Quantum Corp (QMCO) 2011 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Quantum Corporation first quarter 2011 conference call. (Operator instructions). This conference is being recorded today, Wednesday, July 28th of 2010. I would now like to turn the conference over to Shawn Hall, General Counsel. Please go ahead, sir.

Thank you. Good afternoon and welcome. Here with me this today is Rick Belluzzo, our CEO; Jon Gacek, our COO and CFO; and Bill Britts, our EVP for Sales and Marketing. The webcast of this call, our earnings release, and the 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'll make forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements regarding our business strategy, opportunities and priorities, anticipated product launches 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 Q1 2011 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 11, 2010. Those 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 are 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 the forward-looking statements in the future. With that, I'll turn the call over to Jon Gacek.

Thanks, Shawn. Good afternoon. Thank you for joining us as we report our first quarter fiscal 2011 results. I'm going to walk through our results for the quarterly period ended June 30, 2010 and comment on significant accomplishments and challenges from the quarter as we continue to focus on becoming a growing and more profitable storage systems company.

For the first quarter revenue was $163.2 million compared to $160.3 million in the comparable quarter of fiscal 2010. Non-GAAP gross margin was 45%, an increase of 300 basis points over the same quarter in fiscal 2010 when we reported gross margin of 42%. Non-GAAP operating profit was $15.9 million in Q1 of 2011, and $14.4 million in the comparable period in 2010. Non-GAAP EPS for the quarter was $0.04 involved Q1 of fiscal 2011 and 2010.

Clearly our revenue performance was less than we anticipated , and given that one of our key goals for this year is to grow revenue, my comments will be more in depth than usual about what went on in Q1. In addition, Rick will also talk about the actions we are taking to address the revenue gaps that we currently see. On the positive side of the revenue results we had very strong growth in our branded disk systems revenue. It increased 22% sequentially, and 125% year-over-year. In addition, we had a very strong quarter in acquiring new enterprise tapecustomers.

On a geographic basis we performed significantly above our sales plan in Asia Pacific, and in two of our four sales areas in North America. With regard to revenue challenges, we were at 60% of our sales plan in EMEA, which we believe was a result of economic uncertainty. Also in one of our North America sales areas where we have historically seen a number of significantly large deals, we were at 30% of our sales plan. Overall, EMEA accounted for about two thirds of our Q1 revenue shortfall plan, while the North America area I mentioned was responsible for the remaining third.

The key take-aways is that we are seeing very good growth in our branded DXi product as a whole and we are performing very well in growing in the majority of our geographies, but we recognize we have to make improvement in a couple of our geos to hit our sales plan. As I mentioned last quarter, we evaluate our financial performance, there are several key measures that are important to both our midterm and our 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. I will comment on each of these.

For the first quarter, our branded business represented 73% of our nonroyalty revenue compared to 71% in the same period a year ago. On the year-over-year basis our first quarter branded product revenue grew 6% and for the remainder of fiscal 2011 we expect our branded business to continue to grow for tape, disk systems, and software products. Non-GAAP gross margin for Q1 of fiscal 2011 was 45%, up from 42%. This 300 basis point improvement reflects an increase of $6 million in gross profit dollars on revenue of $2.9 million.

We continue to generate very strong gross margin contribution and believe we have more opportunity here as the year progresses. This systems and software revenue, inclusive of related service, was $34.7 million for the first quarter of fiscal 2011 compared to $19.2 million in the same quarter last year, and $22.8 million reported last quarter. In total, branded disk and software revenue in Q1 was up 86% year-over-year, and 14% quarter-over-quarter.

And more importantly, branded disk revenue, so the DXi line, increased 125% over the same period in fiscal 2010 and 22% sequentially. DXi OEM software increased 69% year-over-year, as a result of the revenue level in Q1, as a result of the completion of the contract terms with that OEM and that timing. That DXi OEM software revenue contract is still in place, but we expect minimal revenue from it in future periods.

As we look forward to the remaining three quarters in fiscal 2011 we expect our branded disk systems and software products to be a significant driver of growth. The end user market and opportunity is very large. We have excellent products including a number of offerings introduced in the last year that have been very well received, and independent channel partners want an alternative solution to sell to their customers.

Non-GAAP operating profit for the quarter was 9.7%, up from 9% in fiscal 2010. As you can see, we tightly managed our operating costs during this quarter and that gives you some visibility into the variability of our operating model and where we get leverage.

Finally, $15.7 million of cash was used in operations. The cash usage which was expected was generally caused by balance sheet fluctuations. More specifically, the largest contributor to cash usage was a reduction in deferred revenue of $15.2 million primarily related to the final utilization of the EMC prepaid royalty, and to a lesser extent a typical seasonal decline in service contract deferred revenue. The majority of our service contracts renew in the third and fourth fiscal quarters.

We generated $23 million of EBITDA during the quarter, paid down $500,000 of our senior debt, and ended the quarter with a cash balance of $99 million. In the upcoming quarter, the quarter we're in today, we will be paying off the remainder of our convertible debt of $22.1 million with cash. In summary, our Q1 results were mixed.

We are pleased with the growth in branded disk systems and software sales and the new customer acquisition in enterprise tape automation, as well as the sales execution by our Asia Pacific team and two of our four North American sales areas. However, we still under performed in branded revenue generations, specifically in EMEA, where the economic impact either pushed out or cancelled deals, and as I mentioned in one of our four North American sales areas. On a positive note, we have seen several large EMEA quarters come through that we expected in Q1 but we still remain cautious about the EMEA market especially with the seasonality typically experienced there in the fiscal second quarter. We also expect strong revenue growth in the public sector this quarter.

With that, I will walk through the detailed results for Q1. I'd like to refer everybody to the financial statements and the supporting schedules included in the release. It will be helpful to refer to the documents as I comment. As I mentioned revenue for the quarter ended June 30 with $163.2 compared to $160.3 million a year ago.

Year-over-year increased $2.9 million as a result of higher branded revenue and higher OEM DXi software revenue, which was mostly offset by expected declines in OEM devices for revenue. Royalty revenue was $16.1 million for Q1 compared to $16.2 million in the same quarter a year ago.

For the quarter, nonroyalty revenue totaled $147.1 million of which 73% was branded and 27% OEM. That compares to nonroyalty revenue of $144.1 million a year ago of which 71% was branded and29% was OEM. The fiscal Q1 2011 percentages are overshadowed by the recognition of the remaining OEM DXi software revenue during the quarter. So excluding the effects of the revenue, we would have reported 78% branded revenue in Q1.

The increase in nonroyalty revenue is primarily related to increases in our branded revenue, specifically disk systems and software, offset by reductions in our OEM revenue. As our recognition of additional OEM DXi software revenue was offset by the expected reductions in the device revenue from OEMs. We have executed on our plan to stop doing business in areas in which we are not profitable and focus on those that positively impact the bottom line.

In the past years, this has a negative impact on our revenue trends but our operating profit, and nonroyalty branded share has improved as expected and our non-GAAP gross margins have increased from the low 30's to the mid 40's over the same period. Our branded revenue increased 6% year over year, and we continue to be focused on growth of the branded business and overall revenue in fiscal 2011.

Looking further at various revenue classification, devices in media totaled $20.5 million compared to $27.2 million in Q1 a year ago. The decline is primarily attributable to anticipated declines in the OEM devices and media of $5.3 million. And declines in branded media of $3.1 million offset by increases in branded devices revenue of $1.6 million.

As a point of reference, OEM devices revenue now totals less than $1 million in this past quarter, compared to $6 million in the prior year quarter. So a move of $5 million, and really has become an insignificant piece of our overall mix. The most significant year-over-year increase is in branded devices with sells -- and those are branded VTL devices.

Tape automation revenue was $56.7 million compared to $61.1 million in Q1 of fiscal 2010. The declinewas due to reductions in branded enterprise and mid-range product revenue, primarily resulting from the below plan performance mentioned earlier in EMEA and in one of our North American sales areas. However, we did see an increase in revenue from our new entry level products driven by our Scalar i40/i80 products which began shipping in the last half of fiscal 2010.

OEM automation remained relatively flat on both the year-over-year basis and sequentially. This system software product and related service revenue was $34.7 million, up from $19.2 million a year ago. On a year-over-year comparison we had significant increase, 125% in branded DXi revenue.

StorNext revenue grew 46%, and the revenue from our existing OEM DXi software agreement increased 69% as we recognized the remainder under the contractual agreement. Much of our growth in the branded DXi revenue was driven by large deals. To give more color to the geographic differences we saw this quarter in our branded disk systems business, we were above plan in North America . We were at 94% of plan in Asia Pacific, and we were at 31% of plan in EMEA. We continue to see very good demand for our DXi7500, as customers like its scalability, VTL interface, and tight integration with tape, which are all important features in enterprise environments.

In the mid-range, Q1 was the first quarter in which all DXi6500 were shipping for the entire quarter and we saw growth from this product, but declines in EMEA. We have received very positive feedback and interest in the DXi6500 product line from end users and channel partners, however our revenue has been slower than we expected. We are still not getting the high velocity deals from the DXi6500 that we want, but we did make significant progress during the quarter in adding VAR partners and increasing opportunities in our sales funnel.

Service revenue was $38.6 million compared to $38.9 million a year ago. The decline is primarily the result in a reduction of OEM out of warranty repair, branded product revenue increased slightly this quarter from Q1 in fiscal of 2010.

Turning to gross margin, non-GAAP gross margin in Q1 was 45% compared to 42% in the prior year period. This was the result of both higher branded sales mix and an increase in OEM DXi software revenue on a year-over-year basis. We are very pleased with the quarter's gross margin and continue to believe it's great indicator of the value of the overall business.

Moving to expenses. Non-GAAP operating expense totaled $57.6 million compared to $53 million a year ago. The largest driver of the increase in operating expenses was an increase in marketing and sales expenses primarily related to advertising and marketing programs for our new products. And increases in sales head count and the associated costs.

R&D spending also increased quarter-over-quarter due to additional head count, added in our disk systems and software teams. Non-GAAP operating profit for the quarter was $15.9 million, or 9.7% or revenue compared to $14.4 million, or 9% revenue in the same quarter a year ago. Interest expense for the quarter was $6.1 million compared to $5.7 million a year earlier. This included interest expense -- cash interest expense of $5.7 million and amortization of that issue cost of $400,000.

The current coupon interest rate for our remaining senior debt which totaled $185.6 million at June 30th, will be 3.85% for the quarter ended September 30th. And the average coupon rate for our total debt will be approximately 7.3% for the same quarter. We expect interest expense will be approximately $6 million for the second quarter of fiscal 2011.

One thing that we are often asked and I can confirm is that we are actively reviewing options related to further improving our overall capital structure. For the first quarter, we had net tax expense of $400,000 related to state and foreign taxes. We still believe it's reasonable to model tax expense of $1 million per quarter.

Summing that up for Q1 we had non-GAAP net income of $9.3 million with non-GAAP EPS of $0.04 compared to non-GAAP net income of $8 million and non-GAAP EPS of $0.04 in the same quarter last year. Focusing on cash flow for the quarter, and the balance sheet at June 30, I would like to highlight several key points.

Cash used in operations for the quarter was $15.7 million as mentioned earlier, we expected to use cash this quarter as a result of the final utilization of the prepaid EMC royalty, and the seasonality of service contract renewals. We paid down $500,000 of our senior debt and at quarter end the composition of the debt is $186 million of senior debt, $122 million outstanding with EMC, and $22 million of convertible debt. We ended the quarter with $99 million in cash.

Non-GAAP EBITDA for the quarter was $23 million. We are in compliance with all debt covenants at June 30, and we expect to be in compliance with our debt covenants during the next 12 months. And for purposes of calculating our debt covenants, EBITDA for the last 12 months was $105.2 million.

On a sequential basis, manufacturing inventory increased $2 million, accounts receivables increased $2.2 million, we also had an accelerated payment of $11.3 million from one customer. CapEx was $2.2 million and the purchase of service parts inventories were approximately $1.4 million during the quarter. Appreciation, amortization and service part lower of cost or marketing expense totaled $16.9 million in Q1.

Looking forward to Q2, we are forecasting revenue of $165 million to $180 million. Slightly lower gross margin and total non-GAAP operating expense of $58 million to $62 million. Interest and taxes should be similar to Q1. With that, I'll turn the call over to Rick.

Well, thank you, Jon. Today I'd like to spend most of my time discussing the near term plans to improve revenue performance and take advantage of the market opportunity before us. As we said during our last call, we have made numerous fundamental changes over the last few years. Changes in products, margin structure and investments to mention just a few. This has allowed us to transition our business model to that of a systems business. As evidenced by our operating margin improvements and new product releases that are positioned into more vibrant segments of the storage market.

Now to further improve our performance we must deliver consistent revenue growth and generate higher profits and increase the value of the company. As the industry continues to evolve, we are well positioned to help customers manage and protect their data by providing tiered storage and work flow solutions encompassing disk, tape, software, and key technologies such as deduplication, replication, and high performance file sharing. Our plans for FY-2011 at the highest level are about continuing the delivery of new products and driving branded revenue growth in disk systems, software and tape, and introducing new elements of our technology that will position us for further growth and expanded contribution.

Clearly, our Q1 results were not up to the level that is appropriate given these expectations. While we deliver improved results from last year, most notably non-GAAP income and net income up 10% and 17% respectively, our revenue weakness held back our opportunity to deliver even greater improvement. As Jon stated, the revenue shortfall was largely centered in EMEA. Where we saw deal slippage, extended approval cycles and channel contraction across all of our product lines. While some of the behaviors we saw in Q1 felt like the environment we experienced world wide during the [IT] Spain pull back just over a year ago. This time, we saw some areas of significant strength in Asia Pacific where business was very strong and in a number of areas of North America. In short, there were global factors that certainly impacted our business in Q1. Yet we believe that the overall market opportunity remains significant and there were several issues that we need to address to improve our underlying position and avoid being negatively impacted by uncontrollable economic issues as we experience this quarter.

In recent quarters much of our branded mid-range and enterprise business has been very large deal oriented. In fact for Q1, nearly 40% of our branded mid-range and enterprise revenue came from deals of more than $200,000. This included a multisite follow on DXi7500 sale to one of the top insurance companies in the US and other large wins such as the DXi7500 purchase by a new customer that is one of the leaders in the American music recording industry, and a multiunit DXi6500 deal with a government agency.

On the StorNext side notable customer wins above $200,000 included new business from a major financial -- major manufacturer of super computers, several Chinese television stations and a top university in the Middle East, aswell as a follow on sale to large government owned broadcast network in Asia.

We also had significant Scalar i6000 deals, including multiunit sales of a global networking company and a major European provider of information and communication technology. We are very pleased that large lead organizations around the world continue to turn to quantum for the data protection and management needs. However, the fact that such a significant part of our branded mid-range and enterprising business comes from big deals increases the risk of making our results lumpy from quarter to quarter and makes us very susceptible to economic variation.

As I have said in the past, a key element of our go-to-market model involves being more selective in pursuing DXi enterprise opportunities and focusing our where we're best advantaged while building a runway business that is more mid-range channel oriented with the DXi6500. Combined with the other elements of our go-to-market model around tape automation and StorNext, in both the enterprise and mid-range, we feel that this balance will allow us to build a growing business within our investment model.

In Q1 the downside of large deal opportunities was apparent in terms of being subject to delays, especially in EMEA. Compounding this was an insufficient level of mid-range run rate business. So yes, there were clear weaknesses in EMEA across the board, but again, the point I'm making here is that our overall mix of business makes us very exposed to economic down turns, and this is something that we need to continue to address.

The net of all this is simply that the opportunity and strategy remains unchanged. We have the right market and product focus, and must grow a channel and run rate business, especially with the DXi series. While we cannot control the economic environment, we must build a more diverse foundation to provide greater stability and growth. That has been our focus over the last six months and remains so. As demonstrated by the number of recent changes and some of the target investments that we have made. Let me review some of these key areas.

First, it's been said in the past building greater VAR channel engagement is critical. There's significant opportunity given the destructions caused by the Data Domain EMC change and the Oracle acquisition of Sun . We are pleased with some of the progress we have made in capitalizing on these disruptions. For example, in the June quarter new DXi opportunities from our current top five DXi channel partners were up nearly 50% year-over-year. In part reflecting a shift that several of them have made from selling mostly Data Domain deduplication products.

In addition, we have reached agreement with a range of ours to lead with our DXi solutions. On tape automation side, as Oracle has focused on a direct sales model and increased service pricing from the former Sun Storage tech business, we have seen interest form several VARs in working with us on targeting the Sun Storage tech and install based customers and transitioning them to Quantum. Where we can provide a significant advantage from a total cost of ownership standpoint. Despite this progress we must do more in engaging with the channel.

One data point is clear. The sales of the area that are furthest along in respect to delivering on this channel focus have had better overall revenue performance. So driving our channel program will remain our major priority. On the product front, we will continue to focus on ramping the new products launched over the last year. Including not only the DXi6500, Scalar i40/i80, and StorNext 4.0 , but also the DXi4500 and Scalar i6000 both of which just started shipping in Q1.

We will also be introducing new products to further expand our offering and improve our position, including the additional enhancements to our DXi portfolio this quarter. In addition, we have sharpened our competitive positioning around DXi particularly related to what we can offer customers in terms of better performance at a significantly lower cost. This would be our ongoing effort and we believe it will help us increase our opportunities and our win rates.

Another change we have implemented is the introduction of a series of marketing campaigns heavily focused on our very large install base. These multifaceted campaigns target specific segments of the install base with offers tailored to their environment, including upgrades to existing products, expansions, expansion with new products, and tradeups to current technology. We're also engaging with key channel partners to expand these marking activities to their customer base, providing the tools and processes to enable quick execution. We know that we perform better when we initiate the opportunity and compete in the install base. So we are greatly expanding our efforts in this area which we believe will also help us gain greater momentum with both end users and a channel.

Next, we recently restructured our North American organization, created a simpler overall model to drive greater focus around opportunities and align our sales team, our sales areas with seasoned leaders that have demonstrated success in making this model work in their previous area of responsibility. And then finally, we are focused on driving more opportunity in enterprise tape automation accounts.

Our new Scalar i6000 is the best in class open system enterprise library and we believe there's more opportunity than what we are currently achieving. These five changes and initiatives are largely aligned with the program and plans we set out -- when we began the new fiscal year, FY 2011. We have made some adjustments and moved quickly to implement them based on the some of the early experiences that we had in Q1. The goal remains to grow revenue this year.

For the first time since we combined Quantum and ADIC in 2006, we believe this goal is still attainable despite the slower than expected start to the year. We have a solid product position and we have clear evidence that the formula does work as we saw with solid success in many areas of the business and many areas of our organization. Of course, the keys to make this scalable across all geographies despite economic head winds and the actions we have taken here are really about making this a reality.

Beyond these go-to-market actions we have also made some structural changes over the last several months to create a more tightly integrated and focused product organization. This changes will enable us to execute more quickly and effectively in a rapidly changing, competitive environment with the significant opportunities that exist.

In summary I wanted to spend most of my time today on the revenue focus of the company. We have a strong sense of urgency to build revenue momentum beyond the 2% growth we experienced in Q1. At the same time, we'll continue to strive for other improvements and in our business model, including our investments as well as our capital structure. With that, let me turn the call back over to the operator who will be addressing your questions. Thank you.

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, thanks for taking my call. A Couple quick questions. I guess first and foremost, as you look at EMEA for the month of July versus last year, are you seeing any improvements versus the trends you saw in the June quarter that offers some rays of hope or is it continuing to be sluggish there?

Certainly, summer in Europe is hard to get an indication of how the quarter will end. Most of the activity happens in September. Certainly we saw some deals that we had anticipated closing in the June quarter. Those have already booked, so that's positive. I think in terms of just kind of how we saw the softness across all the product lines, and the macroeconomics in Europe, Central Europe, Germany did better than the UK and France, it's still early but it looks like from the standpoint of executing on our plan, we think that this quarter will be better.

Okay. My second question is, as I did my checks on the quarter, a number of contacts indicated that the ramp of LTO-5 was pacing a bit slower than the LTO-4 ramp had been. Is that your experience, question number one? And as a follow on to that some of the new technologies you're bringing out media management, etc., do you think they can accelerate the adoption of LTO-5?

I think that LTO-5 and LTO-4, it's so early to look and say which one is going to ramp faster or slower. It is a different jump this time as you know. There's not as big a jump in performance which is always the case in the previous versions. I think that generally speaking when you're talking about new tape technology, it's something to go and sell and people are interested in it. But we're selling disk products and otherthings with those. I think it's too early to declare LTO-5 is slower than LTO-4.

Having said that, we have other things like you mentioned that we can differentiate our products. We saw very good growth in i40/i80 we were above plan in both those products, and those are both actually LTO-4 products. I think it's kind of mixed right now. And I think a lot of our weakness generally, and then specifically in tape, was really more geography based than it was product based. I think I want to emphasize one thing Bill said. I mentioned in my remarks that DXi was 30% of the plan and in Europe, overall that business was at 60%. We saw across the board issues as it related to Europe, not just DXi, not just tape media as well.

Okay. All right. And then the final question I had andthen I'll cede the floor, is if you think of the guidance you provided for next quarter as typical back of the envelope would be to obtain a high end low end by going to the high end of the range of expenses on the low end of the range for revenue. Would you foresee that happening, or should we think if you're at the low end of the range of revenue you'd probably be at the low end of the range of expenses as well.

So I did that on purpose, actually. Because for the very question -- if you just look at this quarter, we're below the low end of the range on revenue by roughly 5%. And we were below the low end of the range on expenses by about the same amount. Because of our model, if we miss on revenue our expenses are going to be lower. The other thing that I would say on the guidance and I think you have to remember, is while it looks like the low end of the range is flat, it actually would include about $9 million to $10 million in growth because the DXi OEM contract is not going to repeat.

So we're expecting growth in Q2 at the low end of the range of $10 million. At the high end of the range of $25 million. So I just want to make sure that as people model that they understand that's not a flat plan that's a growth plan as it relates to our goals internally. But for sure, it's not appropriate to take the low end and the high end of -- low end of revenue and high end of expense.

Okay. Great. I'll jump out and get back in queue if I have something else.

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

Hi, guys. Just to follow up on Brian's guidance question which you in part answered with the DXi -- the EMC royalty [de dact]. Since you see this potential for a $10 million to $25 million adjusted increase in revenues, I think I'm thinking about that correctly, or even a little higher, can you give us a road map of which categories will take up the bulk of that? Should we see considerable sequential improvement in DXi based on how you guys are planning the quarter? Do you see a big bounce back in tape? Any change in your thinking on the royalty or on service income?

So if you just went down the list there, I think DXi and software are key contributors. Most of the growth will be in DXi. We think tape automation and tape media and tape devices will all be stronger primarily because we don't expect Europe to be so far off plan, and the other area that struggled in North America we think that particular area will be much, much stronger this quarter. In fact, they've already sold more this quarter than they sold last quarter. That's good. That makes us feel good about it. I think service will be -- isnot a place for growth. I think it will be flat and I think the royalty will be in the same kind of range. So this is really about branded growth across automation, disk and software, and even devices and media, which while it's not about a profit there is some revenue there and we struggled with that in Europe as well.

So the drop in that category, I guess the devices and media category, that was really just geography related? It wasn't like you were continuing to walk away from low margin business or whatever? Because that had been stable for five quarters and that was, by product categories, 60%, 70% of the miss from the low end?

Yes, two things. I often get asked, even by, you how much more is left is there in OEMDs. I added in my remarks that OEM device revenue is now less than $1 million. So that piece of the business has really gone away, and it's helped with our margin. As it relates to let saysequentially, if you did a sequential comparison, in Europe we struggled with devices and media, and those are fairly large dollar amounts but small profit.

Right.

If you track the results in Europe and one reason we tend to talk about some of the economic challenges, when you take that segment of the business you could just see the channel partners really pulling back on inventory. And I think, again, reflecting the environment that they saw, maybe tightness in their capital structure and trying to preserve cash. That was a real indicator of what we've seen in the past when the environment pulls back. Again, we saw that in Europe. And I think that affected those numbers as well.

So thinking about what we look for from here, you are off to a much better start for the quarter than the way you ended the last one it sounds like at least on branded products. I know it's really in the early innings with your new OEM, have they started to see a little bit of success? Has that begun to generate any results in the new quarter and do you see expanding your strategic partnerships at all with respect to more joint ventures or OEM deals?

Let me start by talking about overall. Overall we have a lot of things that we have been putting in place for the last six months. Whether it's campaigns and lead generation, whether it's our channel program, whether it's new products, whether it was the new OEM. There are many, many things that we put in place. This setback this quarter was really unexpected.

I think we had this call a quarter ago, there was some inkling of some activity or some pullback that we saw, minimal. And it really developed quickly and so we're still going to bank on the fact that we have a lot of things going that we think will continue to put us in a position to see improvements around revenue. I would just say, the OEM front, it's one, but none of these by themselves are big home runs. They're individual actions that we think cumulatively will help us continue to move the business forward.

All right. And then -- go ahead, I'm sorry.

On the quarter, I was very specific about the North American territory is off to a much better start. But remember we talked about this before. How you start matters but how we finish really matters because a lot of our branded business is in the last month. For us, we don't know where we're going to end up until we're done.

And the teams are chasing deals, and we were chasing plenty of deals to get to our number. They just didn't close. So the good news is we closed a number of those already. That's good, but it's still going to matter how we close at the end, and then I think somebody else mentioned, Bill did, a lot of the business in Europe is going to get closed in September.

So this quarter again, will be about how do we finish. The good news is, at least in this one example, some of the deals that we thought were going close that didn't have closed. We didn't lose those. I think that's important for everybody to see the progress that we're making. But the initiative that Rick's pointed out are the initiatives we're driving towards and we have to continue to execute and it matters the most how we finish.

Got it. Understood. Last but not least, and then I'll turn it back. There's been a fair amount of discussion about you guys picking up new channel partners. Some of whom are dropping Data Domain EMC. Can you give us a little color about how that progresses through the last quarter, how long it takes with your -- from your vantage point to then really be up and running and delivering the goods with Quantum? Just any other thoughts on that?

Bill's going to address that. I wanted to say on that point when we did our plans for this year and gave our guidance for the year and for the quarter, Bill is going to talk about the work that it takes to makes this transition and some of the timeline that goes with it. That's the reason why this plan is an accelerating plan during the year. We see the opportunities, but we know it takes work. Bill's going to talk about where we've been having success and why and the work that's been going on.

So Rick mentioned it earlier in his comments to begin the call that the two big opportunities that we see in the independent channel are people that want to find a very competitive disk space backup appliance that's competitive. Again, Data Domain EMC. And then the second is partners are very disillusioned with the way that Oracle is set up, the go-to-market and the direct sales emphasis, and the way that they have handled the business model with the partners that have historically sold storage tech. Those are the two big factors that drive the strategic alignment with partners.

If you think of what you have to do to get an independent channel really producing revenue and being able to really build that run rate business it's a key part of our plan, is we're starting with this strategic alignment and that part is going extremely well. Underneath that it's training all there SCs, getting them to really understand how our products are positioned, how they're differentiated, how to actually build reference architectures that they can then take to their customers, and that means they've got to get into their sales cycles. And then the follow on to that, obviously, is replicating that success. So if you look at the spectrum, and this is something that's happening across all the geos. North America, Europe and Asia we're seeing partners that are coming to us, we're getting alignment and we're taking them through that process of getting them capable to resell both our DXi products as well as our tape products as an alternative to storage tech and Data Domain.

Okay. Thanks.

Thank you. Ladies and gentlemen, if there are any additional questions, please press the star followed by the one at this time. (Operator instructions). Our next question comes from the line of Brian Marshall with Gleacher & Company. Please go ahead.

Hi, guys. Thanks for taking my question. The question with regards to the StorNext business, I was wondering if you could comment on some of the trends that you saw in the quarter both from a qualitative and quantitative perspective?

Yes, Bill can answer. The one thing we did do, I think for the first time, is we gave a growth rate for that piece of the business, and we're going to talk about it more because we see a lot of really interesting opportunities for us to have our technology solve customer problems, and that's great lead for Bill.

Yes, it was a very strong quarter StorNext, a number of new customer acquisitions, accounts that we added in the quarter. This quarter also saw adoption of some of the features that were really instrumental in StorNext 4.0 such as replication, distributed data movers, so it allows you to scale much more effectively. Partial file retrieval for some of our media accounts.

So it was a very strong quarter, sets up well for this quarter in terms of continuing to build on that success with StorNext 4.0. We also saw a number of accounts where we sold both our StorNext software with our tape products, i6Ks specifically. I think there's some really good successes there. Some early wins with the 4.0 product line and , yes, we feel very, very encouraged by having that new product into the market.

Okay. And as a percent of disk-based backup business, care to comment on whether this is greater or lesser than 20% of that business at this point?

We haven't broken it out separately, but we have given you a lot of information.

Understood.

You can tell it's getting more and more significant, and as a percentage of the total, if I say it's more then you are going to ask what it's less than? Do the math, and then maybe on the next call we'll be in a position to start breaking them up even a little bit more.

Understood. That would be great. My final question is with respect to gross margins. It sounds like your higher gross margin products are going to be growing a little bit faster. Obviously going forward, but we're talking about gross margin declining on a sequential basis slightly. Can you talk about [puts and takes] relative to increasing richness of the revenue mix, and why we would see gross margins down tick a little be in the September time frame? Thanks.

Yes, sure. So if you think about the guidance, the DXi OEM revenue is 100% gross margin. So you take that out, and let's assume you replace that with let's say $15 million of our high margin branded product, you're still going to have a decline in gross margin percentage. So that's really about replacing that DXi OEM revenue that's causing that particular relationship. But over time, as that branded business grows we would expect that the gross margins will continue to increase as a percentage and in raw dollars throughout the rest of the year.

This sounds like this more or less a one-time event and we should not see that in the future?

This is a transition. You replace 100% gross margin on a business that's roughly $160 million, $170 million, it's going to take a little bit of revenue growth. If it's 50% margin it would take $20 million, right, on the dollars but you would still be less on a percentage.

Understood. Very helpful. Thanks, guys.

Thank you. Ladies and gentlemen, if there are any additional question, please press the star followed by the one at this time. Once again, ladies and gentlemen, if you would like to ask a question, please press the star followed by the one on your touch tone phone. (Operator instructions) There are no further questions in the queue at this time. I would like to turn the call back to management for any closing remarks.

Okay. Well, thank you for joining us again today and we look forward to giving you another update in another quarter. But again, I would just summarize it. It was a very interesting quarter, we certainly had some challenges. But underlying thesis of the business and where we're headed we believe is very, very much intact. And as we continue to learn, we will execute quickly to take advantage of that opportunity, and I think we'll have more to say about that in the next quarter. Again, thanks for joining us.

Thank you. Ladies and gentlemen, this concludes the Quantum Corporation first quarter 2011 conference call. If you'd like to listen to a replay of today's call, please dial or 1-303- 590-3030 or 1-800-406-7325 and enter the access code of 4326811 followed by the pound sign. We thank you for your participation and you may now disconnect.