Quantum Corp (QMCO) 2006 Q4 法說會逐字稿

Good afternoon ladies and gentlemen, welcome to Quantum Corporation fourth quarter fiscal 2006 conference call. At this time all participants are in listen-only mode. Following today's presentation instructions will be given for the question and answer session. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded today, Tuesday, May 2, 2006. I would now like to turn the conference over to Shawn Hall, General Counsel. Please go ahead sir.

Here with me today are Rick Belluzzo, CEO; Ned Hayes, CFO; and Andy [P], VP of Corporate Development. The web cast of this call, our earnings release and quantitative reconciliation of any GAAP and non-GAAP financial measures discussed today can be accessed at the investor relations section of our web site 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. Forward-looking statements include our financial projections and prospects including our outlook for the first fiscal quarter of fiscal year 2007, our products, their features and benefits, market share and expectations, new product releases, and expected ramp cycles, our business prospects, priorities and opportunities including anticipated R&D spending and cost reduction efforts.

Our acquisition of ADIC including expected synergies, and benefits of the transaction, expected costs arising from the transaction and the anticipated timing and closing of the transaction and the general business and IT spending environments. We would like to caution you that our statements are based on current expectations that 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 Q4 and FY 2006 results, as well as to a report filed with the Securities and Exchange Commission from time to time including pages 44 to 54 of our most recent 10-Q filed on February 2, 2006. Such reports contain and identify important factors that could cause actual results to differ materially from those contained in our forward-looking statements. All such risk factors identified in our press release and in our filings with the SEC including our most recent 10-Q 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. Good afternoon and thank you for joining us. Today we're going to discuss fourth quarter results as well as exciting news involving the combination of Quantum and ADIC. One year ago we defined fiscal 2006 as one of the most critical years for Quantum. Over the last 12 months we have implemented an very aggressive set of actions that have been aimed at improving our performance and establishing a strong foundation for the Company.

These actions have included the integration of certain, the introduction of a record number of new products and continued action to improve our execution foundation including operations, quality and our cost structure. As a result of these efforts we have been able to deliver improved financial results in the second half of the fiscal year. Now with the acquisition of ADIC we believe we can further improve or performance, but most importantly together we can build a foundation that provides for a more competitive team business, increased revenue opportunities and the opportunity for growth and the backup recovery and archive marketplace.

With that let me turn the floor over to Ned for further details on the fourth quarter.

Thanks, Rick. For fiscal fourth quarter signaled year of dramatic change and one of progress for Quantum. This progress was characterized by a roughly break even non-GAAP first half as we focused on completing integration, streaming lining our organization and completing the development and market introduction of new products. Following this first half, we shifted our focus towards manufacturing rational, continued organizational restructuring, especially around R&D, and the launch of a record number of new products. We expected these activities to lead to a second half inflection where Quantum would begin to benefit from a more competitive product set and a more efficient operating structure. We are pleased that we were able to largely accomplish these goals in the third and fourth quarter.

While the fourth quarter experienced many of the benefits of this transition we were also confronted with many of the challenges that are associated with introducing and ramping new products and shifting manufacturing locations. While we had anticipated inflection period during the second half and started on this path with solid third quarter results we are unable to entirely overcome these issues in the fourth quarter. Having said that we feel that most of these operational challenges were well resolved during Q4.

As a result, total revenues for the quarter were roughly 206 million, down sequentially from 218 million in the third fiscal quarter, our seasonally strongest quarter and down from 240 million from the fourth quarter fiscal 2005. This compares to our guidance range of 210 to 225 million for the quarter, the decline was driven by the above mentioned products and manufacturing transition issues, with this a couple OEM customers and weakness in our branded business in storage systems within EMEA. On the positive front we saw continued strength in overall branded business which grew from 22% of sales in the fourth quarter fiscal year 2005 to 30% of sales in the fourth quarter of fiscal 2006.

We also took considerable comfort in having a strong media royalty and branded media quarter along with our service businesses rebounding from a relatively weak performance last quarter. Revenue in Quantum Storage Systems business for fiscal fourth quarter '06 was $62 million. This was down from 69 million, sequentially in the third fiscal quarter, primarily due to product transition issues as sales of new products were not yet sufficient to offset the decline in older products. Now you remember that our new SuperLoader 3 is replacing both our ValueLoader and SuperLoader lines in the low end automation space and our new PX 500 family of products is replacing existing M series libraries in the mid range automation range.

Quantum's [Eslong] disk platform which includes the Company's DX series and DPM 5500 products also showed solid growth in the fourth fiscal quarter. Shipments including base units and upgrades increased 23% sequentially and 162% over comparable quarter last year. We have a number of significant global customer wins including a name brand mortgage company, a large insurance company in China, a major U.S. health care government agency and Quantum's first OEM customer for virtual tape. We have also sold solutions into several state and government entities including Washington State based douglas county public utilities district.

The Company expect this momentum to continue as its new DX 3,000 and DX 5,000 disk based backup appliances gain further traction. Quantum's tape drive revenue in the March quarter was 83 million, down sequentially from 89 million in the third fiscal quarter, again largely as a result of product platform transitions. However there were significant highlights in the quarter, shipments of Quantum's new DLT V4 were up 123% over the December quarter and the company sold more LTO2 half drive and LTO3 tape drives than it has in any quarter since acquiring [Sertants] in January, 2005.

Quantum also began shipping 2 industry leading tape drives, DLTS 4 and SDLT600A. The DLTS4 enterprise class tape drive which is specifically designed to meet demands of emerging tiered storage environment offers the industry's largest capacity, high performance and lowest cost per gigabyte of storage as well as manage ability, security and compliance features through Quantum's DLT stage architecture. The SDLT600A, an enhanced version of Quantum SDLT600, is the first data tape drive enhanced for professional video. Networks have installed the SDLTA-- I'm sorry, Turner entertainment networks has installed the SDLT600A in its broadcast center in Atlanta and we recently announced 10 new partners that integrate complete solutions for professional video systems. Tape media revenue in the fourth fiscal quarter was 61 million, roughly flat with the last quarter and the comparable quarter last year.

However Quantum expects to see a positive impact on media revenue as the DLTS4 and SDLT600A begin to gain market traction. During the fourth quarter our OEM relationships generated 39% of channel sales with branded sales channels comprising 61%. This compared with 42% and 58% for the prior quarter and reflects our continued efforts to diversify our sales strategy with a bias towards branded sales. Dell and HP contributed 18% and 17% of revenue respectively, consistent with the fiscal third quarter On a geographic basis 66% of sales revenue was generated from US customers and 34% from international customers. This compared with 68% U.S. and 32% international for the third quarter.

Despite the shortfall in revenues we were able to achieve non-GAAP gross margin rate for the fourth quarter of 31% which was relatively flat from Q3 and consistent with our guidance for the quarter. We're able to achieve this even as we continue to face the product transition challenges that I alluded to earlier mainly because of manufacturing efficiencies gained from new lower cost product platforms. The GAAP gross margin rate was 28% down slightly from 29% in fiscal Q3. Non-GAAP operating expenses on a sequential basis increased slightly over fiscal Q3 to 56.7 million from 55.8 million.

This performance was in line with guidance and contained a number of one time items in our non-GAAP results. For example in the quarter, we incurred 2.1 million in legal fees relating to litigation defense efforts leading up to the storage patent dispute settlement and cross license agreement. With the settlement of this behind us we do not envision any related charges to occur in future quarters. We will continue to monitor R&D expenditures enlight of the recent completion of new product introduction as well sales and marketing expenses as we highlight these new products to new and existing customers. This performance was within our guidance range for the quarter.

For the fourth quarter, Quantum posted non-GAAP diluted earnings per share of $0.04 based on a share count of 188.7 million shares these performances was in our guidance range for the quarter. On a GAAP basis we posted a net loss of $0.12. Included in the GAAP net loss was 5.5 million in intangible amortization, 5.6 million in restructuring charges primarily related to our cost reduction plans around R&D and G&A and $18.6 million in legal settlement charges per our previously announced agreement with storage tech. Cash flow from operations for the quarter was a negative 4.6 million, primarily due to the $20 million cash disbursement for the storage tech legal settlement and cross license agreement paid in the quarter. Without this one time disbursement cash flow from operations would have been a healthy $15.4 dollars in the quarter.

For modeling purposes we will be incurring payments for $ 1 million per quarter for the next 5 quarters per the settlement and licensing agreement. We expect that we will generate break even or positive cash flow from operations in fiscal Q1 of next year. In terms of working capital, DSO's declined to 53 days from 57 for Q3. I mentioned in our last conference call that I was not satisfied at all with our fiscal Q3 collection results and our renewed focus on this issue resulted in the reduction of AR in excess of $23 million. Today's payable were 47 in the quarter so our DSO DPO spread is nicely back in an appropriate range.

Inventory turns of 7.3 declined from 8.7 turns in the third quarter due to higher inventories in our balance sheet as a result of moving manufacturing away from several contract manufacturers to our in house [Pinang] operations. We are effectively holding stock at two location with each of these migrations to mitigate any potential supply demand glitches in these consolidations. Inventory should be a source of cash in future quarters was we complete these rational sayings moves.

From a capital structure perspective we closed the sale lease back transaction on our Colorado Springs facility and paid off our $50 million synthetic lease obligation in the quarter, with the payoff of the synthetic lease we removed the contingency requirement at the end of the synthetic lease term which would have required us to pay out $50 million of our cash at the maturity of our synthetic lease in December of 2007. This transaction also freed up $25 million in our revolver availability which previously had been committed to a letter of credit pledge toward the synthetic lease. With removal of the $25 million letter of credit the amount available to borrow on revolving credit facility is approximately 142 million. With these items covered let's turn to guidance for the first fiscal quarter of 2007. Please note that in light of other important announcements to be covered on today's call this guidance pertains strictly to stand alone Quantum.

As you know we have been somewhat bedevilment by the first fiscal quarter top line in the last two years in a row. In some cases one could point to significant across the board weakness in Europe for the entire storage sector as the root cause. In other cases the root causes of this apparent seasonality effect were less discernible. Therefore, with this first quarter[inaudible] experience over the last 2 years we are taking a somewhat cautious approach to revenue by providing a guidance range of 195 million to 210 million. We expect non-GAAP gross margins to be roughly flat to up slightly, from Q4

Non-GAAP operating expense are expected to be in the 54 to $57 million range. As a result, we expect non-GAAP earnings per diluted share to be roughly in the range of $0.01 to $0.04 per diluted share for the first fiscal quarter of 2007. We expect GAAP gross margins in the first fiscal quarter to be relatively flat sequentially and to include estimated amortization of acquisition related intangibles of roughly 4.1 million and 0.3 million of FAS 123 R stock based compensation.

GAAP operating expenses are expected to be in the 57 to $60 million range and include estimated amortization of acquisition related intangibles of 1.4 million and FAS 123 R stock based compensation of 1.7 million. As a result we expect GAAP bottom line in the range of a loss of $0.03 per diluted share to break even slightly profitable on a per diluted share basis. I want to share with you that we will be changing our reporting structure starting with the first fiscal quarter of next year.

Over the last few quarters we have made a significant number of changes to our overall product lines to achieve better product positioning and lower cost platforms. Also made a concerted effort to better integrate our suite of complimentary drive and systems, products and platforms. Further our marketing and sales teams are increasingly transitioned to a product suite approach in selling and marketing our products so that we can better leverage customer relationships and customer support. As a result we will change how we report our segment financial performance to better reflect these trends and the way management is running the business. So therefore beginning in fiscal Q1 we will be moving to a single reporting segment.

Another not so suttle change we will be making to our external financial reporting and guidance, beginning in the new 2007 fiscal year will be a change in the reconciling items that we use to bridge GAAP and non-GAAP results. Over the past years we have undertaken a number of efforts to streamline and reduce the cost of our operations infrastructure and expense foundation.

Now with these actions largely behind us we will no longer remove the so-called restructuring charges from our non-GAAP results. The only reconciling items we will formally have between GAAP and non-GAAP external financial reporting will be the amortization of intangibles and stock based compensation. Both non cash charges. The extent management feels it is appropriate we will call out certain other charges on our press releases and conference call narrative should they truly not represent the underlying fundamentals of our business over the long term. Such other charges will as a matter of course now be included in our non-GAAP results.

For modeling purposes we see the two reconciling items from GAAP to non-GAAP, to amount to roughly 5.5 million a quarter for intangible amortization and $2 million a quarter for stock based comp relating to the implementation of FAS123R, again for standalone Quantum only. So in summary the fourth quarter marks the end of a year paying for Quantum, we successfully rolled out many new products based on lower cost platforms completed the bulk of the activity associated with integrating acquisition, improved operations, made significant improvements to our balance sheet and meaningfully reduced operating expenses.

While product mix issues during the fourth quarter impacted our financial results the unfavorable impact was somewhat mitigated by sales of new products. This is encouraging because as the sales of legacy products continue to wind down in the face of ramping sales in new products we will be better able to leverage our operating margins in order to achieve profitable growths.

Now I'll turn it over to Rick to discuss today's announcements regarding the combination of Quantum and ADIC.

Thank you Ned. We define fiscal year '06 as a critical execution year we have always realized successful completion of this agenda was only the beginning of a broad strategy to deliver consistent growth and profitability. Now that we have completed these actions,resolved the SDK litigation and improved financial foundation of the company we now feel empowered to make significant steps towards establishing a leadership position in the storage industry.

Today we announced that we will acquire ADIC. The combination of these two companies will create one of the industry's largest independent storage companies with revenues exceeding $1.2 million and one that will provide customers with a comprehensive and integrated range of solutions from security storage, managing protecting and recovering their data. There are 3 compelling reasons for this transaction and they are 1, the creation of a more profitable storage business, 2, expanded market access that will lead to more revenue opportunity and 3, a stronger growth platform.

I will talk to each of these in more detail, but let me first turn it over to Ned to discuss the detail of the transaction.

Let's go over some of the details of the close combination. Quantum and ADIC have entered into a definitive agreement under which Quantum will acquire ADIC for approximately 770 million in offer value, net of transaction expenses. And 577 million in transaction value net of transaction expenses and ADIC pro forma cash position of approximately $193 million at the end of March. This assumes the close of the Rock Salt acquisition recently announced by ADIC for $63 million.

Under the terms of the agreement which have been approved by both boards of directors ADIC shareholders will receive $12.25 per share in cash with the right to elect to receive in lieu of cash 3.461 shares of Quantum stock for each ADIC share they own. Stock election is subject to pro radiation plus Quantum will issue no more than 10% of the total merger consideration in Quantum stock. There are no callers per se under the agreement. If the transaction were settled in all cash we would intend to fund the proceeds through a combination of available cash on hand of approximately $320 million at the end of March and debt up to 500 million for which we have already received a formal commitment from our financial institution, Key Bank.

This will lead a pro forma cash operating balance of approximately a hundred million for the combined entity at the close of the transaction. In light of the leverage associated with the transaction this management team will be vigorously focused on generation of product, a profit and free cash flow. We believe that synergies in the first full year following close will amount to some $45 million in savings. We believe the transaction will be accretive in the second full quarter following close. This accretion will total up to $0.15 EPS on a cash basis for the first full year following close.

We also believe there to be cash generating opportunities as we look at ADIC working capital balances and compare them on our own experience. Needless to say we will be extraordinarily diligent in delivering synergies and free cash flow as soon as possible to pair down our debt as quickly as we can. In terms of leverage our only state as a function of total debt to EBITDA we believe we are well within and toward the low end of the range of recent leverage technology transaction comparables. We are expecting one time cash restructuring costs associated with this transaction to be approximately 25 million.

And these costs are expected to cover expenses such as severance, lease write office, manufacturing consolidation and other contingency. Synergies will come from primarily applicable overhead, product road map integration, elimination of cost associated with ADIC being a public company,such as listing fees board comp, rating agency fees, etc., G&A redundancies, leveraging our respective services infrastructure worldwide as well as sharing of R&D and marketing program expenditures. We will be assuming the cash on ADIC balance sheet at the time of closing as well as any commitments related to announced acquisition of Rock Salt .

ADIC revenues for the fiscal year 2005 were 454 million and we expect that the combined companies revenues will exceed 1.2 billion annually. We do expect some revenue leakage from the combined company as we do have products that have already been out in the market for a couple years and we may experience normal units and pricing declines as these products mature.

However we expect this transition to be relatively small. Even with this revenue transition we want to emphasize that the potential synergies we expect to derive from this transaction will make it accretive to Quantum earnings within the second full quarter following close. At this time we're not prepared to provide any other guidance for the newly combined entity and we will not be prepared to do so until the transaction formally gets through customary closing conditions, regulatory HSR review and ADIC shareholder approval. We expect the transaction to close in our second fiscal quarter of 07. The deal structure results in a taxable merger that is fully taxable to ADIC shareholders, and Quantum will be accounting for the transaction under purchase accounting.

So with that transaction summary complete now let me turn it over to Rick to provide strategic color to the transaction.

Thank you, Ned. Let me expand on my earlier comments and share with you the three main strategic elements of this combination that we believe will create value for customers, shareholders and employees.

First the combination will create a more profitable storage business as this transaction will be accretive in the first full year following the close. We expect to achieve approximately $45 million in synergies in the first full year following the close that will more than offset the potential interest expense of $36 million. The synergy estimates take into account the potential revenue attrition and capture the broad range of cost savings including elimination of duplicate overhead and programs as well as sharing R&D marketing expenditures.

However we do not expect to realize significant cost savings within the sales organization as there are few redundancies. In fact we believe there are huge opportunities to capitalize in the respective companies, complimentary sales capabilities to expand the combined company market access and increase revenue potential. We also expect leverage higher combined volume over our fixed manufacturing base thereby driving cost of goods down and providing incremental margins.

We also anticipate additional cost savings from consolidation of supply chain, manufacturing sites as well as reduced overall product and component cost through the integration of Quantum drive and media into combined solution. We are committed to delivering these synergy levels and we believe the success we have had with the recent acquisition illustrates our ability to pick the best of two organization and create an integrate company while achieving significant financial benefits.

In the end we will be able to deliver a competitive foundation for tape product and achieve successful business model. Second, we are very excited about the revenue opportunity that exist with the combination. In short we will have much greater revenue diversity, opportunity and control. This will include a stronger branded business, a more diverse OEM base and expanded coverage in key market geographies especially with EMEA and Asian Pacific. Gaining market access has been one of our biggest challenges in recent years and we are confident that this combination will greatly help us in this area.

ADIC also brings to the table a very strong global services business, that complements ours. Combined we will not only be able to serve our customers around the world better, but we will also have the opportunity to expand upon this higher margin business segment. One of the major drivers to revenue growth is the strength of a complimentary sales capabilities of the combined companies. Over the last two years Quantum has built an industry leading position in the sale of high volume storage products that include tape drives, media, low end automation and low end disk products such as recently announced, [Cobalt]

At the same time ADIC has created a very successful higher end branded sales channel including a very successful partnership with EFC. The transaction will nearly triple our sales force and double our service capabilities and will enable us to serve our customers from over 90 countries around the world.

We intend to integrate ADIC products into Quantum's high volume platform and leverage ADIC enterprise sales model to sell Quantum products. We believe that the dual go to market approach will enable us to compete more effectively and establish stronger relationships with our customers. Lastly, this combination provides a stronger growth platform than either company on a stand alone basis can produce. Over the next several years the market for backup recovering archive solution will experience tremendous growth of the mostly in the areas that combines software and security features with industry hardware. Both companies have made investments in these areas.

ADIC has developed a solid software business which includes [inaudible] for data management within the intensive -- within the data intensive sans environment and [amax] for archival performance. Recently ADIC added to software solutions with the announcement of Rock Soft which provides data duplication and redundancy elimination. Meanwhile, [inaudible] leader developing value added features and address a growing concern around data security.

In addition both companies have separately invested development of innovative solutions and disk space data production, one of the fastest growing segments of storage. We believe that the combined company will more effectively invest in a leadership product road map that will enable it to capitalize on growth segments and deliver a wide range of innovative cost effective solutions to a diverse customer base. In summary we believe that the three elements capture the main strategic rationale for this combination and we will work aggressively to deliver on each one of them. We will drive synergy to create an effective operational structure that can produce tangible financial benefits.

We will capitalize on revenue growth through a well balanced OEM, branded, geographic business and lastly we will gain critical mass in the development of new solutions that combine software security features with hardware to create innovative product categories for the backup recovery in our market place. I'm very excited with the opportunity to lead this effort we will work diligently to insure a smooth integration. We have a strong management team and we will be further strengthen by the addition of the ADIC leadership team. This combination is about building the Company that leads the industry in operational efficiency, product innovation and growth. We will seize the opportunity to build upon this momentum in the most vibrant segment of the storage industry.

With that let me open the lines up for Q&A. Operator.

Thank you sir. Ladies and gentlemen, at this time we will begin the question and answer session. [OPERATOR INSTRUCTIONS] Our first question is from Mark Moskowitz with J P Morgan, please go ahead.

Thank you. High guys.

Hi.

A few questions if I may. Obviously a lot of folks are focusing on the ADIC acquisition here as you announced today. I want to get a sense from you if you could maybe give us a sense in terms of what we should focus more on in terms of the revenue opportunities versus the earnings growth opportunities from the acquisition. I realize your benchmark and acquisition in the past were of a much smaller scale, but it seemed that both acquisitions provide you some nice operating leverage, maybe bench marks seem to be temporary, the verdict is still not out. But the revenue was a little more cloudy in terms of the revenue benefits from those deals. How should we think about ADIC given the past history.

I think that's a good question. So first the first two acquisitions we did with Benchmark and [sertants] were really about improving the critical mass of the tape drive business, getting synergy out of that relationship by in large. Certainly with [sertant] that they had a big segment of revenue that was in decline. The low end tape business is the very worst part of this business, we knew that clearly going into this, that wasn't the purpose. The purpose was really to get a position in the market and be able to overall increase our economies and scale. So, you know, I would say that the first two moves were largely about strengthening the product line, accepting the fact that there would be significant revenue leakage, but they really have both demonstrated strong financial results if you look at the detail on all the things, all of the impact that they have had.

So I would want to clarify that first. We believe this is different. This transaction is much more trans forming for both companies. On one hand we believe that we can gain tremendous financial strength for both the ADIC business as well as the Quantum business through many of the things we mentioned, more efficiency, better volumes, critical mass, all of those factors, really have led to the synergy message that we have delivered. At the same time we do have to be concerned about the top line. And ADIC comes to us with good growth, I mean they actually today updated their guidance which shows growth over last year. And having the ability to have greater presence in the marketplace in terms of sales people, ability to deliver messages, ability to technology to the market and have an impact is strategically very, very important. So I communicate this internally that the three objectives that I mentioned are equally balanced. We plan to execute on all front, improve the financials as quickly as possible through the action that we have described, maintain momentum in the sales organization and insure that we have a large footprint for storage sales on a global basis and execute on a consolidated road map that gives growth potential outside of traditional tape. And so, you know, it is very different than the other two transactions. It's much more trans forming, it does have both the short-term impact on the core tape business, but also has tremendous amount of potential that we intend to capitalize on on the revenue side.

Okay, thanks for the commentary there, I appreciate that. As far as the customer leakage in terms of your guidance you provided so far, I know you don't want to get too much into the details, but in terms of the accretion of $0.15 what is the percentage of revenue leakage at ADIC that supports that accretion.

Yes, I think it's a small number. I would say single digits. We don't identify any particular leakage that we know about. We just have worked in our modeling to be conservative about all of our assumptions. We know it's not uncommon for there to be, to be some leakage as a result of change. Having said that, you know, we think that we can execute that quite well. You know, there are other factors going on in the industry that creates, with -- tech integration there's a lot of change underway. So we think that we will be able to be in an environment that continues to be favorable for systems products.

Okay. And then I want to get a sense how we should think about your potential exposure to EMC, does that offer you any opportunities to leverage your existing business in terms of maybe having EMC take a second look at some legacy Quantum products.

Yes, well, we do the relationship as a very strategic, that's the way its operated within ADIC. I think both companies have done a very nice job. That relationship we intend to capitalize on that. Just continue to reinforce that we are a company that has been through this multiple times. We have learned how to bring the best of multiple organizations together. We believe clearly that ADIC has a very strong enterprise branded sales go to market EMC relationship capability that will be at the center of a lot of what we do. To your point to the extent that we can use that relationship to leverage more overall opportunity, we certainly will try to do that, that's the way we thought about every aspect of the combination, pick the best of both and try to leverage across the entire organization so that we can have, leverage success with the strengths of both companies have.

Okay. One last question, getting back to Quantum stand alone, I just want to get some more color from you folks if we could with respect to SuperLoader 3 and the PX 500 in terms of the recent weakness, what is driving your confidence at this point that you should have a rebound in those sales given the recent slow ramps with the OEM's, what are you seeing that would provide this confidence for you going forward.

Well, they're all, different issues, it's hard to generalize. I would say our branded business this those segments are doing quite well. We probably had some interruption as we were ramping certain elements of those products. So we had moments in the quarter program that we were on allocation or didn't have full availability, that's certainly branded business. We like like others in the industry didn't see weakness in the [MBA] and I think that seems to be very broad based. The OEM situations are all different, in some cases they're ramping, some cases slow in ramping, in some cases people have promoted more of the previous generation product than the new product. And that's why we characterized it the way we have. We feel the products are strong, ramping well, and, we just, we see in the marketplace we continue to believe that, we're through most of the transition, there are no products today that are on allocation, everything is shipping. So a lot of those issues have been worked through, which we think will generally be positive in the marketplace.

Thank you.

Thanks Jeff.

Again, ladies and gentlemen if you do have a question please press the star followed by the one on your push button phone. Also if you are using speaker equipment you will need to lift the handset before pressing the numbers. One moment please for the next question. Our next question is from Brian Freed with Morgan Keegan, please go ahead.

Hi guys, thanks for taking my question. Real quick on the 500 million, up to $500 million that you may borrow, is that at a fixed or available interest rate than what is the interest rate at least initially.

Brian, that's all subject to, going out and marketing on to the open market. It's up to 500 million. Right now we think it's probably going to be at a rate around 2.75 over LIBOR, actually we think we can get that better than that as we go out talk to moodies, get it rated, talk to customers. Key bank will be coming with us on all those presentations, all those customer visits. They're a very strong supporter historically of the company. They have committed to take the entire, so we think we have pretty good opportunity there in terms of getting 275 over LIBOR or better.

And secondly in terms of the evaluation you're paying for ADIC, that's about 14 and a half times their trailing 12 months free cash flow, storage tech was acquired for 9.3 times, I guess why do you think it seems to me you probably over paid a little bit, why do you feel like the price was fair.

Well, first of all, the you look at the price from a variety of perspectives. And we really believe the price is fair. It's very much driven by the strong synergy that we can deliver with the core business. We think we are in the best position to be able to put the combination together. And deliver make the economic model work. The fact is that having a large global storage very strong capable sales organization and service business and a growing software business is overall revenue line of growing 10% is a good business. And, you know, is hard to replace. So when we look at the options of building that capability or purchasing it we feel that the price is fair and we believe that we have a good path to make that very good for your shareholders.

Okay. And then lastly, on the synergies line, obviously ADIC has been a pretty successful job with storage systems business, it has run a profitable business there, you didn't comment on whether your storage systems business was profitable in the quarter, but it's historically run at losses. Can you talk a little bit more about what your thoughts are in terms of, integration and what you're going to do I guess what different why will you be able to run the ADIC business at a profit when you haven't had the greatest amount of success with your storage systems business, can you talk a little bit about the synergies there i.e., drives or product rational sayings.

Yes, I'll make a few comments. I mean first of all scale matters in this business. And, you know, on a revenue basis ADIC is third largest provider of automation products and we're a couple spots behind them. So clearly they have had scale, we put the two together we think we will have more scale and the ability to gain a lot of benefits that I described. The other important point is that their business, the ADIC business, has a strong branded component, has a strong enterprise component which is generally a better business. Our business very much position at the lower end of the market which we actually feel that we can succeed in and that we with our drive strength we feel we can compete more effectively with anyone else there. But that's work in process that we have been going through as we have gone through this product transition. We think that building the service business which is both businesses are roughly equal we can a very good foot print around service and gain more efficiency, so scale matters. It's about building more branded business, about building stronger position in the enterprise strengthening, services business and getting more scale. We picked the combination of those things will result in an improved business.

Okay. I guess in terms of the 45 million in synergies, can you talk, you talked a little bit about the G&A expenses, you know, looking at the ADIC model, they did did about 25 million in G&A last year, so I guess I'm struggling to find, you know, 45 million in synergy there. So can you talk a little bit more about how you came up to that number.

I would first say we put both businesses together. So, you know, we are not I want to be very, very clear that our model for doing this is not to take a look at the Company we are acquiring and figuring out what we saw and how we save money. We instead look at how we put the organization together in a way, pick the best elements and gain those synergies. So, you know, overall they had, I'm looking at some numbers here, about 135 million run rate. And, you know, a lot of that is, you know, percentage of total combined expenses. It's like roughly less than 10% I think is the synergies that we intend to achieve.

So I think you should look at it that way, not look at one particular element of ADIC. You should try to look at the combined business and see that this is roughly 9% . We run the numbers with other transactions and other results and synergies and we feel like we're not being overly aggressive and yet we're not the lowest either in terms of the math. We have gone through it function by function, program by program, this isn't just a wish. This is something we understand and we want to execute.

Brian, this is Ned, I want to reiterate, to think that this is completely coming out of G&A is just not the way that we're looking at it. We think there are extraordinary opportunities above the gross margin line in terms of manufacturing operations overhead and what we might be able to do there. Both on the manufacturing side and on the services side quite honestly. We take a look at the productivity of the Company, vis-a-vis our productivity and profits we think there's considerable opportunities there to be able to massively drive improvement to the bottom line. We have overlapping territories.

In addition to G&A, we will be taking a long hard look at our road maps and making sure the best product wins. To the extent that there are integration efforts that, they will be moneys coming out of that. We talked about, converting DLT and drive switches, using our drives as opposed to somebody else's drives are massively beneficial to the income statement. Then you have the bomb effect that we talked about again and again with scale. When you got two big companies going together and being able to, leverage that against your respective and mutual supply chains there's a ton of money to come out of there as well. So we have no problem whatsoever owning up to a 45 million savings level, we hope to deliver that and more.

Okay. All right. Thanks much.

Our next question is from Chris [Sipple] with Blue Lion Capital, please go ahead.

If you think about what you have talked about previously in terms of earnings power as opposed a cash basis being close to or approaching 10 cents per share, non-GAAP 10 cents per share on a quarterly run rate basis you're saying this transaction could be close to 40% accretive on fully integrated basis using 45 million in cost savings, is that correct in

That's roughly right, Chris.

And on a combined basis, what sort of revenue growth are you anticipating. Once integrated.

We haven't -- we haven't finalized that. I mean, the growth opportunity will come in two steps. First integration process we don't expect to see a lot of growth as you go through some of the transition. But we think based on product road maps this growth will come in, a year or so out, year, year and a half out. And, this industry, you know, we're dealing with a tape industry that is roughly flat and yet we're dealing with some of the new segments that are growing in the high teens. So that's the balance, we think that we have the mechanism in place with the combination to be able to capitalize on revenue potential and growth that we have attacked before.

My last question would be around your manufacturing operation between yours and ADIC's, can you give us a little color on, I know you have been consolidating some facilities, can you talk to us about capacity utilization today at Quantum, where you think it is at ADIC, you know, pro forma, where you hope to drive the capacity utilization of the combined company at your manufacturing facilities.

Well, we have, we probably on both sides have additional capacity. I'm not sure I can quantify that percentage. But we have capacity available on both sides to be able to make some transitions. We haven't decided what those transitions are, but we think there is potential to more effectively utilize manufacturing infrastructure, that's critical part of it. And, you know, we don't have specific number as to what that would be.

Okay, thank you.

Thanks Chris.

Ladies and gentlemen, for additional questions please press star followed by one at this time. Again, if you're using speaker equipment we ask that you lift your handset before pressing numbers. Our next question is a follow up from Mark Moskowitz with JP Morgan, please go ahead.

Thanks for the follow up. Just one more question here. I want to get a sense if you could in terms of where you are with your progress on leveraging the [sertants] manufacturing platforms versus legacy Quantum and how we should think about the margin profile for at least a stand alone company going forward prior to the acquisition of ADIC.

I will reinforce what we on a stand alone basis have talked about, that we are working on a model that moves in the mid 30% gross margin range. We still have a few points to achieve to be able to get there on a non-GAAP basis. We feel that we have made or are close to completing all the transition. We had initially something in double-digits, contract manufacture that really, needed to be brought together.

We brought much of that capacity together in our facility in, [Tainan] and in our value added manufacturing in geographies, so we have worked through much of that transition and we think that's an important part along with mix and platforms and a number of other things all work together to move in that range of the mid 30% non-GAAP gross margin. So we feel we have made all the decisions, we have made much of the implementation and we're, on final completion of of a lot of that work to be able to deliver those kinds of results.

The mid 30s is that achievable or can you at least reach that maybe by the second half of this year all things considered.

Mark, we still have that as intermediate term, we're looking to get that in addition to the manufacturing operation we talked about we are in the process of repair facility. We took a large restructuring charge for that in prior quarters, that's on track, nicely on track to be accomplished in the June, July timeframe. That will help us in terms of our purchase unit cost on service and warranty. Again, we're still on track to try and deliver mid 30% on gross margin, mid 25%, mid 20%, 8 to 10 non-GAAP operating model and to the extent that we can't get there we still think we have the dexterity on the E&R side to be able to maintain the spread on stand alone basis.

Lastly with respect to the acquisition can you share with us initial read from some of the key customers in terms of their sponsor reaction to proposed acquisition.

We have talked mostly to analysts, industry analysts at this point. The only person we have pre briefed under NDA we really focused to keep this confidential because of the magnitude of two public companies, I would say the industry analyst feedback has been if he nominal. Those who watch the industry and know the companies feel this is a very good combination. Initial response is big move, big move we weren't necessarily expecting, but while this makes a lot of sense, good for you, we think this will be good ultimately for customers. We do believe this is good for customers. We do believe having a company in the back of rover and archive marketplace that is independent, focused on heat Jean us environment is a void that no one completely fills today.

The closest to achieving that were ADIC and Quantum, yet neither of us had all the right scale to make that work. Now we believe we do. And we believe that providing for competitive products for our OEM customers and better scale for our OEM customers and end user customers it provides a good alternative for companies that are, you know, want to get a base, embrace new technology and, you know, be able to have something that works in environments.

Over time these businesses have all kind of been heavily integrated within the system companies and that's created an environment that is really dictated the economics for this industry. We think this changes that, we think this opens the industry up, provides customers with more choice, potentially more value. And we think feedback will continue to be strong. The service capability is something that for a company of either of our size was always a challenge to provide global support with the size of business that we have. We put together, we now have the potential to have more service people and more efficiency in that service experience so the customers get more and we're able to improve utilization. So we go down item by item and we believe that there's a value proposition strong for all constituents that we look at.

Thank you.

Thanks mark.

Our next question is from Kevin [Orium] with [Praesidium] Investment Management, please go ahead.

How does your tape business benefit from this or does it?

Yes, It absolutely does. The fact is that there is not a remaining tape company that is not in the automation business today. That has been a circumstance that developed over the last several years, where even the smallest of companies in the tape drive market have expanded in automation because in every case people want to go-- to move upstream and not just be a component in somebody library.

So we fill this impacts this significantly because now we have the ability to put together the strongest systems platform in the automation business with sales force and service capabilities that allows to take technology and promote, and I'll give you direct example. Today we introduced a leadership SDLT F4 product , double the capacity about half the cost per gig-a-bit of the competition the only products with security capability, the whole works. No doubt, it just went through recent reviews, bake offs where the competition gets great reviews. The OEMS ultimately hold the cards, you go to the ORM and they say well, yes we think it looks good but were not sure what were going to do within and how we should do it. We have are old products and on, and on, and on.

We can't-- that's a real difficulty situation for us to get through unless-- that when I used the word market access. Unless we have the ability to take innovation to the market place and have influence and impact quickly. That's something that has been limitation for the Company, and we think this will change it. Look at the LTL market today cause you could say that's just with the problem with [inaudible] you have HP and IBM who are both manufactures of LTL products and have a strong system component and market footprint. Dell follows HP, you get to the end of it all and the market is very constrained for us, unless we break and create a more variable environment when we have the ability to innovate in the market place. We believe this does it better than any situation that we can see in the market place and we think it's very complementary dry business and our resulted media model.

Right. That makes sense. You had said in the September quarter call in October, that you thought you would be at or close to break even in the systems business, I'm guessing you didn't get there. Can you comment on that at all?

Yes, I think we made progress, the numbers show good progress in that. I think the revenue shortfall in EMEA and some of the transition issues, probable held us back a bit, but the progress continues improve, gross margins improved, expense structure in that business is improving. We continue to move down that path. It was a weaker than anticipated revenue quarter for that business.

Is the revenue component of it the only reason why you did't get it? In other words--

Yes, gross margins were up and expenses were down. Gross margins were up nicely. So--

In line with where you thought you would be. The miss on revenue?

I would say yes. I am 90% sure that that's right.

Okay, all right, good, thanks.

Once again ladies and gentleman for additional questions please press the star followed by the one at this time. Also if you are using speaker equipment please lift handset before pressing the numbers. One moment, please. At this time there are no further questions. I will turn the call back over to management for any closing comments.

Thank you, for joining us today and we look forward for future updates on the business as well as this exciting transaction. Thank you and have a good day.

Ladies and gentleman this concludes the Quantum Corporation fourth quarter fiscal 2006 conference call, we thank you again for your participation, you may now disconnect.