Quantum Corp (QMCO) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to Quantum Corporation's first quarter fiscal 2007 conference call. At this time all participants are in a listen-only mode. Following today's presentation instructions will be given for the question-and-answer session. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded today, Wednesday, the 26th of July 2007.

I would now like to turn the conference over to Mr. Shawn Hall. Please go ahead.

Thank you. Good afternoon and welcome. Here with me today are our CEO, Rick Belluzzo; and CFO, Ned Hayes. The webcast of this call, our earnings release, and a quantitative 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 be make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include our business prospects, priorities and opportunities, including anticipated revenue and gross margin performance, media trends, working capital and cash flow management efforts, and our ability to operate profitably; and our pending acquisition of ADIC including expected synergies and benefits of the transaction and the anticipated timing and closing of the transaction.

We would like to caution you that our statements are based on current expectations and involve risks and uncertainties that could cause actual results to differ materially. We refer you to the risk factors and cautionary language contained in today's press release announcing our fiscal Q1 2007 results, as well as to our reports filed with the Securities and Exchange Commission from time to time, including our most recent 10-K filed on June 12, 2006 and the final definitive proxy statement relating to the ADIC acquisition filed on July 20, 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 SEC filings, 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 for our fiscal first quarter conference call. Today, we are going to discuss our results for the first quarter and the current status of our pending acquisition of ADIC. During FY '06 we established a number of critical priorities that included the introduction of a record number of new products, an accelerated focus on improving our product gross margins, continuing to focus on OpEx reductions, and final resolution of legacy issues, including the StorageTek litigation.

As a result of this work, we believe we have fundamentally improved our competitive position in what has become a very challenging storage environment. We have been pleased with the progress we have made on the operational foundation of Quantum, yet we have also felt the critical need to move more aggressively to address the strategic growth and sustained profitability challenges.

To that end on May 2 we announced a definitive agreement to acquire ADIC in order to create and industry leading storage company focused on the $20 billion back-up recovery and archive market. We continue to believe this combination is strategically sound and allows Quantum to address the continued challenge of market access, growth, and sustainable profitability.

Ned will provide a detailed summary of Q1 results, but let me start by saying Q1 results reflect the continuation of the trend that we've experienced in recent quarters. GAAP and non-GAAP profit came in the middle of the guidance range.

These results reflect a continued weakness in revenue accentuated by both traditional seasonality and a couple of unique Q1 factors. However, we continue to deliver improved product gross margins and OpEx reductions. The net result is solid operating improvement over last year's Q1 results. With that said let me turn the call over to Ned to provide further details on Q1.

Thanks, Rick. To begin, as we advised on our last earnings call we start our fiscal year 2007 external financial reporting with a move to single segment reporting, reflecting the way management is running the business, and to better reflect the trends we have observed in the industry and in our business. We have made a concerted effort to better integrate our suite of complementary drive and systems products and platforms.

Further, our marketing and sales teams are increasingly transitioning to a product suite approach in selling and marketing our product so that we can better leverage customer relationships and customer support. We'll provide additional commentary to these single segment financials as warranted. Secondly, over the past years we have undertaken a number of efforts to streamline and reduce the cost of our operations, infrastructure, and expense foundation.

As we advised on our last earnings call, with these actions largely behind us, we will no longer remove expenses associated with restructuring charges per se from our non-GAAP results. The only reconciling items we have between our reported GAAP and non-GAAP financial results are amortization of intangibles and stock-based compensation, both non-cash charges.

To the extent management feels it is appropriate we will call out certain other charges in our press releases and conference call narratives should they truly not represent the underlying fundamentals or trends of our business over the long term. But such other charges will, as a matter of course, now be included in our non-GAAP results. And finally, to avoid any confusion whatsoever these results reflect stand-alone Quantum and do not take into account any impact of the announced acquisition of ADIC other than expenses and costs incurred in connection with preliminary integration planning and closing the transaction.

So with that reporting concept established, let's move into the first fiscal quarter's results. As we noted on last quarter's call the first quarter has historically been adversely impacted by significant seasonality, weakness in Europe, and other less defined macro economic conditions. And this year's first quarter was no exception.

Despite the fact we provided a reasonably cautious outlook for top line results for Q1, these factors impacted revenue more than we anticipated. Fiscal Q1 revenues were $187 million, approximately $19 million, or 9%, lower than revenues posted in the fourth fiscal quarter of 2006 and below the guidance range we previously provided of $195 million to $210 million. Breaking out the quarter-over-quarter sequential declines, product revenues were down $14 million and royalty revenues were down $5 million versus last quarter.

Product sales for fiscal Q1 were $159 million, compared with $173 million for the fourth quarter fiscal 2006. Much of the decline was the result of end-of-life transitions forced by the need to comply with European RoHS directives. This impacted both our branded and OEM businesses. On the tape drive side DDS-4, VS80, SDLT 320, and LTO-1 drives all were significantly down as a result of this transition.

Also ValueLoader and SuperLoader products declined for the same reason. Despite these difficulties we were encouraged with the ramp of several new products and growth in enterprise systems. Shipments of the SuperLoader 3 increased 29% over the prior quarter, offsetting most of the decline on the older ValueLoader and SuperLoader that it replaced.

The increase in SuperLoader 3 shipments also reflected strong momentum in sales of the SuperLoader 3 with our new DLT-V4 tape drive which speaks to the tremendous value we can provide to customers by combining our tape drives and tape automation in a powerfully cost effective solution. Volume sales of our PX500 series libraries increased 11% sequentially, while volume sales of our older enterprise PX720 increased 20% quarter-over-quarter.

We also saw unit sells of DX5000 increase in excess of 40% while our older DX products, the DX30 and DX100, continued to see good momentum with unit volumes doubling from Q4 to Q1. While DX sales are still a small part of our overall business, we believe that the ADIC acquisition will enable us to enhance our disk-based portfolio and take advantage of the growth opportunities in this segment of the market.

One of our newest products, GoVault, saw tremendous momentum with sales jumping sixfold since its launch in March of this year. GoVault is a removable disk-drive backup recovery and archive solution that offers a low-cost alternative to traditional storage options, as well as easy to use solution for smaller businesses and distributed computing environments. As we announced in early June, this product is being OEMed by IBM.

The success of our newer products helps to illustrate the improving competitive product position that we have achieved in recent quarters. We continue to believe that our product suite is one of the most competitive, best of breed offerings available in the market. Media royalties declined $5 million quarter-over-quarter, to $27.6 million, largely as the result of a price increase implemented by a large OEM that had been announced in Q4. This increase created a series of inventory impacts including the pull-forward and associated buildup of channel inventory in Q4.

The net effect was significant. Q1 reductions in media purchases by the OEM, the channel, and other suppliers as everyone reacted. This affected royalty generating sales of most media products particularly DLTtape 4 and DLTtape 1. Royalty revenues are expected to return to normalized trends in the current second fiscal quarter.

Overall, we are pleased with the success of our new products and their contribution toward improving our margins and optimizing our product mix. As newer products begin to overtake sales of older products and volumes ramp, our ability to operate profitably through the cycles of the storage industry should also improve.

During the quarter, our OEM channel contributed 36% of our total revenues versus 39% for the fourth quarter. Most of that weakness was within the DLT product line, although the LTO platform also experienced declines. 10% plus customers included Dell at 19%, NHP at 15%, compared with 18% and 17% respectively last quarter. Our branded channel sales continued to increase, reaching 35% of our total revenues, compared with 31% the prior quarter.

Part of this increase reflects the overall absolute dollar decline in total revenues, however, a larger percentage of our volume is going through the channel as we continue to aggressively push to build our branded sales. In fact, branded product sales have increased 9% year-over-year. Geographically 68% of sales were from U.S. customers, and 32% from non-U.S. customers reflecting the weakness in Europe we noted earlier. This compares with 66% and 34% in the fourth quarter.

Despite missing revenue guidance for Q1 2007, GAAP gross margin rate for the quarter remained on target and was roughly flat for fiscal Q4 at 28%. Maintaining this level in the face of the royalty revenue shortfall categorically underscores the positive impact on gross margin rates that has resulted from our newer, more cost effective platforms in both our tape drives and automation lines. And the hard work we have accomplished in rationalizing our contract manufacturing strategy. In fact, these activities have enabled us to improve gross margin rates by two and three to four percentage points within our tape drive and automation lines respectively from the fourth quarter last year to this first fiscal quarter.

We believe our ability to maintain sequential gross margin rate is reassuring, given the top line shortfall in our very high margined media royalty stream. For your information, the quarter's GAAP gross margin of $52 million and rate of 28% included the non-cash impact and amortization of intangible assets and stock-based compensation. Amortization of acquisition-related intangibles affecting gross margin in the quarter totaled $4.1 million, while stock-based compensation relating to our implementation of FAS 123-R affecting gross margin in the quarter totaled about $300,000, both squarely on target with guidance provided last quarter.

Non-GAAP gross margin totaled $56.4 million for the quarter, or roughly 30% of revenues, roughly flat with last quarter's performance and in line with provided guidance. We continue to be our encouraged by our ability and responsiveness to manage operating expenses effectively. GAAP operating expenses for the first fiscal quarter were $55.4 million, down from $63.2 million the previous quarter and nicely better than our guidance range.

Here the significant activities we undertook throughout the second half of fiscal 2006 towards sales and marketing organization streamlining, R&D rationalization, following the completion of our several product platform transitions, and continued focus on our G&A expenses, especially around IT, are beginning to become evident in our results. G&A expense quarter-over-quarter also benefited from a reduction in our legal expense run rates having the STK and Franz litigations largely behind us.

Again, for your information, the first fiscal quarter's GAAP operating expenses of $55.4 million included the non-cash impact of amortization of acquisition-related intangibles and stock-based compensation. Amortization of acquisition-related intangibles affecting operating expenses in the quarter totaled $1.4 million, while stock-based compensation relating to our implementation of FAS 123-R affecting operating expenses in the quarter, totaled about $1.5 million, both squarely on target with guidance provided last quarter.

Non-GAAP operating expenses totaled approximately $52 million for the quarter, or roughly 28% of revenues, down considerably from last fiscal quarter's performance and better than provided guidance.

Summarizing, Quantum posted a fiscal Q1 GAAP loss of $0.02 per diluted share which was was within the guided outlook we provided on last quarter's earnings call. If one were to exclude the non-cash charges of $5.5 million in intangibles amortization and $1.8 million in stock-based compensation, the Company posted non-GAAP's earnings of $0.02 per diluted share, again, within our earnings guidance range.

Now turning to working capital management for the quarter, cash flow for operations was a negative $12.2 million. Clearly, this is not the kind of performance we have been used to nor is it one that we will find acceptable in the future. Essentially, there were two primary drivers for this consumption of cash, $6 million in cash severance payments in the quarter relating to the previously announced closing of our service and repair facility and operation in Dundalk, Ireland, a closure that has been completed and is largely behind us, and a $6 million increase in service inventories largely due to spending to meet RoHS compliance for our service parts and inventories in Europe, Middle East and Africa.

Both of these appear to be largely one-time impacts and are now behind us. As we closed the ADIC transaction, working capital and management of free cash flow generation will remain a top priority and our ability to rationalize the two companies' service hubs and service inventories around the world should be a source of cash in the future.

DSOs increased to 58 days from 53 day in the last fiscal quarter. The primary driver for this increase in days was a higher percentage of sales being completed later in the quarter as compared to Q4 of fiscal year 2006. There does not appear to be any erosion in the quality of receivables whatsoever, as our current receivables, as a percentage of total receivables, remained above 90%. DPOs remained roughly flat with the previous quarter at 47 days.

Inventory turns of 6.1 declined from 7.3, primarily due to moving manufacturing operations from contract manufacturers to our Penang facilities, and to a lesser extent lower revenue levels than previously anticipated. So despite our disappointment with the weak top line that exceeded even our expected seasonal downward adjustment for the quarter, we are encouraged by the ramps we are seeing in our new, cost effective product platforms. In addition, we expect our royalty revenues to bounce back from what appears to be largely a one-time pre-buy anomaly in the marketplace.

And we are satisfied that our margin rates remain steady despite a hefty sequential decline in high margined royalties. We remain steadfast in our conviction and our ability to effectively manage our operating expenses. Now let me turn the call back to Rick to give you an update on the acquisition, guidance, and closing remarks. Rick?

Thank you, Ned. As we begin 2007, we believe the actions we took over the last year have resulted in operational improvements across the entire Company and the opportunity to deliver improved financial results. Q1 is typically our most challenging quarter. When compared to Q1 of FY '06 we have delivered improvements in gross margin in spite of the one-time media issues, reduced non-GAAP operating expenses by $8 million, and improved non-GAAP net income from a slight loss in Q1 of FY '06 to a profit of $3.7 million.

Clearly, this improvement is not sufficient. To deliver ongoing improvement we just address the continued revenue challenge and reposition the Company to be the largest independent storage provider focused on the backup recovery and archive market. This will mean extending our leadership in tape products, including drive, media and automation, and expanding into growth elements of the backup recovery and archive market, including disk-based systems, software, and service. Herein lies the strategic focus of combining Quantum and ADIC.

So for FY '07 we are focused on five critical priorities. One, continuing to make operational improvements and accelerate this through the added scale of ADIC. Two, building a meaningful position in the developing disk-based data protection market through aggressive product introductions that combine technology from both companies.

Three, delivering a targeted synergies to both cover our debt service cost and improve profitability, applying cash flow and asset improvements to debt reduction. Four, integrating the ADIC and Quantum sales and marketing capabilities to drive revenue opportunity and margin improvement across the tape drive and automation product lines. And five, capitalizing on new growth opportunities, including the recently introduced GoVault product and the expanding ADIC software business.

Our proposed acquisition of ADIC is a capstone of a strong foundation we have built in recent years. The combination of ADIC and Quantum will create one of the industry's largest independent storage companies with revenues exceeding $1.2 billion and one that will provide customers with a comprehensive and integrated range of storage solutions. We believe that the accretive nature of the ADIC transaction will bolster our ability to operate a profitable storage business.

In addition, ADIC's strong OEM relationships, experienced sales force should also expand our market access, leading to both new customer opportunities as well as opportunities to further penetrate our existing customers. Overall, we believe ADIC will strengthen our growth platform. We have cleared the Hart-Scott-Rodino waiting period, the competition authority in Ireland, and the federal cartel office in Germany. In addition, a final definitive proxy statement for the merger was filed on July 20, with the merger now subject to approval by the ADIC stockholders at a special meeting to be held on August 18.

Since May 2's definitive agreement announcement we have been working through a series of teams to develop actionable plans for every aspect of the business. Our sales and marketing teams are finalizing a deployment of every salesperson across both companies. We have developed plans for integrating road maps, critical policies and programs and operations. We have developed detailed plans to deliver the expected synergy results. In summary, the two organizations have worked well together as we have developed these plans that are focused on the earlier-mentioned strategic priorities. This is challenging process and I am pleased with the progress we have made during this time period.

We recently announced that two ADIC executives will join the senior management team of the combined Company at close. Jon Gacek, CFO and Executive Vice President of Finance and Operations at ADIC, will serve as Executive Vice President and CFO of the combined Company.

Bill Britts, ADIC's Co-executive Vice President of Products, Sales and Service at ADIC, will become Quantum's Executive Vice President of Sales, Marketing and Service, a newly created position.

Both Jon and Bill have been instrumental to ADIC's success and I'm sure their operational and industry experience will help to drive the new Company forward. As a result of the pending close of the ADIC transaction, we will not be providing guidance for Q2. We still expect the transaction to close in the later half of August, and this will have a measurable impact on Q2 results.

In closing, we are pleased with the operational progress that has been over the past year and we are excited about the opportunity for Quantum to move to the next level of market strength and growth. We look forward to joining with ADIC to deliver our joint customers an expanded suite of best of breed backup recovery and archive solutions backed by strong global service and support. With that I'll open the call up for any questions that you might have. Operator?

Thank you, sir. Ladies and gentlemen at this time we will begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Just a moment, please, for our first question. And our first question comes from Glenn Hanus of Needham & Company. Please go ahead.

Good afternoon. Just on a stand-alone basis for Quantum can you make any comments just sort of directionally I would assume, maybe gross margins might be flat to up this quarter, and you know, just sort of operating expenses on a stand-alone basis. Can you make-- give sort of, without maybe giving specific numbers, can you qualitatively comment just kind of directionally this quarter for Quantum on a stand-alone basis?

Hi, Glenn. This is Ned. We really are going to stand fast here with regard to not providing any guidance with regard to the combined Company. With regard to the stand-alone Quantum Company, I don't think for modeling purposes you'd be too far afield to have margin rates roughly flat, and operating expenses to be in the ballpark of what we were just able to deliver on a non-GAAP basis. GAAP is completely different given some of the stuff that we'll be working through.

And how about revenues?

Nothing.

Yes, I don't-- I don't think we're going to-- we haven't gone through the disciplined process of looking at it for guidance, because it's not going to be relevant given the fact that we'll have a close sometime in August and the numbers will be different, so we just don't want to confuse things by getting numbers out there that aren't going to be relevant to what we announce.

Can you give any comment on your previously, you know, discussed numbers you put out for transaction, synergies and, you know, you talked about $0.15 accretive-- you know what you said. Can you update us at all on any of that?

I would just say stand by what we said on May 2. We have gone through a lot of work. I can tell you people are working around the clock, to go through plans, our intent is to move very quickly and decisively once we close, and we feel like we're very well prepared to do that. All of that work, you know, we stand by the announcements we made on synergies and the accretive nature of the transaction and the numbers we put forward. Nothing has changed, if anything, I feel very good about-- about how things are coming together and the opportunity that we have.

And maybe anything more specific on, you know, sort of integration wise, you know, how you are stepping through some of the areas? What your really top priorities are and-- in-- in the integrations?

Sure, if you remember the strategic priorities that underly this transaction is, first, market access. Secondly, is growth, and third is financial, you know, synergies. We are-- as we work through integration we are addressing all three of those. So the integration is not just about how we get the synergies. That's a very important part of it.

But we're also trying to focus on how we get growth traction quickly, how do we take advantage of our larger sales footprint, and so we're very much mindful of all of those activities. For example, we have a product road map, as I mentioned in the script here, you know, we have a product road map in disk-based backup that draws from technology from both companies that we will introduce rather quickly as-- as we get to the close.

That's something we developed through this process, so we're focused not just on reducing costs. We're very much focused on delivering momentum and growth around the strategic priorities that we laid out. So, you know, we put a lot of focus on the sales piece. You know, we will not be reducing salesperson head count. We feel like we want to have maximum impact in the marketplace.

We have, you know, been announcing organizations. Last week I announced my-- the high level organization, the-- the next level or two will be announced this week and next week, so all of that is coming together. When we get to close, you know, everyone will know what their job is and people will be moving forward to a set of strategic objectives. We've worked as teams, we have had product road map teams, facilities teams, we have IT teams. We've done this before and that work is all well underway.

We review it on a regular basis to make sure we are prepared to make the decisions that we want to make in terms of committing on-- you know, within the first quarter or so to be able to have the vast majority of the actions behind us. So all of that is on track, and I would just reinforce that it's easy to get focused on the expense side. We do that very well.

We know how to work through those processes, but we do not believe that that alone is the strategic foundation for what we're doing, so we're putting equal effort into product road maps into revenue-generating opportunities, into making sure our sales force will be ready to go, trained-- you know, ready to be trained on each other's products with clear road maps and clear territories, clear compensation systems all the that work is being done and we have about 30 days left, roughly, to be able to-- to complete that, and we -- we feel good about that.

Can you make any comment on your latest generation-- I think it's Super-DLT 4 and where that stands and sort of traction there?

Well it's-- the-- the product-- it's early it's developing. We're shipping it now fairly broadly now across Quantum products, we are engaged in OEMs, have some closure there. Until we get more of those products through qualification and shipping the ramp of the product will be curtailed until you get more of that momentum.

You know, I would reinforce that-- you know, as we now have the opportunity to be the largest automation company in the world, this is now the biggest opportunity to impact, be it SDLT, LTO, or whatever we choose to impact, and you know, we have the opportunity to go to marketplace and really make things happen without having to go through this long and arduous process with OEM qualifications.

We, obviously, will do that but we intend to push the market, deliver aggressive solutions more so because the combination. So we have-- you know, we have captured that in our road map plans, and we'll be having really exciting, you know SDLT announcements as a result of having the ability to go with our large sales force that sell automation with more capacity and competitive products and a better feature set. That's, you know, an essential part of breaking the revenue doldrums that we have been in the last couple of years.

Okay. I'll let somebody else thank you.

All right, thank you. [Scott Middleman] with Jefferies Asset Management. Please go ahead with your question.

Hello. Your financing for the merger is subject to some conditions. Among them obtaining ratings on the senior credit facility. What rating do you need? And have you gotten it and is the financing ready for the closing of this transaction?

The pre-condition was to receive a rating. We have been able to go through and both from S&P and Moody's we have received ratings. The S&P rating is a B rating. The Moody's rating is a B-3 rating. We have a standing commitment from KeyBanc for the entire $500 million worth of financing. They have been a very strong supporter of ours along with the rest of the bank group we have assembled here over the past couple of years. We look forward to being able to have that closed and syndicated here between now and the close of the ADIC transaction.

Thank you.

Thank you.

Thank you. [Nick Matal] with Glazer Capital. Please go ahead with your question.

My question has actually been asked and answered thank you, though.

Thank you.

[OPERATOR INSTRUCTIONS] Derrick Wenger with Jefferies. Please go ahead with your question.

Yes, I jumped on the call late. If you could just give me the total depreciation and amortization for the quarter and also the capital expenditures for the the quarter?

Sure. D&A for the quarter were $10.4 million, capital spending for the quarter was $5 .2 million, free cash flow when you add that to the total operating cash flow was negative $17.4 million.

Okay. And what is the estimate for CapEx for fiscal year March '07?

We haven't disclosed that.

Okay. Thank you.

Thank you.

All right. Thank you. [OPERATOR INSTRUCTIONS] Management, I have no further questions at this time. Please continue with any closing comments.

Well thank you for joining us today. I just would like to close by acknowledging and thanking Ned Hayes for his service as CFO at Quantum for the last couple of years. As you know in the announcement that we made, our effort has been to put together a team that has broad capabilities, including more systems expertise and as that has worked out that will be Jon Gacek, but I want to say that Ned has played a very critical role to bring us this far.

We went through a lot of tough and challenging changes over the past couple of years, and Ned has really provided a tremendous amount of leadership during that process and so I'm saddened to see Ned move on, but I wanted to take this opportunity to thank him publicly and wish him the best of luck going forward.

Thanks, Rick.

We'll talk to you again next quarter. Thanks.

Ladies and gentlemen, thank you for your participation. This does conclude Quantum Corporation's first quarter fiscal 2007 conference. You may now disconnect. Thank you for using ACT teleconferencing. Have a very pleasant day.