Quantum Corp (QMCO) 2012 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Quantum Corporation first-quarter 2012 conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions.

(Operator Instructions)

This conference is being recorded today, Wednesday July 27 of 2011. Now I would like to turn the conference over to Shawn Hall, General Counsel. Please go ahead, Sir.

Thank you and good afternoon and welcome to our call. Here with me are Jon Gacek, our CEO, and Linda Breard, our CFO. 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, opportunity 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 10-K filed on June 14, 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 Jon Gacek.

Thanks, Shawn. Thank you for joining us today as we report our first-quarter results. Let me start by saying, for the Quantum team, that we are not pleased with our revenue result and it's not the way we planned to start fiscal 2012. We are very focused on growing revenue and we still intend to do so. This start puts us a little behind for the year, but we plan to make it up -- plan to make up for it as the drivers for revenue growth are there. To do so it's clear we need to continue improving our sales and go to market execution, including our overall product and overall solution positioning. For today's call I'm going to start with a summary of the revenue results and product developments for the quarter, Linda will provide more financial color and detailed results for the quarter and then I will come back and describe our Q2 action plans and our guidance.

Q1 revenue was $153.5 million, compared to our guidance of $160 million. We grew our branded business year-over-year and had another strong quarter for tape automation. But both our disk systems and our software sales did not meet expectation for the quarter so I'm going to address both. First disk systems. While branded DXi, including related maintenance grew 15%, over the same quarter last year, we only achieved approximately 70% of our DXi revenue plan for the quarter. At a high level we made progress in closing DXi8500 deals, resulting in DXi8500 revenue increasing over 80% sequentially. This was a significant improvement from the past 2 quarters, but we still fell short of our goal. Our DXi8500 product is very competitive and well-positioned but we still need to do a better job of closing deals that we are working.

What was more significant this quarter, however, was that we had a sequential decline in our mid-range DXi6000 family revenue. We believe our DXi results were impacted by 3 factors. First, overall sales execution by us and our channel partners. We had plenty of opportunities to meet and exceed our DXi revenue plan. We just didn't get the deals closed by quarter end. We still are not getting uniform and consistent results from our team or our channel partners.

The second factor impacting our DXi6000 family revenue was product positioning and messaging. Our DXi6500 and DXi6700 products are very solid and represent a good solution for customers as reflected by the fact that Q1 was the best quarter for new customer acquisition that we've had since the products launched. However, they were not as good as we planned but they were still the best.

In retrospect, I believe the introduction of DXi 2.0 software on the DXi6500, while the DXi6700 remained on a previous generation software for several months, made it more complicated for our channel partners and our own sales team to drive the intended level of sales velocity. With today's announcement of our new DXi6701 and DXi6702 appliances which include the DXi 2.0 software, this is obviously no longer an issue. I will say more about those new products in a moment.

And finally, competition also impacted our overall DXi results. We have been winning large deals and gaining momentum with our branded DXi products. It's ironic that we rarely get mentioned by our competitors as a viable alternative in this product category because we clearly have their attention as they fiercely compete with us in large accounts or when we are threatening to take them out of existing accounts. We saw much more aggressive competition in Q1 and our win rate was reduced to approximately 45%. However, with today's launch of the DXi6701 and DXi6702, we believe we have a disruptive solution that will get us into significantly more opportunities, enable us to increase our win rates and overall revenue.

The other main driver of the revenue shortfall was StorNext. Q1 was the first time in 5 quarters where we didn't grow StorNext either sequentially or on a year-over-year basis. While this fact has our attention, we do not think this is a start of a trend that will continue. Most of the shortfall was in sales into our installed base as we still added a significant number of new customers. Q1 also did not include any revenue contribution from our new StorNext partnerships or the new StorNext appliance products. We believe we will see material benefit from both of these in coming quarters and for the year overall.

In summary, both our DXi and StorNext revenues were below our expectations for the quarter, but we are confident we can deliver better results and growth in these categories moving forward. On the tape automation side, the story is much more positive as we delivered another strong quarter. We grew branded tape automation revenue 8% year-over-year, and we met our overall branded and OEM tape products and service revenue plan. We also continued the trend of new customer acquisition adding approximately 120 new mid-range and enterprise tape customers. We believe tape is far from dead and that our branded business will perform better than the overall tape market in coming periods. So to close on revenue, Q1 put us $6.5 million behind for the year but we intend to make it up and achieve our growth objectives for fiscal 2012.

Now let me talk briefly about product developments in Q1. Our goal is to be a leading specialist in providing unique solutions to customers for meeting their data protection and big data management and archive needs in both traditional and virtual storage environments. To do that we need unique products and we need partners to get to market. We had a busy quarter on both fronts.

On the product side, we launched our first StorNext appliance, the M330, targeted particularly at rich media environments where we currently have a strong presence but now can reach a broader range of customers. This is our first StorNext appliance and there will be more to follow. We also announced a StorNext resell agreement with NetApp. The combination of StorNext and NetApp's Ingenio disk is a compelling product offering that provides access to a broader base of customers that either of us had previously been able to reach.

On the tape side, we introduced our new Extended Data Life Management, EDLM feature, in our Scalar i6K libraries. EDLM further enhances the long-term retention capabilities of our libraries by automating the integrity checking of tape media and also integrates with our StorNext Storage Manager archiving software to automatically mitigate -- sorry, migrate content from a suspect tape based upon the results of an EDLM scan. In addition, we also announced a new OEM agreement with HP under which we will brand and sell a new enterprise tape library based on our Scalar i6K platform. We expect this agreement to be contributing revenue in the second half of the fiscal year.

Although we had no DXi product launches in Q1, we were finalizing our new DXi6701, DXi6702 products announced today. These products incorporate our DXi 2.0 software and provide industry leading performance, twice that of leading competitors, and scalability as well as a unique approach to distributed or hybrid deduplication. Offered at a new lower price point, as low as half that of leading competitors, with all the necessary software license included in the base price, it delivers an unparalleled value.

The DXi6701 and DXi6702 is designed to protect customers' prior investments and provide future flexibility and future backup archive decisions moving forward. We believe this a unique offering that enables customers to get the full advantage of market-leading deduplication without having to make trade-offs other vendors require. In other words, deduplication without compromise.

Finally, we closed our first acquisition in almost 5 years by acquiring Pancetera Software. We believe the combination of the Pancetera technology with both DXi and StorNext will give Quantum a larger market opportunity and allow us to provide unique solutions for protecting and managing data in virtual environments. We expect to launch our first new product incorporating the Pancetera technology this quarter and begin to see revenue from it and the stand alone Pancetera software this quarter, as well. Now I will turn the call over to Linda.

Thanks, Jon. Now I will walk through our detailed financial results for Q1. 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 first quarter ended June 30, was $153.5 million, compared to $163.2 million a year ago.

The primary driver of the decline was the recognition of approximately $9.5 million in OEM software revenue in Q1 of last year. Year-over-year, our branded revenue was up 3%, we had 8% growth in branded tape automation revenue, 15% growth in branded disk revenue inclusive of maintenance and a decline of 9% in branded software revenue. Royalty revenue was $14.6 million for Q1, compared to $16.1 million in the same quarter a year ago. The primary driver of the decline was expected reductions in DLT royalties. For the quarter, non-royalty revenue totaled $139 million, of which 80% was branded and 20% was OEM. That compares to non-royalty revenue of $147.1 million a year ago, of which 73% was branded and 27% was OEM. The decline primarily relates to the exclusion of the $9.5 million in OEM software revenue we recognized in Q1 of fiscal 2011.

Looking further at various revenue classifications, devices and media totalled $21.1 million, compared to $20.5 million in Q1 of the prior year. Branded devices and media revenue grew $1.3 million, but was offset by anticipated declines in OEM devices and media revenue of $700,000. As a point of reference, OEM devices and media revenue combined was less than $500,000 in the quarter. On the branded side, the most significant year-over-year increases were in sales of our LTO media.

We are still experiencing higher than usual purchases of media due to the events in Japan and concern over supply disruption. Tape automation systems revenue was $57.7 million up $1 million from Q1 of fiscal 2011. Branded automation grew $2.3 million, year-over-year, offset by a decline in OEM automation of $1.3 million. We experienced moderate growth in revenue related to our enterprise and entry platforms while our mid-range was down slightly compared to the same quarter in fiscal 2011. As Jon said, we added approximately 120 new enterprise and midrange customers during the quarter. Disk systems and software products and related service revenue was $27.6 million in Q1, down from $34.7 million in the prior year. Last year's results included the $9.5 million of OEM software revenue.

As I mentioned earlier, we had a year-over-year increase of 15% in our Quantum branded DXi revenue including the related maintenance. On a sequential basis, branded disk systems revenue was relatively flat. We saw increased traction for our DXi8500 over the March quarter but a sequential decline in DXi6000 family sales, as Jon discussed earlier. We expect to regain momentum in this segment of the market with the DXi6701 and DXi6702 appliances we announced today. We believe they will gain us entrance into more opportunities, further improve our win rates and help us grow our disk systems revenue.

StorNext revenue was down 9% year-over-year, as we experienced weakness in license revenue across all geographies and the number of large deals declined on a year-over-year basis. On a positive note, our overall customer count for sales of software licenses was up significantly with new customers increasing nearly 60% over the same period last year.

Moving to service revenue, it was $36.7 million in Q1 compared to $38.6 million the prior year. The primary driver of the decline was a reduction in both branded and OEM out of warranty repair revenue. Turning to gross margins, non-GAAP gross margin in Q1 was 43% compared to 45% in the prior year period. On a year-over-year basis, non-GAAP gross margin was negatively impacted by the decline in OEM software license revenue and royalties which contributed 100% gross margin. Removing the margin contribution of both from the prior period would have resulted in a 200 basis point improvement in gross margin in Q1 of fiscal '12 compared to the same period last year.

Looking at expenses, non-GAAP operating expense totaled $59 million in Q1, compared to $57.6 million in the prior year. In absolute dollars, Research and Development and Sales and Marketing contributed approximately equal amounts to the overall increase in OpEx. The primary driver of the increase in R&D spend relates to salary and benefit costs as we continue to invest in our Disk and Software teams. On a year-over-year basis, the increase in Sales and Marketing also relates to incremental salaries and benefits from additional investments we made in headcount throughout fiscal year '11.

G&A was relatively flat this quarter, compared to the first quarter of fiscal 2011. Non-GAAP operating profit for the quarter was $7 million or 4.6% of revenue, compared to $15.9 million, or 9.7% of revenue in the same quarter a year earlier. The absence of $9.5 million of OEM software license revenue was the primary driver of the decline in operating profit compared to the same period last year.

Interest expense for the quarter was $2.8 million compared to $6.1 million a year earlier. This included cash interest expense of $2.2 million, and amortization of debt issue costs of $600,000. The current coupon interest rate for our remaining senior debt, $99 million at June 30, will be 3.75% for the quarter ending September 30 and the average interest rate for our total debt will be approximately 3.77%, for the quarter ending September 30. For the first quarter we had other expense of $100,000 due to net foreign currency losses and we recognized tax expense of $600,000 primarily related to foreign and state taxes.

Summing it up for Q1, we had non-GAAP net income of $3.5 million, with non-GAAP fully diluted EPS of $0.01. This compares to non-GAAP net income of $9.3 million and non-GAAP EPS of $0.04 in the same quarter a year earlier. Focusing on cash flow for the quarter and the balance sheet at June 30, I would like to highlight several key points. Cash flows from operations for the quarter were $11.4 million. We paid down $5.3 million of our senior debt in Q1. At quarter-end, the composition of our debt was $99 million of senior debt and $135 million of convertible debt.

We ended the quarter with $75 million in cash. Non-GAAP EBITDA for the quarter was $11.4 million. For purposes of computing EBITDA this quarter, the pre-closing net loss of Pancetera Software for the June quarter is included in the computation. We are in compliance with all debt covenants at June 30 and we expect to be in compliance with our debt covenants during the next 12 months.

EBITDA for the last 12 months was $74.7 million. For purposes of computing EBITDA for the last 12 months, the net loss of Pancetera Software for the 11.5 months prior to the acquisition has been included in the computation. On a sequential basis, manufacturing inventory increased $1 million, accounts receivable decreased $18.1 million, and we had an accelerated payment of $8 million from one customer.

CapEx was $3.4 million and purchases of service parts inventories were approximately $500,000. Depreciation, amortization and service parts lower of cost or market expense totaled $11.2 million for the quarter. As we close on our first quarter of fiscal 2012, the underlying strength of our business model is solid. The year-over-year 200 basis point improvement in gross margin when removing $9.5 million of OEM software and incremental royalty revenue from Q1 of fiscal 2011 is an indicator of the power of the model. Had we hit our disk systems and software targets, we would have reported a higher than planned gross margin.

And finally, we continue to make progress paying down our term debt, which is now less than $100 million. We have paid down 80% of the debt from the acquiring ADIC in less than 5 years, and will continue to utilize cash from operations to further pay down the debt this year. Now let me turn the call back over to Jon.

Thanks, Linda. We are 1 quarter into the new fiscal year, and while we are not pleased with the total revenue generally, and our DXi and StorNext revenue results specifically, we are confident that we will improve. Outside of DXi and StorNext revenue, we achieved growth in tape automation in Q1 and added new products, technology, and partnerships that will contribute to revenue in Q2 and beyond.

We also strengthened our team by adding Ted Stinson as SVP of Worldwide Sales, made changes in our Engineering organization and CTO function to be more effective and efficient, and broadened the charter and resources of our 2 product groups. We expect to see benefits of these actions as we move forward, which is another reason we are confident about our ability to get back on track for the year.

Our strategy and business objectives have not changed. We plan to grow revenue, we plan to grow branded revenue, and we plan to grow disk systems and software revenue this year. We also expect the Pancetera Software and the new products focused on virtual environments to provide revenue growth as well.

Our product execution is solid and our road map and direction is clear. We will focus on getting our new and broader solution message out to end users and to channel partners. Our business model is also good and we will get significant operating leverage and cash generation as we grow.

We will continue to be aggressive about paying down debt and strengthening our balance sheet over the course of the year. So for those who have model -- models, here is our guidance. Now for the year, we have not changed our plans. Q1 put us behind but we are driving to make it up for the year. We are not stepping back internally from our annual goals.

For Q2, we are guiding to $160 million, slightly lower gross margin than in Q1 and total non-GAAP operating expense of $60 million. Interest will be approximately $3 million and we still believe it is reasonable to model tax expense of $1 million for the quarter. Assumed weighted average shares outstanding would be $245 million, as our convert is not dilutive at our anticipated level of non-GAAP net income. Now I will turn the call over to the operator for questions. Operator?

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

(Operator Instructions) Our first question comes from the line of Shebly Seyrafi with FBN Securities. Please go ahead.

Yes. Thank you very much. I have a few questions. So, just like to know when you expect to turn your midrange disk business around? I modeled it in my model, a decline occurred in the June quarter -- you said slightly, but I have it down meaningfully, was down from -- with my model, from $17 million in March to $8 million in June. Maybe you can comment on whether that's roughly accurate. And then with the 6700 -- the new 6700 products, do you expect a meaningful growth in that segment of your business in the September quarter?

Yes, let me -- I'm going to try to address all of this. So I can't comment on model shoveling. I don't want to do revenue by product at that level. I can say that we were sequentially down and it was slightly. So, if that -- if that helps. We need to prove that we can grow this business. And I think the new product is critical, I think, I encourage everybody on the call to look at the press release, follow the links. It is a dramatically different solution than we've had in the past and I'm happy to talk more about that. We believe that will drive growth. It is in the sweet spot of our market, and we need to execute on that. As everybody knows on the call, this is a growth year for us. We expect everything to grow but we expect the bulk of the growth to be driven by DXi and then StorNext. So to answer your question, yes, we think we're going to grow this quarter. We have to start and we're putting a bunch of plans in actions and we have a product to build around to do so. So we are excited about getting this out. We have actually been shipping it for a week or so. And we announced it today in conjunction with earnings because we didn't want to get people ahead of it, but we are very excited about the product and prospects.

Okay.

I'd say one other thing, I think, this product, part of the intention around this product, its positioning, some of the things that we are doing with the overall channel and with our own field, is we need to be in more deals so we don't get cherry picked hard in specific deals. We're in some big deals and they are dog fights. We need to be in some other deals where the dogs are either smaller or haven't shown up yet and we think this product will definitely help us. And we really think it positions us very strong against all the other de-duplication players besides just the market share leader.

Okay, I just want to be clear, you said the high-end grew 80% sequentially and the 8500 has not come out with the DXi 2.0 software yet?

That's correct.

That's amazing that you did that. And when do you expect that to occur?

I think, it won't be this quarter. One of the things that we did and when you read the release, we made a decision during the quarter to really add more than just the software to this midrange platform. We, 2.0 is on it. We expanded it to 80 terabytes. We put our new client side de-duplication product accent on the product. We ended up adding much more to it. So the result of that was we decided to push out the 2.0 on the 8500, probably it'll be into September, October, November, into that quarter, I guess that would be our fiscal Q3. And the other reason is the current product is really well-positioned. We are winning with that product. The way that that software's architected is very good for that particular target market. So, we decided to push it out and really bolster up this spot where we expect to get a lot of velocity and simplicity.

Okay, last one for me. You said your midrange win rate was reduced to 45%, what was it before?

Actually, it was our overall, and--

Overall, okay.

Last quarter and the quarter before it was 55%. And I think what we saw is we had some really big deals this quarter. Some that we won and some we didn't win. And I will say in the real large deals, our competitor got aggressive in a numbers of ways and we will be prepared for that this quarter. And we've already won some big deals this quarter. In fact, we had a couple close together, which was good timing for my attitude, actually. Because we are make progress.

Okay. Thank you.

Thank you, our next question comes from the line of Brian Marshall with Gleacher & Company. Please go ahead.

Great. Thanks. Jon, I guess we've obviously had somewhat of a serial issue with respect to execution on the -- on the disk-based backup business for many quarters now and I guess the question becomes -- it kind of seems to be the same problem every time, sales execution, by the Company, by the channel, et cetera. I mean if we could dig a little bit deeper, I mean, what are we really talking about here, is it just essentially the caliber of the sales guys having a tough time transition to this type and lack the technical knowledge, et cetera. Can you tell us a little bit more, sort of granular with respect to the issues, and then how you're going to change that going forward.

Yes, I think the first issue, Brian is uniformity of execution. Let's start with that. We have some channel partners and we have some salespeople who absolutely are doing great. And we have channel partners whose business has grown 400%, 500% year-over-year. We have salespeople who are way over their quota. So the number one issue that I would say is we don't have uniform performance yet. So that's the high layer, high layer answer. If you dig down into it, there isn't any one thing. And Ted and I have both been on the road, well since he got here, and I guess I was started a little bit before he got here. Meeting with customers, meeting with the team, meeting with channel partners, and it isn't any one thing. We have some partners who just aren't sufficiently trained on the product. We have some of our salespeople who don't have enough opportunities. We have some salespeople who are fighting a very tough installed base against an entrenched competitor.

There is a whole myriad of things, and I think, because we are smaller than some of the people we compete with, we have to be better at it than them. And I think one of things that I feel like we've made a lot of progress on over the last two quarters and I think 6701 and 02, really symbolize that, is we have to have a unique solution for the customer. And I think it's gotten better over the last 2 quarters, I think we make a incrementally giant step here with 6701 and 02, but Ted and I both will say we've got to do a better job of getting the deals qualified, getting the partners positioned right, getting the deal, the PO off the street. I mean, there is a whole bunch of tactical things. And the reason why I think you still hear us being buoyant. I'm trying to be reflective of that we didn't get to our number but I'm also trying to focus on what we need to do differently. And it isn't any just -- any one thing. There is a bunch of people who are doing very well and there is a bunch of people who need to improve. And we are trying to drive execution across all of that.

Okay.

Final thing I'll is this is a growth business. And we are going to grow. But we got to -- we have to start playing better to grow.

Okay. Can you gauge your conviction level with respect to your prior comments that you expect to space back up to hit break even later in fiscal '12?

Yes I think -- I actually think we will still get there.

Okay. Final question for me.

I mean, again -- this is a -- it's a -- and I'm trying to be balanced here. I'm not happy about missing revenue. On the flip side it's $6.5 million and we are $700 million Company, it's 1%, and we have so many positive things going, behind us, around these partnerships, getting the products out, the new product position, that I want to be for the shareholders, and our team reflective of we didn't have the quarter we wanted to but it isn't a complete disaster either and part of growing is believing you can and part of growing is showing you can. And we have parts of the business that did execute that way.

Okay. Final question for me with respect to some of the OEM deals that we've signed. Obviously, we are getting a tremendous amount of support from some of the world's best technology companies, in my view -- Apple, NetApp, et cetera. Can you talk about when, I mean, these are obviously large opportunities when are these going to start to show up in the P&L?

I think we will see revenue from all of the new things except for maybe HP and even that's possible this quarter. As far as meaningfully goes -- meaningful goes, as you know I'm not going to comment on everybody else's product but the NetApp team has been real aggressive about promoting their new E-Series. I believe that's great for StorNext. Active Storage has gotten -- had a lot of interest around their product. We have a lot of interest around the M330. So I'm expecting revenue this quarter, it's hard to gauge how much. Since they are not ours and they are new. And then I think we will have revenue this quarter from Pancetera as well, both on their existing product, they do have an OEM agreement, and we'll launch a product this quarter and we expect revenue from that as well.

Thanks. Good luck.

Thanks.

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

Yes. Thanks for taking the question. Jon, I was wondering, is Ted in the room with you guys right now or is he not on the call?

No, we decided to spare him the first call.

Fair enough. Just looking at the model, at this lower revenue run rate than what we were thinking about earlier before you guys came in to the $154 million number. Do you think about making some cuts to any of the 3 operating lines to sort of boost up operating margin in the back half. How do you think about that?

Yes. Not yet. It's a good question. You know, we've talked about this a lot. And as you know, we feel like we are spending plenty of money in Sales and Marketing and that would be the logical first place, although you could say we'd spend less on R&D too. I really feel good about the products, the road maps, the partners, as you know I want to meet everybody's expectations every quarter. Having said that, I have to take a little bit longer term view to this too and I feel like we have a unique position in the market. We haven't quite hit our stride yet. We have a lot of positive things going on. I don't want to artificially restrict those. I think, though, if we were to continue a trend where we just can't perform with the products we have in the market, we would have to think about some things differently. But, we are not close to that yet.

Okay and I think earlier in the call you mentioned some kind of annual number that you were striving towards or -- you were sort of alluding to some kind of guidance. You guys haven't given out an annual guidance before, right? I think you are just talking internally?

Yes. I actually said our internal plan. So our, what we said to you guys is what I reiterated was, we're going to grow total revenue, we're going to grow branded revenue, we are going to grow disk and software revenue, and we're going to outperform the market in branded tape. Those are our -- that's all we have given to you guys.

Okay. And last question for me, why not pre-announce this quarter?

Yes. It's a good question, it's not an easy thing to answer. Basically it -- we've had a 4% revenue miss. And I feel like I am in a spot where I need to tell the story, not just say we're going to miss revenue and have a range, we still have debt. So to me, and we talked about internally, it just -- it wasn't of a magnitude to preannounce. That would be the summation.

Okay. Thanks, Jon.

Yes.

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

The adjusted gross margin declining next quarter, on the higher revenue, can you go into -- can you explain that?

That -- I think it's really a round mix is what we're -- what we're talking about. We have a plan, Eric, and when you are looking at performing around that plan it's like what is the mix going to be? So we gave ourselves a little room in that concept. I think, if the revenue grows and it grows correctly, gross margin could be better. But we're trying to be conscientious, less conservative in what we can say.

Is that potentially pricing pressures, competitive, give you more wiggle room in going up against your big competitors, especially in disk?

Not as much that. It's really about, well, we are going to do that if we need to, but this was really a mix related -- mix related discussion. We had some really nice -- we had some good profitable large deals, too -- so there's a whole bunch of calculus that goes, I wouldn't take too much in to. I think I was pretty clear it was slightly lower. We are talking slightly. I could have set said the same and it would have in rounding, have been similar.

Okay and then in the quarter, you had a little bit higher cash flow than I was expecting. You talked about an accelerated payment. Can you explain what -- was that a special terms for a -- to get a new customer, was that a sizable order that got special terms? Could you give some background there?

No, we've actually, we have been doing this for a long time. We have done every quarter I can think of maybe for the last 10 or 12, we always feel though that we should disclose what it is. And it used to be, I don't know, in the $15 million, $16 million a quarter range.

That's right. And this quarter was pretty consistent with last quarter's acceleration as far as amounts.

And basically what it allows us to do is we provide a very nominal discount and we get money in -- into the quarter as compared to early in the next quarter. And that just helps us manage debt pay down et cetera. So if you go back in the script, we've done, I don't know, probably for the last 3 years. I'm looking at Linda.

That's right.

Thanks.

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

Good afternoon, guys. Just to return a minute to the outlook for next quarter with, are we -- I would expect to see decent growth with the disk and are you expecting to see sequential growth here with disk and StorNext, and then if so, I would have expected that to help your gross margin sequentially. Can you kind of address that?

Yes. We definitely believe the disk and software will grow, and those would be contributers to margin per share. As you know, Glenn, we've got a number of different moving pieces in margin around the products. I don't want you to be, I was -- meant slightly and I mean slightly, you could model it flat, it would be fine too because I think I even used approximately in there. I guess I just am trying not to be -- I'm trying to give you some direction but not be too specific. Because as you know we don't really know where the mix is going to come in.

Okay. What would be the offsetting factors given that disk and StorNext should grow that would put some downward pressure on the margin?

So you have -- we have, you have the low-end, low-end stuff, media, devices, we are seeing an uptick in media because of the Japan situation. That mix could change. Branded automation versus OEM automation, we've got a new OEM partner. There just several different moving parts there. I think Linda in her piece talked about the fact, though that if we get the right level of disk and software growth that that definitely is what will drive the margin, and that's where she did the what if -- the what if discussion.

Okay. Did you see some sort of large deal delays at the end of the quarter? I mean, I know you are fairly back end loaded and I think you expressed some comments publicly about large deals and just the environment and the possibility of pushouts.

Oh, yes, yes.

Did you -- did you experience much of that at the end of the quarter? Or was the miss related to the other things we've discussed more?

So I, in my prepared remarks and Linda's prepared remarks, we stayed away from this concept of slipped deals only because I think it provides confusion. Having said that, I think I was pretty clear that we got to do a better job of getting deals closed and I think Ted would agree with that too. So, there's -- and I also mentioned we closed some big deals, even some today. So we absolutely had some deals that carried over. Which is better than a loss. But I would say I'm closer to those deals and we need to get those kind of deals closed. And then we need to -- we need to add additional deals on top of that. So we will have some and we've had some nice wins actually since the quarter started. And we actually got off to a pretty good start last quarter, so to be candid, it was we just didn't close well. And I didn't expect this to be the result with a week to go in the quarter. I felt we would be over $160 million, so we just didn't get stuff done.

Right, right at the end, okay.

Yes.

Okay. And, you feel like -- do you feel like some -- there was any aspect of this of customer delays waiting for the new release of the midrange there?

Yes. I will tell you what Jon thinks. I think it has -- it is a factor, in partners that I talked to. And if you really -- I encourage everybody that follows the Company closely to really look at the messaging and the positioning of the new products. The prior products were fine but I think it was a difficult selling when you had to sell 2 different software stacks in the same family, different pricing models and I believe it did have a impact. I don't know how we will ever quantify that, but I just think it needed to be -- having this complete family be simpler is important. But it remains to be seen. You know, I -- nobody is more disappointed in the result than me. Having said that, nobody is probably more optimistic about the future than me either. So I feel good about where we are. I really like these products. We just have to show we can do it. And I think consistency is what we are striving for, growth is what we are striving for, and we've got to prove to ourselves and everybody and you that we can do that and that's the goal.

Okay. Maybe lastly, on the tape business, it sounds like that came in pretty good. It basically I guess met your expectations. Any broad comments there about demand in tape, the margins achieved, the competition, things you're -- you need to work on there to maybe get some growth?

I mean the biggest thing to selling more tape is selling more disk, actually. I think our tape execution is really very good. I think our products are good. The road maps are well received. We grew 8% year-over-year I mentioned we were at our plan for the quarter. We added a new OEM channel with i6k, we had the EDLM software, I like all of that. I don't -- tape is still the biggest part of our revenue, I don't want people to forget that. So it's a perform on plan or better than plan or better than market. That's a good achievement. And I'm going to reward our team for that. But we will sell more tape as we sell more disk and software too because we are tightly linking those products and we're adding new customers. So even our Accent Software that comes now on our target side, dedupe, we are the only provider of target and source-based dedupe that can move data over a WAN as well as LAN and can do a path to tape at completely integrated solutions, so those types of successes will drive more tape and I think we will see that in coming quarters as well.

Thank you.

Thanks.

(Operator Instructions)

Our next question comes from Chad Bennett with Northland Capital Markets. Please go ahead.

Just a couple of housekeeping, I think, questions. Linda, what was the actual disk and software product revenue number?

Our disk and software for the quarter was $27.6 million.

And that's product?

That's product -- yes.

Okay.

That's with the related services (inaudible).

That's what he's asking.

Yes, that includes the related -- related services. So we put out our five quarter trend on our website and it will have it there too.

The amount without it, was (inaudible)?

Without it $23.5 million.

$23.5 million. Okay. And what is -- the convert, what is the net income level that kind of triggers the dilutive effects of that, can you give us an idea there?

It's just slightly below, it's around $7 million to $9 million range of net income.

Okay. All right. Thanks. Jon, I guess on the StorNext side of things, it sounds like new customer adds were -- really strong and from what it sounds like renewals with existing customers just didn't come in. I guess is there anything -- I guess from a competitive standpoint, I think StorNext is pretty unique from a competitive standpoint, is there anything that has changed there or in the end market? I can't imagine your appliance product really affects the StorNext software business but any more color there?

Chad it's a good question. I think, if you remember StorNext has 2 components -- it's got a file system component and then the storage manager component. And a lot of the big revenue deals, I think Linda mentioned we were -- had a fewer large deals in her piece, a lot of that is driven by Storage Manager and Storage Manager generally we sell more into the installed base and then we'll have some net new as well. So we had a lot of File System deals and we had a number of File System and small Storage Manager but we didn't have the -- sort of the bigger deals and those are generally in the installed base, sometimes net new as well. So we are not really -- we are not really aware of anything that we -- we've had lots of theories of what could have happened. It could be transition to the new partnership, the appliances, all that stuff, we are just going to keep our eye on it. It did, -- it was a surprise compared to prior results. But nothing yet that we are -- think we have to dramatically change what we are doing.

And -- I just, -- on the channel side of the DXi business, it seems, you talk to your bigger partners and they are just killing it. And your numbers don't reflect kind of what they are doing. I mean, we just don't, I think it's a pretty simple answer, we just don't have enough of those. I mean, how are we getting channel -- how are we improving channel partner performance? What progress have we made in the last 3 months?

Yes, so let me give you -- let me give you a little the problem that you -- that you are articulating and then I will tell you what we are doing. I mean, those channel partners that you are talking to generally are very technically and business tied-in to the product and to Quantum. So they are probably a NetApp primary disk reseller, they -- maybe they used to sell data to main and now they don't, they understand de-duplication, they can deal with complex products and we have a -- say 50 of those kind of partners around the world. Well we sell a lot of product through partners that are less, that are -- have less technical capability and are less business aligned. And our midrange product for example is -- was having 2 different platforms and having different configurations and having to understand all of that -- it just makes it harder. And I think one of the things that's going to help with the channel will be this new product.

We have been out talking to partners, there going to be -- there is hopefully still a lot of press coverage today, we did a lot of industry briefings over the last couple of weeks, and we have gotten very, very good responses. So one of the biggest things is product. The second thing is it's just ongoing training around messaging and how to sell it and how to size it, what to do. We are putting on, we have a bunch of online training and sizing tools that are coming up. I'm believe here shortly, if they're not already up for some people. And then it's our team working tightly with those partners. So I can't tell you the exact progress. I know more are trained. I've been out talking to channel partners as had Ted. I think we are on the right track, I think our message is right. I think people like this product. We are going to just keep working at things that working in other places.

Okay. I mean, do -- is it safe to say, because you obviously made some changes when you took over in terms of kind of the structure of sales and now you've added Ted, I mean, are we making any more dramatic changes in kind of composition of sales or structure, organizational structure and support of sales -- I mean, any of that going to happen and if it's not, do you think the changes that you implemented -- it's just -- we are still early to see, kind of reap those benefits?

I think there's a whole bunch of answers. I mean, I think one of the things that was a positive about Ted is Ted understands the uniqueness and complexity of the products and the solution set and customers and the channel that we are selling into. So, I mean, he is very thoughtful about how we go to market and what it takes to be successful. And a lot of the changes we've made, he and I were talking about during the recruiting process, if you will. Do I think Ted will -- I already know Ted has implemented new things around inspection and sales force and he is making -- he's making or he is further putting focus on changes that we've made. So I think the biggest thing he is bringing is new perspective as well as focus. I expect him to have ideas of things he wants to do differently. And I also expect him to know that we need to -- we can't have a big disruption either and I will expect we will do some things still. But I think the overall changes we made are good. And I think we are seeing the impact of them. We just didn't see the impact to the tune of $6.5 million if you want to get really down and measure it that we expected to, but we think we will.

Okay. Last one for me. On the NetApp partnership, OEM agreement on StorNext, can you give or -- give us any -- you alluded to it in the call, but any better idea of where you are in there in terms of training their salespeople, jointly doing pitches and so forth, and any type of quantification of progress.

Yes, just as a reminder, it's not an OEM, it's a branded resell which is important for us because when a customer is buying -- and a tightly integrated solution but it's their disk and our software, we have lots of activity, we've had lots of field events. I believe that they have announced their first product. They have a series of products planned. I don't believe they are shipping any -- have shipped that product yet. And I think that has to do with what disk platform they run on but I don't know for sure. I think that's a question for them. I expect there will be revenue from them this quarter, though. And I think it's been really well received in the field. And then one of nice things you mentioned is because it's a branded play and it's branded for them too, both our field reps are going to get paid. And that always helps drive alignment in field.

Okay. All right, that's all I have, thanks.

All right. Thank you.

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

Good afternoon. Thanks for taking my call. A couple quick questions. And I guess the first is, when you look at the federal exposure you guys have in the September quarter, hear -- have heard a number of folks from IT Ecosystem talk about softness in federal. Can you discuss kind of your outlook for federal on two fronts -- one overall and second specifically with respect to StorNext, given that it has a pretty big exposure there?

Are you talking about for this quarter, Brian or broader?

Yes, yes, for the September quarter specifically.

Yes, so if you recall last year we had a whole -- we had a whole bunch of deals get hung up in this -- in the June quarter that popped out in September. That would be a good result this quarter. I think we are cautious about fed just with all the budget discussions and the debt ceiling and all of that. Having said that, there are a number of large opportunities that we are involved with. So I think we are cautious but we are optimistic about some of the wins that we've had and some of the designs that we believe we are doing well in. And if you want to accuse us of being cautious about the quarter, that's certainly part of it for us. It also could create a bunch of upside. I think they probably have the biggest opportunity bucket of all of our districts or regions, however you want to think about it. But there is also risk to getting that close.

Okay, and--

And it's all product. It's StorNext, it's tape, it's DXi.

And generally, what is -- what is fed typically in terms of percentage of a September quarter for you guys, ballpark?

Oh, oh no, we've never given it out separately because it's not big enough. The way I usually answer this it's a little bit different now the way we are configured, but if you think about the country being broken into 3 territorial sections, fed would be equal to one of those generally.

Okay. Okay.

And that's -- it's primarily north of -- we don't do much of government in the rest of the world. A little bit but not like we do here.

Okay and my second question with the launch of the new products today, how do you foresee the product cycle playing out in terms of the amount of time customers need for test and eval, until you get to it the point of revenue recognition and installation? Do you feel comfortable with--?

Yes, it's actually it's been -- one of the great things about this product, is anybody who buys -- has bought a 6700 can upgrade to 6701, 02, and we also expanded out the footprint that it -- that it covers, so we've got a bunch of that going on right now. We were working some orders last quarter. A couple of them came in already, today. We'll expect more this week. So we kind of have a jump start on that. But every deal is different. I think people who have, we are encouraging people to take our product and compare it to anybody else's. Because we think when we get people to do POCs, our win rate is way closer to 100% than it is to 50%. So I think there will be a pretty quick uptake in the product, as I mentioned we had a strong -- we did pretty well on 8500 even though we didn't get to where we wanted to. We've got a bunch of big deals there, too. So again, I can get easily get excited about all the opportunity but I'm trying to be balanced around, we just delivered a quarter that was $6.5 million shy in a growth business that should have grown 50% and grew 15.

Okay. Okay. The third question I had, you mentioned the strength in new customer acquisitions in both StorNext as well as DXi. I guess on one hand I find that encouraging, on the other hand, should I be concerned that your installed base isn't adding at the same pace as new customers?

Yes, I think that the buying activity is different between those 2 products. I think that the transition of customers from a 75 to an 85 or a 75 to a 67, from 1.4 to 2.0, that's more complicated actually and more of a sales cycle extender. I think on the StorNext one, at least what we know today, is we just think that was just timing of big deals and the things we are chasing and what is going on.

Okay.

I actually think it's more opportunity than concern, but for sure I'm concerned about everything when we are short.

And then on the sales force, I know you've done kind of a change in your quota whereby the StorNext folks are now selling the full suite of products and vice versa. Do you attribute that shift in your kind of available product set to any of the softness in StorNext for the quarter?

We talked about it a lot. I think we concluded that our change in model wasn't a factor. Having said that, we have high expectations for growth. So the change in model needs to be a factor but in a positive way.

Okay. Okay. And then, I guess my final question around just kind of your thoughts for this year. Obviously we don't have a specific full year target from a revenue and EPS perspective, as analysts. But in terms of your internal view not coming down, I can understand that, but I tell my kids when they are eating vegetables sometimes it's better to eat them in one big bite than to nibble at them all night. And the last couple of quarters has kind of felt like street numbers have been trickling down.

Yes.

At what point do you look at it and say you guys just need to lower the bar versus we think that we can make it up?

Well I think one might argue that $160 million is lowering the bar since I think consensus is $170 million for Q2, just being frank.

Right.

Internally though, and I think somebody else asked this question, too. We still see a path to numbers that are higher than that and so we are trying to be thoughtful about the guidance, not be pollyannish about it and execute well. And so when we start executing well, then I'd like to have the problem of talking everybody down. So we gave $160 million, we did $153 million, we've got a lot of positive things in the hopper. The fed thing could be really positive. It could be potentially negative. That's works its way in there. So we are trying to give you direction for your models. We know what we are driving to and we are going to keep driving to it.

Okay and then to end on a slightly positive note. Tape seems to be executing quite well, and as you look in the industry, some of the new emerging technologies like LTFS and the like, seem to be breathing new life into tape. As you talk to customers -- one, how do you feel like you're positioned better than your peers. I think to some extent, you've been a little ahead of the curve in refresh. But you can kind of give a little sense as to how you feel you're stacking up versus your peers, and how long you think the share gains you're currently seeing can perpetuate?

Yes, I don't know how long. I do think tape cycles go for a long -- go for a while, so I don't think this is a 1 or 2 quarter phenomenon. I think it's been going on for 4 of 5, I think it's going to go on certainly all through this year and maybe some even into next. And who knows? I think you're right. There are industry and technology [things] that are also making tape, have unique offerings for customers. And the thing that everybody forgets in data is growing at this incredible rate and you just can't put it all on Span disk as much as you'd really like to. I mean you can, but it's just -- it's cost-prohibitive. I think one of the key, other key things is we are selling tape in a lot of the instances where we're selling DXi and a bunch of our net new tape customers actually come from DXi sales.

We are -- by far and away -- we are the only tape company that has a disk-based backup and now a client-side de-duplication story that hums. I mean, IBM doesn't, HP doesn't, Oracle doesn't. So, that's easy for us and a lot of our configurations when we put in that new tape include -- we're putting disk in, too. So, again, the linkage of the products, being a specialist, having unique technology -- I think that adds to the fact that we believe we have the best open system products, we believe our [ILA] are going from small to medium to large. Ease of use, vision software over the top of everything -- all of those solutions make us unique compared to the other tape competitors. The other thing -- and while it's not tape-centric, per se, but we haven't even scratched the surface of what we think we can do in data protection and management in virtual environments. That is all coming for us and that's going to drive more of our hardware products, too. So we've got -- like I said, we've got a lot of positive things in the hopper, we just need to execute and demonstrate that in our results.

Great. Thanks so much.

Yes.

Thank you.

(Operator Instructions)

I'm showing no further questions in the queue at this time. I would like to turn the call back to Management for any closing remarks.

All right. Thank you very much. As I said earlier, I encourage everybody to digest the positioning in the product release today, and just reassure you that we know what the task and the challenge is and we intend to meet those expectations. So thanks very much for being on the call and we'll talk to you in October.

Thank you, ladies and gentlemen. This concludes the Quantum Corporation first quarter 2012 conference call. If you would like to listen to a replay of today's conference, you can dial 303-590-3030 or 1-800-406-7325 and enter the access code of 4456042 followed by the pound sign. We thank you for your participation. You may now disconnect.