Quantum Corp (QMCO) 2006 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Quantum second quarter 2006 earnings release conference call. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded today, Thursday, October 27, 2005. I would now like to turn the conference over to Mr. Shawn Hall with Quantum general counsel. Please go ahead, sir.

Thank you. Well, good afternoon and welcome. With me here today is Rick Belluzzo, CEO and Ned Hayes, CFO. The webcast of this call along with the quantitive reconciliation of any GAAP and non-GAAP financial measures discussed today 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 means of the Private Securities Litigation Reform Act of 1995. The forward-looking statements we will make include statements regarding our financial projections and prospects including target financial metrics and our outlook for the third quarter of fiscal year 2006 and for the second half of fiscal year 2006, new product introductions, their features, competitive positions and expected ramp cycles, and our business prospects, goals, priorities, and opportunities.

We would like to caution you that our statement are based on current expectations and involve risks and uncertainties that could cause actual results could differ materially. We refer you to the risk factors and cautionary language contained in our press release issued today announcing our fiscal Q2 2006 results, as well as to our report filed with the Securities and Exchange Commission from time to time including pages 36 to 46 of our most recent 10Q filed on August 5, 2005. Such reports contain and identify important factors that could cause actual results to differ materially from those contained in our forward-looking statements, all of which risk factors are incorporated by reference into today's discussion. 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, Shawn. Well, good afternoon and thank you for joining us for our fiscal second quarter earnings call. Over the last few years we have been aggressively focused in substantially improving Quantum's competitiveness and therefore our financial performance across a broad range of areas, including our cost structure, quality, new products and balance sheet.

During the first two years much of our work has been directed towards our infrastructures and this has been reflected in lower operating costs and improved financial performance allowing us to achieve six quarters of cash flow positive operations and non-GAAP profitability in seven of the last eight quarters. While this progress has been important, it has been insufficient in terms of driving significant and sustainable operating improvement. With this issue in mind we established several critical priorities for FY'06 that would enable us to capitalize on and further the progress that we have already made. These include completing the integration of [INAUDIBLE], launching a very aggressive new product transition and later in the year and into fiscal 2007 further reducing our expense structure and improving gross margins. As result of this plan we characterize the first half of FY'06 as a period of significant new product transition activity leading to performance that was largely in line with recent quarters, that is break even to slightly positive non-GAAP EPS. The first half challenges are largely captured in the risks and complexity of transitioning new products in a very competitive market environment. These include higher development costs, pricing pressures on end of life platforms, weak revenue in anticipation of new products, early new product manufacturing challenges, and the risk of end of life inventory. However, it is these same first half challenges that will help us set the stage for a recovering second half, which is why we have characterized the second half of the fiscal year as a period of recovery as the risk factors decline and the opportunities for benefits from the investments begin to payoff.

With that background, let me summarize our Q2 results which were largely consistent with the framework I described. Q2 revenue continued to be soft. At $203.6 million which was below our guidance and slightly down from last quarters $206.6 million level. On a year-over-year basis revenue was 13.1%--was up 13.1% as a result of the certain [sinigration]. Tape drives and system revenues were down slightly from Q1 while media recorded a slight increase. The revenue challenge was mainly due to weak sales with one particular OEM that affected a number of categories: systems, drives, and service parts, and lower total service parts sales which were down nearly $4 million.

The service parts sales can be very inconsistent as OEM's often rebalance their inventory levels which they did in Q2. In spite of this overall revenue weakness, there were some positive elements. This included strong media royalty revenues, improved Quantum branded system sales, especially with new products that shipped late in the quarter, and a record quarter for sales of our diskbased DX systems. The non-cap GAAP margin rate declined to 28% in Q2, reflecting product transitions challenges and the abnormally weak sales of replacement parts which generally carry a higher gross margin rate. As I referred to earlier, the product transition challenges including lower sales volumes and discounting of older products, new product manufacturing inefficiencies leading to higher manufacturing costs and some level of excess and obsolete exposure. We experienced all of these during the quarter and since the new SuperLoader3 and PX500 library shipped late in the quarter, we were unable to achieve significant benefits from these new products. Virtually all of gross margin pressure occurred in our systems business where we executed this agressive new product rollover. The GAAP margin rate was 26%.

Operating expenses continue to improve during the quarter as a result of completing much of the R&D investments for new products and an ongoing focus on managing operating costs. Non-GAAP operating expenses for the quarter came in at $56.4 million, a decrease of 7% from Q1. In fact in the first half of this fiscal year we have eliminated over 15% of our Q4 non-GAAP operating expense run rate. GAAP operating expenses were $67.3 million. The combination of lower revenue and gross margins but improved operating expenses resulted in non-GAAP net profit of $1.2 million or $0.01 per diluted share. GAAP net loss was $13.8 million or $0.07 per fully diluted share for the second quarter. The increase in our GAAP loss was driven by the restructuring costs associated with the closure of one of our European operations facilities. This decision was made as part of our rationalization process following the Certance integration and it is expected to result in longer term cost savings.

Now let me get into a bit more detail for each business segment. Then Ned will follow this with further analysis of the financials before I provide guidance. Let me start with the business highlights with storage systems which generated $67 million in revenue. Although this was relatively flat compared to last quarter, product revenues were up sequentially as we achieved strong growth in our DX product line which increased 62% sequentially and solid sales of our newly launched automation products, the PX 500 series and the SuperLoader 3, all of which began shipping late in the quarter. Offsetting this were revenue declines in our older product lines as well as services which decreased approximately 9% this quarter from Q1. Non-GAAP and GAAP gross margin rates were again under pressure this quarter as a result of a continued strong pricing pressure from our older products.

In addition, a decrease in higher margin service business during the quarter adversely impacted margins. As a result, gross margin rates were lower than what we saw in Q1; however, we do expect margin rates to improve as our new products continue to ramp over the next few quarters. We are very encouraged by customer response to our new products. Which have already resulted in several OEM wins including at Sun, Storage Tech, and Dell which have already shipping and have generated significant excitement among our channel partners.

Our new PX500 series tape library platform redefines mid-range storage by providing enterprise features unmatched density and unmatched cost per gigabyte. It is the only mid-range automation family that enables customers to meet current and future scalability and descaleability needs within a platform allowing them to protect their investment as their data storage requirements change. Likewise, the SuperLoader 3 extends Quantum's number one market position in autoloaders. With a combination of superior value, operational simplicity, and sophisticated features from needing the back up recovery and archive needs of customers in small and medium businesses, work groups, and departments within enterprise.

In Q2 we also announced our new DPM 5500 which expands our disk space offering beyond virtual tape libraries. The DPM5500 is an appliance that integrates an optimized platform and differentiated features with Microsoft's new data protection manager for windows environments. It offers a complete data protection solution, delivers increased replication opportunities for greater restore granularity with increased features such as Optyon hardware based compression technology and migration to tape capability. And on Tuesday we introduced two more products from our disc based family. The DX3000 and the DX5000 aimed at small to medium enterprises, work groups, and remote offices. These two appliances can be easily deployed and integrated into existing infrastructures offering enterprise class features that deliver higher availability and include other value oriented options that customers can select to best suit their IT and budgetary requirements. In addition, both products leverage Quantum's Optyon hardware compression technology allowing us to deliver these appliances at less than half the cost per gigabyte of the nearest competitive offering. All in all we believe we are moving down the path of achieving non-GAAP profitability in our storage systems business as we continue to benefit from higher margin new products and improved operating structure.

Now let me turn to tape drives. Drive revenue decreased approximately $3.8 million from Q1, mostly due to significant declines from our older products, including the DS80, Travan, and LTO1. A product mix shift to more OEM versus branded sales and lower service revenue which declined 18% quarter-over-quarter. We also faced market challenges with our SDLT products. Clearly, addressing the SDLT competitive pressure is one -- is an important aspect to improving our performance. About a year ago we announced changes in our road map to adapt to the changing market in competitive environment. We plan to introduce the first product as a result of this change this fiscal year. This product will include leading capacity, lowest cost per gigabyte of storage and significant new value added features that will allow this platform to be ideally suited for the demands of tier storage as driven by the shift towards information life cycle management. Also, these new products will be aggressively integrated within our new libraries providing an in-customer benefit from the new value added feature set. At the same time we will continue to drive adoption of the current SDLT product line. We believe this strategy will stop the leap frog pattern with LTO and position SDLT well as a unique solution.

On the OEM front, we saw increased tape drive buying from Dell and Sun Storage Tech in Q2. Revenues from these increased by more than 15% sequentially in this quarter. We believe that strong relationships with multiple partners will both strengthen our business and also provide for better OEM diversification. We again saw strong unit sales of both the DAT40 and DAT72 drives which had sequential increases of 29 and 6% respectively. The LTO2 [INAUDIBLE] drives also continue to sell nicely with the sequential increase of 84%.

Last week we launched our new DLT-V4 tape drive which combines exceptional capacity and performance with value added features including DLT sage for predictive and preventative diagnostic manageability and DLT IS for meeting regulatory compliance requirements through standard media with write once read many capability. At an unprecedented sub $1000.00 price point, DLT-V4 is an ideal choice for small businesses to meet their near or long term storage needs. Non-GAAP and GAAP gross margins were relatively flat from last quarter. Gross margins were negatively impacted by lower service revenue but this was mostly offset by lower warranty costs on our SDLT and DS products.

On the media side, revenue for the first quarter was $55.8 million which was a slight increase from the $54.3 million in the first quarter. The increase in revenue was mostly driven by higher royalty revenues. On a year-over-year basis, total media revenue increased 31% largely due to LTO royalties. In addition we saw volume and to a certain extent pricing stabilization with our Tape4 and Super1 products. So at this point I'd like to turn the call over to Ned for some additional financial details.

Thanks, Rick. Despite the fact that we knew Q2 was going to a period of difficult transitions, we were again disappointed that revenues were below expectations. As previously described, the weakness in the quarter was mostly attributed to revenue shortfalls from a major OEM partner that affected sales across almost all categories. Lower services revenues as well as continued pricing pressure on our more mature products that are in the process of being replaced by our new product platforms. Q2 sales from our OEM channels were relatively flat as compared to Q1 at about 41% of sales. Once again HP and Dell were 10% plus customers for the company. Domestic sales were relatively flat as percentage of revenue quarter-to-quarter at 68% of sales. Non-U.S. sales accounted for 32% of overall revenues for the second quarter. Non-GAAP gross margin rate in the quarter was 28%, 2 percentage points lower than the roughly 30% we experienced in Q1. As Rick mentioned, factors impacting margin rates included a decline in our overall high margin service replacement parts revenue, and in particular with an OEM rebalancing it's inventory levels an issue we believe is short lived as these inventories will quickly hit efficient levels and consumption will be reinitiated, lower sales volumes and discounting of older, end of life products, and inventory reserves for some end of life products. These negative impacts were offset in part by a strong media royalty quarter and improved Quantum branded sales which inherently hold better margins for the company than alternative channels. I'd like to reiterate that this period is one comprised of very complicated transitions. Many companies struggle with the execution issues brought by a single major platform transition. We're undertaking several simultaneously with an eye toward creating a stronger competitive base than anyone in our space. Our recent product announcements demonstrate that we have been initially successful in executing these platform transitions. 1. In our low end automation platform with the introduction to market of our SuperLoader3. 2. In our mid-range automation platform with the introduction to market of our PX500 series. 3. In our DLP tape drive platform with the introduction of our DLT-V4 for SMB customers. 4. In our disk space backup platform with the introduction of our DPM5500 expanding our offerings into the category beyond just virtual tape libraries. And 5. The expansion and extension of our DX platform with the introduction of our DX3000 and DX5000 appliances. You combine these completely refreshed product sets with our SDLT and LTO technologies and embedded base, our media model and our services capabilities and you will find a portfolio unlike any other in the category. We're very pleased with the progress we've made on the execution front. We're pleased as well with our operating expense management in fiscal Q2. On our last conference call, in the face of a weak revenue picture, I advised you that we were committed to reducing our non-GAAP operating expense level below $60 million by the end of the fiscal year. Non-GAAP operating expense for the second quarter were $56.4 million compared to about $60.5 million in the first quarter and $67.6 million just two quarters ago. Non-GAAP operating expenses saw a 7% sequential decline and were significantly better in absolute dollars as well as percentage of sales than the guidance that was provided on our last earnings call. The decrease was spread across all OpEx lines. And is reflective of the work we have done and will continue to do in streamlining our overall cost structure. We remain committed to maintaining non-GAAP operating expenses below the $60 million mark excluding special charges. GAAP OpEx was 67.3 million, well within our guidance range and included about 9.6 million in restructuring costs and 1.3 million in intangibles amortization. On a non-GAAP basis the company earned a net income of $1.2 million or $0.01 per diluted share compared to the break even performance seen in fiscal Q1. GAAP net loss for Q2 was $13.8 million or $0.07 per diluted share. This compares to loss of $5.5 million or $0.03 per diluted share in Q1. GAAP results included the previously noted 9.6 in restructuring related charges as well as $5.4 million of intangibles amortization. Both GAAP and non-GAAP EPS were well within our guidance ranges. Net cash flow from operations for the quarter was slightly negative at $1.2 million in usage. During the quarter we made our final installment payment relating to the Certance acquisition with a cash payment of $5.8 million into an escrow account per the transactions agreement. This payment is now classified as restricted cash on the company's balance sheet. We ended the quarter with cash and short term investments of approximately $229 million exclusive of restrictive cash. On the working capital front, DSOs increased slightly at 54 days from the 53 days seen in Q1. Inventories turns remain constant quarter-over-quarter at 8.7 turns. Days payable decreased to 44 days in Q2 versus 47 days in Q1 reflecting the disciplined expense management in the quarter. I'm very pleased to announce that yesterday Quantum entered into an agreement with Key Bank and several other lenders to extend the maturity on the company's $145 million revolving credit facility to October 2008. This facility was due to expire next March and we took this opportunity to renew early with a transaction that was oversubscribed by the bank group containing improved terms across the board on various rates, fees, and covenant levels inherent in the facility being replaced. We're delighted with this demonstrated commitment and show of support from our banking group as we continue to execute against our business plan. So all in all the second quarter was largely what we had expected, a challenging one for us as revenue continued to be under pressure, and we executed through challenges that come with product and platform transitions. However, we've made solid strides in reducing our operating expense levels and we will remain vigilant in identifying opportunities that will unable us to improve our overall cross structure above and below the gross margin line in the second half of the year. So with that I'll 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. Now that we are in the final stages of completing our new product introductions we are shifting our focus to ensuring that we can capitalize on this opportunity. Recently we made some changes to strengthen our go to market capability through changes in our sales, marketing, and service structure. The goal here is to ensure that we gain the greatest efficiency in our resources, better service our customers, and drive revenue opportunity, especially with Quantum branded products. Related to this it is a significant focus--related to this is a significant focus around delivering unparalleled customer value and an improved customer experience as a result of Quantum's unique opportunity to combine tape drive, media, automation, disc solutions, and service offerings to achieve competitive advantage. No other supplier in the marketplace has the opportunity to innovate at every level and deliver unmatched value, read that competitive costs, along with exciting new features. While the market environment remains very challenging, now that the first half of the year is behind us and all of our product components are strong, we will use our unique position to gain share and improve our overall performance. Now let me talk a bit about guidance. The performance for the first half of the year was consistent with what we had stated in terms of top line in gross margin pressures from declining sales of older products and product transition and timing issues that affected our results. In the second half of the year we expect these challenges to continue to a certain extent. Market dynamics remain a challenge as spending in our space remains tepid, the competition along with the restrictive distribution channel dominated by a few OEMs will continue to put pricing pressure on margins. However, we also expect to see some positive impact from new products that we have introduced as well as a more efficient operating structure. So for the third quarter, guidance will be as follows: We expect overall revenues to be the range of $210 to $225 million. We expect non-GAAP gross margin rate in Q3 to be slightly better than Q2. Non-GAAP operating expenses are expected to be in the $54 to $57 million range as R&D costs begin to normalize following product transitions and we continue our overall OpEx cost reduction program. As a result, we expect non-GAAP earnings per diluted share to be roughly in the range of $0.02 to $0.05 per diluted share for the third fiscal quarter. As we proceeded with the integration of Certance and finish the transition to our product programs, we will continue to evaluate opportunities for efficiency improvement across our organization. As such, we may incur additional restructuring costs of up to $4 million in the third quarter. We expect GAAP gross margin rate in fiscal Q3 to be up slightly, sequentially and GAAP operating expenses to be in the $59 to $62 million range. The GAAP to non-GAAP difference in OpEx reflects estimated amortization of acquisitional related intangibles of $1.3 million and restructuring costs of $4 million. As a result we expect GAAP bottom line to be in the range of a loss of $0.03 per diluted share to break even. I've very excited about the opportunities that we have before us. We are focused on continuing our new product program and improving the elements of our operation that will enable us to be more efficient and to better respond to customer needs and the changing market environment. With that, I'll open it up for any general questions that you might have. Operator?

[OPERATOR INSTRUCTIONS] Our first question comes from Mr. Brian Freed with Morgan, Keegan. Please go ahead with your question.

Hi, guys, thanks for taking my call. Actually, I had a couple quick questions. 1. Could you talk about drive ASPs in the quarter on a like-for-like basis, what kind of trends you saw there.

You know I don't think there was anything unusual in drive ASPs. I mean there's always a bit of downward pressure, I think that was typical in the course so we really didn't really see anything that was substantially different. Okay. And then secondly, in Europe they've got this RoHS compliance. What do you see as the potential impact for that in terms of your product lines. What -- I assume all your new products are RoHS compliant, but with respect to your older products that you're transitioning away from, do you think that accelerates the transition or do you intend to make more of them RoHS compliant? It has certainly being an issue and challenge that we've been working for for quite some time. And you know it all varies a little bit with our branded business. We're pretty clear and pretty on top of those changes. OEMs -- it involves some requalification, et cetera. And so we're--I think there are transition challenges that certainly relate with that but again, for us we're somewhat fortunate in that we have been moving to new products and been dealing with that from the outset. And so I think we'll talk more about that as we approach that date but generally we're on top of all the existing products, most of which are being corrected. New products are in compliance and the cases where that is different we have to transition people to new products more quickly and that, of course, is sometimes challenging to do.

Okay. All right. Thanks, guys.

Thanks, Brian.

[OPERATOR INSTRUCTIONS] Our next question comes from Mr. Ben Nayam (ph) with David J. Green. Please go ahead with your question.

Hi, gentleman. Appreciate the continued effort on the turnaround, we know it's tough, but it feels like there's some good news out there. Just a question on sort of industry landscape and consolidation and how you view Adick and Overland (ph) does that play to your benefit? Is there something about that transaction that might benefit to Quantum's--for you at Quantum?

Well, thanks, thanks for the question. No doubt that our industry and this segment of the industry is going through a really dramatic change right now. The Sun Storage Tech deal probably caught a number of people by surprise. The Adick Overland activity is further challenging in terms of the industry. We think all these changes by and large are good. We think this industry needs to be shook up a little bit. There needs to be consolidation. We think that now Quantum is the largest independent provider of many of these products. And so we are working very diligently to look at the options we have to capitalize on the turmoil that might exist. But in general, again, I think these are all good things. It's very, it's still -- in the short term it may be somewhat negative because it's almost more competitive as people are trying -- in the short become more short term oriented in terms of protecting their position at a time when there's a lot of OEM activity in terms of OEMs really working through these opportunities to gain better pricing. So in the short term things are actually more competitive, more difficult but we believe that ultimately that more opportunity will exist if that makes sense. So we -- it is unprecedented for this industry. We think it's timely. It's challenging in the short term but over the long-term because of your unique position, we think it's going to strengthen our overall opportunity. I use in my script, I made some comments about our unique position of bringing together tape and automation, all the pieces to deliver more value to customers meaning more competitive products and a better user experience. That's our new mission. I mean we are now intend to be very agressive at bringing new innovative products to market because all our components are or will shortly be very competitive. And we think we can make things even better by combining them in creative ways and helping customers get more value, be able to gain market share and so we think the preparation work we've been doing now for the last few quarters in the time of significant change in the marketplace gives us more opportunity than we've had in a long time.

Terrific, Rick I appreciate that. Just another note though, on that attempt to go to the marketplace with a complete array of products, are there any examples of that that you would side as really being effective? I'm just wondering about that.

You mean other industry players?

Yes. Within the storage business when having the whole soup to nuts or A to Z basket do you think has laid the groundwork for a more competitive long-term offering?

I mean they're all a bit different. I mean I can --

How does automation and automation and tape and--

Let me give you an example of SuperLoader 3. I mean this can't be -- really be disputed. We built into a feature in the SuperLoader 3 as well as our drives called ADI. What ADI is it's a protocol that allows you to share electronics on the tape drive to have those same electronics control much of the automation product. We were able--we were the first in the industry to do that. And we were able to take a significant cost out because up until now you've had to -- have duplicate components in the two products because they've been kind of plug and play. That's an example, very simple example, that allows us to be first to market and achieve price points that other people can't achieve. So it will be things like that that will either lower cost or will improve the way customers utilize these products because there's also a lot of pressures of companies in their backup recovery and archive around a number of areas including ,performance, and manageability, and security, and privacy, and a whole bunch of things. We can address those issues quite well in this way.

Terrific. Well we do continue to appreciate the work that you and your team have done so keep it up.

Thank you.

Thank you. Our next question comes from Mr. Jim McAiry (ph) with David J. Green. Please go ahead with your question. Hi, guys. Ben beat me to the punch but a couple house cleaning questions. Could you tell me what D&A and CapEx were in the quarter?

Let's see. CapEx for the quarter was $5.5-5.6 million.

Okay.

That'll give you a free cash flow of just under negative $7 million.

All right.

What was the other question, I'm sorry.

Depreciate and amortization. But I can back into that because you gave me the free cash flow.

Okay.

So that's fine. You had mentioned that on the replacement parts side that it was abnormally weak. Could you flush that out a little? Have you been able to sort out why that was in the period?

Yes. There was a lot of -- it's always somewhat of a lumpy business. It was particularly so here as there were a lot of efficiencies that were implemented that basically reduced the level of inventory in the field. So our OEM partners store parts all over the place. So as we get more efficient and in fact in some cases we've taken over more and more management of those levels and improve our turn around time which is kind of good operationally, it's kind of bad from a short term revenue perspective because people decide they need less inventory because we can turn things around faster and we have more efficiency in it, and a lot of that hit in the quarter, and again we think that's a hit of kind of that adjustment in level that we don't think is a sustainable issue.

Great, thank you.

Thank you.

Thank you. Our next question comes from Mr. Matt Bryson with Avian Research. Please go ahead with your question.

Hi. Three questions, I guess, the first is on the media side of things you've got a couple of different parts where you've got some older legacy products that are going away, some newer LTO stuff that's coming on, it looks like revenues seem to have stabilized. Is that the case with that segment? Can we assume going forward that we kind of hit a bottom with the LTO royalties and the LTO shipments coming on and we can see some improvement in terms of total revenues that are going forward? Second question is on the LTO drives from Certance can you give us some feel for in the Quantum branded side of things, what percentage of automation equipment that is shipping with those drives and how much more of your automation equipment you can integrate those drives in to? And one more question when you're finished with those two.

Okay. I'll take the first two on media, I mean you never can predict total stability so I don't want to say that it's totally going to stable moving forward given that there's always growth areas and decline areas. Having said that there certainly has been stability the last few quarters and you know we were a year, year and a half ago quite concerned about the trajectory of media royalty, the combination of stability in DLT as well as bringing LTO on as part of the Certance integration has really helped shore that business up. So we think that's a good thing. The future will see. The factors that cause stability -- recently, hopefully, we don't see anything that will cause those to change, but I almost hesitate to say that because they have in the past. Pardon me?

I just said, understood.

On the second question we still have more work to do there. We have because of this tremendous workload we've had with new product transitions we havn't universally built the LTO drives into all of our automation products. I can't totally recite what is in what right now but there are a number of areas where we have integrated products. I can tell you our plan going forward is to launch new automation products with Quantum branded tape support from the outset. We think that's an important part of our new strategy going forward. So I would--so to summarize. Incomplete progress not enough because it's just the sheer number of priorities that we've had and going forward it should improve. I mean just one other piece of clarification, when we sell a product like to Dell and they have their favorite drives some of them are ours some of them aren't ours. And we go through quite an integration process of maybe three or four or five even, different drive types and so when we introduce these new automation products there's a tremendous amount of work. For every OEM there's a very complex matrix of integration. But what we're trying it make clear to people if you buy Quantum tape drives and Quantum automation you get fast integration, it works, it's designed together and it's lower cost.

I guess my last question is if you could provide some sort of metric around what percentage of automation revenues in the September quarter were comprised of the newer products versus the older products, there's just some some sense whether it was a significant or whether we really haven't seen that ramp start to hit the revenue line yet.

It was wasn't very significant. I'm thinking there were a few weeks of real shipments and with some of the OEMS, some of the OEMs have just started shipping recently so it really wasn't a significant -- significant factor.

Could we assume like less than 5% or less than 10% or --

Certainly less than 10%, maybe less than 5%.

Okay. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from Robert Moses with RGM Capital. Please go ahead with your question.

Hi, Rick. In your prepared comments you talked about non-GAAP profitability in the systems business I think you did in your prepared comments. Could you talk about the timing of that when you would expect that to occur?

I -- I think the reluctance about that is the fact ,of course, we still have a lot of transition to go through, but we think it's within the next couple of quarters I would say by the last quarter of the fiscal year. We ought to be there or very close.

Meaning the March quarter?

Yes.

Okay. And I think in past conference calls you've talked about kind of an intermediate goal of 8 to 10% operating margins, is that still reasonable given the business environment you'rein and just some clarity on timing that if you would.

Yes. I'd say we're behind a little bit in getting there and I would attribute it almost exclusively to the environment that we're in. So I think we would still say that it's -- we would characterize it as intermediate term. We haven't given up on that goal. We think that goal is an appropriate goal. We are -- now that we're getting through this products transition we are driving very aggressively to changing every line of the operating statement through initiatives to get to that goal as soon as possible so I would just still say intermediate term.

And would you view the third quarter or the December quarter guidance of $0.02 to $0.05 in earnings as kind of a stepping tone to kind of improve on thereafter or is there some reason to belive that that's a seasonally strong quarter and we could see it slip back in say the March or June quarters?

Well, there's a little bit of offsetting things, yes. December is certainly a seasonally strong quarter. We've tended to have good December quarters. At the same time we still have a lot of overhang of these transitions challenges that will affect the first part of the quarter more so than the end. So in answer to that, I do think it is a stepping stone. I mean I do think it does demonstrate improvement and we don't want to stop there but clearly seasonality does affect our results.

And part of the improvement if it is a stepping stone, I guess, would be reduced losses in the system businesses.

Absolutely we can't achieve the goals I described without achieving that non-GAAP profitability level.

Thanks.

Thanks, Rob.

Thank you. And management there are no further questions at this time. You may continue. Okay. Well, thank you for joining us today. We look forward to talking to you again in the next quarter. Ladies and gentlemen, this concludes the Quantum second quarter 2006 earnings release conference call. Thank you and you may now disconnect.