Quantum Corp (QMCO) 2011 Q3 法說會逐字稿

Welcome to the Quantum Corporation third quarter 2011 conference call. During today's presentation, all parties will be placed in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions)This conference is being recorded today, Wednesday, January 26th, of 2011. And I would now like to turn the conference over to Mr. Shawn Hall, General Counsel. Please go ahead, sir.

Thank you. And welcome to our conference call. Here with me today are Rick Belluzzo, our CEO, Jon Gacek, our President and COO, Linda Breard, our CFO, and Bill Britts, our EVP for Sales, Marketing and Service. The webcast of this call, our earnings release and a quantitative reconciliation of any GAAP and non-GAAP financial measures discussed today can be accessed at the Investor Relations section of our website at www.quantum.com, and will be archived for one year.

During the course of today's discussion, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include 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 would like to caution you that our statements are based on current expectations and involve risks and uncertainties that could cause actual results to differ materially.

We refer you to the risk factors and other cautionary language contained in today's press release announcing our fiscal Q3 2011 results, as well as our reports filed with the Securities and Exchange Commission from time to time, including our most recent 10-K filed on June 11, 2010, and our most recent 10-Q filed on November 5, 2010. These risk factors are incorporated by reference into today's discussion and we undertake no obligation to update them in the future. With that I will turn the call over to Rick Belluzzo.

Thank you, Shawn. Well, good afternoon, and thank you for joining us. Today, we're going to change the structure of our call, given the organizational change that we announced two weeks ago. I will start with an overview of our strategy and results. Linda Breard, our recently promoted CFO, will follow with a financial discussion and then Jon Gacek in his new role as President and COO will provide more details regarding our operating results and expectations for Q4.

As we stated at the start of this fiscal year, FY 2011 has been defined as marking the beginning of a new period for Quantum, highlighted by a focus on growing our business and taking advantage of the work we've completed over the last few years. This work has resulted in increased profitability, in both margin and absolute levels, a greatly improved capital structure, most importantly, a set of strategic opportunities built around significant market changes and improved technology and products.

In FY 2011 our goal has been to deliver our first year of overall revenue growth in more than four years. And although we are likely to be relatively flat for the year, we still expect to deliver growth in a number of key areas. Including our overall branded business, and branded disk systems and software. And therefore we believe we are well positioned as we enter FY 2011.

Now, let me expand a little bit on the opportunity that we focused on. Our aim has been to transition Quantum to become a storage system specialist and as a result, we are focused on four key opportunities. First, the tape market remains a significant element of the storage market, and we are now well positioned in the strongest segments of this $3 billion market, with a very solid product offering. This is a highly profitable business, and we have near-term incremental opportunities, as a result of the disruptions caused by Oracle's acquisition of Sun, and a more general move towards consolidation. Our Q2 results demonstrate the relative strength of our tape business.

Although our branded automation revenue was down slightly year-over-year, the decline was less than that of the overall market, suggesting that we gained market share. In addition, our revenue grew again sequentially. We have more work to be done here, given the incremental opportunity. But we feel that we can grow share and offset some of the near term market decline, as we target our incremental investments around solutions that make tape more valuable, including areas such as encryption, long-term retention and archive, and the cloud.

The next opportunity is with DXi and the growth of de-duplication and replication. This is a fast-growing market that is still in the relatively early phases of adoption. Since the change in the EMC relationship we have been focused on building the VAR channel and establishing our run rate business in the mid range while selectively pursuing large enterprise opportunity. Our results in the past year have been inconsistent as a result of the slower-than-expected build of the channel business, and the lumpiness of the enterprise business.

These dynamics changed this quarter. As we made excellent progress in the mid range run rate business, adding the most customers ever in a single quarter, and growing the VAR channel significantly. Yet we had a weak quarter for the enterprise business, which we attribute to the timing of deals, and a new product transition. Despite the enterprise weakness, total DXi revenue grew year-over-year, and was flat sequentially, and we expect future quarters to have more traditional pattern of large enterprise deals.

In addition today, we announced the DXi2.0. Our most significant DXi software release to date, which we feel will strengthen our position, as one of the leaders in the disk backup and duplication market. Jon will provide more detail on our DXi progress and plans in just a few minutes.

The third area of opportunity is StorNext, the StorNext business, where we had a record quarter this quarter. The market for high performance file sharing and advanced archiving remains strong. And again we feel we are well positioned to grow this business over the next year, through a continued focus on vertical markets, and delivering greater success through our expanded features and functionality.

And then finally, over the next year, we will be working to expand our available market for StorNext and other key technologies by delivering more integrated solutions of hardware and software, that expands our addressable market and leverages our go to market capability. Of course, behind all of this is our ability to drive -- ability and our drive to position Quantum as a storage system specialist by bringing all of these elements together, providing a common management framework, and ensuring that our service offerings provide unique expertise.

In short, we continue to feel we are well positioned to capitalize on the four areas of opportunities I have just discussed. We clearly have work to do to build our go to market position, and further expand our product portfolio. But we believe our strategy will enable us to more than offset any segments that have revenue decline and therefore increased profitability. While building momentum has been a challenge, we see distinct progress and look forward to continued improvement.

Now, before I turn the call over to Linda, let me say a few words about the organizational change we announced two weeks ago. Earlier this fiscal year, we announced an expansion of Jon's role and made him COO. The initial focus was on engineering and new product delivery. The progress here has been very solid. And today's announcement of DXi2.0 is a very important milestone. Given this and the recent refinancing of our EMC debt it was time to make the next step making John President and promoting Linda to CFO.

As part of this change we will move sales and marketing to Jon, allowing him to fully integrate all elements of our operations, and deliver improved overall market momentum. Jon has proven his ability to aggressively drive operational performance. And we should benefit from his new focus. Likewise, I am pleased to promote Linda to CFO. She has been a key contributor to Quantum for many years, and has played an important role in our operational improvements and our financial progress.

I would just like to summarize that all of the changes we have made have positioned the Company well for a new period of growth. The consistent double digit operating margins and improved capital structure are very positive. And while revenue momentum has not increased as quickly as we would like, we remain positive and confident about the opportunity, and we will continue to make any needed modifications to our approach, as we drive for further success. With that, now, let me turn the call over to Linda. Linda?

Thank you, Rick. Now I will walk through the detailed financial results for Q3. I would like to refer everyone to the financial statements and supporting schedules included in the press release and on our website. It will be helpful to refer to those documents as I comment.

Revenue for our third quarter ended December 31, was $176.2 million, compared to $181.7 million a year ago. A year-over-year decline of $5.5 million. The primary driver of the decline was a reduction of $5.1 million in OEM revenue that was anticipated and related to declines in devices, tape automation and service revenue in that order.

Non-GAAP gross margin in Q3 was 44.6%, compared to 44.4%, in the prior year period. Our non-royalty branded sales mix trended well this quarter, which strengthened our overall gross margin position, as did lower access and obsolete charges related to an inventory write-down last year that did not reoccur in Q3 of 2011. Offsetting these increases to gross margin was a decline in royalty revenue of $2.5 million, which carries 100% gross margin.

In Q3, non-GAAP operating expense totaled $58.8 million, compared to $57.9 million a year ago. Marketing and sales costs were higher due to increases in salaries and benefits, related to growing our branded sales force and marketing team. Offsetting the increase was a reduction in general and administrative expenses, driven primarily by a decrease in bad debt expense resulting from lower allowance requirements and provisions for back audits that were recorded in the prior year, but were not repeated in the current year. For the third quarter, we had a net tax benefit of $700,000 related to successful closure of a foreign tax audit, offset by recurring foreign and state taxes.

Summing it up for Q3, we had non-GAAP net income of $16.4 million, with non-GAAP diluted EPS of $0.07. Compared to non-GAAP net income of $16 million, and diluted EPS of $0.07 in Q3 of last year.

Focusing on cash flow for the quarter, and the balance sheet at December 31, I would like to highlight several key points. Cash provided by operations for the quarter was $18.4 million. We paid down $40 million of our senior debt and refinanced our $122 million 12% debt with $135 million of convertible debt at 3.5%. This will reduce interest expense by approximately $10 million per year. At quarter end, the composition of our debt was $145 million of senior debt, and $135 million in convertible notes. We ended the quarter with $93 million in cash.

Interest expense for the quarter was $4.8 million, compared to $6.8 million a year ago. This included cash interest expense of $4.3 million and amortization of the issue cost of $500,000. The current coupon interest rate for our remaining senior debt, $144.7 million at December 31, and the average coupon rate for our total debt will both be approximately 3.8% for the quarter ending March 31.

Non-GAAP EBITDA for the quarter was $26.8 million, and we are in compliance with all debt covenants at December 31, and we expect to be in compliance with our debt covenant during the next 12 months. For purposes of calculating our debt covenant, EBITDA for the last 12 months was $95.1 million. On a sequential basis, manufacturing inventory increased $2.4 million, accounts receivable increased $17.9 million, and we had an accelerated payment of $10.7 million from one customer. CapEx was $1.7 million, primarily related to purchases of engineering equipment and other testing hardware in support of product development. Purchases of service parts inventories were approximately $700,000, and depreciation, amortization and service parts lower of cost or market expense totaled $13.2 million for the quarter.

In closing, we made great progress on the balance sheet in Q3, particularly in improving our capital structure. We continue to generate strong cash from operations, and are investing diligently in our business with a focus on opportunity and growth. Today's announcement of our new DXi2.0 software release and the refresh of almost our entire product portfolio over the past year are reflective of that focus. From an external perspective, our credit rating with Moody's was recently upgraded and was another acknowledgment of the progress we have made strengthening our balance sheet and underlying business model. Now I will turn the call over to Jon.

Thanks, Linda. For my part on today's call, I am going to talk about what went on in the business in Q3, briefly describe the new DXi2.0 software platform we announced today, and discuss what we are focused on, and what we expect for fiscal Q4.

Starting with revenue performance, we recognize that the total revenue amount of $176.2 million was below our guidance for the quarter. However, we made significant progress in several areas that I will summarize. First, branded revenue was $125.8 million, up $2.1 million year-over-year, and $6.4 million sequentially. Year-over-year growth was the result of growth in our branded disk and software revenue, which was up 26% to a new record level. In fact, both StorNext and branded DXi revenue reached an all-time high individually.

The sequential increase resulted from a slight increase in branded disk and software, and growth in all tape automation segments with enterprise automation being the primary driver. Growth in enterprise tape was driven by both upgrades and new system sales, to our installed base, as well as the addition of new customers.

The addition of a significant number of new customers in all segments of tape automation is the second area of progress I want to highlight. In our enterprise and mid range automation segments, we added 170 new customers in Q3. This is the third quarter in a row we have seen a significant sequential increase in the number of new tape customers. In addition, in our entry level space, we have also added many new customers and gained a significant amount of share, 6 points of share, since we began shipping the Scaler i40 and i80 just over a year ago. This is an important trend as our strategy and tape is to grow our share and add new customers that we can sell future tape upgrades to, as well as disk and software products in the future.

The third area of progress was disk and software revenue. Including related service, revenue was $30.7 million, compared to $24.8 million a year ago, and $30.6 million in the prior quarter. Although revenue was flat on a sequential basis, there was a significant change in the composition of the revenue and how we achieved it. Driven by sales of DXi6500 and DXi6700, excuse me, our mid range DXi business grew 115% sequentially, and comprised 52% of the disk product revenue for the quarter, compared to 24% of the disk product revenue in Q2. Helping to drive this growth was increased traction with independent channel partners. In North America, the number of channel partners selling our mid range DXi products rose by 30% sequentially. And mid range DXi revenue from our top partners in North America was up 50% over the prior quarter. 6500 and 6700 are the products that we have expected to be the primary drivers of our DXi growth, and this quarter we made substantial progress on this front.

In contrast, our enterprise DXi7500 and 8500 business was down 42% sequentially, and comprised 41% of disk product revenue this quarter, compared to 70% of the disk product revenue in Q2. So, what happened? With the launch of DXi8500, we brought to market a product that had a slightly higher price, but had significantly higher performance than the DXi7500, and also higher performance in the data to main DD880. However, we did not close a significant number of large enterprise deals that we were working throughout the quarter. We believe that this was the result of the product transition, and getting customers moved to the 8500, from the previous DXi7500.

To put some numbers behind this, our deals greater than $200,000 for Q3 declined by $5 million compared to the prior quarter, and those deals in the prior quarter were primarily made up of DXi7500. The deals we were working were pushed out of Q3, and will require more work to get closed this quarter. But we feel well positioned to win many of them. In fact, in Q3, our win rate for enterprise disk, 7500 and 8500 deals, was nearly 60%, and our win rate for the mid range, 6500 and 6700 was nearly 50%. In summary, on the disk products, our 6500 and 7500 -- excuse me, 6500 and 6700 run rate business was very strong. Offset by weakness in big enterprise deals, due to the product transition from the DXi7500 to the 8500.

The last area of progress I want to mention is StorNext. This was the highest revenue quarter ever for StorNext, driven by growth in rich media archive, general archive and file system licenses for work flow management. A record 22% of StorNext sales for the quarter came from new customers. As Rick mentioned, StorNext is becoming more and more strategic, and you will see us not only enhance the software, but also come out with software hardware bundles this year to increase the overall reach of StorNext.

Turning to the other product categories, royalty revenue was $15.6 million for Q3, compared to $18.1 million, in the same quarter a year ago, the majority of the decline related to continued reductions in DLT royalties and we also experienced a slight decline in LTL royalties this quarter. Devices in media, totaled $23.9 million for the quarter, compared to $27.3 million in Q3 a year ago, and the decline was attributable almost equally to a reduction in branded device revenue, and an expected decline in OEM device revenue. OEM and branded media revenue increased slightly over the same quarter a year ago. Service revenue was $37.4 million in Q3, compared to $39 million a year ago. The $1.6 million decline was primarily the result of expected reductions of OEM out of warranty repair. Branded product service revenue remained fairly flat this quarter compared to a quarter a year ago.

So, to summarize the revenue story, the absolute results don't reflect the amount of progress we made this quarter. We saw increased traction with the channel this quarter in both tape and disk. The tape opportunity is real and significant and we are well positioned to capitalize on it. Our DXi products are strong and differentiated, particularly with the new DXi2.0 software platform announced today, which I will discuss in a minute. In addition, the market for disk-based backup and de-duplication is growing. We have demonstrated that we can compete and win against the market share leader. And we have distanced ourselves from the other competitors in terms of performance and value of our products. Finally, StorNext is growing, becoming more strategic, and has increasingly more applications to solve customer problems.

Now, I will briefly describe our new DXi2.0 software platform announced today and what it means for customers and Quantum. DXi products running DXi2.0 software, beginning with our DXi4500 and 6500 offering, will deliver the highest de-duplication speeds available for any open protocol in line appliances and their respective class, doubling performance over earlier generation DXi products, and with no change in price. As a result, customers will be able to protect more data on smaller systems, further solidifying our price performance leadership. In fact, we will have as much as a 5X advantage over the nearest competitive offering. The DXi2.0 software also provides enhanced management features that significantly streamline deployment, monitoring, and administration of the entire data protection process, saving IT managers time, even in complex multi-site backup and disaster recovery environments.

The combination of this new software and the refresh and expansion of our entire DXi hardware offerings over the last year provide significant differentiation that we can leverage in securing new customers, expanding our footprint with existing customers, and increasing our momentum with the independent channel. The technology advancement and the performance benefits we see in DXi2.0 are key elements of our strategy to grow our DXi business, and continue to add new customers and channel partners.

As we enter fiscal Q4, and look forward to fiscal 2012, I want to make it clear what we see as the opportunities and what we are focused on, and what we are going to do. I'm going to start with tape. This is the biggest piece of our revenue stream today. Tape is a mature market, but there is plenty of opportunity for Quantum. We are focused on growing our branded tape automation market share, and adding new end user customers. We are doing this by leveraging our industry-leading tape automation product portfolio, capitalizing on the opportunity with channel partners created by the Oracle acquisition of Sun, and offering end user customers a better backup solution with our Scalar and DXi products. We have very specific end user and channel marketing campaigns to drive awareness around these points. And we are aggressively working with channel partners to target end users. You can see in our results this quarter that we are having success adding new tape customers, and we are going to continue to build on this opportunity.

For DXi, the market opportunity is large. We think EMC and Quantum are demonstrating that there is a lot of value for customers in improving their backup performance with target-based de-duplication appliances, and we believe we now have the product portfolio and product road map to be a leading provider in this market. We have had a big year in getting now products out to the market, with the introduction of the DXi4500, 6500, 6700, and 8500, all in the last 12 months. Our DXi2.0 software further strengthens our product offering and market position by providing customers even more value at no additional cost. We will roll the 2.0 software out to the DXi6700 and 8500 this Summer.

On the channel side, we have also made measurable and notable progress. We will continue to focus on deepening our relationships with existing channel partners, and adding new partners who can sell DXi. We are focused on adding more opportunities to our funnel, and the channel that is key to that strategy. Our win rates are good. Our products are strong. And the positioning with DXi2.0 makes them even stronger. We are working to ensure our partners understand DXi, how to compete with it, and how to win. This market is still early in its life cycle and we think we are well positioned to have significant growth here. We have to execute on the opportunity.

For StorNext, we are coming off a record quarter. This was driven by market dynamics as a result in data growth, such as HD and 3D content, proliferation of the use of rich media on the web and companies having budget constraints, but having more data to manage. We are going to continue to enhance StorNext's capabilities in our current core marks and also start offering professional services to these customers. In addition, in fiscal 2012, we will be offering targeted solutions based on StorNext, that are packaged with hardware, to reach new customers, and broaden our reach beyond where the product is sold today. These new solutions will be sold through our current StorNext partners, but will also be made available to our existing tape and disk channel partners.

In summary, there is growth potential in all three product categories, and we are very focused on growing Quantum branded revenue in tape products, DXi, as well as StorNext.

Let me close with our guidance for the current quarter. Q4 is typically seasonally down from Q3. We expect revenue of $165 million to $175 million, but we believe it is likely that the branded business will grow sequentially. We also expect non-GAAP gross margin of 44% to 45%. Non-GAAP OpEx of $59 million to $61 million. Interest expense of $3.2 million. Taxes of $1 million. And non-GAAP EPS of $0.04 to $0.05 on 270 million fully diluted shares.

As we look forward to fiscal 2012 and beyond, there is plenty of opportunity in our core markets for Quantum to grow and deliver higher revenue and profits. In addition, our technology is extensible to a broader set of customers, and the opportunity for growth is there. We started the transition to a growth company this year, and we will continue that transition and work to accelerate it in 2012. We will give detailed guidance for fiscal 2012 on our Q4 earnings call, but at this time I can say we do expect growth in both total revenue and branded revenue in 2012. Thank you. And with that I will turn the call back over to the operator to take questions. Operator?

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Brian Marshall with Gleacher and Company. Please go ahead.

Hi. Thanks, guys. I guess I have a question with regards to linearity of the quarter. Revenues obviously came in about $17 million light of kind of a consensus expectations, and I think you talked about expected weakness in the OEM business, and actually, that mix kind of went up, so I'm just trying to sort of put it all together and try to figure out how did we miss the low end by kind of 5%, and just figure out the linearity of what we were seeing there, thanks.

I will start with this, and Linda can jump in. Linda's comments are on OEM, was when she is comparing it to year-over-year, so our OEM -- that question about her comment is really when she compares it to last year.

Our OEM business actually was fairly close, if not slightly above the plan. And the linearity of the branded business, especially in this quarter, is very back-end loaded. As a complete company, we're usually 20, 30, 50. We have talked about that for a long time. Branded is more back-end loaded than that. And this particular quarter is even more back end loaded than that. So, we were running hard at deals all the way up until the ball dropped in New York, I guess, would be the way to say that.

And I guess if that is the case, when we look at guidance being lowered from margin, if these deals, especially on the DXi8500 front, were simply pushed out into the March time frame, I guess can you sort of balance how that kind of plays into consideration? I mean if these deals are going to close into March, can you talk about the incremental weakness that we're seeing in the other businesses that are non-DXi8500.

Yes, so I guess I said in there that we have a chance to grow branded on a sequential basis, the OEM business, we would forecast it down on sequentially, Q3 to Q4, so that is what is going down if you go off of our actuals. And we have to demonstrate that we can get the business closed. We have a lot of deals. We have new products. We had some very nice wins. And we have some nice win rates. But we've got to get more of a close.

So, the sales guys have plenty of things to work. The number of slipped deals was much higher than normal, I would say. I'm looking at Bill. And we got to go get that business closed.

Thanks. The final question for me, and then I will hop back in the queue, if you look at the royalty business, and obviously down double digits both sequentially and year-over-year, despite the fact that your automation business is going up, so do you think that there is a trend in the industry to actually use less tape going forward? Can you sort of help me understand a little bit sort of the disconnect there?

Yes, so on the royalty business, remember, we get the royalty when the media manufacturers first sell into the channel. And so those two things don't always correlate to each other. Depending on what the -- and this is the Maxell, Fuji, TDK Imation. So, there is sometimes not a correlation between what is going on in the market and what is going on within the channel. In this next quarter, there is actually a decline in the royalty rate. There is some contention that the media guys went light into the channel. But we can't really verify that at this time. We've talked about it being a $15 million to $18 million quarter of business in what we can see, and that is how we see it.

And I don't think there is any indication that there is some fundamental shift in media usage as a relationship to libraries at all. I don't think that -- I think the factors behind it are relative to the whole market, as well as some of the points Jon mentioned, pricing changes, and shifts in the channel inventory, and there are other factors.

Thanks, guys.

Thank you. And our next question comes from the line of Shelby Seyrafi with Capstone Investments. Please go ahead.

Yes, thank you very much. So, I believe you indicated earlier that your 8500 has strong performance, and you have this DXi2.0 software, which is going to increase its performance further. The prior through-put of the 8500 was 6.4 terabytes per hour. EMC just came out with a DD890 at 14.7 terabytes per hour. With your new software, will you eclipse EMC again and perhaps garner bragging rights again?

So, I'm just going to comment generically on that. That 14 number is when they use their DD boost, which is doing de-dup on the host as well as on the product. We don't see that implemented very much. It is a good marketing number, but we don't see it from a product perspective.

Where people are deploying it would be VTL, OST, and the various configurations of the NAS. And when we put 2.0 on 8500, which will be this Summer, we expect to be right at or above them in all of the measures of what -- how customers actually deploy it. But the DD boost number of 14 is not a number we have a capability of today.

Okay. Also, on the disk system business, you indicated that a lot of the weakness was due to the decline in the high end, but the mid range grew very well. I believe you said 115% sequentially. So, now that the mid range is over half of the disk business, do you expect meaningful growth in the disk business, in the March quarter? And maybe perhaps you can make some comments about all of 2011, perhaps you don't want to make a doubling comment, similar to what you made a year ago or so, but any kind of projected expectation for the disk system and software business in -- sorry, in fiscal 2012, for example?

So, without giving exact numbers, if you take the midpoint of the range we just gave which was 170, and we have a disk number imbedded in that, which is sequentially up from what we just did, if we compared that number on an annual basis first, so we take what we've actually done and we add Q4, we will be up actually branded DXi, in excess of 50%. If we hit that number.

So, while we haven't gotten as far along as we would like, and I'm not sure what the actual market growth is in this space right now, probably somewhere between 40 and 70 depending on who you believe, we will have grown 50%, using those numbers, and our branded DXi this year. Which to us, I hope that people listening, we understand we believe we can even do better than that, but it isn't like we didn't grow. We grew significantly. So, when we look out to 2012, and we look at the product offering, the market, and who we're competing with, and what the other choices are, we think we're very well positioned. And we need to grow more because we think we have very, very good product.

So, take that say, while we didn't get exactly where we wanted to be, we've grown a lot this year, the products are a lot better, the 2.0 software further pushes them, we go to an inline model now, which also changes the cost model further for customers. So, we think we're -- Shelby, we think we're very well positioned.

And I would just add to your comment about the mid range channel growth is very fundamental to what we have been saying for a year, in that we believe that we have to not just have a big deal business and a project oriented business, but we have to get more smaller velocity business working for us. And this I would think, we would say this is the first quarter where we would say that's happened. And we believe that is a momentum creator, in that you have more customers who will be buying more units, and who would be doing more upgrades, et cetera, et cetera, and the channel is getting more confident.

So, I think that is a bit of the theme here of being -- of feeling there was more done this quarter than it looks, was because we did add a lot more customers, and we add a lot more channel partners in this space and when we get the more normal performance out of the enterprise business, we think they will stack up to be a much better story going forward.

Final one for me if I can. My gross margin model is still getting a higher gross margin than you're guiding, and I'm just wondering whether you had to give stiffs or any additional incentives that's creating a segment by segment declines in your gross margin, just seeing the disk segment, for example, going forward.

No, I think when you're adding new customers, we're going to be aggressive on price. I think our material margin, or the way we think about that particular margin, was a little lower for us this quarter. But the same for us is really mixed. And my experience is when you -- you new analysts are doing your models, just the way the mix works and what the actual margins are of the products can drive you to be a little bit different. I think you will see us as we grow, you will see the margin go up, because we do have a very leveragable model.

Thank you.

Thank you. And our next question comes from the line of Chad Bennett with Northland Securities. Please go ahead.

Just a couple of things. So, I'm trying to -- not to beat a dead horse here, but on the high end of the DXi business, trying to reconcile the comments you made on the September quarter, when the 8500, I think, wasn't out yet, but was soon to be out, post-call, you talked about orders that had already been won or driven at that point, and a pretty big pipeline, and that the -- you were just getting business quicker than you even thought, because the product wasn't even GAed yet. I guess what happened from then to the end of quarter that basically fell apart?

Well, we just didn't get the deals closed. We had a lot of deals. We pushed more deals of that size than we've had. We had a lot of proof of concepts out. I mentioned our win rate was higher actually.

So, it wasn't that we lost. We did have more deals. We did have line of sight to more opportunity than we have seen in a long time. Although everything you said is exactly what we saw at the time. The difference is when we got to the end, we didn't get the deals closed and they pushed. Not walked. Pushed.

And I think it speaks a little bit to the fact that we're still building critical mass. I mean we can have five deals affect our results at the enterprise level. And that is because we don't have -- we haven't built enough critical mass there. And so I think we can look back at any quarter and look at a handful of deals that were very large and so we're susceptible to that. And I think that was probably as much of the issue as anything. Relative to how things lined up as we got to the end of the quarter.

I think coupled with what Rick said, we had more than a handful. Our enthusiasm was built around we had more than five, we still have more than five. We've got a lot large deals that we're working that we just haven't closed yet.

Okay. So, when you -- do you think at all, and they seem to be separate markets, but your VARs that sell both the high end product, DXi product, and your mid range product, do you think there were any cases of them being more focused on the mid range than the high end, just because deals are maybe easier to get done? Did you see any of that?

No. I would say that this though, the high end deals, we do. And some, not all of those are filled through partners. Most of them do. But we have had some of our larger deals, we've taken direct. And I'm sure Bill agrees with me.

So, I don't think it is a shift -- I actually think the shift of the mid range is a really healthy thing for both the mid range products and the enterprise products, because as partners get comfortable and capable with selling the mid range product, they will be willing to take on more around the high end product, which is what I was referring to in my comments about them having more capabilities and being able to go further in our product line.

What -- I know you gave kind of what the high end products did sequentially. What would the high end products -- what is a comparison year-over-year as a percentage of disk and software revenue?

I don't know. I mean a year ago, virtually all of our business was high end. Wouldn't you say?

Yes. It is probably down a third maybe. But in scale, we had lots of deals. I mean we had a lot of deals just move out. And we're doing more proof of concepts, performances I mentioned, quite a bit higher than what they have seen from us in the past, and it is just -- it just took longer.

What did StorNext do year-over-year?

We didn't break it out separately. StorNext is up, we haven't -- I'm trying not to give product revenue.

I think you gave it on last release, though, didn't you?

As far as the percentage increase?

Yes, percentage increase year-over-year.

It was probably 10%.

Okay. And then I know you don't segment the business like this anymore, but can you just talk about how sequentially the tape business did, September to December this year, versus last year, on a product basis?

I don't know. I don't know a year ago from -- it is in the -- it is on our Web site, with the tape system. I know this quarter, we were up 6 million sequentially, and we were up a couple of million, a couple percentage points I think actually year-over-year. But we definitely -- we have had five quarters of branded growth, so that tape automation overall is on our Web site, I just don't have that off the top of my head.

All right. Thanks.

Thank you. And our next question comes from the line Eric Martinuzzi with Craig-Hallum Capital. Please go ahead.

First, congratulations to both Jon and Linda on your promotions.

Thank you.

That takes me to an organizational question. As far as your investments in the business, people investments in the business, I know you're just buttoning up your fiscal year ended 2011, for March 31, but curious to know where are you focused on investments in people, sales, marketing, R&D? Does the head count need to rise to capture next year's growth estimates?

We've been pretty consistent in that in sales and marketing, we are today investing ahead of revenue. I think we feel like we have largely adequate resources to deliver on our program. I think there are a few places here and there where we might invest incrementally more around things like inside sales and some other aspects. But we think we're invested for the revenue strategy and growth that we have.

And then the second place that we have invested is in engineering. Because we believe that we want to increase the pace of our product, and gain more depth there, and so I think in this year, we have had some increase there. But overall, our head count has not grown a lot. We really don't expect it to grow a lot. We would love to grow more in sales and marketing. But that is going to first follow, as we get more results from the investments that we've already made.

Okay, and how does that juxtapose with pipeline? You talked about the number of deals you guys have. You had a pipeline entering the December quarter, you have the pipeline entering the March quarter. How does the pipeline compare quarter over quarter?

Pipeline slightly up over where we started in the December quarter, which when you think about the seasonality, that actually is a good sign. And in particular with DXi.

And we have, to your earlier question, we have invested in the last year more in creating, or finding opportunities, and lead generation. That has been an area that we have made incremental investment, because we do think that we, in a number of places, need more opportunity and especially with our channel program. We want to be able to see the channel, more opportunity because we think we get something in return for that. When we do that. So, that is another area that we're focused on.

Thank you.

Thank you. And our next question comes from the line of Alex Kurtz with Merriman Company. Please go ahead.

Thanks for taking the question. Bill, haven't heard a lot from you today. Can you just give us a sense of what you saw from an execution perspective out in the field, with these larger deals, and on the flip side, what were the positives with the 6500 and the 6700?

And then second what I would like to hear from you, Bill, is do you think you have the personnel right now to win those bigger deals? You're obviously becoming a -- becoming focused on more growth areas, and you need better execution type guys out in the field. Do you feel you have you those in the stable right now? I just want to hear your color on that.

So, the first thing, let's go back to the 8500. We will just start with your question. We were kind of building off of some of the earlier questions. We were very bullish on 8500. Really from the standpoint of the ability to really have industry-leading performance, and we were very aggressive in the way that we positioned the product relative to EMC data domain and that continues -- EMC data domain continues to be our number one competitor in that space. So, as Jon mentioned, we had a lot of very, very large deep complex deals where we did a lot of proof of concepts, there was a lot of detailed planning with customers and questions around how to integrate in their environment, and in several cases very large deals that pushed in part because the customer was trying to consider kind of their complete architecture.

So, from that standpoint, I think the product transition, we probably were a little bit overly optimistic about how quickly we were going to be able to kind of work through the evaluation process in some of these opportunities. But we have absolutely the right people to be able to compete against anybody in this space. And that's part of the reason why we're encouraged by the win rates. We would like to close rates in terms of the pipeline we entered the quarter with, we would like those close rates to be better, and I think that is getting closer to the customer being a little bit more, I would say, kind of complete in the way that we launch these campaigns. We have a very different sales model than an EMC or an IBM, where it is all about account control. So, our positioning is really about making sure the customer understands our differentiation, and how we deliver value in these backup redesigns.

And one thing I would add to Rick's comments about where we're investing for next year, we've already started this, is we're investing ahead of the curve in terms of presales, solution architect, people that can really kind of start outside of our box and really start to help the customer understand how to integrate our solution into their environment. And that's critical. And I think that is part of the reason why these deals pushed over into the quarter.

In terms of the 6500 and the 6700, the thing that was really -- it maybe sounds a little bit kind of overly bullish to say it was a break through quarter, but it was really about the fact that we had much broader participation from the channel in terms of selling DXi. That was the encouraging part. We had more territories that actually were successful winning very important head-to-head competitions against EMC data domain. The market continues to have new competitors, new entrants. I think that is confusing the end user customers in a lot of case, and where we've actually gone in and forced either a POC, an evaluation, or had hands-on comparisons with our product, we have been very successful. As I say that, that is -- we're picking up velocity on that. But we're still not in a leverage position in terms of the mid range.

So, when I think about capacity, not just for our capacity, but these channel partners, that are looking for a competitive solution to EMC, we are the logical choice and the 2.0 introduction, just makes that whole comparison that much more clear-cut. I mean you kind of think about how this market is evolving, and they're going to be the low end solutions, where it is disk space appliances, but they don't really have the capability that we do with our family of appliances.

At the low end, you've got ISB's that are basically what I would say, tacking on de-dup to their applications and customers are, I would say, interested by it, but they already see some of the difficulties in being able to scale that. And the high end you have the data domain release of their products are really up in the stratosphere in terms of kind of price and in terms of the part of the market that they can address.

So, I feel very, very good about our portfolio. The feedback from our partners is extremely positive. As Jon says, we just need to close more business across the portfolio and build off of that momentum.

Just as one follow-up, Bill, about the comments around the 8500, that is obviously a much more of a direct model kind of business. You have in the past said Quantum has a different model than EMC, but the 8500 is going to get a lot of attention from EMC, and those deals, they're going to bring all of their guns to the fight, in those specific deals, and I guess as a follow-up to my earlier question, you think you have the resources in place to consistently compete in that high end?

Let me answer it from this perspective. We need to be very, very clear on the qualifications of those opportunities, because if we try to fight a multi-front war with those guys, we will be stretched thin. So, that absolutely is part of the consideration we have. But we have proven over the last several years that we can compete head-to-head against them. Even in their large install base accounts. And the reason is that we have a more complete solution when you think about not just the disk part of it, but the integration with tape, and the ability to manage this environment.

I think the 2.0 announcement really takes one of these, I will call it a flood factor but I will also kind of look at it is we've implemented it very, very effectively into our set of product trade-offs, if you will, in terms of all of the things that kind of go into making the single scalable software architecture, being able to handle multi-protocol. Being able to do things with edge decor deployment. This is really where we can compete very effectively. We can't fight a multi-front war, but we have been very effective in this last quarter. We had a number of wins where the customer was previously running EMC data domain products, but we displaced them in part because of our more complete solution.

All right. Thanks for that, Bill. And Jon, just a quick question here. Is it safe to assume the 30.7 in disk systems software and services is the same number for branded, or is that slightly lower number?

It is basically the same. We had a little bit of OEM, but not enough to write home about yet.

Okay. Thanks, guys.

Thank you. And our next question comes from the line of Brian Freed with Wunderlich Securities. Please go ahead.

Good afternoon. Thanks for taking my call.

Hi, Brian.

Hi. So, real quick. If you look at the tape market, you can talk a little bit about what you're seeing transitionally there, particularly as you look at the opportunity to take share from what used to be the Sun storage tech space post the Oracle acquisition? Do you see the majority of those opportunities at the high end or do you think it is fairly evenly distributed from low end to high end?

I would say most of what we're seeing is in mid range, up into enterprise. A lot of the big opportunities are where customers have -- got legacy storage tech Oracle equipment. They're looking at some kind of large maintenance renewal. We've had a lot of traction with partners that formally, basically had a nice symbiotic relationship with Sun storage tech and they took a lot of that responsibility for supporting those install base accounts, and that is really where we have a very, very good value proposition.

We can start the conversation really around we can get you into a technology refresh, and it is not a big -- it is some pretty simple pay-back. Less than a year pay back and then we are able to actually get in and do more detail about the product differentiation, it just allows us to close those deals. So, as Jon mentioned, new customer acquisition really picked up momentum in this last quarter and a lot of that was in the mid range and kind of low end of the enterprise storage tech install base.

So, as you look at kind of the target opportunity there, would you say it is more the kind of the FL500 and below install base versus displacement of the FL8500 class products?

No, I mean I would say it is more L700, kind of in that SL500, 3500 range.

Okay.

Also, we, often times, customers are looking at a large storage tech library, and they're doing a backup redesign, and they may end up buying smaller tape and disk as that solution.

That's right.

Which is something that we try to play, and so they will in fact -- it will look like a smaller library, but in fact, it is replacing a large library, and putting tape -- disk in front of it as part of the solution is what makes it all work.

Okay. And then the second question, kind of related to the StorNext, and what I'm seeing is somewhat of the rearchitecture of backup and archive and definitely see a lot more focus on the archive layer within the industry, and a lot of those archives tend to be front ended by a file system. Do you continue to see that as a trend, number one?

And two, do you feel like that you're still somewhat unique in your ability to front end tape with a file system architecture versus other competitors out there? And as you think about opportunities for that, do you think ultimately some of the cloud type opportunities, which today are primarily disk, will ultimately begin to offer a lower cost storage solution based on tape?

Yes, I think where we're seeing traction in the archive spaces, a lot of that is rich media and in rich media there is really two things. There is the size of the archives, so it is very large, and HD content, and 3D content, and that space, are driving that. But also, it is performance. And StorNext is super high performance. And in fact, tape is very high performance when you need to stream a large amount of data. It is actually faster than disk. And so we're finding ourselves now being architected much broadly, with StorNext over the top, as being the data mover, and an opportunity to sell our tape, and then have other people's disks be almost the cache or the working part of the archive.

So, we've been in some recent customers so some of the sort of high flying recently acquired name brand solutions that you hear talked about, they just can't compete with a StorNext solution and tape, when there is a lot of data and you need it quickly. So, that is driving our business. We think that is more extensionable into a similar type of structure, maybe not as big, and then candidly, people just have a lot more data and they're trying to manage it and StorNext plays very well there.

And then my final question. This is maybe pointed more towards Bill. If you look at the sales cycle for the DXi8500, how do you think the rollout of the 2.0 software influences that? I think you said on the call that you will have it out fairly rapidly, but do you think it elongates the valuation cycle on those products? And maybe pushes the ramp beyond the fourth quarter into the first? Or do you think that evaluation is well under way?

I think the most significant part of that is it is a 2.0 software release. So, anybody buying appliances now, that upgrade is very clear-cut in terms of kind of what you have to do, and it provides kind of this -- it gives you more head room. You think about this backup with de-duplication, a lot of the real value comes from the fact that you can retain data longer, and as you start to grow, you need to think about that scalability. So, essentially what 2.0 from a practical standpoint for these customers just gives them more head room to grow, as they deploy these appliances in their environment.

So, I guess the short answer is I think it will help the decision-making process. Because they will have more complete understanding of a road map. We previewed this with a number of customers in the last quarter. Customers in the enterprise space, they want to know what your road map is. They want to understand kind of how your architecture works. It is a very, very -- it has become a very, very strategic decision for them as they start to think about what architecture they're investing in.

I think this point -- nobody has asked this question, but this made me think about this particular competitive environment, is we have refreshed our entire hardware portfolio, EMC, just announced an upgrade to their hardware, I don't know, a couple of weeks ago, and our road map, this was planned to work out this way. And we're going to get -- be right for them, or pass them, in the case of the mid range space already, and so we've closed the gap technically. And Bill points out, we have some unique features on how we win, we're specialists in backup, and that is going to continue. It doesn't mean our products are all better than theirs, because they have some good products, too. But we have closed the gap dramatically, and in fact, we have passed them in the mid range again. And we're going to be on our cycle.

So, there is a lot of spring in our step around the products. And the sales guys like it. And the number of deals we have is very strong. We just got to -- we have to get them closed and when you're going through product transitions, we got off to a great start. We've got some nice deals still. But we've got to get them closed.

Okay. Thanks.

Thank you. (Operator Instructions)And our next question comes from the line of Glenn Hanus with Needham and Company. Please go ahead.

Good afternoon. Just to follow up, the EMC refresh have any impact on the sales cycles and your ability to close these 8500 deals, or do you feel it was more around this complete architectural evaluation that you mentioned?

I think, without knowing everything, because I would assume a lot of that was under MDA. It could have entered into it. I mean we have had a number of customers where they had both Quantum and EMC installed base and they were evaluating what they do next, and those -- that would be a subset of the deals that pushed, where there was no decision. They didn't decide for either of us. So, I think it implies some of that.

But it gets back to, as we've talked about, it gets back to making sure that the customer understands how they get value from these different implementations [that we do]. And the characteristics for us are in fiber channel environments, we do extremely well. We improved our NAS and OSP protocol implementation greatly over the last year. We have a very, very strong story in terms of being able to actually integrate with tape and to be able to have that as part of the core offering in the data center. And the number of customers that start out saying that they want to eliminate tape completely and then eventually they move to some kind of mixed approach, that is pretty high, and we gain credibility through that process.

So, I think there are certain types of customers that maybe lean in on kind of buying the whole EMC stack, but we compete very, very favorably, and it is not just a platter of who's got the fastest box.

Any update on the budding Fujitsu net app relationship and status?

No, we didn't have anything number-wise to disclose. It is the same. As we mentioned, we got the net app sales force in 20-some countries in Europe reselling the Fujitsu product. The Fujitsu product seems to be -- we're starting to see it more in Europe. I think that [Bill said that]. There are signs that they are making progress. When it hits us financially, we are going to make sure we bring it up.

And Jon, would you anticipate some gross margin expansion through next year, as the mix returns more favorably to disk?

You're talking about margin?

Gross margin.

Yes, I think as we grow -- branded generally, and the products that we have, as those grow, margin will go up. But as Linda pointed out this quarter, I think year-over-year royalty was down a little over $2 million. That's 100% margin that falls out.

So, I think within the branded piece of the mix, any of the three products are good. All of those will help our margin. We also have some things that have been in decline, like the tape royalty. So, growth will definitely push it up. But the point is it is branded, not --

Branded.

Because tape automation, and branded tape, and disk, have similar structures. They've both good margins. They're both above the average by and large, with the royalty exception.

Thank you.

Thanks, Glenn.

Thank you. And our next question comes from the line of Shireen Qadri with Pilot Advisors. Please go ahead. And our next question comes from the line of Ryan Esposto with Sterne, Agee. Please go ahead.

Hi, gentlemen. Thanks for taking my call or question. You guys are deleverring significantly. You did a lot on the balance sheet. One, should we kind of continue to see the same level of CapEx and do you have any targets for debt in the next year, as you kind of start to plan your next fiscal year? And two, are you getting -- do you so that as any advantage in the field? Or is that just kind of a fact that kind of goes by people, that type of thing?

I think on the CapEx perspective, we typically run about $10 million, $12 million, over last year, I think it was a little bit higher, we had a lot of investment related to our DXi8500. So, I would probably say $12 million to $15 million is probably reasonable. For CapEx.

From a cash perspective, we're generating about $20 million a quarter of cash from operations. And we have been aggressively paying down the term debt. And we will continue to do so. We have some excess cash flow requirements that happen every fiscal year end, being March 31, and we have been paying down enough this year that I don't know that we will be required to pay more, but we will continue to delever the balance sheet and use our cash to pay down. So, there is no real target set on when we would pay that down, other than we're managing our cash balances along with actively trying to reduce that balance overall, on the $145 million term.

And then as far as in the field that we see, I think getting the EMC debt off was good, it is something that can't be used against our sales force. I think Bill would agree with that, that was something that was pulled out against us, that we had been financed by EMC, and I think that is a good thing to have, just off the table.

Okay. And then as it relates to the 2.0 software release is, that going to be -- is that -- can that be layered into all of your existing base? Are we going to see a cycle where some of your existing customers go for this software upgrade, so you will go a bump from that?

So, the existing customers can upgrade as part of maintenance for the current product portfolio. And then what we believe it will drive is additional upgrade cycle within that install base because the performance is a lot better.

And I guess the other key point to note is that all of our appliances are replication compatible. So, if you've got a 7500, that is going to be replication compatible with 6500, with (multiple speakers) the new software.

Great. And then on your StorNext, have you guys ever given a number how large that business is now.

We haven't. Basically, it is part of this technology grouping because the products are based upon the same technology. I think we talked about that every quarter, and we believe this overall bucket is going to grow, and product pieces, is less relevant.

Okay. So, maybe down in the future as it becomes more significant --

Or maybe it is the opposite. They are tending to merge. StorNext is all software, but as we talk about it, it will become appliance based and we use some of the appliances that potentially we use for DXi, so we think overall, if anything, they're merging, not diverging.

Got it. And just finally, are you guys seeing any -- as you roll out new products, you announced the Fujitsu deal, obviously, in tap was a big partner with data domain in the past and these cycles take a long time for sales guys in the field to shift mode. Are you seeing any momentum there? Are you getting more kind of reverse inquiry into doing certain types of configurations using your guy's product, kind of at least help with that sell-in to the enterprise.

I think a lot of that is just deal by deal and relationship by relationship. So, I wouldn't generalize from it. But yes, there are examples, absolutely.

Okay. That's it. Thanks.

Thank you. (Operator Instructions)The next question comes from the line of Brian Alger with Wedbush Equity Management. Please go ahead.

Good afternoon, everyone. Thanks for taking my question. This question, I guess, is probably directed maybe at Rick. I'm trying to reconcile a couple of things here.

Coming into the quarter, obviously business looked to be pretty good. We talked about the growth year on year for the systems business. And kind of on that strength, you picked up a lot of coverage on the street. Half a dozen or so analysts, and here we come in with a report today that is nowhere near what any of the analysts were expecting. No one was talking about a short fall of this magnitude.

And I guess it boils down to, you internally understanding your ability to close sales in that sales funnel and then communicating with the street. Because I've been around the stock over a year now, and unfortunately more often than not, there seems to be something each and every quarter that we aren't expecting, and with the stock sitting here at $2.70 and people expecting a completely different outcome, I'm wondering what have you guys done internally to scrub the numbers better and to maybe give you the ability to communicate better with the street going forward.

I would start by saying not to make excuses, but throughout this transition, we always have had a lot of moving pieces relative to revenue declines of some segment, and revenue increases, et cetera. And that is why we have always tended to focus on ultimately what we're trying to deliver, is improved operating performance that would be largely impacted by revenue. And so that has been our focus. And we think it is changing to where the overall number now does start to make a lot more of a difference, because we have seen some of the revenue changes to the point that we are increasingly now an assistance company, we're increasingly a branded company, and we are driving overall revenue performance and growth. And so that transition is occurring.

But as you go back historically, there just have always been a lot of moving pieces, which has been challenging for us around what we say. But you will find us to be a lot more closely aligned with our operating income performance than our EPS guidance, because of the way we manage things. So, that is point number one.

Point number two is if you look at the numbers, as we said, we feel like we were largely on track, that we grew our disk and software business 26% year on year. We should have grown it more than that. Approaching 50 or so percent and we can point to this slippage around the enterprise as being the biggest challenges behind that, but a lot of the rest of the business performed as we had planned, and as we had driven the overall performance.

And so it really gets down to this choppiness that we had in the enterprise relative to the end of the quarter that ultimately was what it was and as Jon has said repeatedly, we have to close business and we have to focus on that. It is really not about predicting. It is about being able to close business, as we think we have shown some difficulty in doing that in certain quarters.

Well, I appreciate the answer, Rick, but I mean you guys presented at Needham, and I mean were you in front of the street and I understand you're in a quiet period and all that, but you guys missed by a mile. It wasn't even close. And I mean the communication with the street I guess is what I'm disappointed with. I'm perfectly happy with the cash flow. I think the $0.07 a quarter free cash flow by my math and the guidance you have for next quarter is great on a free cash flow basis, but what is lacking here and what I'm fearing and the stock is going to struggle with for some time is confidence in terms of communication with the street.

The communication in what time frame? Our guidance?

Well, I mean look, you finished the quarter, you had -- I mean these deals obviously slipped, but you ought to have had some sense that they were slipping before the quarter ended and to miss this quarter by this much and to not hit your guidance and not pre-announce, I guess as a shareholder, I'm blown away that the number is what it is today.

Again, I would say that we have -- through this transition, we have focused primarily -- we spent a lot of time talking about this, on our earnings number, as being the most important aspect of the guidance that we provide, and we perform very close to that, and therefore chose not to preannounce.

There was nothing said at the Needham conference that reaffirmed our guidance. We talked about the opportunity. We talked about the strategy that we were pursuing. We even acknowledged that the DXi business had, in previous quarters, had some of these challenges. But that we were focused on building a run rate business, and driving enterprise opportunity on top of that. And we fell short largely in one segment of that. Which is around the enterprise opportunity. And we -- we chose to focus on the messaging that we have given consistently over all this time period and not change it.

Thanks for addressing the questions.

Thank you. (Operator Instructions)One moment, please. And at this time, I am showing no further questions in my queue. I would like to turn the conference back over to management. Please continue.

Thanks for joining us for the Q3 call. As a reminder, Q4 is our audit period. Our calls will be generally in the late mid May time frame. We will look forward to getting back to you then. And we will also talk about fiscal year 2012 at that time. Thanks very much.

Ladies and gentlemen, this does conclude our conference for today. If you would like to listen to a replay of today's conference dial 303-590-3030 or 1-800-406-7325. With an access code of 440-1361-pound. We thank you for participation. And at this time, you may now disconnect.