Quantum Corp (QMCO) 2010 Q4 法說會逐字稿

Thank you for standing by. Welcome to the Quantum Corporation fourth quarter teleconference.

(Operator Instructions)

This conference is being recorded today, Thursday, May 13, 2010. I would like to turn the conference over to Shawn Hall, General Counsel. Please go ahead, sir.

Thanks, and good afternoon and welcome. With me today are Rick Belluzzo, our CEO, Jon Gacek, our COO and CFO, and Bill Britts our EVP for Sales and Marketing. The webcast for this call, our earnings release, and quantitative reconciliation of any GAAP and non-GAAP 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 Reform Act of 1995. Forward-looking statements include statements regarding our business strategy, opportunities, and priorities, anticipated product lunches and plans, future financial performance, including expected revenue, gross margin and expense performance, and debt covenant compliance, and trends in our business and in the markets in which we compete.

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 2010 results as well as to our reports filed with the Securities and Exchange Commission from time to time including our most recent 10-Q filed on February 5, 2010. 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 in today's discussion and we undertake no obligation to update the forward-looking statements in the future. With that I will turn the call over to Jon Gacek.

Thanks, Shawn. Good afternoon and thank you for joining us as we report our fiscal 2010 and fourth quarter results. I'm going to walk through our results for the year and quarterly period ended March 31, 2010 and comment on a few areas where we made significant progress toward Quantum becoming a more profitable growing storage systems company.

As we end fiscal 2010 and begin fiscal 2011, it is clear that Quantum is well positioned having greatly expanded our portfolio of tape, disk, and software products during the year and shifted our go-to-market focus to capitalize on changes in the competitive landscape and the growing market opportunity. In just the last five months of fiscal 2010, we introduced a new DXi family of mid-range, disk-based de-duplication and replication appliances a new version of our StorNext software, a new entry-level Scalar tape automation platform and tape drives, libraries, and media incorporating the newest generation of LTO technology.

Most of these products began shipping during the March quarter, during which we also prepared for last month's launch of the new Scalar enterprise library and this week's announcement of the new DXi appliances designed for SMB and remote office customers. Our financial model, product introduction, and fiscal 2010 results provide a strong foundation for growth in 2011.

Now I will move to the results. Revenue for fiscal 2010 and the fourth quarter were $681.4 million and $164.5 million respectively. Non-GAAP EPS for the year was $0.26 and for the fourth quarter was $0.04 compared to $0.18 in fiscal 2009 and $0.01 in the year ago quarter.

As we evaluate our performance, there are several measures that are important to both our fiscal 2010 results and our mid-to-long term business strategy. These include the branded versus OEM revenue mix, non-GAAP gross margin, disk systems and software revenue growth, non-GAAP operating profit, and finally, cash generation and EBITDA.

Let me comment on each of these. For the fourth quarter, our branded business represented 78% of our non-royalty revenue compared to 70% in the same period a year ago. On a year-over-year basis, our fourth quarter branded revenue grew 8%.

As we look to fiscal 2011, we expect our branded business to continue to grow for tape, disk systems, and software products. Non-GAAP gross margin for fiscal 2010 was 44.5%, up from 40.8% in fiscal 2009. And is our best result in ten years.

For Q4, non-GAAP gross margin was 44.4% compared to 39.6% for the same quarter last year. This is a 480 basis point improvement and reflects increase in $6.4 million in gross profit dollars on slightly lower revenue. Disk systems and software revenue was $95 million for fiscal 2010 and $22.8 million for the fourth quarter. Branded disk and software revenue in Q4 was up 29% year-over-year and comprised 96% of the total compared to 70% of the total a year ago.

As we look forward to fiscal 2011, we expect this product category to be significant driver of growth. The end user market is large. We have excellent products and the independent channel partners want an alternative set of solutions to sell to their customers. Non-GAAP operating income for the year was 11.7%, up from 8.2% in fiscal 2009 and our best performance in nine years. On a year-over-year basis, Q4 operating profit almost doubled to $14.6 million or 8.9% of revenue.

And finally, we generated cash from operations for the year of $100 million and had EBITDA of $103 million for the fourth quarter. Cash from operations was $18.6 million and EBITDA was $20 million for the quarter. We paid down $500,000 of our senior debt, ended with cash of $117 million. During the year we have increased our cash balance by nearly $30 million while repaying a net $64 million in debt.

All of this demonstrates how much we've accomplished over the past year and why we feel good about the opportunities ahead. It also provides context for much of the way we view Q4, namely the final step in positioning Quantum for growth in fiscal 2011. With that, I will walk you through this quarter's financial results.

I would like to refer everyone to the financial statement and the supporting schedules included in the press release. It will be helpful to both read those but also refer to them as I make my comments. Starting with revenue, revenue for the fourth quarter ended March 31 was $164.5 million compared to $168.1 million a year ago. Year-over-year revenue declined by $3.6 million, as a result of significantly lower OEM DXi software revenue and OEM tape device revenue.

The $164.5 million was at the low end of the range of our guidance but we are pleased, given that we were later than planned releasing the DXi 6530, DXi 6540 and DXi 6550 series and the fact that LTO-5 drives were released late in the quarter or in the last month of the quarter. Royalty royalty revenue was $17.7 million for Q4 compared to $16.2 million in the same quarter a year ago. This was primarily driven by increases in our LTO royalties while DLT royalties remained relatively flat year-over-year.

For the quarter, non-royalty revenue totaled $146.8 million, of which 78% was branded and 22% was OEM. That compares to $151.9 million a year ago, of which 70% was branded and 30% was OEM. The decline is primarily related to, again, the reduction in the OEM DXi software revenue and OEM devices offset by growth in our branded products. As I mentioned, our branded revenue increased 8% year-over-year in the same quarter in fiscal 2009.

Since merger with ADIC in 2006, we have been focused on transitioning our revenue stream to higher-margin products, which has been one of the primary reasons for the year-over-year revenue declines. However, during this time, our nonbranded share has increased from 52% to the 78% we recorded this quarter, the highest percentage in company's history. And this mix shift is a significant contributor to the increase in non-GAAP gross margins from 31% to 44% over that same period of time.

Looking further at various revenue classifications, devices in media totaled $26.4 million compared to $28.8 million in Q4 a year ago. The decline is primarily attributable to anticipated declines in OEM devices in media of $4.8 million offset by increases in branded devices revenue of $2.1 million. The most significant year-over-year increases were in sales of our branded LTO devices. Tape automation system revenue was $61.9 million compared to $61.3 million in Q4 of fiscal 2009. Branded automation shows slight increase while OEM automation remained relatively flat.

This system software product and related service revenue was $22.8 million, down from $24.2 million a year ago. However, on a year-over-year comparison, we had a significant increase of 66% in our Quantum branded DXi revenue. StorNext revenue was relatively flat year-over-year and revenue from our existing OEM agreement declined significantly.

We continue to see very good demand for our DXi 7500 as customers like its scalability, VTL interface, and tight integration with tape, all of which are important features in enterprise environments. The strength of our DXi 7500 offering combined with the later launch timing of the DXi 6500, DXi 6530, DXi 6540, and DXi 6550 meant that larger deals continue to be a significant part of our DXi revenue mix. In fact, nine deals over $200,000 made up nearly half of our overall disk revenue, including one deal in excess of $1 million.

However, despite the product launch timing during the quarter, sales of our mid-range DXi 6500 NAS line more than doubled from the previous quarter and with all five of our DXi 6500 models now shipping, we expect to significantly increase the revenue contribution from higher-velocity deals moving forward. We have received very positive feedback from end users and channel partners on the DXi 6500 and are confident we now have a disk product that fits our branded go-to-market model in the mid-range, including being well-lined with our mid-range tape system products.

Service revenue was $38.8 million compared to $40.1 million a year ago. The $1.3 million decline is primarily the result of a reduction in OEM out-of-warranty repair. Branded product service revenue increased slightly this quarter from Q4 of fiscal 2009.

Turning to gross margin, non-GAAP gross margin in Q4 was 44.4% compared to 39.6% in the prior period. This is the result of higher branded sales mix and our continued improvement in managing our manufacturing and service costs. On a year-over-year basis, non-GAAP gross margin was negatively impacted by the decline in OEM DXi software revenue. However, we are very pleased with this quarter's gross margin and believe it is a great indicator of the overall value of the business.

Moving to expenses. Non-GAAP operating expense totaled $58.4 million compared to $59.1 million a year ago. The largest driver of the decline in operating expenses was a reduction in G&A spend of $2.3 million, partially offset by a $1.5 million increase in R&D spending on new product launches. The G&A decline was primarily related to the lower head count in associated costs and the recovering collection of previously written-off collections receivable.

Non-GAAP operating profit for the quarter was $14.6 million or 9% of revenue compared to $7.6 million or 5% of revenue in the same quarter a year ago. This is a nearly double from the prior year, driven by our increase branded mix and sales of higher margin product along with ongoing management of our operational costs. Interest expense for the quarter was $6.1 million compared to $5.7 million a year earlier. This included interest expense of $5.7 million and amortization of debt issued cost of $400,000.

The current coupon interest rate for remaining senior debt, of which was $186 million at March 31 will be 3.8% for the quarter ended June 30, and the average coupon rate for our total debt will be approximately 7% for the quarter ended June 30. We expect interest expense will be approximately $6.2 million for the first quarter of fiscal 2011. For the fourth quarter, we had other expense of $500,000 due to foreign currency losses and we recognized a net tax expense of $600,000 primarily related to foreign and state taxes. We still believe it's reasonable to model $1 million per quarter for tax expense.

So, summing it up for the quarter, we had non-GAAP net income of $7.3 million and non-GAAP EPS of $0.04 compared to non-GAAP income of $2 million and EPS of $0.01 in the same quarter last year. Focusing on cash flow for the quarter and the balance sheet of March 31, I would like to highlight several key points. Cash flow from operations for the quarter were $18.6 million. We paid down $500,000 of our senior debt in Q4.

At quarter end, the composition of our debt was $186 million of senior debt, $122 million outstanding with the EMC, and $22 million of convertible debt. We ended with $117 million in cash. Non-GAAP EBITDA for the quarter was $20.4 million.

We are in compliance with all debt covenants at March 31, and we expect to be in compliance with our debt covenants during the next 12 months. For purposes of calculating our debt covenants, EBITDA for the last 12 months was $102.9 million. On a sequential basis, manufacturing inventory increased $4.3 million, accounts receivable decreased $13.2 million, and we received an accelerated payment of $11.7 million from one customer.

Cap Ex was $2.9 million. And purchases of service parts inventories were approximately $1.3 million. Depreciation, amortization and service parts lower cost or market expense totaled $15.8 million for the quarter.

As we close on fiscal 2010 and reflect on our performance, we see it as a very good year, which ended with an improved balance sheet and strong financial model, a mature but enhanced taped portfolio that is very profitable, and a large growth opportunity with our disk system and software products. We believe we are now well positioned to grow and we expect to do so in fiscal 2011.

For those that have models, here is our guidance for fiscal 2011. Revenue of $700 million to $750 million, we expect growth in disk systems, software, and tape products. Non-GAAP gross margin of 45% to 47%. The improvement over fiscal 2000 is primarily related to product mix. Non-GAAP or operating expenses of $240 million to $250 million.

The increase primarily reflects investments in sales and marketing aligned with our growth plan, including sales, commissions, and demand generation. And it also includes an expectation to accrue incentive compensation across the company. Interest expense of $24 million and $4 million in taxes. You can assume weighted average shares outstanding of 220 million. We will pay off the remaining $22 million of our convertible debt with cash. And we will comply with the terms and covenants of our senior debt agreement.

For Q1, which is typically a seasonally weak quarter, we are forecasting revenue of $170 million to $180 million. Slightly higher gross margin than in Q4. And total non-GAAP operating expenses of $60 million to $62 million. Interest and taxes should be similar to Q4. Now let me turn the call over to Rick.

Thank you, Jon. Today I would like to start by providing a summary and perspective on our FY2010 performance and then shift to spend time reviewing our critical priorities for the new year FY2011.

This last year was very important year for the company. While we have been focused on transforming the company for several years, in many ways 2010 should be viewed as the year where most aspects of the transformation were completed. Positioning Quantum for the future.

During the year, we dealt with a number of challenges and had significant accomplishments. All of this has positioned Quantum well and now our primary focus on translating these actions into growth. One year ago we faced a number of critical issues including a very difficult economic environment, which negatively impacted spending on storage by our customers and wide spread doubt about whether we would be able to refinance our convertible debt.

Additionally, our product line had some gaps, including a mid-range NAS de-duplication offering, the need for greater strength in the entry level and enterprise tape automation offerings, and important features and functionality in our StorNext offering. Finally, and maybe most significant, one year ago our go-to-market strategy was largely optimized around EMC. To route FY2010, these issues were addressed or clarified and the overall market environment has improved. Many of these changes came to fruition at the end of our fiscal Q4 making it very much a transition quarter.

Let me provide some details. First, with regard to the market there is little doubt that the environment for IT spending and storage, specifically, is improving. While there is still an atmosphere of caution, budgets and spending have improved. Storage projects are highly scrutinized and competition remains challenging, but we find that opportunities are definitely growing.

This became evident in calendar Q4 of our fiscal Q3 and while we saw the traditional seasonal weakness in our fiscal Q4, the environment was much healthier than a year ago. We are particularly encouraged by the core market strength in de-duplication, where the vast majority of customers have yet to implement de-duplication in their environments. We also see growing strength in other areas that play to our position, including tiered storage, rich media, and consolidation, all of which relate to our current and future StorNext solution set.

Finally, although tape's role is evolving, 85% of customers still use tape in conjunction with disk or on a stand alone basis according to Gardner. In short, the environment shifted during the year and Quantum is well positioned in markets that have fundamental growth potential.

On the product side, we had a series of strong launches during FY2010. The most significant of these were completed during the end of the March quarter and the beginning of the current quarter. These Included Dxi 6500 Family of Mid-range Disk-based De-duplication and Replication Products Optimized For Nas Environments, Stornext 4.0, the Entry-level Scalar I40/80 tape libraries, and LTO-5.

Most recently, we launched our new Scalar i6000 enterprise library and Quantum Vision 4.0 Monitoring and Reporting software. These products give Quantum a competitive advantage we have not enjoyed for some time and established the foundation for building revenue momentum. Capitalizing on this opportunity and growing revenue will clearly be the priority in coming quarters.

Turning to our go-to-market strategy, we continue to drive the volume part of our business throughout our traditional channels in FY2010. However, we made a dramatic shift in our go-to-market focus for the rest of our business as the EMC relationship changed from a partner to a competitor in the area of de-duplication . This element of our business changed rapidly, requiring us to respond aggressively.

At the core of this transition are several priorities, including a greater emphasis on building our mid-range business through the independent bar channel with the DXi 6500 as well as related tape products while focusing our enterprise business and channel programs on accounts where we have competitive advantage. This involves not only the DXi 7500, but also StorNext and our Scalar i6000 tape libraries.

Next, we are pursuing tighter alliances with ISVs as well as strategic partners. For example, Symantec selected Quantum as a pilot offering in their new Symantec Alliance Network, which promotes and educates and rewards the channel for selling joint solutions. In addition, NetApp recently worked with us to certify their disk with StorNext and a new disk OEM recently began shipping a product based on our DXi software. With the full line of our DXi 6500 family only shipping for couple months, we are now in the early phase of our go-to-market transition, yet we feel that we are gaining solid traction with new partners, aided in part by the EMC acquisition of Data Domain and the Oracle changes with Sun. Both of these disruptions have created opportunity for Quantum in the storage industry.

Finally, as John said, we have continued to improve our financials over the last year. In fact during FY2010, we delivered increased non-GAAP and GAAP operating income and net income on both a dollar and margin percentage basis. In spite of a meaningful decline in EMC revenue. Summary, non-GAAP operating margin for fiscal 2010 increased to 12% from 8% in 2009.

We believe our business model now resembles a system company and further improvement will come from growing our higher margin revenue both branded sales and disk systems in software. This is our focus for FY2011. Also, for a balance sheet perspective, I would add that we worked our way through our convertible debt refinancing challenge generated cash of $100 million during the year and we will continue to strengthen our balance sheet in FY2011.

So let me just reemphasize that FY2010 was a good year in terms of improving our results, but more importantly, working through a series of transitions to position the company for even stronger performance through revenue growth. We completed a number of critical product launches at the end of FY -- of fiscal Q4 and we are now focused on growing revenue and continuing to improve our product competitive position.

So, as we start the new year, we intend to capitalize on the actions taken during FY2010 and improved external environment to build revenue momentum. In order to achieve this, we have established -- we have focused on several priorities. This starts with products, where we feel we are very well positioned with the from a competitive perspective. The DXi 6500, our third generation de-duplication product offered unparalleled combination of simplicity and value for mid-range users and is optimized for channel partners.

This week, we also announced two new DXi 4500 appliances that provide affordable, non-disruptive de-duplication and recommendation to small and medium sized businesses and remote offices with DXi software licenses included as standard, at no extra cost. In addition, our StorNext 4.0 release announced earlier this year it is now shipping, delivering new functionality for high performance data sharing and management. It expands our opportunity in both current StorNext markets and other areas where customers are struggling with the huge growth of unstructured data that is critical to their business.

On the tape side in the last six months, we introduced new entry-level Scalar i40 and i80 libraries and our new enterprise Scalar i6000 system, building on our number one position in open systems tape automation. In doing so, we have not only extended our iLayer intelligent management software to the entry-level automation market, but enhanced it to provide enterprise customers with a long-term archive and data retention solution optimized for the evolving role of tape in data protection.

The enhancements include a new feature, Media Data Integrity Analysis, that proactively scans archive cartridges to detect potential media issues so that they can be addressed before they become a problem and thereby maintain data integrity. Finally, with our Quantum vision software also recently enhanced in version 4.0, we link our disk and tape offerings together and manage them from a single pane of glass, whether it involves a single site or multiple sites spanning the edge of the network to the core of the data center. As we move forward this year, we will continue to expand and further improve our product portfolio.

Next, we are very heavily focused on expanding our bar channel. Our edge-to-core disk and tape offering fits very strategically with independent bars and we are seeing improving gaugement as they become more excited with our products -- product offering and looking for better alignment given the changes with Data Domain for de-duplication and Oracle with enterprise tape. The engagement is key towards improving our go-to-market leverage and scaling our business. We have a solid program, a strong product line, and strategic alignment with this channel. We are now executing a plan that includes top to bottom engagement with select -- with a select set of bars. It is clearly early in the process, but we were confident this work will yield improved performance.

As we focus on the near term products and revenue opportunities, we are also continuing to invest in our technology platform to ensure that we can extend our growth position. We have a number of key areas of opportunity, including enhancing de-duplication replication, where it is still very early in the evolution of this technology. And extending StorNext into a broader market as companies struggle to manage their vast growth and unstructured data. In both cases, we intend to deliver next generation technology over the coming year to leverage the power of de-duplication more broadly in their environment and further enhance StorNext as an enabler of cloud storage solutions.

All of these efforts and more are intended to achieve three important objectives. First, to gain share in open systems tape automation. Next, to roughly double the size of our disk systems and software business. And finally, to deliver new technology in order to extend our ability to grow.

The guidance that John provided reflects the results that we intend to achieve in this fiscal FY2011, including the first year of overall growth for Quantum since we acquired ADIC. We expect momentum to grow as the year progresses given the recent series of new product launches and the changes in our go-to-market model. We believe the environment for our products can support this goal.

We are also making selected investments in sales and marketing and engineering to ensure that we make this shift to growth. As part of this, we expect to achieve further margin growth as revenue improves. Of course, our plans assume the recent improvement in the economy, specifically IT spending, continues. The indications continue to point to growth in spending this year, yet economic uncertainty clearly exists.

I will close by saying this last year was a successful and very important year. This new year will be similarly critical, but the focus will be different as we shift our energy to growth and revenue momentum. Ultimately, we believe that this will result in improved profitability and make Quantum more valuable. I will turn the call over to the operator for more

Thank you, sir. We will now begin the question and answer session.

(Operator Instructions)

Our first question comes from the line of Brian Freed with Morgan Keegan. Please go ahead.

Good afternoon and good job managing through lot of product transition.

Thanks, Brian

Couple quick questions. Firstly, as you look at the LPO-5 launch, you guys were pretty timely with your product launch, but the bigger OEMs, in particular, IBM, saw some pretty significant delays in their LPO-5 media and drive launches. Can you talk a little bit about how that impacted you in the quarter in terms of did it help you from a branded side? In terms of gaining share? Did it hurt you, do you think, from an OEM side? And how do you think that plays out over time?

I'll start and then Bill can jump in. One of the reasons that we did our joint development agreement with HP, one of the goals is to be out early and first to market and that was one of the things that we achieved here and we're really pleased about that. The other goal was to get the drive in to automation products also timely. And we achieved that as well.

So, from a branded perspective, it was positive, it was unfortunate that it was in the last month of the quarter, because what happens is these sale cycles are several months to multiple months long and so you don't want to unhinge a deal by introducing a new technology. So, I think -- On that one specifically, we'll see momentum starting this quarter and throughout the fiscal year we'll get the real benefit from that.

On the OEM side, it's a little bit different story. We still ship LTO-4 to our OEM partners. It's harder to know how much it impacted their specific business. But in our OEM products, we generally ship IBM base drives so we would love to have those be available, too. And we are working with IBM to make sure we can get them into the various library flavors as soon as possible.

Yes, it did have a positive impact on the quarter. It was relatively small, as John mentioned, because of the late start. And then LPO-5, these were sold in new systems, so it did actually win some business in competitive head to head competition against StorageTek and IBM. The upgrade of our install base, which typically will happen over time, that didn't contribute in the quarter at all. So, we'll start seeing that uptake in this quarter.

Great. My second question relates to StorNext and the 4.0 release. Can you talk a little bit about what makes StorNext unique among scale-out file systems in terms of the features that you guys bring to the table that is unique?

So, I think it's important to start with understanding that StorNext is both a very high performance file system with an integrated archive. So, the archive ability in StorNext allows you go up into petabyte types of archives and certainly, scale-out NAS provides that. But we have the native file system performance in StorNext is much, much higher performance than a NAS type of alternative. Generally we are best positioned in very, very demanding, large data set, rich media, entertainment, high performance computing, life sciences where the performance demands are high.

With 4.0, we added some additional features that really broaden the applicability of the technology, namely replication, so now you can replicate from one file system to another file system for DR purposes. To have another site, to be able to be connected through recommendation and we also have native de-duplication in the file system, which again, starts to broaden the applicability of StorNext. So, that's really what I would say that key unique differentiators for 4.0 relative to the position we had with previous versions of StorNext.

And for less technical person, when you say you have integrated archives, does that mean that StorNext supports both the disk and tape tier of the solution?

Well, the file system itself runs on disk sub systems. And we basically have the ability to scale that out to a number of clients and then the archive pieces, the storage manager pieces integrated with the file system. So, that means you can have tiered storage that you can move between the disk and tape tiers at very, very high performance levels.

Okay. Great.

And I would just add that a lot of the words that Bill used there really do speak to new opportunities in the storage landscape and that's a strategic area that we're working in terms of how does some of those attributes and how can we move StorNext into more cloud-like applications, where people want to build larger repositories data with high performance with its integrated archive and storage management capability. I think we were referred to in our previous call where we won one more mainstream horizontal opportunity that was very large that was about building a private cloud. So, we're clearly working that opportunity and I expect you will hear more from that in future calls as we get more direct and clear about how our next releases will help position ourselves in larger markets.

Okay. And my final question and I'll jump back into queue. As you look at your partner relationships, in particular, Fujitsu, who you announced an expanded relationship with on the tape side, and I believe they're also your OEM partner for de-duplication, but as you look at that relationship in particular as well as your other partnerships, are they ramping as you expect and can you talk about how you see the timeline of those relationships unfolding in a material way?

Well let me de-link the two. Because we haven't announced anything specific about the DXi OEM, who that is and I understand your perception there. As we've talked about in the past, on these new OEM agreements, we don't build numbers into the model. So, in the guidance that we gave and how we budget we don't put those numbers because we don't know how big it will be and we don't control it. And then as we get some time under our belt with those partners, we'll have a better feel for what the opportunity is and we'll talk about it more. As Rick pointed out, the product did begin to ship recently and I think we will have some revenue from that relationship in this quarter but not built in to how we're thinking about it.

On the tape side with Fujitsu, that's a broader relationship than we've had in the past. We've had a really strong relationship with them in Germany, in particular. This is a worldwide agreement. And we are getting engaged with both tape and disk opportunities with the Fujitsu sales force around the world. It's still mainland Europe in focus, but we can see it broading out from there. It is part -- it's built into our assumptions of growth and tape for 2011

Great. Thanks a lot.

Our next question comes from the line of Glenn Hanus with Needham & Company. Please go ahead.

Good afternoon, guys. Maybe talk a little bit more on the guidance side here, the $700 million to $750 million and then I think imbedded in there you indicated -- did you indicate doubling your disk business this year? What would be -- as you kind of look at the variables in there, what do you see as the biggest swing factors that might make you towards the lower end or toward the upper end of the range?

Well, as Rick pointed out, this is the first time since we put the two companies together we're in a growth mode. So, going from getting smaller to making the transition to going bigger, that is one of the things that we think about is you have to move the mind set around that.

I think I mentioned that we expect to grow in tape, branded tape, in disk, and in software, all three of those important categories, and they're different. We think on the tape side, it's about taking share. We think -- we're one of the few companies that has added actually new platforms with the i6000 and i40 and i80 and with LTO-5, that's a share taking opportunity. Yet, we recognized that tape's a mature market.

On the StorNext side, it's a vast opening opportunity for us. We can see certain places where we really compete well. Bill mentioned those characteristics are. Yet we find ourselves getting pulled into more broad base fields. So, that one has a higher beta in what the upside is.

And then on the DXi space, it's really all built around this new product set in the mid-range that fits well with the channel and augmenting our current business, which, admittedly is kind of lumpy, large deals for very specific customers, which continues, by the way, and that product works very well. But to grow at the level where we're doubling the disk business, it's all about getting velocity through our channel partners, which is about the DXi6500 and now the new DXi4500 products.

Okay. Great. And could you maybe just talk a little bit more about where you feel you're at with the channel then for the mid-range NAS product? I don't know if it's metrics on a number of partners and how far have you come in terms of having in place the partners that you intend to have and give us some color around that?

So, I'd characterize the adoption in the channel is really kind of accelerating in the last couple of quarters if you think about the launch of the 6500. That was DXi6510 and DXi6520 back in the December quarter and then the DXi6530, DXi6540, and DXi6550, and we now have the full lineup and that's been important in terms of that fit with their go-to-market. The other factor, we focused a lot on trying get traction with partners that are looking for alternative for Data Domain and we have very detailed deep business plans with several partners that had sold Data Domain in the past and are looking for an alternative and we see them in traction with them as we get critical part of this channel development.

So, we see it, as Rick pointed out, this is going to happen in phases. It's about winning end user deals, demonstrating that the products very competitive, that we are providing a lot of value to the end user customer. I think we had some good wins in the last quarter that demonstrated that. We've done that with partners and we're building on that success to scale out across their sales force and to do that, you need to put together these business plans with these independent partners and that's progressing very well.

And Jon, on the OpEx, could you elaborate a little bit more there. You're putting in a healthy uptick this year. Just where is that going?

Yes. A couple of things. We're going to invest in some growth areas around sales and marketing and it's a combination of demand gen to actual feet on the street. Although, most of our feet on the street editions are really filling open territories.

The other thing that I put in my script and I assume somebody is going to pick up on it like you did is that we for the first time since we put the companies together we will build in to our model some incentive compensation for the companywide. That's one of the elements that's on the increase. And that is to drive this growth concept that we feel is important culturally inside the Company. And I think those are the two big items that are different. And then I think we'll continue to operate well on the Cog side, generally that's a place where we end up doing better than we expect when we start the year.

But another way to think about it, too, is a portion of that increase is performance-related.

That's right.

The commissions to the sales force which are higher because of expected better performance as well as the incentive compensation, which will also be driven by performance. There is some regulation of that self-regulation based on our performance.

And lastly, Jon, just for fiscal 2011, non-GAAP depreciation and amortization and CapEx thoughts?

Okay, I actually have that in front of me, so I'll try to do the math real quick. We're going to start scaling down some on amortization because some of the intangibles from the ADIC acquisition start to work their way up. Depreciation, we'll start with that. Fairly flat. And the amortization will move from say, $12 million a quarter down to sort of $9 million at the end of the fiscal year. And then on CapEx basis I think you will see its in the same range of $3 million to $5 million of both including service parts and regular CapEx.

Okay. And then the depreciation being flat meaning what?

It's about $3 millionish a quarter.

Thank you.

Thank you. Our next question comes from the line of Joe Feshbach with JFP. Please go ahead.

Hello. Great job in fiscal 2010.

Thank you.

Congrats. Couple quick questions. On StorNext, was 4.0 generally available in the March quarter or was general availability begin in the June quarter?

It was in the --

It was available in the March quarter.

Yes, the March quarter.

I got it. Alright. Secondly, on the royalty -- the LTO royalty number was at least a little stronger than I expected and I'm curious whether that was impacted in any observable or significant way by LTO-5 and how we should think about LTO-5 layering into that and whether that's a good base line number to look for a little bit of growth out of, or whether there are other variables we should consider?

Yes, LTO-5 was not a big contributor. So that's the upside. I think -- I don't know that I would make this the new base line. It surprised us some as well. Some had to do with timing.

So, I think you have to look at the last three quarters or four and draw the line. I don't think it's going to change appreciably. It is true that LTO-5 does have a higher royalty rate and we could be surprised on the upside there. But I wouldn't model anything different.

Yes. As much as anything, I think you should be -- we should be careful there wasn't some inventory correction given how deeply people pull back over the last year. I don't know -- I think that's mostly anecdotal, but it's something we should be careful with and not get too excited about that performance.

We're actually modeling, year-over-year, a decline in that number. But again, that's a place where we don't control it, as you know how we feel about that. We're trying to be judicious how we forecast it.

Makes sense. With the DXi6500 being fully available in all five models this full quarter that we're in, can you just make any comments? I'm sure its embedded in your guidance to some extent already, but just any comments on how the new models are doing now that they have been out for probably close to three months? I don't know whether they're as inclined to end of the quarter sales cycle or not. So maybe Bill can comment?

Let me start and then Bill can comment. I'll say a couple things. We talked about having a 50% win rate in the DXi7500. We've seen a higher than 50% win rate with the DXi6500.

Secondly, that's a channel product, more so. We really don't want our sales guys -- we're not going to get to our number without getting leverage from the channel. So, we're also focused on getting channel partners to accept and standardize and sell the product. And that also has been very good. And then I think the product has done very well when it's been positioned in bake-offs.

Yes. So, with five models in the DXi6500 series, you have ASPs ranging from $20,000, $30,000, all the way up over $100,000. So, the different models will have different characteristics in terms of are they back-end loaded sales cycles. We're building a good pipeline. We're doing a lot of technical proof of concepts that will lead to bigger sales.

We're doing a lot of, as Jon mentioned, we are doing a lot to train the channel on the differentiation of the DXi6500. Get them to understand how the DXi6500 compares to other mid-range alternatives. So, the indicators from a pipeline stand-point, back to this idea that channel enablement, that's really our focus for the quarter and we anticipate that that will have a positive impact. Not only in this quarter but in the out quarters.

Got it. And just, Jon, I have to ask my one house keeping question, which was service gross margin? Just helps me finish up my model.

It was 36.9%.

Great. So, that looks to be pretty stable.

Yes, it has stabilized. Great.

And then just think being the DXi6500 versus the DXi7500. It doesn't sound like there is much susceptibility to cannibalization of the DXi7500 by the DXi6500 because one is obviously VTL and the go-to-market approach is different. But is that the right way to think about it?

That's right. Very minimal and the positioning, you're absolutely right, the positioning for the DXi7500 in the VTL space is more enterprise, it's more likely to go into these larger shops.

I got it. Alright, I'll jump back in the queue if I think of anything else, but excellent.

Thank you.

(Operator Instructions)

Our next question comes from the line of (inaudible) with Technology Insights Research.

Yes, hi. The doubling and disk revenues for fiscal year 2011 sounds like that's based upon a bottoms up approach. Can you also triangulate that back to how you see the addressable market growing, because I believe Data Domain was talking about also at least a doubling and duplication revenues at EMC World.

Yes, let me make a few comments on that. I'm not sure I would characterize it as bottoms up. It's tops down, but I'll give you the top down perspective. Yes, the de-duplication market we believe is growing rapidly. There are reports in 80 plus% range.

There are data on how many people have implemented and it's very, very low and so we believe that the market definitely supports pretty rapid growth. And to be frank, our base is pretty small. And we feel like we have to be focused on that kind of result.

The StorNext piece, which is part of that, is -- has a good base of business, but -- and has fundamentally good growth in those categories, but not to the extent of the de-duplication market and there, I think we're trying to address it mostly with investment. I think we believe that we can, with the expanded footprint of that technology, we can pursue more opportunity and we're working to invest to make that happen. So, the doubling is a way to think about the fact that we are very focused about delivering that result.

And that when you couple the volume channel bay DXi6500 and now DXi4500 with the DXi7500 enterprise, larger deals with StorNext that's allowing us to get into some new areas of opportunity, the overall growth of the market -- we are setting a clear direction around the Company that we have to deliver results in that range. And we're very focused on that and there are bottoms up and top down reasons for it, it hangs together and it sounds ambitious.

It probably is ambitious. But we have worked for a couple of years to position ourselves for this opportunity and we are going to do everything in our power to take advantage of it.

Thank you.

Thank you.

(Operator Instructions)

Our next question is a follow-up from the line of Joe Feshbach of JFP.

Just two more quick ones. If I look at disk and software as roughly doubling, not precise, it does seem like even the high end of your annual guidance looks a little light. If -- I'm not sure what's going to go down but didn't we just do $680 million or something?

That's right.

$680 million, $686 million. I guess maybe it's close enough for government work. But it strikes me that it's more like a $760 million top end kind of thing or maybe even midpoint. Am I --

The way we're thinking about it is, disk and software are together and we said branded tape will grow. The downside is, I mentioned we had royalty going down and we have OEM tape going down.

OEM tape. Okay great.

You have to work that in to get in.

Now I got it. No problem. That was question number one. And then there was one other quick one. I can't remember. Anyway. Okay, well that's plenty. Sounds really good. Over to you.

Our next question is a follow-up from the line of Glen Hanus with Needham & Company. Please go ahead.

Just a quick one. Do your comments from last quarter still hold with the final catch up payment from EMC hitting in the first quarter?

It's not a payment. They've already paid us.

Right. I meant revenue recognition.

That's right. We have -- it will be in this quarter.

Okay. Great. Thank you.

Yes.

Thank you.

(Operator Instructions)

And at this time I have no further questions in queue. I'd like to turn the call back over to management for closing remarks.

Thank you for joining us. This is an important interesting call for us in that it closed out a year that we think was one of the best years in the Company for sometime relative to not only improving our performance, but getting the Company well-positioned. And we think that as really culminated towards the end of this last year and as we start off this new year, I hope you get a sense from all that you've heard today that we intend to be aggressive at extending the work that we've done and that we believe now that we are in the position where we've talked a lot in the past about reducing revenue and improving margins and now we believe we're in the position where growing revenue in the branded and disk systems and software area is really what's going to improve our performance moving forward.

So, it's a changed horizon. And that is the area focused, and I suspect in future calls we'll be spending more time on that, on how we are doing relative to getting the engagement that we need with our partners and how the products are being received, et cetera. That's our focus and so, you should -- if you've been listening to the calls for a while, you should sense that change in thinking and change in direction, really as a result, again, of really completing much, if not all of this transformation in this last year and now trying to focus on the opportunity that is before us.

And I would caution all of you that hopefully the economic environment will continue to show signs of improvement and strength. And that won't become an issue that comes back to create difficulty. But we were focused on what we can do and that's continuing to improve our product line and to build revenue momentum. So, with that, I look forward to giving you an update again in the next quarter. Thanks.

And ladies and gentlemen, this does conclude the Quantum Corporation fourth quarter 2010 teleconference. If you'd like to listen to a replay of the conference, please dial 1-800-406-7325 or 303-590-3030 and enter the access code 428-6988. ATT would like to thank you for your participation and you may now disconnect.