Quantum Corp (QMCO) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Quantum Corporation second quarter fiscal 2009 conference call. All parties will be in a listen-only mode. Following the presentation, the conference will open for questions. (OPERATOR INSTRUCTIONS). This conference call is being recorded today, Wednesday, October 22nd of 2008. I would now like to turn the conference over to Shawn Hall, General Counsel. Please go ahead, sir.

Thanks, and good afternoon and welcome. Here with me today are Rick Belluzzo, our CEO, Jon Gacek, our CFO and Bill Britts our Executive Vice President for Sales, Marketing and Service. The web cast 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 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. The forward-looking statements include statements regarding our business prospects, priorities and opportunities, future financial performance, including anticipated revenue, gross margin, expense and income performance and debt covenant compliance and trends in our business and in the markets in which we compete.

We would like to caution you that our statements are based on current expectations and involve risks and uncertainties that can 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 Q2, 2008 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 13th, 2008 and our most recent 10-Q filed on August 8, 2008. Such reports contain and identify important factors that can 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 are incorporated by reference into today's discussion. We undertake no obligation to update these forward-looking statements in the future. With that I will turn the call over to John Gacek.

Thanks, Shawn. Good afternoon, and thank you for joining us. Today we are reporting our results for the second quarter of fiscal 2009. This is definitely a challenging time for many companies and investors. We are very focused on execution, paying down our debt and improving our operating profit. Clearly the economic climate continued to deteriorate during the period, and impacted our business. However, we did make progress in a number of areas in Q2.

First, we paid down $40 million of our acquisition debt, our ADIC acquisition debt was nearly $400 million a year ago as of September 30th, it was $250 million. Second, we settled with Riverbed and received a one time payment from them of $11 million which is included in our royalty revenue line on the income statement. Third, our non-GAAP gross margin was 41.9%, 38.8% excluding the Riverbed revenue. Compared to 35% for the same quarter last year.

Finally, we again increased our disk and software revenue on a year-over-year basis. Our disk and software revenue was $20.8 million including related maintenance revenue compared to $15.8 in the same quarter a year ago. I would like to refer everyone to the financial statements and supporting schedules included in the press release. It will be helpful to refer to those as I make my comments. Revenue for second quarter ended September 30th was $215.4 million compared to $248.5 million a year ago. For the quarter, nonroyalty revenue totaled $184.8 million of which 66% was branded and 34% was OEM. That compares to nonroyalty revenue of $224 million a year ago of which 63% was branded and 37% was OEM.

Royalty revenue was approximately $30.6 million for the second quarter compared to $24.5 million in the same quarter a year ago. The increase is a result of the Riverbed revenue of $11 million ,an increase in the LCO royalty and a decline in DLT royalties.

Looking further at product revenue, tape automation systems revenue was $85.8 million, compared to $110.6 million in Q2 of fiscal '08. Approximately two-thirds of this decline was related to OEM products and one-third related to branded automation in North America. Sequentially, branded tape automation systems revenue increased in Q2, including increases in our enterprise and mid range tape products. Entry tape automation systems revenues were flat sequentially. We believe the changes that have been implemented in our branded sales force are beginning to make a positive impact on our results.

Looking at devices and media, they totaled $38.8 million compared to $59.5 million in Q2 a year ago. The decline is primarily attributable to our anticipated decrease in OEM device revenue. In addition, we had a decline in both our branded device and media revenue. We continue to manage our media business opportunistically to generate gross profit dollars. This quarter's media market pricing resulted in us not pursuing additional revenue opportunities. Disk systems and software product and service revenue was $20.8 million up from $15.8 million a year ago, a 31% increase.

Just to provide some further specifics on DXi, our year-over-year growth was largely driven by the addition of the Dxi7500 to our portfolio and license revenue from EMC. In addition, to EMC disk customers who purchased systems incorporated in our replication software, Quantum alone increased our DXi customer base to more than 400 in September. Driven in part by sales of our DXi-7500 Enterprise solution. Reflecting its strong value proposition, two-thirds of DXi customers to date have purchased replication licenses and nearly one-third have taken advantage of the direct tape creation option which provides seamless disk-to-tape integration.

Turning to gross margins, non-GAAP gross margin in Q2 was 41.9% compared to 35% in the prior year period. Excluding the Riverbed revenue, the non-GAAP gross margin was 38.8%. Overall, this is a result of a higher branded mix, but going a little deep into this quarter, we had less OEM product revenue, less branded device revenue and less branded media revenue. These are all lower margin product segments. We also had higher disk and software revenue and had an increase in our service revenue. So, excluding the Riverbed revenue, the 380 basis point improvement on -- of gross margin on revenue that is approximately 20% lower shows how far we have moved the company in to developing and introducing and selling higher value added solutions.

Moving to expenses, non-GAAP operating expense totaled $70 million compared to $67 million a year earlier. For the quarter, R&D was $17.9 million, Sales and Marketing was $33.1 million and general and administrative expenses were $19.1 million. Non-GAAP operating profit for the quarter was $20.2 million or 9.4% of revenue compared to $19.9 million or 8% of revenue in the same quarter a year ago. Net other expense of $385,000 was primarily comprised of $1 million in foreign currency losses, partially offset by a gain related to our interest rate callers. Interest expense for the quarter was $7.5 million compared to $11.6 million a year earlier. This includes cash interest expense of $7 million and amortization of debt issue costs of $500,000.

The coupon interest rate for our remaining acquisition debt of $250 million at September 30th will be approximately 7.3% for the quarter ended December 31st. For the second quarter, we recognized tax expense of $1.1 million related to the foreign and state taxes. We still believe it is reasonable to model tax expense of $1 million per quarter looking forward. So, summing it up for Q2 we had non-GAAP net income of $11.2 million, non-GAAP EPS of $0.05 compared to non-GAAP EPS of $0.04 in Q2 of fiscal 2008.

Focusing on cash flow for the quarter and the balance sheet at September 30th I want to highlight several key points. Cash flow from operations for the quarter was $5.1 million. We paid down 40 million of our ADIC acquisition debt during the quarter which now totals $250 million. For purposes of calculating our debt covenants, our non-GAAP EBITDA for the quarter was $28.3 million, and for the last 12 months, it was $99.5 million. We are in compliance with all debt covenants at September 30th, and we expect to be in compliance with our debt covenants during the next 12 months.

Sequentially, inventory increased $1.2 million and accounts receivable decreased $1.4 million. We had an accelerated payment of $17.5 million from one major customer. CapEx was $1.3 million, and purchases of service parts for maintenance were $600,000. Depreciation and amortization totaled $20.2 million for the quarter.

As we look forward to the remainder of the fiscal year, there is clearly uncertainty surrounding the macro economic environment. And we are very focused on optimizing around generating EBITDA. Therefore, we feel it is important to note that our results for the remaining two quarters of the fiscal year could be -- could turn out differently than we expect today.

Having said that, we recognize that current and potential shareholders as well as debt holders would like financial information about the rest of the year. So, therefore, let me summarize our current thinking about Q3 and Q4 guidance. So this is the next two quarters combined. Total revenue of 400 to $450 million, non-GAAP gross margins of 38% to 40%; non-GAAP OpEx of $130 to $140 million. Total interest costs of approximately $12 million to $14 million. And tax expense of $2 million or $1 million per quarter. When you combine the above with our first half actuals, this results in a non-GAAP net income of $25 million to $30 million for the full fiscal year ended March 31, 2009.

Again, let me emphasize that our focus over the next two quarters is to generate EBITDA and therefore we will make trade offs to do so. Now let me turn the call over to Rick.

Thank you, John. As John said we achieved most of our performance goals in Q2. Some of the highlights include growth in our disk systems and software business even with some significant challenges posed by the financial crisis toward the end of the quarter. A continued improvement in gross margins reflecting our focus on shifting our revenue mix and aggressive work in operations. We had an OpEx reduction of more than $4 million from last quarter. We completed another de-duplication agreement this time with Riverbed, and finally a reduction of $40 million of term debt.

All of these accomplishments reflect our continued strategy of focusing our investments on growth opportunities, shifting our business mix to higher margin segments and paying down debt. We pursued these objectives by building a disk systems and software growth business, reducing investments in declining market segments and continuing to generate cash.

Our revenue performance was a disappointment this quarter. We believe we have taken many of the right actions in order to deliver improved revenue results but this quarter it was clear that the global financial crisis impacted our ability to close business at the end of the quarter. Our third month of the quarter, September, underperformed relative to typical quarters as we saw numerous sizable deals fall out of the quarter. This was clearly evident on the DXi side where much of our business tends to get closed towards the end of the quarter, particularly larger deals that we are increasingly involved in with the DXi 7500.

We believe that many of these will close in the coming quarters, but given the strong de-duplication replication market, there remains a significant risk that opportunities more generally will become soft as our customers manage their investments more carefully. So it was the end of the quarter climate prevented us from being able to report a very strong quarter. We know that we have many opportunities to enhance our business over the next few quarters and we are focused on driving more customer opportunity and more aggressively closing business in this challenging environment.

These opportunities include product enhancements in our DXi line, continued growth in our EMC business, investments in our channel program and returns from investments we have made in growing sales territories, to mention just a few. In short, Q2 was a challenging quarter given the impact of the global financial crisis but in spite of this we were able to deliver solid improvements in most areas of the business.

Now let me make a few comments regarding our strategic priorities and say a few words on how we intend to respond to the current economic environment. We continue to feel the transformation we began a couple of years ago is focused on the areas that provide Quantum with the greatest opportunity to deliver greater value. Our focus is about delivering a set of products and solutions that protect data from the edge of the network to the core of the data center. We will combine our disk, tape, software and services to provide customers in the mid range up to the enterprise with integrated highly scalable solutions that meet the needs-- that meet the full range of needs of the data protection retention and management offering. To achieve this we have focused our investments on strengthening our product offering in disk systems and software segment.

Building on our leadership position and de-duplication technologies, providing tight integration with tape, and by working with partners, we intend to deliver these solutions with the right surrounding applications and services. The market for de-duplication replication is very strong and building leadership here remains our top priority.

In addition to the growth we have experienced and the increased traction we are seeing through our software license agreement with EMC we have recently reinforced the strength of our core intellectual property and de-duplication through the Riverbed settlement. Going forward we intend to pursue additional opportunities to leverage our de-duplication IP and broader software stack which will enable us to further build our leadership in this rapidly growing market.

Going forward we will also continue to refine our Go To Market model in order to provide greater return on our overall investments, this will include working more closely with EMC to fully leverage during opportunities, driving more opportunities overall, and building our channel program expanding our partnerships and aggressively closing business. There's no doubt that this is a challenging environment. But we believe we can capitalize on these opportunities. Finally, we intend to be more aggressive at managing our cost structure. We will approach this environment as one of uncertainty which will require us to even be more aggressive and managing our investments and costs. Therefore we expect to reduce OpEx in order to achieve greater flexibility in our financial model.

In summary our strategy is clear and very focused and the opportunity is significant. We made good progress in Q2 but did not achieve all that we wanted as a result of the weakening macro economic environment. We are committed to taking actions to improve our revenue performance and reduce costs as we manage our way through this uncertain environment. With that, I I would like to turn the call back over to the operator for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS). Our first question comes from Brian Freed with Morgan Keegan. Go ahead.

Good afternoon. Thanks for taking my call. You guys show great progress in the branded automation. Congrats on keep that solid in the quarter. Can you talk a little bit about media and drive. Obviously were the biggest component in the short fall relative to your revenue expectations in the quarter from a margin perspective, can you kind of give us a sense, is that a profitable business or is it really much more of a break even business as we tend to think about the value of that revenue versus the more high margin revenue out there?

Sure. So I will take this and go from there. Let's do media first. Media is clearly sold as a commodity through multiple channels, and we have opportunities to have really good business there, but if somebody, one of the media suppliers or one of the big system OEMs decides they want to drive revenue and not margin, that pushes hard on the price.

And we are not going to chase that business if we are not going to make money. We have an internal threshold of what we are trying to target in the media space. I can tell you it is positive. There have been times when it hasn't been positive actually. But it is positive today, and we are not going to chase that business down. If the dynamics of the market are bad. So it is just a trade off and I don't feel like it is contributes a lot financially to chase it down. So we are not going to do that. It burns up cash and doesn't generate EBITDA.

Devices is a little bit different. You know, we have a LTO 4 drive that we have announced, and launched, and we think there is more opportunity there in the channel as we deliver that product, and put channel programs around it. So I think that is a place where we would like to see some growth. It does -- it is a nice profitable business for us, and that's a place where we are going to focus some effort.

Okay. Secondly, related to the EMC relationship, can you give any quantification in terms of how the ramp is going with EMC? And secondly can you give us a little more granularity in terms of timing for reporting EMC royalty? Is it intra-quarter, is there any sort of lag?

Let me start with the second question. We get a royalty report from them monthly. So, this quarter included the three months of the quarter.

As far as their business, all I am going say is we are pleased with the partnership. I don't want to talk about their products. I know they already had their call. That would be a good question for them as compared to us, but we are pleased with how the relationship has started. This is the first full quarter, and we look forward to more opportunity there.

Okay. Great. And then finally, as you kind of look forward, can you give us some sense, you know, how much visibility do you think you have into your pipeline at least one quarter out given the back end loaded nature of things, in terms of forecasting, scrubbing the pipeline? Do you feel like you are getting more accurate.

I will let Bill comment. What I wanted to say about the guidance we gave is obviously we lowered our numbers down to try to take into account the economic environment and what we could see. That was based upon a scrubbing process. With that, I'll let Bill answer the rest.

So, I am going focus my remarks mostly on the branded systems because that part of the business is really the one that is back end loaded, it is where we have the largest pipeline that we have visibility all the way through to the end user. It is also where we saw at the end of the last quarter starting in week 10, we saw that we fell behind kind of our historical pacing and really didn't close the quarter with kind of the revenue we had expected certainly looking at it midway through the quarter and then all the way until early September. So we have gone through the process of analyzing that pipeline.

We are trying to basically make sure that we don't build into that pipeline and looking at kind of this quarter and the next quarter. A lot of uncertainty about decision making around going forward with larger projects in particular. We saw a number of larger deals that got pushed. At this point it's still very uncertain, but certainly from a pipeline standpoint we feel like the overall opportunity has been growing and it is really just a very uncertain environment in terms of trying to project what the macro economic environment is going to do to our specific business.

Let me make a comment about DXi generally related to this. This applies to a number of questions that you may have. And that is that our strength in that product line is the DXi 7500. It is a highly scalable, high performance, well-differentiated product. That has tended to take us into bigger accounts and bigger deals and pretty exciting sets of opportunities. But those that become more visible, a little bit harder to close. And also the ones that tend to go to the end of the quarter. I think that was why we were maybe more susceptible to that back end than other people might be.

So our strategy to expand on that, is we need to take the platform and move it down more and strengthen our position in the mid range where we can have more of a channel play, where we can have more velocity. We can have smaller deals with more leverage with partners. That I think is really the key of what we need to address to be able to improve that revenue, but also change the nature of it so that we now have a velocity business plus a big deal business, and that really I think gives us the best overall opportunity.

Okay. Thank you.

Thank you. Your next question comes from the line of Glenn Hanus with Needham and company. Please go ahead.

Good afternoon. I think you said early in the script, you've had some issues with sort of sales organizational issues. I guess in the US, mostly in the branded business, and you said you made some progress, could you kind of talk about that?

Yes. At the beginning of the fiscal year, we reorganized the Americas field sales organization. We also did some restructuring in our channel sales organization.

We made investments also to better support our strategic OEM relationships where we have a branded reseller relationship, so EMC would be the largest example of that. And just in general, we're looking for better ways to leverage our very focused solution-oriented resources. We made progress in the Americas and Europe. Again, it was largely driven by the last month of the quarter where the business really didn't close that we expected. Again we look at this as still a very good opportunity for us to be able to take the 7500 momentum that we have built through our OEM relationship and with our own branded sales force and to be able to take that and get leverage from the channel.

So you are going to see us very focused on taking that very unique positioning edge to core solution, using de-duplication, replication and integrated path-to-tape, taking that and enabling the channel to build service offerings around that that really address what I would call is a major rearchitecturing of back up in the enterprise and in the mid range enterprise types of companies.

This is going to happen, we believe this is happening even independent of some of these macro environmental pressures on companies because this is something that has a very strong ROI for these end user customers.

Can you talk a little bit about the competition de-dup space and competing with data domain and how you feel you are doing there and I guess you want to have a little more penetration in what you are calling the mid range space and those are sort of more high velocity sales if you will. And that should help get that going a little more. Is that what you are saying?

Yes, they're multiple aspects of that. I would say first of all how we are doing, this was the first full quarter of 7500 shipments, both -- well, 7500 shipments for us and the EMC OEM version of our software. I would say we are rapidly gaining share in the deduplication space.

And then if you look specifically at the enterprise part of the market, and again there aren't analysts reports that break this out but if you just combine the systems sold through EMC and through us, I think what you will see is that we made significant progress and actually are growing very, very rapidly in that enterprise segment.

Our challenge now and we see opportunities to do this with channel partners is basically help them understand the overall edge to core solution and our ability to be able to help them build services around that, helping them understand that not all data de-duplicates the same way, policy based de-duplication where you can basically choose the type of de-duplication at the VTL or mass level, you can do that in a way that better fits the customers needs. That is a key initiative for us is to be able to take that technology and get more leverage from our Quantum branded independent channel partners.

John, can you talk a little bit about how to think about the two upcoming quarters? You gave the combined number. Normally December is the strong quarter and then March is the weaker quarter. Would we expect to gave the same seasonality that you typically have?

Normally, I would say yes, and I will say our guidance that that we gave incorporates that concept. We would expect Q3 would be stronger than Q4. We are just caveating that by the uncertainty around the economic environment. But generally, yes, and our plan also does that. I think on the expense side, same would track, our expenses would be a little higher in Q3 slightly lower in Q4.

Okay. Thank you.

Thank you. (OPERATOR INSTRUCTIONS). Our next question comes from the line of Brett Miller with Dialectic, please go ahead.

Hi guys. This is actually James Basch with Dialectic Capital. I had a couple of questions. First is this, for the three months ended September 30th of 2008 over '07, revenues look like they decreased on an absolute basis around $33 million, yet operating expenses were higher over $2 million. I am kind of surprised and disappointed to see that trend and I'm actually even more and disappointed to see that sales and marketing expense was actually up around $4 million over the time frame. Again you guys had a significant retrenchment in revenues. Why is that happening? I see that operating expenses are going down now but I think it's is a little late to find reIigion. What are you guys doing to address it now? How much more room do you have in terms of operating expenses? What specifically are you doing on the sales and marketing line? And then a second question would be concerning cash. You have around $34 million in cash right now. You guys are kind of hovering around the free cash flow break-even point if you were to try to normalize things right now. Do you feel comfortable with $34 million in cash given that you are not consistently generating strong free cash flow at this point? I might have a follow up depending on your answer.

Let me say something about the expense revenue piece. So, one factor is pretty important is our branded and OEM revenue is very different. Our OEM revenue is declining significantly. It has lower gross margins, it has low expenses. Our branded revenue is stronger, and requires more sales and marking expense. It has much higher gross margin. So a big piece of that transition, one would expect even in normal times, you would expect to not necessarily to look at the revenue number but to look at the gross margin number. I don't think still that story is strong as it should be but it does change it quite a bit. It does cost you more money to be in the branded business but you get that because you sale a service contract and you have a higher gross margin by probably maybe double what the gross margin would be in OEM. So I would start there. Secondly, I would say clearly we have work to do in expenses. We think we have been working to fine tune our sales and marketing, to match the opportunity. I think today we are very much focused on driving productivity, it is another way of saying we either improve revenue or we lower cost. We are doing, intend to do some of both. And then I would say that in this environment, it is important for us to do a fairly top to bottom look across our expense structure, not only sales and marketing, to understand how else we can optimize things because we'd like to have more margin in our plan. And the best way to do it is with something you control. That's expenses.

I will just add to the expense comments Rick had, you know, we have been clear that growing the branded business is part of the strategy. And we have invested ahead of revenue. think if you look at it more sequentially, then year-over-year as it relates to the expense line on a non-GAAP basis, I know those numbers better, it goes from $35 million to $33 million sales and marketing. So we are trying to be smart about where we invest, how far ahead we invest, understanding that our -- this new business we are entering is a very high gross margin business, and the business that we are exiting is not nearly this high. And the media example I gave earlier -- I think the media number is down roughly $10 million sequentially. That looks like a $10 million decline in revenue but it really is very little in gross margin. The other point on expenses is in G&A, we still had roughly $1.75 million of litigation Riverbed expenses included in G&A that will not reoccur next quarter. So, that is one of the reasons why we have guided down expenses to, from $70 million on a non-GAAP basis to as low as $130 million or $65 million on a non-GAAP basis for the next two quarters. So, that is kind of the room that we are targeting right now. You asked a question of where we are targeting. It is really that. We expect to try and keep R&D about flat. G&A and sales and marketing down. As it relates to cash, we think that we do, we are generating some cash. We have some room to do that in the balance sheet still. But we are going to be smart about balancing our cash use and our debt pay down. We have been aggressively paying down debt. We think that's a good thing overall for both shareholders and where we are trying to head. I think we were very clear that we are very focused on generating EBITDA which you know, is the proxy for generating cash. We are going try and continue to aggressively pay down our acquisition debt. We think our capital structure and our capital structure, generally, is a weight on the stock and we would like to continue to show that we can pay that down.

Okay. I would just add this. I understand you're taking down OpEx. Given how conservative, extremely conservative you guys should be operating in this environment, given you have posted inconsistent results, certainly your top line has fallen below your expectations at least over the last two quarters, I would stress how important it is to be phenomenonally conservative in managing your OpEx at this point especially considering you are a levered firm.

I don't think $130 million to $140 million is conservative enough, not even close given that your revenues are contracting in the -- at a more accelerated clip. But I just want you guys to really meditate and think about that. And I guess I will just leave it with that.

Thanks.

Thank you. (OPERATOR INSTRUCTIONS). Our next question comes from the line of Jason Bernstein. Please go ahead.

Thank you for the guidance, and regarding the pay down $in debt, the 40 million this quarter and $90 million year-to-date, can you provide any guidance on the convertible debt?

Guidance on it?

Yes, how you guys intend to either pay it down or handle the 2010 maturities.

Yes. Right now we have $160 million convert, it's due in August of 2010. We have a date before that from our senior debt agreement which is February 2010. We have to refinance $135 million. If you don't know, and I will say, he convert market right now is basically closed.

A lot of financial institutions have done converts and you know our advisors are telling us it is going be awhile until that washes its way through. So the traditional way to refinance that doesn't exist. We hope over the next 15 months, that will come back. Having said that we will look at other alternatives as necessary to refinance it. There's no ambiguity in our minds, we understand that something needs to happen by February of 2010. Right now, there's just not a lot of choices.

Okay. Thank you.

Thank you. Our next question comes from the line of Steve Baughman with [inaudible] Partners. Please go ahead.

Afternoon, guys. Most of my questions have been answered but maybe I missed it. John, did you say if you had already received the Riverbed proceeds and if that was included in the balance sheet.

We received the proceeds after September 30th. But we have received them.

Okay. So that was included in AR as of September 30th?.

That's right.

Okay. And then, the other thing, just on the cash question that one of the previous callers asked about, what other sort of cash resources do you guys have? Can you just remind us? Do you have availability on a revolver.

We have a $50 million revolver. I think if you look in our last Q we borrowed $15 or $20 million after quarter end and then repaid it shortly thereafter just dealing with fluctuations of cash and expenses during the quarter.

Okay. So you are comfortable running with stated cash on the balance sheet at the current level or at the $33 million level because you have availability if you need it for short term cash needs?

That's right. Again I think I said in prior calls, we can, we could run lower than that if we needed to but right now that's fine. That level is fine with us.

And we are always balancing the difference between paying down debt and borrowing it back and that's where we were comfortable at the end of this quarter. If you think about it liquidity-wise we have that cash plus the $50 million.

Okay. And then just on the interest rate on the debts, and I know that this is probably stuff that's able to be figured out from your filings but I don't have it on the top of my head you mentioned a 7.3%. Is that set for the entire fourth calendar quarter?

It is LIBOR plus 3.5.

Okay. But it is your guys alternative, right? You can also do prime plus 250.

That's correct.

If the markets, if the credit markets continue to be troubled through the end of the year the way they have been you guys always have that opportunity to go to prime plus 250.

That's right.

Okay. Great. And then, final question, just wondered on the DXi 7500, you mentioned you guys had quite a few large sales slip. Have any of those closed yet?

Bill?

Yes, a couple.

Several have.

Several have. Okay. Great. Thanks very much.

Yes.

(OPERATOR INSTRUCTIONS). We do have a follow up from the line of Brett Miller with Dialectic. Please go ahead.

I guess all of our questions have been answered. Thank you.

Thank you. Management,, there are no further questions. I will turn it back to you for closing comments then.

Thank you for joining us. We look toward to talk to you again in our next release. Thanks.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. Thank you again for your participation. At this time, you may disconnect.