Quantum Corp (QMCO) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Quantum Corporation's fourth quarter fiscal 2007 conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (OPERATOR INSTRUCTIONS) This conference is being recorded Wednesday, May 23, 2007. I would now like to turn the conference over to Shaun Hall, General Counsel, please go ahead, sir.

Thank you. And good afternoon and welcome. Here with me today are Quantum's CEO, Rick Belluzzo; CFO, Jon Gacek; and Executive Vice President for Sales, Marketing and Service, Bill Britts.

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 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, our target business model, and anticipated future revenue, gross margin, operating expense, and income performance, trends in our business and in the markets in which we compete, and the expected timing and features of new product launches.

We'd 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 Q4 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; our 10-Q filed on February 8, 2007; 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 SEC filings are incorporated by reference in, 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, Shaun. Good afternoon and thank you for joining us for the Quantum fourth quarter earnings conference call. Before we review our fourth quarter results, I would like to spend some time setting the context for this announcement as well as provide you with a framework for what to expect from us in the coming quarters. It was just over one year ago that we announced the merger between Quantum and ADIC.

When we announced this transaction, we stated that the objective of the combination was to build a more valuable storage company. The way we intended to achieve greater value was by driving three key objectives. First, we intended to improve profitability by driving a better economic model, with the primary goal of delivering approximately $20 million in quarterly synergies within one year of the close of the transaction.

Next, our goal was to use our greater scale in sales and service to increase market access and expand our branded business with the near-term goal of a 60% branded share of our product revenue. And finally, we felt that we could combine our technology assets to build a sustainable opportunity in the growth segments of the storage industry.

This final goal was also critical and that we needed to offset some of the negative growth elements of the tape industry. Now with two full quarters operating as a combined company, we feel very positive about what we've accomplished thus far regarding these three objectives. Let me provide some details.

On the business model side, we have made excellent progress in achieving our synergies, with approximately $20 million in synergy savings for Q4, we've achieved the target that we established two quarters earlier than originally expected. We remain confident in delivering our business model goal of an 8 to 10% non-GAAP operating income.

As evidence of this progress, we've delivered solid non-GAAP operating income for three consecutive quarters. Since we reported -- began reporting as a combined company, we delivered $14.1 million in non-GAAP operating income for the second quarter, which included only 5.5 weeks of ADIC's results, $22.5 million in Q3, and $16 million in Q4, the quarter we're reporting today. In percentage terms, our non-GAAP operating income was 5.6% of revenue in Q2, 7.5% in Q3, and 5.8% in Q4.

These results are significantly better than the combined ADIC and Quantum results as reported over the last couple of years before the acquisition. We still have more to achieve, but we feel that this is an excellent beginning.

On the sales front, we put tremendous effort into building, into bringing our sales and service teams together. We placed a high priority on making the customer and partner experience positive. We defined our road maps, consolidated our channel program, and made territory assignments clear early in the process.

As a result, we've seen a greater shift to our higher margin branded business over the last two quarters, growing to 57% of product revenue in Q4. We expect this trend to continue as we extend our focus in this area. Finally, on the product side, one very promising highlight was the very fast delivery of our first disk-based systems built on technology from both companies.

We launched the DXI 3500 and 5500 in December and began shipping the products in February. The combination of a solid hardware platform along with software solution -- a software solution that includes D duplication technology, our high performance file system replication and more - allowed us to deliver this very exciting solution. This product line is aimed at a very high-growth segment of the storage market and will be extended with even higher performance products later this year. In summary, we feel good about the progress that we have made towards achieving these three goals.

Now as we work to deliver the solid integration of the two companies, we also focused on evaluating the strategic opportunity for the new combined company. While we are confident that we can deliver an improved business model as a result of this combination, we are also very clear that we must shift more of our revenue stream to market segments that have significant growth potential, dedicated tape companies have all struggled with revenue and therefore valuation challenges.

To this end, we pursued a strategic process that evaluated all of our opportunities in light of what we have learned from the integration process. We have evaluated the market opportunities and our investments to insure that we are clearly driving change that will further improve profitability and allow for improved revenue and margin opportunity, thereby improving longer-term value.

For example, last quarter we made the decision to stop investing in low end tape drive products and we suspended investments in the Next Generation SDLT product, the DLTS5. In short, we have been and will continue to reduce investments in areas that have less growth and profit potential. We will instead focus our go-forward investments on continuing our leadership in tape automation systems, where we lead the market with 31% revenue share.

The open systems midrange segment where we are strongest also has projected growth. We will expand our focus on disk systems in the software segments of Quantum. And, finally, we will partner as needed to provide more leverage to our investments and ensure that we avoid investments in areas that can be obtained through partnering.

The market growth for disk and software-based secondary storage is accelerating. In fact, these segments are likely the highest growth segments in the storage industry and we believe that we are well positioned. We have a unique opportunity available to us by combining our early technology lead with our strong branded sales and service capability.

Data de-duplication will be a central element of these solutions. Our proven patented technology coupled with a wide range of additional software components allows us to serve this market with a strong value proposition.

For example, our solution will allow a customer to back up data at a distributed office, reduce the data up to 50 times, and replicate the data to a data center where it could be stored in disk or seamlessly moved to tape. This is just the beginning of a road map to expand our solution contribution and the customers for these solutions are the same customers that buy our tape products and can be reached through our nearly 1,000-person go-to-market team and our award-winning channel program.

Over the next two quarters, we will be making several significant changes that will allow us to take advantage of this opportunity while extending our leadership in tape systems. The changes we are making should accelerate our progress towards our 8 to 10% operating income goal, our non-GAAP operating income goal. And now let me say a few words about our Q4 financial performance before John provides the details.

While Q4 was a solid indicator of the value of the combined company, we were below last quarter's non-GAAP operating income performance by approximately $6 million. At $277 million, revenue declined by $24.6 million.

Much of this decline was the result of normal seasonality, but we also experienced incremental weakness in North America, which has been consistently reported by other storage vendors. That said, our non-GAAP gross margin percentage increased half a percentage point as a result of improved material costs and our branded OEM mix.

Finally, operating expenses were flat to last quarter as a result of a few incremental costs associated with new product launches, completing our systems conversion, as well as increased sales compensation expenses as we completed two differing fiscal years and began a new combined program. Without these additional costs, we would have reduced -- we would have further reduced OpEx.

In summary, the core fundamentals of OpEx and gross margins have continued to improve, but clearly we are disappointed in the unplanned incremental expenses and the weak North American revenue performance. The other milestone of the quarter was very strong cash flow from operations, up nearly $72 million, which allowed us to operate with a lower debt load.

Strong cash management will continue to be a focus as we work to reduce interest costs. Before I turn the call over to John, let me summarize a few key points. First, the integration is going well and we are in an excellent position to achieve our operational and strategic goals.

Next, as a result, we are pursuing a more aggressive strategy that will allow us to address the continued revenue challenges by building a growth segment to our business. To achieve this, we will -- we will be aggressive at shifting our investments and focusing on new opportunities in order to improve short-term performance while building this growth business.

And finally, although we are not pleased with the operating income decline from Q3, our Q4 results continue to demonstrate the value of the combined company. With that let me turn the call over to Jon who will provide more financial and operational detail.

Thanks, Rick. I'm going to provide detail on individual income statement line items as well as on significant balance sheet changes. But before I do, I want to emphasize several key points that Rick brought up from the fourth quarter results.

First is gross margin. On a sequential revenue decline of 24.6, our non-GAAP gross margin increased from 32.5 to 33. This reinforces the changes we are making in our infrastructure and cost model and supports our strategy to grow branded business and drive revenue in growing segments that are more profitable.

The second point is non-GAAP operating profit of 5.8% on non-GAAP OpEx of 75.4. This is the second highest operating profit period in recent history and includes approximately $4 million of the additional cost that Rick mentioned in his section. With this quarter's results, the last three quarters are three of the four best in at least five years at Quantum.

But the final point is the most important. We've made a lot of progress, but we have higher expectations than the results of the last three quarters. We have a business strategy that is focused on making Quantum a more valuable company. We will improve our balance sheet and capital structure.

We are driving to a business model that has improving margins and operating income of 8 to 10% on a non-GAAP basis and most importantly, we believe in what we are doing and we are very focused on achieving the results. Now looking at fourth quarter results in more detail, I will go through the income statement line items and describe results on both a GAAP and a non-GAAP basis and any related business points.

Let's start with revenue. Total revenue for the quarter was $277.3 million. Royalty revenue amounted to $29.5 million and product revenue was $247.8 million for the quarter.

Royalty revenue increased approximately $500,000 from Q3 as a result of a royalty of $3.3 million from Data Domain, another company for a, license for our de-duplication technology, as part of a cross license agreement. The LTO and DLT royalties were down $1.2 and $1.6 million, respectively, from the prior period. The LTO decline was the result of a decrease in the LTO royalty rate this quarter and the DLT decline was a result of a decline in media units shipped during the period.

As I mentioned last quarter, as we look forward, we expect that the LTO royalty rate -- LTO royalty will increase as the install base grows and the DLT royalty will decrease over time. Product revenue includes sales of hardware and software products and services through both our Quantum and branded and OEM channels. As a reminder, our branded products generally have higher gross margin and higher selling costs than similar OEM products.

Sales of our branded products also give us an opportunity to sell ongoing services and continue to provide additional products and services and solutions to our end user customers. Over time we expect that Quantum branded revenue will grow in absolute dollars and as a percentage of our product sales and as a result, will increase our gross margin. For the March quarter, product revenue was $247.8 million, of which 57% was branded and 43% was OEM.

For the prior quarter, product revenue was $272.9 million, of which 54% was branded and 46% was OEM, so that's a 3-basis point increase. As in past quarters, I will further break out the components of revenue. At, we've been asked for this numbers of quarters in the past, so beginning this quarter we're going to begin separating software and disk products into their own combined category to allow you to chart our process in this exciting and growing area.

As a reminder, the product groupings are software and disk, tape automation systems, service and other, and drives and media. I'll start with software and disk. This category includes our Storenex software and related disk revenue, our new DXI products that began shipping during the fourth quarter and our older VTL products, PBX and DX.

Revenue in this category was $8.6 million for the quarter. This was down from $11.9 million in fiscal Q3, reflecting an expected decline of, in our older VTL products as we began to transition those products and our customers to our DXI product line. We expect to expand our DXI product family in fiscal '08 and we believe this revenue category will grow quickly during the year.

Tape automation systems is next. Revenue in this category was $119.2 million in Q4 compared to $142 million in the prior quarter. We had two areas of sequential decline.

First, our branded North America automation sales were down. We believe this is consistent with what other stores provided reported this quarter. We had offsetting strength in Europe and Asia, so we don't believe the North American weakness is specific to us or to our products.

The other area that declined which was expected was low end automation systems with OEMs. We had forecasted seasonal decline in our midrange offering and the continued roll-off of our low end library at two of our OEMs. We expect this product roll-off to be completed in fiscal Q1 of '08, the quarter we're in now, and will have a minimal negative impact to our results. Overall, this was the most disappointing revenue category in the fourth quarter, but we believe the issue was centered around the challenging North America market, and we expect to see improvements in Q1 as the market improves and we fill some open sales territories in the region.

The third group is services and other. This includes service contracts, repair, installation, and professional services. Services totalled $38.5 million for the March quarter compared to $37.9 for Q3. We believe our service offerings will continue to be a key driver of growth and profitability.

The final revenue group is devices and media. Q4 revenue for this group was $81.6 compared to $80.6 million for the prior quarter. OEM device revenue was down in the entry level and midrange space, offset by an increase in branded media during the quarter.

We expect that we will see additional declines in OEM device revenue as products roll off and we focus on more profitable revenue segments. On media, we described last quarter that this is a very commoditized market and we plan to be opportunistic in driving profitable revenue.

This quarter our media revenue increased approximately $5 million and more, and more importantly --- and because of much better market dynamics, had much better results. We had improved gross margin percentage and an improved gross margin dollars. In the media space, our strategy is to support our branded and OEM tape library customers with our higher margin Quantum branded media and sell media in the open market when it makes financial sense to do so.

Our media team did an excellent job this quarter of implementing our strategy to drive profitable revenue and increased both the revenue and the gross margin in the period. Now I'll move to cost of revenue, gross margin dollars, and gross margin percentage, which for the fourth quarter were as follows on a GAAP basis: cost of revenue was $195.6; gross margin dollars were $81.7 million, and the gross margin percentage was 29.5%.

Included in cost of revenue and negatively impacting gross margin dollars and the gross margin percentage were three items, which totalled $9.7 million. The largest, amortization of acquisition-related intangible assets of $8.5 million, restructuring costs of $900,000, and stock compensation of $300,000.

These are the same basic items that were included last quarter. The specific amounts for those were as follows: -- I apologize, (inaudible) a total. Excluding these items, non-GAAP gross margin was 33% for the fourth quarter. So on a non-GAAP basis, 33%.

For Q3 '07, cost of revenue was $212.9, gross margin was $89 million, and 29.5%. Included in cost of revenue and negatively impacting gross margin dollars and gross margin percentage in Q3 were three items which totalled $9.2 million. Amortization and acquisition of intangibles of $8.4 and (inaudible) transition related expense of $500,000, stock compensation of $300,000, and when you exclude all that stuff, it was $32.5 for the quarter. So let me just summarize there.

33% this quarter, 32.5 last quarter on down revenue of 24.6. All of that, all of that is evidence that we're making the right decision and as the branded business grows, you'll see our margins improve very, very quickly. Let me move to operating expenses. Research and development expenses for the fourth quarter were $31.1 million compared to $32.1 million for the prior quarter.

Sales and marketing expenses were $37.9 million compared to $37.4 in Q3 and G&A expenses for Q4 were $13.9 million compared to $15.2 for the prior quarter. In addition, we had a restructuring line item in OpEx of $4.6 million. This is related to closing our Scotland facility and the cost of reducing our investment in tape drive development. Total GAAP operating expenses were $87.5 million in Q4.

Included in operating expenses were amortization of intangibles of $4.4 million in Q4 compared to $5.7 million in Q3, $4.2 million of this amount for Q4 was in sales and marketing compared to $5.3 for Q3. Stock-based compensation in OpEx for Q4 and Q3 was $2.1 million and $2.2 million, respectively.

And this quarter, we had a unique transition expense related to the ADIC acquisition where we had $1 million in accelerated depreciation for the legacy quantum ERP system as during the quarter we have now consolidated Legacy ADIC and Legacy Quantum financial system into one global Oracle ERP system. So excluding the restructuring and transition expenses that are included in OpEx, the amortization and the stock-based compensation, non-GAAP operating expenses totalled $75.4 million in Q4 compared to $75.7 million in Q3.

So when you total all up, for the fourth quarter we reported a GAAP operating loss of 4,--- $5.8 million compared with an operating income of $3.7 million for Q3. Included in the Q4 operating results are the following items - Amortization of intangibles, $12.9 million, acquisition-related restructuring charges, $5.5 million; stock compensation expense of $2.4 million; and $1 million of accelerated depreciation for the ERP change I just mentioned.

When these items are excluded, the result is non-GAAP operating income of $16 million or 5.8% of revenue for the second full quarter as the new Quantum. This compares to $22.5 million of operating income in Q3 or 7.5% of revenue. While these fourth quarter results are below what we'd hoped, it is the second best quarter in the company's recent history.

We have a plan and as Rick has stated, we are confident about delivering on our non-GAAP operating income goal of 8 to 10% in fiscal '08. One final measure we have been asked to provide is EBITDA. Adjusting for the same items described above, our EBITDA for Q4 was $31.5 million compared to $37.9 for the prior quarter.

Moving on to nonoperating items, interest income and other was $2.5 million and interest expense was $14.8 for net interest and other of $12.3 million. Our weighted average interest rate for the period was 8.75%. Our quarterly income tax provision was $2.2 million compared to $200,000 for Q3.

This amount was higher than expected, but is primarily non-cash and is the result of acquisition accounting. As we look forward, our tax rate is fluctuant quarter to quarter as we integrate the legal and tax structures of Quantum and ADIC. We reported a GAAP net loss of $0.10 per share and had a non-GAAP profit of $0.01 per diluted share, an $0.11 impact of the combination of the non-GAAP items of intangible amortization, ADIC-related restructuring, and transition expenses which included the depreciation and then stock compensation.

With that I'm going to move to the balance sheet. Cash and cash equivalents and short-term investments totaled $95.6 million at quarter end. We generated $72.2 million of cash from operations during the quarter and repaid $126 million of debt. Those are very large numbers and indicate we have a lot of opportunity in our balance sheet to generate cash.

We have a number of initiatives in place to improve our balance sheet, not all of which will be sustainable in future quarters. You will note our cash collections were dramatic and as we get a better feel for our cash flow requirements to run the business, we expect to maintain just enough cash to operate the business and meet our minimum cash debt requirements. This will allow us to reduce our debt and decrease interest expense.

Accounts receivable were $149.4 million. That was down approximately $53 million from the prior quarter. Our DSOs were 57 days compared to 63 last quarter.

Inventory was $91.2 million representing a decrease of $7.9 million from the prior quarter. This continues to be an area of focus and we have some near-term projects in place to further reduce our inventory investment. This quarter we will be consolidating our North American manufacturing operations into Colorado Springs, closing our Costa Mesa site, closing our repair site in Germany, and closing our Scotland manufacturing and repair site.

Fixed asset purchases amounted to $5.9 million for the quarter and depreciation expense was $9.4 million for the quarter. We expect fixed asset additions to increase next quarter related to the new Oracle ERP system. Other current assets decreased $6.5 million, primarily the result of collection of that receivable.

Moving on to liability, accounts payable were $98.8 million March 31, an increase of $18.2 million over the prior quarter as a result of timing of payments. Total deferred revenue was essentially flat for the period.

As a reminder, the vast majority of our deferred revenue is generated from Quantum-branded products and is the result of selling additional service contracts above and beyond the product's standard warranty, as well as selling ongoing software maintenance. We expect that our deferred revenue will grow as our branded business grows.

I will finish with a brief discussion about our debt and capital structure. I mentioned we reduced our debt balance $126 million this quarter as we leveraged our balance sheet. This is a significant accomplishment in an area focus for the company.

We plan to treat the debt as a revolver and truly manage it as a revolver to keep our cash balance to a minimum. To date, we have borrowed back $50 million since year end. During fiscal '08, we expect to be looking to refinance our acquisition debt at better terms and improved covenants, and currently the debt markets are quite active and we will begin pursuing the refinancing immediately.

As we look forward to fiscal '08, we believe revenue for the year will be $1.1 to $1.2 billion. Our revenue mix will continue to grow toward higher margin-branded business. We expect our disk and software business to grow from $30 to $40 million per quarter by Q4 of '08.

We expect fiscal '08 non-GAAP gross margins to be in excess of 35% and non-GAAP operating income to be approximately 10% for the year. We will be taking a number of actions over the next month to continue aligning our investments and infrastructure with our strategic focus.

We expect revenue to fluctuate quarter to quarter due to seasonality and our transition from lower margin OEM revenue to higher margin branded revenue. As we look at first quarter specifically, this has traditionally been our most challenging quarter and therefore we expect our Q1 non-GAAP operating income to be approximately 4% of revenue.

As we look toward the remaining quarters of fiscal '08, we expect the strategic and operational changes we are making will allow us to more quickly achieve and then exceed our targeted business model of 8 to 10% non-GAAP operating income. Quantum is a company that's going through a dramatic change. We have a strategy that takes advantage of our strengths, we are focused on growing revenue segments that are profitable and expanding, and we believe we are creating a very valuable company. With that we will turn it over to Rick.

Thank you, Jon. We have a very ambitious plan in place to allow us to deliver on our goals of increased value. And over the next couple of quarters, we will be focused on several key priorities. First, we will be increasing our focus to grow our branded business, especially the new DXI and Storenex products.

While Q1 is always the weakest seasonal quarter, we will be focused on driving momentum that will allow us to accelerate revenues throughout FY08. As part of this effort -- Part of this effort will be through expanded sales resources in territories. Next, we will be implementing changes that will fully align our investments and focus around our refined strategic direction.

In general, as I mentioned earlier, we will be executing on fewer product programs and more focus on areas where we see growth and expanded margin potential. And finally, we have more work to do to complete the integration process. There will be greater emphasis on deeper integration of systems and processes. This will give us greater margin opportunity over time. With that, thank you for joining us, and operator, I'll turn it over to you to take questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Our first question is from Mark Moskowitz with JPMorgan.

Ah yes, Thanks, Rick and Jon, appreciate it. Maybe you could just first walk through the revenue profile again. Firstly, I don't think you guys gave guidance for the first quarter revenue. Maybe I missed it?

No, we didn't give any guidance for the quarter. We're trying to -- you know, because we're shifting so dramatically, the composition of the revenue, we're trying not to get too tied down to specific revenue targets, if you will. I think we're comfortable with the $1.1 to $1.2 billion. It's probably our weakest seasonal quarter and we're in a spot where we're shifting out of these OEM products and trying to grow the branded business. I think this quarter would be the low part of, of the year.

And then as you think about the full year, can you maybe give investors -- I know you tried to contextualize it there in the call, but some of the mile posts we should start looking for in terms of gaining confidence that you can put together some revenue velocity or a trajectory that would really get you to your eight to ten or maybe even ten plus operating margin targets. I ask you this because it seems like the revenue profile is still somewhat lumpy and obviously you said part of it has to do with the macro. But I think also your announcement today that you're going to de-emphasize some of your tape assets would suggest that there's still some holes in the model here.

Yes, let me make a few comments about the, maybe the model and I'll address the revenue piece in a minute. I hope you get from the tone of this call that around many elements of our model, we feel, we feel pretty good. And we feel that the gross margin piece,for example, is on the right trajectory. We've captured the synergies, we have more work underway, we're closing facilities etc. that really don't deliver enough contribution and value to where we're taking the business.

So I think we would say that, that that is a critical element that we feel better than we have felt, you know, in the past in terms of the ability for that to move in the right direction. The same is true around OpEx. I think we're very confident that we've captured the synergies and there's just more opportunity as we come together and gain efficiencies as a, as a combined company. So, the gross margin and OpEx side is, you know, feels very positive in terms of delivering the business model that we want to pursue moving forward.

Clearly, the focus and challenge is on revenue. And that has a couple of components to it. You know, one is preserving revenue in the segments that are not major focus area of investments. And I would just correct a couple things here. Yes, we're dis-investing in some engineering costs on some new product segments, but we intend to continue to market those products. For example, in low end tape drives, we have a great product that is our B4 product that is ahead of the market, you know, from a competitive perspective for at least a couple of years. So we decided that we did not feel that we needed to continue to invest to keep that advantage in a market segment that isn't healthy.

We still intend to drive revenue very hard, but we want to be realistic about where we should spend our engineering costs. So, so we will preserve that revenue and we will focus on growth in these branded segments that are all, you know, a very, have a very positive business model impact because of the margin perspective and the margin opportunity that these new products deliver. So our focus is really around driving the branded business, around moving to the higher margin elements of branded business, and yes, there is going to be lumpiness in the absolute revenue dollars, but we believe that from a margin perspective that we can really expand the business over time, which really has led to the guidance that Jon provided for the next year. So, you know, I could understand that the revenue transition is something that could feel a bit unsettling, but we know that's where we have to focus our energy and we don't have to focus on 12 other areas that we're really focused on this, we have a sales force today that has scale.

We have programs in place. We know through the integration that we probably ended up with some empty territories. That kind of has hurt our revenue in the short-term. Those are in the process of being filled or have been filled. So we're very much on the revenue opportunity and we believe that the mix of things going forward, that the margin opportunity -- you know, we don't have to replace dollar for dollar. A dollar of tape drive revenue sold to an OEM, you know, we don't have to replace it dollar for dollar. We could probably replace it on $0.20 or $0.30 to the dollar and have a, a margin neutral, you know,impact. So we're very clear about that.

I think you know, as you think about revenue, there's going to be segments of the revenue that are growing. And so, we've broken it really into a couple cuts. You have branded and OEM and now we have the five, the five segments that we're going to continue to report each quarter. And I think that will help people see, you know, are we making progress.

What Rick just said, though, is really dramatic. I mean, if we grow the branded business, you'll see it very quickly in the results. It just pushes margin and pushes operating profit. Now, our goal is to make Quantum more valuable and to do that we've got, we have to make more money. And so we really are not pursuing revenue that doesn't meet that objective. And one of the things I often say is, we don't, we also don't have any revenue debt covenants. There's not really such a thing. We have profit covenants and we're trying to be a much more profitable company. And one of the things we're doing is as we shed or de-invest in, or don't chase revenue, we're also taking out the associated cost infrastructure. And that's the real important part of what we'retrying to do.

Okay, I appreciate the comprehensive response there.

It's a critical question, we agree with you.

And then, Jon, can you maybe help us understand what could be some of the puts and takes to the full year operating margin target for fiscal '08 versus the first quarter in terms of the implication, that there's going to be a pretty big snapback as you move through the year and go outside the actual model in order to get to these 10% operating margins. So to my point, I mean, how much of this is going to be driven by the emphasis, excuse me, of moving into the branded business versus maybe a greater dependence than we know on the upcoming infrastructure changes that you and Rick have announced will be discussed down the road here?

Right, so really, it's two-fold. We said $1.1 to $1.2 billion. And so, you know, you can do that math. If we start out, you know, at below the midpoint divided by four, it means we'll have to be more back end loaded. But clearly on the OpEx side, we said it would be about 4% and we actually said we'd get to 10, 10 for the year. So there really is two things, and I think Rick said it in his initial response. We feel good about our ability to achieve the OpEx and efficiencies that we need to hit that plan. The thing that is less certain but is in our control to go execute on is the branded revenue growth. And I'm going to emphasize one more point.

Branded revenue is, grows more linearly than OEM revenue. OEM revenue, it comes on lumpy and it goes off lumpy. And so one of the things in our plan and all these numbers, we are not forecasting, you know, revenue that we don't control. So the branded team has numbers it rolls out to, it rolls out to every territory. We are driving to that. So I would say the OpEx is well, well understood in what we're going to do and we'll do that. You know, the, the variable is how fast can we drive this growth in branded revenue. And we've been successful, we've been successful doing that over time.

Yes, I would also say this this business, and if you look at our results over the last three years is very back end loaded. Our profit is mostly earned. I mean, the positive results have been earned to the latter part of the, of our fiscal year. And I think the industry is becoming maybe even more seasonal than less. And so that trend is also working, you know, working for us and impacting our plan.

Q3 is by far and away our seasonally strongest quarter.

I'm sorry, what was the last part?

Q3 is by far and away our strongest quarter. So our fiscal Q3, the December calendar quarter.

I've got you. And now, getting back to the refocusing of the R&D more toward disk and software, can you help us understand what we should expect in terms of the future product development, the future market penetration and where you could work with your OEM partners, but where you could also maybe step on their toes in terms of some things they have?

I'll start and Rick and Bill can come in. Bill's here, he's got the channel conflict issue. You know, we gave the target of $30 to $40 million in this, combined disk, combined disk and software category.

We think we are very uniquely positioned with both products and a channel and end user customers and scale to go after this category where with the duplication and replication, you can have a disk appliance that is a better solution for customers out on the edge than a tape solution would be. And we are -- we believe we're unique in that spot. The channel conflict issue is something that we always deal with, we deal with today, but the big system houses aren't really participating.

I think it's probably worth spending a moment on what's really going on in this space with de-duplication. This is something that has moved very quickly from being something that customers have a lot of interest in to a very specific plan for how they're going to deploy disk space backup that incorporates this type of de-duplication technology and equally significant to this is the fact that not only do you get the de-duplication advantages of being able to store months of data on disk and improve the recovery time, you also have the optimization of the replication from remote sites distributed offices back to a central data center so they can be more easily managed.

If you think about what that product set, and if you're familiar with our DXI technology, it's basically a disk-based backup appliance that includes an integrated replication that's when optimized because the de-duplication technology. There are no system OEM's right now offering that product.

So from a channel conflict in the short-term, there is none. Now over time, everybody's going to have to offer this type of product and we see that as an opportunity to start to forge different relationships with some of the known players, some of the players we currently have relationships with.

But that, we see that as an opportunity by virtue of the fact that this software is highly differentiated to be able to have a different type of relationship than what has traditionally been a low-end tape auto loader or entry level tape library where it's really, it's more undifferentiated in terms of the go-to-market -- the buying criteria is less about the technology and the differentiation and it's more about service support, buying preferences, all of that.

Okay, appreciate that. And then just one last question and then I will definitely flee the floor here. Maybe Rick you could touch more on the disappointment in North America, what you're seeing in terms of customer changes or attitudinal changes in the last few weeks? And I say that just given that now we have a lot of OEMs have either had okay or disappointing storage or server type of revenue trends in the past month and a half or so and then we've got network appliance coming out tonight alongside you with a pretty soft outlook. So I just want to get a sense in terms of what your view is, is this a little blip in the radar or do we have to buckle up here for maybe a more turbulent road throughout the summer?

I'll let Bill add to this, because he's been out in the field and out in the environments where he could have more direct customer feedback. I think if there's, I think the general market is not negative. It feels like the IT spending environment is okay, that people, there's maybe a little bit more caution than there has been, but I don't view it as alarming in that sense.

Now, that would be point number one. I think in our space in particular, there's a lot of new technology choices, I think that causes people to think and I evaluate more for, you know, in terms of where they spend their money, but I think we see plenty of opportunity out there, but I think we might also say that it's taking people longer to make some decisions, you know, because of some of the choices that they have before them. And then I think the other thing we always have to think about again, is back to the seasonality point.

Storage is one of those things that you can spend budget on you know you're going to use. And so sometimes people do buy forward, more in storage which can affect the subsequent period. I'm not sure that happened, to some extent, you know. It always happens, in Q, in our Q4 or the first calendar quarter.

So that's kind of how I see it and I also think it's interesting it's mostly North America, which probably does say there's some either economic impact or maybe the fact that newer technologies tend to flow in North America faster than they do in other parts of the world. I don't know - Bill?

I think Rick kind of has encapsulated most of the feedback I would have on this particular topic. I do think to a certain extent, some of the new technology transitions and these new product offerings around de-duplications, I can just tell you that we have a number of very, very large tape customers that are in the middle of very, very active evaluations of our de-duplication disk based appliances.

So there are certainly a number of, a number of companies that want to really understand, where can this technology apply? It has certain trade-offs between how much capacity you can actually save, by being able to use this software, but it also has performance trade-offs. So, we don't see that it's going to replace tape. In fact, it's going to be more likely that you'll see more consolidation in these core data centers that will actually drive the adoption of tape.

One other key factor in this particular quarter, and it's hard to get a real gauge on how much this is influencing buying decisions across the board is the availability of the LTL4. So everyone's announced availability of LTL4. We will have our enterprise in midrange products available with LTL4 for this June quarter. We know that there are a number of very large deals that are basically driving against the adoption of LTL4.

So that also has played a little bit into some of our plans around making sure that we take the business opportunities that we have to close this quarter, make sure that we got them in the right drive technology. During these transitions, typically there are customers that want to be the early adopters, and they will basically insist on only deploying LTL4. We have other customers that are more conservative and we'll have an LTL3 program that will allow them to then have a trade-in allowance when they want to adopt LTL4. So, that dynamic will be playing out in this quarter as well.

Thank you.

Our next question comes from Brian Freed with Morgan Keegan. Please go ahead.

Hey, guys. I know you touched on this a little bit earlier, but just wanted to get some feel for the data de-dup, you know the technology, the DXI CDs, is it gaining any market traction or just the feedback from your customers who you shipped to the product last quarter, I guess?

I would just summarize it as it is -- it's a fundamental shift in the way that people are thinking about how they're going to solve their backup problems. And equally important to the de-duplication technology, I meant to mention this before, is that with replication, you can truly at the edge eliminate the need for tape and still have a disaster recovery plan. That and that's tat's really the key to understanding how these two key product characteristics interplay. And the adoption, people are certainly, number one, wanting to make sure that they understand how much of their data is redundant, how often it changes, and that determines what type of de-duplication ratios you get. And so, again, this is not like a compression technology, people have thought about over the years in disk or tape.

This is really fundamentally looking at the subfile level and being able to eliminate the redundant data. So, the customer's data is a big part of that. That implies, obviously, that it varies from customer, from customer to customer, application to application and that means that we're involved in a number of (inaudible). I can tell you that we're in the high double digits in terms of deployments where customers are looking at establishing what kind of de-duplication ratio they're going to get with their data and then looking at mult-unit and that's probably the biggest feedback that we've had, is when people are evaluating this, they're looking at multiple units to deploy across their enterprise or in their multi-site backup architectures.

Yes, I think we've found that the early wins that we've had are, you ,now, mid-sized companies and mid-sized data centers where they're basically using it as their enterprise product. The big enterprise opportunities, as Bill points out, are very large, but they're very -- the sales cycles are very long because they're going to evaluate their data, evaluate the deployment, work on management, security, and we're engaged on all of those things. And so, I think it's going to be -- early on, it's going to be the small unit wins and then eventually we'll ramp to a much, to the larger deployments, but those things will take more time to get people comfortable with what the right technology choice is. I mean, I will tell you that I've been around this for a lot of years and I've seen new technology come on board and I've always said the sense sometimes that technology sounds bigger than it really, the market opportunity is. I don't think that's the case here.

I believe the market is very ready for this technology and I think the technology is ready so I think that match is very, very positive. I would also tell you, it's not simple. It's very, a complex software stack that, that I don't think people can quickly enter this business without, you know, some real engineering. This de-duplication technology is very sophisticated. How you manage it, how you do replication. All of the elements is very complex.

We're pleased to have an early lead and an early position in, this but I will also say, I think we have a lot of work to do to really get all the market momentum, get the wins that we need and really start to build momentum. But I think this is a very valuable segment, one that we feel very excited about and I think you get the tone in this call that we're so excited about this opportunity that we're going to put and more energy and focus and drive around building this as a franchise for the company going forward.

Thanks.

(OPERATOR INSTRUCTIONS) Our next question comes from Steve Lawman with Parvest Asset Management. Please go ahead.

Good afternoons, guys. I apologize if you addressed this already, but I wanted to talk a little bit more about disk and software revenue. It's obviously a pretty aggressive goal to, to quadruple that on a quarterly basis within four quarters. Are you dependent on product releases for that, or do you kind of think that that's sort of a linear ramp over the year.

We have product releases, but I don't think that's the driving force in this. We just released this DXI product line that is we think is very well-positioned. We just released a major upgrade to our Storenex file system. A product line, we've been adding some salespeople in the software part of the business to get more scale. So I think this is mostly built around you know, close -- by the way, there's plenty of opportunity out there.

So there's a lot of customer interest. So our challenge to get that revenue number is to engage with customers, engage with these trials and close the business by making sure that we address, that we really solve their customer problem. That's what -- and that's what we're focused on. So, I think that's the biggest driver. Having said that, we will have new products that will, that will, that will deliver a better value proposition, a better vision of our road map that we think will help accelerate the business.

New products really expand the market solutions we can hit. The plan is really based upon, as Rick said, the products we have today and it's all about execution on the market opportunity.

Well, it certainly will be great to see that line grow to the levels that you guys are talking about. Then just, Jon, on another item, you talked a little about refinancing the debt and opportunities there. Is it too early to talk about what you think net interest expense can go to? I think if you net out interest income and interest expense for the last couple of quarters, you've been about $12 million? Can you take that under $10?

Well, I'm going to answer it slightly differently. So, our acquisition debt today is approximately LIBOR plus 5. Companies in our credit rating typically range from LIBOR plus 2.5 up to LIBOR plus 4. And that's a pretty wide range, I know, but they're both quite a bit lower than what we're paying today. And the market is very active right now and we think that our story is much stronger than it was because the acquisition has been complete and we've done the integration and we're actually focused on market opportunity that was better than we thought about a year ago. So pick your number.

I think the other thing we're going to do, is we're going to try to keep our cash balance to a minimum, which candidly makes the biggest impact when you're paying 10%. So more to come on that. Hopefully by the call in July if not sooner that we'll have more information on where we are on that.

Great. Thanks very much.

At this time I am showing no further questions in the queue. I would like to turn the call back over to management for their concluding remarks.

Well, thank you again for joining us today. I mean, we know this is a very complex set of information that we provided, but we believe that we have a set of transitions that really can put us into a position where we create this valuable storage company and I look forward to continuing the discussions with you over the next couple of quarters and work to really show those milestones that we believe are so essential. So again, thank you for joining us and have a great evening.

Ladies and gentlemen, this does conclude Quantum Corporation's fourth quarter fiscal 2007 conference call. You may now disconnect, and we thank you for using AT&T teleconferencing.