into account.

Okay. So really if we strip out some of these - some of these pushed out orders, you're really - how should we think about your guidance then, going forward?

I think the 2.10 to 2.20 number is a reasonable number. Again, we still have a number of risks in this transitional period where we're getting closer to these crossover points on product platform transitions. We need to make sure we hit those road maps. You know, you can't just simply discount the three days because they are -the three days in here. I wouldn't want to characterize how much that was.

Right.

But we certainly have visibility into that. We're back to a normalized day quarter, if you will, in the second and third quarter.

The other challenge is that the September quarter is also - it also has its seasonality issues. We characterized the first half and second half in many aspects of our business. The second quarter, because of the slowdown in the August month, especially in Europe, we expect also, while we will pick up some improvement getting back to a more traditional quarter in terms of the way it starts and ends, we then - you know, we have the additional challenge of a very, you know, strong negative seasonality that will affect us mostly in August. So, you know, that's why - you know, there are a lot of moving pieces in revenue that we have added even more now this year because of product transitions.

But, you know, everything that we see in terms of the work we're doing from a product and OEM and branded sales perspective, we believe we have a lot of things to work with to be able to benefit from whatever market environment exists.

OK. I'm not trying to discount the revenues as far as going into the September quarter. I'm trying to get a sense of - if we look at the outlook for the September quarter, I mean, are you pulling back on the OpEx still just given that we right size - those revenues came in at the June quarter. If we're looking for flat to down, we're spending a little less than we would have wanted to in the back half of the year on the OpEx side?

Not sure I got your question totally, but the OpEx improvements we make are really largely things we have we believed that we can do for sometime.

Mm-hmm.

And certainly when you get a revenue shock, you get more - you know, you get more aware of the need to do that. But these are not new thoughts. We keyed up in the last earnings calls some OpEx goals. We just really believe that the result of a lot of the things that we've had under way. And the fact that we have been investing at a higher level than is appropriate for this segment, given the fact we need to get these product platforms refreshed, that's not a sustainable thing. Whatever the revenue is, we have to make adjustments to our expense. Structure. We felt that before the first quarter. We felt it more strongly after the first quarter. But the strategy around that has not changed.

Okay. As we look beyond the September quarter, just in terms of the commentary on getting to a point where you're at an OpEx run rate below $60 million. Should we assume that one of the key pieces to help to get there are that you are going to pull back on the R&D levers and maybe just allow the current product that is you're ramping right now to kind of bear fruit and then maybe expect product transitions not until mid-part of next year, then?

If - as I mentioned in the last question - we are spending at an R&D rate that's not sustainable for this business. If you go and do the math about what's the return you'll get from continuing. We're not all confused about that but we believe our strategy has been to transition - we had to invest to do this, but to establish a simplified set of product platforms that are more extensible over time. And that will change the way - the way we invest in what we do going forward.

We feel that's absolutely essential and that these - the big ramp in new products we see this year, while we're excited about those, it's not something we really want to do every year. I don't think the market wants to have as many products introduced that we're going to introduce this year on an ongoing basis. But for us this year, it's important. It's about improving our cost structure. It's about getting the gross margins right. And about getting to a more normalized rate of spending in engineering and in other areas of the company.

Okay, if I could touch on the costs? In the past you referenced Certance in terms of the some of the excellence it had with respect to their manufacturing platform and the efficiencies therein. Have you had any sort of process whereby you're able to apply some of those manufacturing practices to the legacy or heritage at Quantum assets? Where are you in that process?

So we're absolutely in the process of doing that. We've been working on our op infrastructure now even before the Certance acquisition to simplify it and to make it even more efficient. But I think through the Certance integration, we have learned a lot of things. And to further exemplify it, Howard Matthews has joined Quantum as President and COO. He's running the storage systems business. In addition to that, I've asked him to manage the overall ops infrastructure. And he is personally leading the transition to - you know, to get our ops structure to a place that is simplified, lower cost, more responsive to customers.

We've already made some changes in the way we manage quality. And we believe we have to accelerate our improvement there. So, Howard is going to be a great addition in the short time he's been here. He knows his business and he's off and running in terms of launching change efforts to get that infrastructure to be very competitive.

And then lastly if I could. As far as just the market dynamics, can you comment on the pricing pressures that you have been experiencing in the June quarter? And also where they kind of stand right now ending the month of July?

Well, what we see is a first of all - as I've - there's been only early earnings results out that I've kind of pondered through. And it appears to me that the kind of low end to midrange of the market has had the most pricing pressure. And I think that - I think we'll see as we hear more as the quarter develops from other people, I think others will reinforce that.

It is - deals are very competitive. And, you know, a lot of this is anecdotal. We track average prices in everything. And certainly there's been pressure. But a lot of the anecdotal data would further suggest that there's a lot of pressure. This is still a market that has a lot of suppliers in it. There's a lot of fierce competition. And our challenge is that we're at the end of the life of some of our products, which is 4 plus years old. We're chomping at the bit to get our new products out so we can go after these segments a lot more aggressively. And we believe we'll be well positioned to do it. But as we transition first half, there are a lot of pain points as a result of that competition.

So I think earning - as revenue has slowed for a number of players in the market, the national reaction is that people do put more pressure on pricing.

Thank you.

Thanks, Mark.

: Thank you. (Operator Instructions).

Management, there's no further question at this time. Please continue with any closing remarks you may have.

Thanks again for joining us. It was a challenging quarter for sure. But we really look forward to continuing to execute of the plans we have in place. So we look forward to talking to you again in three months. Thanks.

Thank you, sir. Ladies and gentlemen, this concludes the Quantum first quarter 2006 earnings release conference call. If you would like to listen to a replay of today's conference call, please dial 303-590-3000 or 800-405-2236, with access code 11034812. Once again, if you would like to listen to a replay of today's conference call, please dial 303-590-3000, or 800-405-2236 with access code, 11034812. You may now disconnect and thank you for using AT&T teleconferencing.