Quantum Corp (QMCO) 2011 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Quantum Corporation fourth quarter 2011 conference call. During today's presentation all participants will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Tuesday, May 17, 2011. At this time I'd like to turn the conference over to Shawn Hall, General Counsel. Please go ahead, sir.

Thanks and good afternoon and welcome. Here with me today are John Gacek, our CEO; Linda Breard, our CFO; and Bill Britts, our EVP of 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, and future financial performance. 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 cautionary language contained in today's press release as well as to our reports filed with the Securities and Exchange Commission from time to time, including our most recent 10Q filed on February 8, 2011. 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'll turn the call over to John Gacek.

Thanks, Shawn. Thank you for joining us today as we formally report our results for the fourth quarter and fiscal year ended March 31, 2011. Today I'm going to start the call by highlighting several key elements of our Q4 results and full year performance. Linda Breard, our CFO, will then walk through the detailed results for the period, and I will close with comments about our strategic direction and plans for fiscal 2012 and financial guidance.

During our April 4 call announcing the CEO transition, we indicated that we expected Q4 revenue to be approximately $165 million. Today, we are reporting total revenue of $165.1 million, which is slightly more than the $164.5 million we reported in Q4 of fiscal 2010. The important revenue story for the quarter is the growth in our Quantum branded business. We grew our branded business 9% year-over-year, and we outperformed our historic goal seasonality trend as the branded business was flat sequentially from Q3 compared to a prior year ago when it was down 7% sequentially.

Specifically, branded tape automation revenue increased 13%. StorNext revenue was up 14% and branded DXI revenue was up 40% year-over-year. We continue to improve our branded revenue performance as a result of participating in a strong storage market, introducing great products that have unique value for customers and are differentiated from the competition, growing the number of channel partners selling our products, and improving our overall execution. For fiscal 2012, growing our branded revenue will continue to be a key focus.

The second item I want to highlight is the overall strength of our product portfolio and the introduction of our DXI 2.0 software in Q4. We exited fiscal 2011 with our Scalar tape libraries, DXI de-duplication appliances, and StorNext software all having received enhancements during the year that offer more value to customers. As a result, we believe we're entering this fiscal year with the strongest product portfolio we have had since the Quantum merger with ADIC in 2006. More specifically with regard to DXI 2.0, this is our forth generation DXI software and has in-line de-duplication. It delivers industry leading performance, and it allows Quantum customers much greater value than our competitors. The DXI 2.0 software began shipping in mid-March on our DXI 4500 and 6500 hardware platforms and approximately 100 customers have already deployed it. And 2.0 will begin shipping on the DXI 6700 and 8500 platforms this summer.

Offered at the same price as DXI products with previous generation software, our appliances running DXI 2.0 deliver both higher performance and better price performance than any other products in their class, and as much as five times an advantage over the nearest competitive offering. This performance improvement makes us the clear leader in not only performance but price performance. In short, we believe we have a unique product offering to solve customers' problems at the lowest cost.

I also want to mention the improvement in our balance sheet and our capital structure this quarter and fiscal year. This improvement is the result of paying down $82 million of senior debt during the year with $40 million this quarter in Q4. We made the final $22 million payment on our 2003 convertible debt last August, and we repaid $122 million EMC debt, which had a 12% interest rate with proceeds from a convertible note issuance of $135 million that has an interest rate of 3.5%. At March 31, we had $104 million of senior debt, which we expect to aggressively pay down during fiscal 2012 and $135 million of convertible debt, which we view as a more permanent layer of capital, given its maturity in 2015.

As I look back, fiscal 2011 was a year that we shifted our focus from repositioning and restructuring Quantum to a focus on growing the Company. We did see the expected revenue declines in our OEM business and in tape royalties this year, but we delivered revenue growth in the areas where we were focused, namely total branded revenue and both branded DXI and StorNext. In fact, branded revenue grew 5% for the year, branded DXI grew 43%, and StorNext revenue grew 28% this year. Although branded tape automation was down 2%, this decline was less than that of the market. In addition, fiscal 2011 we made significant progress in adding new customers across DXI, StorNext, and tape automation and getting tighter alignment with existing and new channel partners.

Finally, we focused on development and launching Quantum branded products that provide customers with unique solutions and value as they look to meet their backup, recovery and archive needs. To sum up, I think this is an exciting time for Quantum as we close out fiscal 2011. We made significant progress on numerous fronts this year, and are better positioned to win in the market, grow revenue in fiscal 2012, and create shareholder value. With that I'll turn the call over to Linda.

Thanks, Jon. Now I will walk through our detailed financial results for Q4 and fiscal 2011. 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 fourth quarter ended March 31, was $165.1 million compared to $164.5 million a year ago. Year-over-year revenue increased due to growth in disk systems and software revenue, inclusive of maintenance of nearly $7 million, and branded automation growth across enterprise, mid range, and entry platforms of $5 million in total. Offsetting this growth were declines in OEM revenue of approximately $7 million and tape royalties of $3 million. Fiscal 2011 revenue was $672.3 million compared to $681.4 million in fiscal 2010. Royalty revenue was $14.8 million for Q4 compared to $17.7 million in the same quarter a year ago. Expected reductions in DLT royalties were the primary driver of the decline.

For the quarter, non-royalty revenue totaled $150.3 million, of which 83% was branded and 17% was OEM. That compares to non-royalty revenue of $146.8 million a year ago, of which 78% was branded and 22% was OEM. The fourth quarter increase relates to revenue growth in disk systems and software along with branded automation, which was offset by declines in our OEM business. Q4 branded revenue grew 9% over the same quarter in the prior year. Fiscal 2011 branded business was 79% of non-royalty revenue compared to 74% in fiscal 2010.

Looking further at various revenue classifications, devices and media totaled $25.2 million compared to $26.4 million in Q4 of the prior year. Branded devices and media revenue grew $1 million but was offset by anticipated declines in OEM devices and media revenue of $2.2 million. As a point of reference, OEM devices and media revenue combined were less than $500,000 in the quarter. In our branded business, the most significant year-over-year increases were in sales of our LTO media. We believe there were incremental purchases in media due to the events in Japan and concern over supply disruption.

Tape automation systems revenue was $62.1 million, up $300,000 from Q4 of fiscal 2010. Branded automation grew $4.8 million year-over-year offset by a decline in OEM automation of $4.5 million. We experienced growth across all our branded automation platforms during the fourth quarter compared to the same quarter in fiscal 2010. Enterprise automation delivered the largest dollar contribution to the overall increase. We added 130 new enterprise and mid-range customers during the quarter and 550 for all of fiscal 2011.

Disk systems and software products and related service revenue was $29.5 million in Q4, up from $22.8 million in the prior year, a 30% increase. For the full year, revenue grew 32% from $95 million in fiscal 2010 to $125.5 million. For Q4, we had a significant year-over-year increase of 40% in our Quantum branded DXI revenue including related maintenance, and StorNext revenue was up 14%. Our mid-range DXI revenue nearly tripled year-over-year in Q4 while enterprise disk revenue was down 34%. In part, we believe this decline in enterprise disk revenue is the result of DXI 8500 enabling us to compete in larger deals that have longer sales cycles. However, while we did close some DXI 8500 deals that had carried over from the December quarter, we recognize that we still are not fully capitalizing on the opportunity we have in this segment of the market.

John will talk about some of the changes we are making in our sales model, and we also expect to see greater momentum when DXI 8500 is available with DXI 2.0 software. Feedback from DXI 4500 and 6500 customers on DXI 2.0 continues to be very positive. In addition, I would note that even without 2.0, our win rate for enterprise DXI systems was approximately 55% in Q4, the same rate, incidentally, as for mid-range DXI systems. Finally, we continue to see increasing channel traction with DXI overall, which we believe will also help drive DXI 8500 growth this year. As an example, DXI sales by our top channel partners in North America grew nearly 90% in fiscal 2011 compared to the prior year.

Moving to service revenue, it was $37.4 million in Q4 compared to $38.8 million in the prior year. We had slight declines in both branded service revenue and OEM out of warranty repair. Turning to gross margins, non-GAAP gross margin in Q4 was 43.7% compared to 44.4% in the prior year period. On a year-over-year basis, non-GAAP gross margin was negatively impacted by the decline in royalty revenue, which carries 100% gross margin. Non-GAAP gross margin for Fiscal 2011 was 44.6%, up from 44.5% in fiscal 2010 and the highest in over 10 years.

Looking at expenses, non-GAAP operating expense totaled $59.9 million in Q4 compared to $58.4 million in the prior year. The primary driver of the increase in operating expenses was sales and marketing spend related to increases in salaries and benefits associated with growing our products and solutions team. G&A and R&D spend were relatively flat this quarter compared to the fourth quarter of fiscal 2010. Non-GAAP operating expenses for fiscal 2011 were $232.9 million compared to $223.4 million in 2010. Non-GAAP operating profit for the quarter was $12.3 million or 7.4% of revenue compared to $14.6 million or 8.9% of revenue in the same quarter a year earlier. The increase of $1.5 million in sales and marketing spend is the primary driver of the decline in operating profit.

For Fiscal 2011, non-GAAP operating profit was $67.2 million or 10% compared to $80 million or 11.7% in the prior year. Interest expense for the quarter was $3.3 million compared to $6.1 million a year earlier. This included cash interest expense of $2.7 million and amortization of debt issue costs of $600,000. The current coupon interest rate for our remaining senior debt, $104 million at March 31, will be 3.81% for the quarter ending June 30, and the average interest rate for our total debt will be approximately 3.78% for the quarter ending June 30. For the fourth quarter, we had other income of $1.2 million due to a gain from an investment in a private technology venture limited partnership related to the sale of a portfolio company during the quarter and foreign currency gains. We recognized a net tax benefit of $100,000, primarily related to monetization of certain tax credits, which offset our foreign and state taxes.

Summing it up for Q4, we had non-GAAP net income of $10.3 million with non-GAAP fully diluted EPS of $0.04 compared to net income of $7.3 million and EPS of $0.03 in the same quarter a year earlier. For the year we had non-GAAP net income of $49 million with fully diluted non-GAAP EPS of $0.21 compared to net income of $54.5 million with EPS of $0.25 in fiscal 2010.

Focusing on cash flow for the quarter and the balance sheet at March 31, I would like to highlight several key points. Cash flows from operations for the quarter were $23.4 million. We paid down $40 million of our senior debt in Q4. At quarter end the composition of our debt was $104 million of senior debt and $135 million of convertible debt. We ended the quarter with $78 million in cash.

Non-GAAP EBITDA for the quarter was $18.5 million. Bank EBITDA was 14.8 million. The difference relates to restructuring charges in Q4 that were disallowed add-backs for bank EBITDA because our restructuring allowance has been fully utilized in prior periods. We are in compliance with all debt covenants at March 31, and we expect to be in compliance with our debt covenants during the next 12 months. Covenant ratios stepped down for the last time in March 2011, and will remain level until the maturity of the debt.

EBITDA for the last 12 months was $93.2 million. For purposes of calculating our debt covenants, EBITDA for the last 12 months was $89.6 million. On a sequential basis, manufacturing inventory decreased $6 million, accounts receivable decreased $3.8 million, and we had an accelerated payment of $7.6 million from one customer. CapEx was $3 million and purchases of service parts inventories were approximately $600,000. Depreciation, amortization, and service parts lower of cost or market expense totaled $12.3 million for the quarter. As we close on fiscal 2011 and reflect on our performance, we see it as a year which ended with an improved balance sheet, having repaid over $100 million of debt and refinancing our 12% debt to 3.5%, saving $10 million per year on interest expense.

On the revenue front, branded revenue grew 5% over fiscal 2010, driven by increases in those areas that we targeted for growth this year. In addition, our financial model is generating strong non-GAAP gross margins, non-GAAP operating income, and operating cash flows; and was again validated this quarter with a credit rating upgrade from both Standard & Poor's and Moody's. Given all the momentum in product releases and revenue growth in our focus areas, we believe we are well positioned to grow in fiscal 2012. Now let me turn the call back over to Jon.

Thanks, Linda. Now, I will summarize Quantum's market position and strategy. As a reminder, we are a specialist in delivering data protection, data management, and data archive solutions that have exceptional capability and provide unique value for customers. Our go-to-market model is to sell Quantum branded products through value-added resellers, system integrators, DMRs like CDW, and two tier distribution partners. Approximately 90% of our branded business is through the channel and 10% is direct to end-users. We also sell our products through OEMs including Dell, HP, IBM and Fujitsu to increase our reach and scalability into other markets.

As we enter fiscal 2012, our operating plan is based on growth for DXI and StorNext and for branded tape automation to perform better than the overall tape market. The branded growth strategy is based on the refresh product portfolio and our current and strategic partners. Offsetting this growth, we expect OEM tape, branded devices and media and tape royalties to perform similar to the overall tape market, which is expected to decline at an estimated 5% per year through 2014. Our product portfolio will continue to center around tape automation, disk space back-up appliances with de-duplication, and file system and archive data management offerings.

In terms of our balance sheet we also continue -- plan to continue to generate cash from operations and pay down debt. I recognize that much of what I just described isn't new or different and at a high level that's true. Our strategy, our opportunity and goals aren't dramatically different in fiscal 2012. However, I believe we are much better positioned to execute on a growth plan as we start the New Year than any time since the Quantum ADIC merger. In addition, what we do and how we do things will be different this year. So let me expand on this a bit.

Let's start with sales and marketing. The first difference is how we assign and focus sales resources. This year we have moved to aligning and focusing our sales resources based on end-user segmentation and not just on a geographical or product basis. Historically, we have had a general sales force and a separate StorNext sales force, and those teams were assigned a territory based on geography. What we have found is that we're getting into larger, more complex deals with DXI and the StorNext products, and DXI and StorNext are dragging large Scaler I6-K tape libraries for longer term retention and archive solutions.

This trend is resulting in much larger opportunities and bigger deal sizes. Therefore, for fiscal 2012, we have moved to one sales force that can sell all products supported by specialized technical resources assigned by opportunity and solution requirements. They will be focused on specific end-user segments including company size, industry, and the opportunity for selling a broad set of Quantum products as well as geography. These technical resources consist of a pool of system engineers, solution architects, and subject matter experts that will be assigned to specific deals based on the technical skills required by the opportunity, again, not limited by geography.

We believe this will make us more effective at generating and closing deals, create better solutions for customers that are differentiated from the competition, and augment the technical capabilities of our channel partners. One of the first examples of where we have already benefited from the above change was a $1-plus million deal we closed this month that included StorNext for archive, DXI for back up and tape for both archive and back up. The competition was for promoting an all disk solution that was three times more expensive initially and much more expensive in future years. We had a technically strong channel partner with us and had the best suited resources assigned to support the specific customer opportunity.

The second area that's different has to do with the channel enablement and partner expansion. We are very focused on getting tighter technical alignment on our complete product portfolio with our channel partners and expanding the partner base that can add technical value to end-users like providing First Call service support and integration services. This effort began in fiscal 2011, and we will accelerate both the breadth and the depth of our technical resources and training for our partners this year. This includes increased in-depth training with partners, SE's as well as more online training and certification tools and more comprehensive engagement on future road maps and the technical direction with our key partners.

In addition, we will continue to focus on recruiting and adding new partners who want to have an alternative to EMC data demand for de-dup and for Oracle on tape, or who want to sell StorNext for large data requirements like video. Through both training and new product offerings, we are going to broaden the number of partners who can sell StorNext, and more importantly, StorNext together with either DXI or tape products or with both.

The third area of change is in the development of new channels. Consistent with our overall strategy to grow revenue and increase profits, we will actively pursue opportunities to expand our market reach for all our products. We believe that our product offerings provide a unique value, but that we need to work through partners to reach additional customers. As an example, in the last 2 months we've begun new StorNext related partnerships with Net App, Group Logic and Active Storage. These new relationships give us access to a broader range of customers and use cases for StorNext. We expect these new partnerships to help us grow StorNext revenue this year, but we do not have specific dollar targets or expectations set for them yet.

The final area of sales and marketing where we're doing things differently involves more intense focus on improving overall execution, and in particular, driving more uniform sales execution. We are working on multiple initiatives to accomplish this including improved training, solution selling tools, more management, inspection, and better marketing. In many ways it's really just taking what's working successfully in territories around the world and replicating that across all our sales territories. There is nothing unique here. It's just hard work and persistence, but our sales leaders and representatives are very focused on driving best practices in the entire worldwide sales organization.

In addition to sales and marketing, another area for focus is in products and solutions. In our Scaler tape library product line, we will continue to add software and hardware features centered on ease-of-use, media management and security, and archived features. Our entry level, mid-range and enterprise libraries all have the Quantum I-layer software and can be managed with our vision software. This year, we will release significant and -- hardware and software features for our Scaler I6-K enterprise library focused on large data, archive requirements, high availability, and security.

Our Fiscal 2012 DXI road map is built around our fourth generation 2.0 software. DXI 2.0 is in-line de-duplication with industry leading performance, and it allows us to offer customers a high performance solution and the best overall value. 2.0 is available on DXI 4500 and 6500 a day and will begin shipping on the 6700 and 8500 this summer. Customers that have already bought 6700 and 8500 systems will be able to upgrade to 2.0 at no additional cost, thereby protecting their investments. In addition, in conjunction with the 2.0 upgrade, we will be offering source based de-duplication and a multi-protocol version of the DXI 6700 with a broader range of capacity for increased scalability. We also expect to make further innovations in our DXI line during this fiscal year, including new capabilities for managing and protecting data in virtualized environments.

For StorNext, we will continue to increase unique performance and operational economic advantages for both the StorNext file system and storage manager. Improvements in fiscal 2012 will include additional performance and scalability enhancements as well as new functionality. In addition, we will launch the initial members in a family of StorNext appliances that will be targeted at specific customer use cases. This will allow us to expand the total available market StorNext can serve by product type and solutions that can be sold by more resellers and channel partners to reach a broader set of customers in both existing and new markets.

These new StorNext appliances will be tightly integrated with the StorNext software with optimized server and storage hardware. In fiscal 2012, we will also build out our StorNext professional services and custom engineering capabilities. With the growth in big data, our customers' problems and needs are becoming more complex, which can often require more tailored solutions in related technical support. In response, we began offering custom engineering during the latter part of fiscal 2011. We combine with professional service, this is an important element in providing greater value to customers while also enabling us to build on our market leadership. Both professional services and custom engineering will scale with demand over the course of fiscal 2012 and beyond.

In summary, our current tape, disk, and software solutions are very good with excellent value proposition for customers. We plan on improving the breadth and depth of these offerings in fiscal 2012. Our strategy is to be the leading independent storage company focused on data protection and management products by offering unique solutions at a great value.

With that, let me now provide our guidance for the coming year and the first fiscal quarter. At an overall market level, we participate in a market that's mature in our tape business, a disk space back up market that's growing, and a file system and archive market that is growing and has a lot of potential for innovation and new solutions. For fiscal 2012, we expect total revenue to increase, driven by branded revenue growth. Specifically, we expect we will see continued expansion in our branded disk systems and software business based on our focus in these areas, market opportunities, historical growth, increased customer awareness and interest in our offering, and a healthy funnel as we enter the year.

We expect branded tape automation to remain relatively flat as we continue to gain market share in a declining market. Offsetting our growing and stable segments of the business, we anticipate continued declines in OEM, royalty, and branded devices, and media revenues in line with overall market expectations. As a reminder, in fiscal 2011, we recognized approximately $11 million of OEM software license revenue from EMC based on a relationship that mostly ended last year. From a gross margin perspective, we expect the growth in overall revenue, specifically branded revenue, which typically carries a higher gross margin, to drive expansion in our gross margin. However, that will be somewhat tempered by the absence of nearly all the EMC software license revenue we recognized last year and expected declines in royalty revenue, both of which contribute 100% margin to our results.

With growth in overall revenue, we expect a modest increase in OpEx, mostly driven by increased R&D investment. For fiscal 2012, interest expense modeling should be based on our exit rate in Q4 of fiscal 2011. And we believe it's still reasonable to model tax expense of $4 million for fiscal 2012 or $1 million per quarter. You can assume weighted average diluted shares outstanding of 280 million. For Q1, which is historically a seasonally weak quarter, we are forecasting revenue of approximately $160 million, non-GAAP gross margin of 43% to 44%, and total non-GAAP operating expenses of $58 million to $60 million. Interest and taxes will approximate $3 million and $1 million respectively. And for anyone comparing this guidance to our results from Q1 last year, it should be noted that we recognized approximately $9.5 million in EMC software license revenue in Q1 of fiscal 2011.

Finally, I just wanted to provide an update on the impact to our business related to the events in Japan. Currently, we see little impact to our fiscal Q1 of 2012 as we have visibility into our supply chain pipeline and are continuing to see existing stock on hand. For Q2 of fiscal '12 and forward, we have implemented several tactics and specific strategies for each commodity to have better visibility into and make adjustments to our supply chain to minimize potential impacts to our business.

We will continue to actively monitor and manage this in upcoming weeks and months with the goal of supporting our customer requirements without any interruptions of supply. Now, I'll turn the call over to the operator for questions. Operator?

Thank you, sir. (Operator Instructions) Our first question is from the line of Shelby Seyrafi with FBN Securities. Please go ahead.

Yes, thank you very much. I was wondering if you could elaborate on the expected pace of the DXI business. It looks like with the summer announcement of the 6700 and 8500 with the DXI 2.0, that's June 21st so that's not really going to happen much in the June quarter. It's going to really happen -- the ramp's going to happen in the second quarter, and can you talk about what you expect that growth to be throughout the year for example? In the past you've talked about potentially even doubling in 2011, came in around 30%. Do you expect 2012 to be 30% again in the DXI business?

Yes. So your pointing at one of the things that we did differently for this call. We specifically stayed away from annual detailed guidance, and the reason for that is we have a lot of things going on that make it difficult for us to really hone in on a range like you'd like, Shelby, and I'm sure this is going to be a follow-up call or question from some of the other guys on the call.

We are seeing take up in our DXI business that we are excited about. It isn't just 2.0 driven, however, our 8500 and 6700 products are very, very competitive just like they are. What we're finding though is that the deals are bigger and the sales cycles are a little longer; and I think you'll notice from Linda's comments, our win rates are actually staying the same. So I understand your question. You're looking for the inflection point.

We're trying to give you some color about things that we're doing. I think we have a lot of positive things going on right now, and it's hard for us to handicap where we're going to be. I do think that we're going to grow. I don't know if the 30% number you gave was the right number or not for the year, but we have high expectations for the year; and we're trying to drive growth at a higher rate than we have in the past. But we're just not comfortable giving an annual look as to where we'll be.

Okay, and just a little bit on that. When you say you aren't comfortable with the 30%, or giving a number, are you targeting a number higher than 30% or you think 30% would be satisfactory?

No. Our internal goals are to improve our growth rate. I'll say that. Where we're going to end up and how we're going to guide, we're very focused on executing each quarter and building off of each quarter sequentially and reporting how we've done.

That's good. Also, on your relationship with Net App, very good reseller agreement for StorNext recently. Can you talk about how that might expand to include your DXI business?

Yes. I'll try to add a little clarification there. So we really have three touch points with Net App today and one of those three is indirect, and I'm going to do them in chronological order. The first one is they have an agreement with Fujitsu to resell Fujitsu's de-duplication appliance in Europe, which is based on our DXI software stack. We really don't have much visibility into that. It exists and that's really all we know. We don't get a channel break down from Fujitsu.

The second is the StorNext relationship that we've announced. We're excited about that. It expands our reach with StorNext as an industry leading product. It expands our reach into places that we are very good at and Net App has some great customer contact.

And then the third is with the acquisition of the Ingenio business out of LSI, Net App becomes a supplier to us for our 8500 product. So we buy disc products now from Net App that go into 8500. There's no formal plans other than what I just said. Obviously, we think that's an important fact for Net App resellers who are looking for de-duplication appliances. We think that will help but there's nothing more formal than what I just described.

Last one for me if I can. Are you prepared to make any competitive statements against EMC, which has pretty good performance in their DD890? Last time you spoke about the DXI 2.0 doubling your performance, the 8500 -- it currently has around 6 terabytes per hour, do you expect to eclipse EMC any time soon?

Well in the mid-range space we are much faster. With 2.0 on the 6500, I don't know what the exact percentage number is but we're a lot faster; and when you include price performance, we think we have a much better value for customers. We haven't announced anything on the 8500 yet.

We will when that product launches and all of the testing is done, but we are not far off from them today with the current product offering and we're excited about the features and capabilities that 2.0 brings to the whole portfolio. I hope you could tell from the comments, we are very focused on really building around the strength of the 2.0 software stack to add more capability beyond just performance, but we think our performance story is unmatched where we rolled 2.0 out.

Thank you.

Thank you. Our next question comes from the line of Brian Marshall with Gleacher & Company.

Great. Thanks, guys. With respect to fiscal year '12 guidance, you're talking about a modest increase in non-GAAP OpEx driven by higher R & D. And you clearly talked a little bit about increasing your specialized technical resources with respect to salesforce, go to market strategy, potentially expanding StorNext professional services, etc. So it sounds like there's a decent amount of activity with respect to just having more technical assets at the Company. Can you talk about how that expansion plan jives with the guidance that we're talking about for modest growth on the OpEx side for the year?

Yes, we're just going to spend differently in sales and marketing. So the changes are not rolling a whole bunch of different headcount. There's some very specialized headcount. We have a lot of these people today. They're just geographically bound. It's kind of the big change, so I'm looking at Linda but our sales and marketing--

106.

Yes, is about the same -- it's flat year-over-year, and she highlighted the fact that where we really are going to spend more is just in R&D.

Okay.

And I think I'd just say, Brian, we talked about the fact that we have pretty good spend in marketing and sales that we just relook at where we're spending those dollars and how we allocate the resources.

Okay, understood, thanks. So if you look at your previous upgrade cycles with respect to your software platform, I know it's obviously talking about a free upgrade here. But can you talk about what the follow on impact to the financial model has been historically and what we might see going forward as a result of the DXI 2.0 being rolled out across-the-board?

Well, I think this is -- all the others have been dot releases. This has been a more fundamental change in the software going inline, and a couple things happen. The performance is better, so there's less hardware cost that goes with it. We can actually add more features to it, and if you recall when we switched to the 6500, when you buy a Quantum product, you get all of our features as compared to some of the competition who does an ala carte type of model and that's one of the things that's helped us with the channel.

We think people like the simplicity but it also builds on our value message, and so the way -- it is a make it up in volume kind of story; but the idea is that we've got a more unique solution with better performance and ultimately more features over time, and we need to have differentiated products as a specialist. So it's really just built into the growth.

Okay, so it sounds like Jon, that the margins here could be higher than the previous versions just due to the things you just talked about?

Yes, I think potentially, all those things together can drive more margin.

Okay.

Certainly, the product solution is more valuable to the end-user.

Sure. My last question is with respect to kind of longer term looking out past fiscal year '12. Was wondering if you could comment a little bit on kind of your long term financial model or perhaps maybe some level of breakeven with respect to the disc space back-up business and just something along those lines further out if you mind discussing that, that would be great. Thanks.

Sure. I think the key part of 2012 is growing the DXI and the StorNext products. Those markets are expanding. We think our solution set is unique and there's a lot of opportunity for both of them. Real specifically, the DXI productline on top of 2.0 has some unique iterations that will continue to push both growth and margin. And in StorNext it's very interesting because we're going to be doing a combination of things.

We'll be appliance sizing the product to make it simpler for broader market acceptance, which will actually push down gross margin percentages but should increase our overall gross margin dollars a lot. And we expect there to be a lot of growth in StorNext as we look forward, and I think the other thing you're going to see us do from an operating model is we're getting value by linking the products together. I don't want to underestimate the importance of going to one salesforce and having everybody sell everything because it makes us more relevant at the VAR and it makes us more relevant at the end-user, and we provide a bigger bundle of solution to the end-user customer; and all that is more margin, so we've talked about growth in the past. I think we're very well positioned for all of the reasons that we mentioned on the call; and if we deliver the kind of growth that we're targeting for this year, you'll see margin expansion and more growth in the future.

The other thing that was in the script I'm just going to highlight is the latest growth numbers for tape or decline numbers for tape came out and they're 5% versus what we've been saying the mid to upper teens and so that's an important distinction. We think tape is here for a while as a recollection we make a lot of money on tape, and we think we'll continue to drive profits there. On your point of breakeven, without giving any guidance for the year, I would say we probably get to a spot this year where we're better than breakeven on disc and software.

That's great. Thanks a lot.

Thank you. Our next question comes from the line of Brian Freed with Wunderlich Securities.

Good afternoon. A couple quick questions. First, is you look at the services line, it declined year-over-year even as your branded revenue is growing. Can you explain this trend a little bit and what would drive an upward inflection in the growth of this segment?

Sure, Brian. So the decline that we've had primarily over this last year in service has been related to our OEM business, in particular as we've kind of gotten out of the repair work on some of the lower margin products that we've chosen to exit with that business. So that's the main driver that you see when you look year-over-year on repair and service. From a growing the business going forward, obviously increased install base and increases in revenue will drive an increase in our overall service revenue.

This quarter we had a little bit of a decline on the branded side and some of that is just the timing of renewals and products rolling on and rolling off. Generally, I think we would expect the branded to grow and we're getting pretty low on the OEM side.

Okay, and then my second question kind of comes down to as you think about guidance from a macro perspective, tape automation in fiscal 2011, this was a relatively good year from a macro perspective in that the Sun/Oracle disruption gave you guys some opportunity to gain share. As you look to fiscal '12, do you feel like those opportunities remain or do you think that there is more headwinds than tail winds versus the most recent year?

I'll start and let Bill go. I think what we're finding is the tape upgrade cycles are long and the dynamic that we see where we think we've got a favorable solution for end-users when competing against install base at Oracle, we think that's going to continue into the year; and it's a combination of both our tape products but also our disc and tape products together. And I mentioned it earlier, I'm going to keep harping on it, and the ability to sell StorNext with tape. And we think that's going to be a phenomenon that we'll see during the year. Do you want to add anything?

I guess the other thing I would add is that the competitiveness of our DXI product as we get into these back up redesigns allows us to acquire new customers, which then in turn generates an opportunity for tape as well. So we have a number of accounts that we've acquired where we've replaced the disc that's been kind of traditional non de-dup disc plus the tape and then present a complete Quantum solution. So that represents net new customer opportunity. The role of tape for sure is changing in back up, but there is still this long term archive and data retention requirement that tape is very well suited for.

Okay, so I am reading you right when you say -- if I take that to mean that you believe your opportunities for share gain in the tape segment in 2012 were at least as good as they were in '11?

Yes.

Okay, a third area in the disc and software, as you look at the sequential trends and that segment it declined sequentially, can you give us a little more color in terms of mix? Did you see sequential growth in the 8500 segment given the push outs you incurred last quarter; and as you look at the 8500 segment in particular, are you still seeing sales cycles longer than you expected?

Yes, so I would say I think as in my comments or Linda's or both, we still see these complex deals of sales cycles longer. And I can tell you there's some deals that Bill and I were working back in December that still haven't closed as of today that we are talking about. They're just bigger and there's a lot more complexity around them. For the quarter, we were definitely strong, the mid-range business was very strong, which has been something we've been driving towards. The 2.0 software helped but our 6700 product is also very, very strong.

I think we made progress this quarter. I think Linda had that in her piece of the presentation. We still have more work to do here. A lot of the changes that you heard me describe are built around this phenomenon of big complex deals, having the right resources, and getting the deals closed; but it's a unique step for us. These are big multi-million dollar deals and we just have more of them. And I think it's a good problem to have actually and the product's going to continue to improve here and our execution is going to continue to improve as well; but no question this quarter was mid-range was strong, and I think we gave those percentages on what the growth was.

Okay. Looking at StorNext, can you talk a little about the StorNext pricing model? I think there's been some attempts to try and from a number of us to figure out how big is the opportunity there; but can you talk a little bit about how you typically price StorNext, whether it's on a per chassis basis or it's ESL or by capacity so we can make rational forecasts?

Sure. Well probably the easiest way to forecast, I assume you're trying to figure out how some of our new partnerships will impact us. Generally speaking, the disc or the hardware piece of a StorNext sale is three to seven times the StorNext value. So if it's $100,000 StorNext deal, it's a $300,000 or $700,000 disc deal. So you can flip that around and go backwards; and generally speaking, the more data there is, the bigger the software number is. How it's priced is the file system is priced based by server, so there's a license per server and for storage manager, it's generally priced on data under management. So the more data generally drives a higher -- not a higher rate but higher revenue.

Okay, and--

So the way to think about like the new relationship with Net App, these are going to be large deals because they're going to sell their traditional products where they can; but when it gets very large, we're having a single file system and storage management capability. That's where we think we'll get the attach.

Okay, and when you look at StorNext installs out there, is it correct to say there's hundreds of petabytes under StorNext file systems out there?

Yes. If I think in terms of the total petabytes under Management, it's probably in the triple digits petabytes.

Easily.

And the other part of this that I think you guys are quite aware of is just the number of petabytes size deals that we're exposed to, particularly in Hi-Definition digital media, the broadcasters all moving digital, increasing HD, 3D. And that digital workflow basically generates opportunities for us that really are unique in the fact that a traditional way of thinking about disc replacing tape for these large scale digital archives, the economics, the power of the cooling just doesn't work, so the starting point for a lot of these very large digital archives is it will be some type of tape based archive. The disc is just prohibitively expensive. So as we get footprint with file systems as Jon mentioned earlier, getting that footprint with disc space file system deployments for work flow and for that initial several hundred terabyte deployment, the opportunity to sell tape and longer term deep archives just goes up as we get more footprint.

Okay, and then my final question before I cede the floor, more of a technical question. Can you talk a little bit about what specifically in StorNext is really its major competitive differentiation versus other file systems; in particular versus things like Icelon, or there's definitely been a lot of market chatter around Hadoop. I know you guys are unique in that you span disc and tape, but can you kind of talk a little bit more about what are the key differentiating features of StorNext versus other of the scale out file systems?

Single stream performance is off the charts for us. We beat anybody in that. The single name space is kind of what you're alluding to is other products in the market; but the ability to be able to do that and do that with heterogeneous storage and platforms, that give us an integration capability that's very unique as well. So if you think of it in terms of being tied to a specific disc platform, we have the ability and the StorNext reseller announcement with Net App is a good example. It just adds to the number of disc platforms that are supported under StorNext.

Okay, thanks.

Thank you. Our next question comes from the line of Eric Martinuzzi with Craig-Hallum. Please go ahead.

Thanks. The royalty revenue the past couple of quarters, this will be back half of fiscal '11, I have it off about 15% or so. I know you threw it into the roughly minus 5% commentary, but is there anything that would cause that to maintain this sort of double digit decline here year on year?

Most of the decline has been around the curve and the reduction in the SBLT and DLT royalty and that's getting fairly low as a percentage. We don't break them out but it's getting fairly small. And then the other piece is the LTO side, and a lot of the up and down you see has been around just timing of launch of LTO5 and some of the macroeconomic things. We threw it in there on purpose.

As you know, Eric, we don't control it so that's our best way to kind of guide where we think it's going to go. Is it possible that it could be higher than that? It's possible and if it was it would be DLT, but we're starting to get to a spot where it's not as significant on the DLT side.

Okay. You gave us a number for the EMC contribution a year ago, and if I do the math there basically back EMC's royalty payment out of June 2010 quarter. The year on year math comes out to about 4% growth for Quantum in Q1. Just wondering if there's other things seasonally in the out quarters that we need to take into consideration, or is that kind of a decent 4% number -- a decent to use that for the out quarters?

You mean as far as growth goes?

Yes.

Well that's a good question to get me to talk about the year. I think what we're going to do, Eric, is kind of stick where we've gone is that we're going to grow and we've seen your guys' models. We now where you are. We have our own plan, and I think we're at a spot where we need to execute on the opportunity and report where we are and then tell you where we're going to go the next quarter.

We said we were going to grow and I think we will, and you can move your model around and move the numbers the way you want based upon what we've said here today. I guess I want to reiterate for this. We're trying to do two things. We're trying to give you clarity in the upcoming quarter and we're trying to be very clear about our intentions to grow and how we're going to do it, and we have a lot going on so we aren't comfortable in giving you more than that.

That's fair. I just wanted to make sure I factored in--

Your math is right.

I wanted to factor in if there were one off issues or seasonality.

Yes, that's the only other one. The one you have is the one that exists.

And then lastly, on the financial statements from a year ago, you had a pretty substantial step down on the cash from Ops for Q1. I'm wondering just for Q1 this year, do we see the same seasonal pattern in the cash from operations or was that also EMC impact there?

You've caught that right. So there was the EMC prepayment and moving that around in the balance sheet caused the negative cash flow from operations in Q1, which is we haven't had in the past couple years a negative cash flow from operations, so that really was kind of a one-time thing with EMC.

But maybe I didn't make myself clear. Would we expect to see an improvement in the cash from Ops this year versus a year ago?

Correct, you would expect that.

Okay, thank you.

Thank you, (Operator Instructions) Our next question is from the line of Ian Kell with Northland Capital Markets. Please go ahead.

Hi guys. Thanks for taking the call. Just a 2.0 question. I know you're rolling out to the 8500 you said this summer. Is that a late Q2 event or is that more mid to late Q3?

Well, we picked Summer so I'm going to stick with that. Let me just say this. We've had very, very good success on how the engineering team is rolling these out. I will say you can imagine the more complicated the box, the longer it takes. So I would expect to see in the mid-range products and then the enterprise products; but we're going to stick with summer. Summer being June, July, August.

Yes, sure. Is there anything -- do you think that it has any impact into your 8500 performance right now in terms of customers waiting on the 2.0 release at all?

No, we don't think so. We think that as I mentioned the 8500 is very competitive and its price performance is very good just as it is. If people want to see the 2.0 software, we have products to show them that, but we don't think it's holding up deals. Now, we're going to get smarter as the quarters go on, but it really hasn't been a factor that we can tell. It's really -- our factor in getting things closed is much more about the overall complexity of some of these big deals that these 8500s find themselves in.

And over to Fujitsu. Still not saying too much on that relationship I don't think. How is it going first of all, and when do you think you'll get to a point, if at some point this year when it makes sense to actually sort of give some color each quarter.

Yes, somebody asked that. We didn't put a lot in the script about them. We did mention them as an OEM. They're starting to get traction with the product and I think they like the solution that they have, and they're finding themselves in more deals especially in Central Europe. I'm looking at Bill, and once it gets to a level that we could have some predictability behind it and it's material, we would love to bring it up. But positive at this point.

And the last one here, top performers, I think you said in the channel. I think you said was 90% or so for the year, maybe I missed it but did you say it for the quarter?

I think we said the mid-range channel business was up 90% year-over-year.

Right.

Is there any way to look at it from a top 10 perspective, how it's performing?

The top 10, what do you mean?

Top 10 resellers, just trying to get an idea for how your larger resellers in terms of the lion's share you might be getting there?

Oh, well we talked about our focus partners, so within that population, you're going to have a different execution. What we're finding is the partners that were the most technically engaged with, they're having the best success; and that's why we're driving this technical alignment much more broadly and deeper than we are today. So if you think about it as a continuum and we've talked about it this way, we recruit people in, we get them up to speed, they get their solutions involved; and we're really driving hard on the technical side.

Okay, thanks for that.

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

Good afternoon. Maybe I'll just circle back to the guide real quick on the first quarter, you're at 160, I think the street was about 166. Should I think about disc being sort of flattish here sequentially and then some acceleration obviously in the disc as we go through the year?

Well, again, I'm trying not to give guidance on the specific products. We think disc and StorNext will grow year-over-year. We gave 160 as Eric pointed out. I think that's up 4% year-over-year when you take the EMC out, and you can see the breakouts that we have in the Q as to what each of the segments did -- product categories did. And we're expecting to have growth in disc and software. So whether we're flat or grow is to be determined; but if I go out to the year, Glenn, we're looking for that segment to grow pretty substantially.

Can you comment on how far you've sort of come with these organizational changes on the sales side, and is that sort of impacting your first quarter guidance being a little bit more conservative than where the street is?

Well, I think it's a great question. We actually had a VP meeting and a sales meeting the first week of April. That's the first time we've done that. I would say at this point, I'm looking at Bill, most everything is rolled out; and I think the team has digested it, and I think we're giving guidance based upon what we see and we're trying to drive to better execution. So the guidance is really just based upon not really what you guys have or what we're doing. It's what we think is the right place to set the target for the quarter and then we're going to drive to exceed that.

I'll try, I'll just give it a shot and we'll see if you can respond. I think for the year, the street's at like 5% growth, like 705. Are you uncomfortable with that level of growth?

We know where all the street guys are, how about that for an answer? And 5% is close to Eric's 4%. We're not trying to be coy at all. I just think it hasn't done us any good to put targets out and have a lot of angst around it, so we're really going to do this year is we're going to give guidance, specific guidance. You notice we didn't give a range either for Q1, which Glenn, you've known me the longest of anybody on the call, you know I've never done before.

We're giving a specific number and we think we know what we're doing for Q1. I don't want to understate the fact that we've got a lot of things going on, and we have a lot of interesting attributes that over the course of the year can drive some significant growth; and yet I don't want to get everybody out ahead of us. I want to execute on the opportunities.

All right, last one. I think in the past you've talked about the breakeven level for the disc software around being in the $35 million to $40 million per quarter area. Is that still kind of the general range of breakeven or has that moved up a little bit with some of the investments you're making?

No, Glenn, I think we would agree that that's generally the break even range right there.

Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Alex Kurtz with Sterne Agee. Please go ahead.

Yes, thanks guys. Jon, when I hear you talking about these larger deals becoming more important and strategic to the overall revenue of the Company, I think the question I wonder about is Quantum really built from a salesforce perspective to compete in those more complex, politically driven deals? If I think about you guys with the 6500 and the 6700 series that's much more transactional. So as it stands right now, you have to hire different kinds of people going forward, or do you feel like you have all of the people in place to execute in the larger deals?

Well, I think the first thing, Alex, is that we recognize that these larger deals required us to have the right resources on them. So a lot of those changes that Bill's implemented that I described were around this question which is when you're in a big multi-million dollar deal where it's back up, archive, tape disc, StorNext, we've got to make sure we have the right supporting cast around the sales team and not just have it limited by the fact we had two salesforces or geography or whatever, and I think we've done that.

I think the team is doing a very good job -- very good job on asking for those resources and sales management is doing a really good job of inspecting for it. I think as it relates to StorNext we have some very specialized knowledge and big data and we're really trying to proliferate that across the entire salesforce. So we're going to be conscience of this new way to assign resources as we hire people, but I don't think we have to go hire people to go make it work at all.

Bill and I have spent a ton of time with the sales team in the last six weeks since the start of the year, and I think the sales team is excited about the products, they like the changes, they like their comp plans. All of the things -- there's a lot of momentum I think in the salesforce, and I don't think we have an issue around capability. Having said that, we'll be conscience of this model when we hire.

And Bill, just as a follow-up, what do you think are the like maybe the two or three top near term levers in the channel business that you're really focused on and could really kick in the next couple quarters to really accelerate that business, things that you're really looking at on a daily basis?

The number one thing, Jon already alluded to it is make sure they really understand the technical architecture and the capabilities of our product. 2.0 has been a huge shift in terms of turning basically what I would say is interest in Quantum to understanding how to compete with our products against EMC data domain. So I think the thing that we started on, gosh several quarters ago and we're going to keep the foot on the pedal is really making sure that these key technical solution salespeople within the partners really understand what we're doing. And we're being very open about the road map. I would say that is a little different than maybe kind of where we've been in the past. As these partners, we've developed enough relationship and we're aligned in terms of who we're competing against and what we're trying to do at the productline that we're being very, very open with them about the road map; and that in turn creates momentum around competing.

So when we're talking about 8500 and these enterprise deals and especially to the extent that you start to broaden it and include tape or StorNext as part of an overall kind of back-up recovery and archive type project, our differentiation goes up. And I know that it's impossible for EMC to think about tape as being part of the solution, but most end-users that are thinking cost effectiveness, they're thinking about how to integrate with their current processes, there is a role for tape and that's a huge differentiator for us. The channel piece of it is making sure they understand what we're doing from a technical standpoint road map, make sure they're enabled. The other lever is basically getting in front of a lot of POCs and proving that our products can compete and win and not back down from kind of the thud that basically gets thrown every day against the channel partners.

Thanks.

Thank you. (Operator Instructions) Management, I'm showing no further questions at this time, please continue.

Well, thanks for joining the call today. We're excited about fiscal '12 as we drive for growth and win in the market, and we look forward to speaking with you in July. Thanks very much for attending today. Bye-bye.

Thank you, sir. Ladies and gentlemen, if you'd like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030 using the access code of 443-2208 followed by the pound key. This does conclude the Quantum Corporation fourth quarter 2011 conference call. Thank you for your participation. You may now disconnect.