Quantum Corp (QMCO) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Quantum Corporation fourth-quarter 2013 conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is also being recorded today, Wednesday, May 8, 2013.

I would now like to turn the conference over to our host, Mr. Shawn Hall, General Counsel. Please go ahead.

Thanks, Doug. Good afternoon and welcome. Here with me today 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, opportunities, and priorities; anticipated product launches and plans; and future financial performance.

We'd like to come 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 reports filed with the Securities and Exchange Commission from time to time, including our most recent 10-K, filed on June 14, 2012, and 10-Q, filed on February 8, 2013. 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. Welcome to our fiscal 2013 year-end and Q4 earnings conference call. Today, we reported revenue of $588 million and $140 million for fiscal '13 and our fourth quarter, respectively. For the year, we reported non-GAAP gross margin of 42% and a non-GAAP loss per share of $0.06. For the quarter, non-GAAP gross margin was 41.8% and non-GAAP loss per share was $0.02. We generated $16 million of cash from operations during the quarter and ended the period with $72 million in cash. Revenue from disk and software, including related service revenue, was a record $152 million for the year, up 11% over fiscal 2012. This growth was driven by record StorNext and record midrange DXi revenue.

Of the $152 million disk and software revenue total for the year, approximately one-third was from StorNext and two-thirds was from DXi. Disk and software now makes up nearly 30% of our total product and service revenue.

I'm going to spend a few minutes addressing Q4 at a high level, and also talk about the fiscal year. Linda is going to walk through the detailed results for Q4, and I will return to describe our strategic direction and plans for fiscal '14.

Regarding our results for Q4, although there were highlights such as the midrange DXi and StorNext growth, and branded tape automation achieving plan that Linda will discuss in detail, we were 3% under the low end of our revenue guidance, primarily as a result of lower than anticipated OEM tape revenue, and branded enterprise DXi revenue; and from a geographic standpoint, lower than expected sales in Asia and Europe. Like others in the industry, we found that the environment continue to be challenging, especially at the end of the quarter, but we also recognized that we must continue to further improve our execution, and have taken some steps to do so, which I'll discuss later in the call.

Turning to the full year, there are four key points I want to emphasize as I reflect on the year. First, it was a tough year in storage overall and very tough for tape. We started the year expecting to grow our overall revenue, driven by growth in disk and software, and overall flat tape revenue performance. Despite difficult market conditions, we grew our disk and software revenue, including related services, 11% for the year, as I mentioned earlier. In addition, our branded tape automation revenue declined 13% versus 20% on the OEM side, and we believe we maintained our market share leadership in open systems automation. With that said, our overall revenue result and the decline in tape revenue, specifically, really impacted our profitability.

The second point I want to make about the year was on spending. We increased our spending at the start of the year to drive growth in disk and software, but it was clear after fiscal Q2 that the market was not in our favor. So we pulled back on spending and reduced overall headcount by 10%. We felt we needed to be profitable while driving revenue growth, particularly given the overall market conditions, the fact that the tape declined substantially in the first two quarters, and turned our profitability to a loss, and the fact that we still had financial debt covenants.

The headcount and the related spending reductions we made represented savings of roughly $6 million per quarter. The fourth quarter just completed is our full fiscal quarter since we made the reductions, and we achieved the $6 million in savings, which Linda will provide more detail on later in the call.

The third point about the year is that we continued our aggressive product releases. In our data protection portfolio, we launched the DXi 6800, which combines industry-leading performance, scalability, and efficiency, with a unique pay-as-you-grow extensive ability to deliver better overall value than our other offering -- than any other offering in the market.

We also enhanced our DXi 8500, adding 3 terabyte drives to create the industry's most efficient disk backup and de-duplication solution for enterprise customers, and incorporating new security features such as encryption of data at rest without impacting performance. Extending our growing expertise in virtualization, we upgraded our vmPRO software, providing pay-as-you-grow, capacity-based licensing and other enhancements, and also began offering an entry-level version as a free download, so customers could try the product risk-free, and experience such benefits as being able to restore data in native format without the backup application.

Leveraging our DXi and vmPRO technology, we introduced our own cloud backup and disaster recovery services under the Q-Cloud name, providing simple, secure, and flexible cloud storage for as little as a penny per gigabyte per month. And, finally, on the data protection side, we launched our new Scalar i6000 HD Enterprise Library, which offers best-in-class, slot density and scalability up to 75 petabytes of data, as well as high performance and availability with new active-active dual robots for fast access times.

Turning to our big data and archive portfolio, we introduced our new Lattus family of next-generation object storage solution, which provides globally distributed disk-based archives that are extremely scalable and cost effective, and allow storage of data forever on disk without interruption or migration. During the year, we launched our first two Lattus products -- Lattus-X, which enables customers in NAS environments to easily access disk-based archives, and Lattus-M, which incorporates the automatic carrying capabilities of our StorNext storage manager technology to provide automatic movement of data from primary online discs to either object storage or tape. The Lattus-M was released just this month -- past month.

We also launched our StorNext M660 and M440 metadata appliances and our StorNext QX storage. In addition to providing industry-leading performance, StorNext M660 metadata appliance enables central control of up to 8 million files for management of large scale, fast-growing data sets, including petabytes of tiered content archives. The StorNext M440 offers similar benefits for up to 500 million files. StorNext QX disk is primary disk storage optimized for StorNext collaborative workflow environments. In addition, just after quarter end, we announced the StorNext ADL 500 mini archive, which integrates storage -- StorNext storage manager with Quantum tape hardware to support policy-based, active archiving and vaulting of digital assets in smaller workgroups. StorNext M440, QX storage, and AEL Mini are 100% compatible with the large installed base of existing Apple Xsan solutions, and ideal for mid-sized creative workflow environments.

With the addition of this long list of new products, we believe our product portfolio is the strongest it has been since we merged with ADIC, and we believe it makes us well-positioned to capture share, add customers, and grow overall revenue in fiscal '14.

The final point I want to make about the past year is the actions we took to strengthen our balance sheet. This includes the decision we made midway through the year to refinance our remaining ADIC acquisition debt of $50 million with a convert. We also amended our bank revolver to be free of financial covenants if we draw less than $45 million. Finally, we generated $22 million in cash from operations in the last six months of the fiscal year, ending the year with $72 million in cash.

In summary, for the year, the storage market and overall environment was difficult, and our year didn't turn out as planned, but we adjusted our business model mid-year, we took out costs, we continued our aggressive product launch activities, and we improved our overall financial position by refinancing our debt and generating cash in the second half of the year. As a result, I believe we are well-positioned for growth and profitability in fiscal '14.

Now I will turn the call over to Linda, who will address the detailed results for Q4.

Thanks, Jon. Before I walk through our results, 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 reference those documents as I comment.

Revenue for our fourth quarter ended March 31 was $140 million compared to $160.3 million a year ago. For the seventh consecutive quarter, we grew disk systems and software revenue, including related service revenue, on a year-over-year basis. StorNext revenue was up 9%, but was mostly offset by a 4% decline in disk systems and related maintenance compared to the same quarter last year. We had a year-over-year revenue decline of $8.5 million in tape automation systems, of which approximately two-thirds was attributable to OEM business and one-third to our branded business.

As expected, devices and media revenue declined $6.1 million, and royalties declined $3.6 million over the same quarter in the prior year. For the quarter, non-royalty revenue totaled $129.5 million, of which 85% was branded and 15% was OEM. That compares to non-royalty revenue of $146.3 million a year ago, of which 82% was branded and 18% was OEM.

Turning to our full-year results, fiscal 2013 revenue was $587.6 million compared to $652.4 million in fiscal 2012. The primary driver of the year-over-year decline was in tape automation systems revenues, which was down nearly $40 million. On a dollar basis, branded and OEM tape automation revenues each were down approximately $20 million. On a percentage basis, OEM declined 20%, while branded performed better, declining 13%. In addition, as expected, we had revenue declines associated with devices in media and royalties of nearly $20 million and $12 million, respectively.

For the full year, as Jon mentioned, disk systems and software and related great maintenance grew 11% or nearly $15 million. Finally, fiscal 2013 branded business was 83% of non-royalty revenue compared to 81% in fiscal 2012. Royalty revenue was $10.4 million for Q4 compared to $14 million in the same quarter a year ago. Expected reductions in both LTO and DLT royalties contributed to the decline.

Looking further at various revenue classifications, devices and media totaled $16.9 million in Q4, compared to $23 million in the prior year. The majority of the year-over-year decline was in media, which was expected, due to the events of the prior year, which caused higher-than-usual purchases in media. Tape automation systems revenue was $45.9 million compared to $54.4 million in Q4 of fiscal 2012. As was the case in each of the first three quarters of the year, our branded business performed better than our OEM business in Q4, declining $3.1 million or approximately 10% year-over-year. That's compared to our OEM business, which was down $5.4 million, or nearly 25%.

In our branded business, enterprise was up 9% year-over-year, driven by an increase in win rates. Mid-range business struggled and was down 30%. While our mid-range win rate remains very high, there were fewer deals closed in this quarter than Q4 of fiscal '12. This was our first full quarter of shipping LTO-6 in our automation systems, and the new technology contributed nearly $16.5 million to our overall tape business revenue this quarter.

We acquired approximately 110 new midrange and enterprise tape customers in Q4 for a total of approximately 550 new customers in fiscal '13. Our OEM tape automation revenues in all product categories declined compared to a year ago, with the largest dollar decline in midrange.

Disk systems software and related maintenance revenue, which includes our DXi, vmPRO appliance, and vmPRO software data protection offerings, as well as Lattus object storage solutions, and our StorNext software and appliances for big data management and archive, was $37.9 million in Q4. This was up 1% from $37.6 million in the prior year. For the full year, disk systems and software and related maintenance grew 11% from $137.4 million to $151.9 million, of which approximately two-thirds was DXi business and approximately one-third was StorNext, as Jon noted.

Looking more specifically at disk systems revenue, it was down 4% year-over-year. We added approximately 115 new disk customers during the quarter for a total of more than 500 new customers in fiscal 2013. For the quarter, our overall DXi win rate was 48%, and given the drop below 50%, I wanted to provide more color.

Our enterprise win rate was similar to that in prior quarters this year, and our new DXi 6800 was well-received, with a higher win rate than the rest of our DXi products. However, our older midrange product, the DXi 6700, had lower than historical win rates. And because it represented the largest percentage of DXi opportunities, it brought down our overall DXi win rate average this quarter. Despite the lower win rate for 6700, Q4 midrange disk revenue was up 30% year-over-year, driven by DXi 6800, which became generally available at the beginning of our fiscal Q4.

As Jon said, DXi 6800 leads the industry on numerous fronts and customers are clearly taking notice. In fact, with the DXi 6800's industry-leading performance and scalability to 156 terabytes of usable capacity, we have seen some customers purchase or transition to the 6800, whereas they may have gone with a DXi 8500 in the past. This shift is part of the reason our DXi enterprise business was down 55% year-over-year in Q4. However, Q4 of last year also included a large number of big deals, defined as deals over $200,000, which drove revenue up. In the just-completed March quarter, we saw the year-over-year decline in enterprise big deals, offset by increases in big deals in the midrange.

Turning to StorNext software and appliances, revenue increased 9% year-over-year. While we continued our strong growth in appliance revenue over the same period last year, this growth was somewhat offset by standalone StorNext software sales, which declined over Q4 of last year. From a customer acquisition standpoint, we added approximately 55 new StorNext customers in Q4 for a total of more than 250 new customers in fiscal 2013. As Jon said, we've introduced a range of new StorNext appliances over the past year, including several targeted towards the large Apple Xsan market, all of which positions us well to expand our customer base this year.

Moving to service revenue, it was $36.9 million in Q4, slightly up from the same quarter of the prior year. Branded service revenue increased, driven by growth in branded contracts, but was offset by a decline in OEM out of warranty repair compared to Q4 in fiscal '12.

Turning to gross margins, non-GAAP gross margin in Q4 was 41.8%, a slight decline from 42% in the fourth quarter of fiscal '12. Although we had a decline in overall revenue, including royalty revenue which places downward pressure on margins, we maintained the gross margin rate, due in part to reduced cost of approximately $3 million in our operations, repair, and service departments, primarily related to the restructuring we completed in the December quarter. For the full year, non-GAAP gross margin was 42%, down from 43.4% in fiscal 2012. This decrease was largely due to the overall decline in revenue, specifically tape automation systems, which contribute strong material margin, and royalty, which carries 100% margin.

Looking at expenses, non-GAAP operating expense totaled $61.6 million in Q4, compared to $65 million in the prior year. Year-over-year, our sales and marketing costs decreased by $900,000. The decrease relates to reduced commission expenses we did not achieve or plan. While we had headcount reductions in sales and marketing related to the actions we took last fall, this quarter, we opportunistically hired in advance of our fiscal '14 plan, a dozen or so team members with big data experience, primarily sales and sales engineer talent from active storage.

Research and development spend decreased approximately $1.9 million, primarily related to reductions in salaries and benefits related to the actions taken last fall. General and administrative costs declined $500,000, also due to reductions in compensation and benefits from decreased stopping. Non-GAAP operating expenses for fiscal 2013 were $250.9 million compared to $243.2 million in 2012. Marketing and sales spend was up $9.1 million over the prior year, primarily related to increased salaries and benefits associated with our increased headcount in the earlier part of fiscal 2013.

R&D and G&A were down slightly year-over-year. Non-GAAP operating loss for the quarter was $3.1 million compared to operating profit of $2.4 million in the same quarter a year earlier.

The largest contributor to the decline in operating profit on a quarterly basis was the overall revenue decrease, including lower royalty revenues, which was somewhat offset by approximately $6 million in cost reductions in both cost of goods sold and OpEx. For fiscal 2013, non-GAAP operating loss was $4.1 million, down from operating income of $41.6 million, or 6.4% of revenue the prior year.

The largest contributor was the overall revenue decline, primarily the nearly $40 million reduction in tape automation systems revenue, which provides solid contribution to operating profit; $12 million left in royalty revenues, which contribute 100% margin; and the $9 million increase in sales and marketing spend. Interest expense for the quarter was $2.4 million compared to $2.6 million a year earlier. This included cash interest expense of $2 million and amortization of debt issue costs of $400,000. The average interest rate for our $205 million of convertible debt is approximately 3.84%.

On a go-forward basis, assuming no amounts are drawn on the revolver, our total interest expense will approximate $2.5 million per quarter. For the fourth quarter, we had other income of $200,000. We recognized a net tax benefit of $60,000, which was primarily related to release of liabilities due to tax settlement and expiration of statute of limitations in various jurisdictions, which more than offset our foreign and estate taxes.

Summing it up for Q4, we had non-GAAP net loss of $5.3 million, which is a non-GAAP loss per share of $0.02, compared to non-GAAP net income of $700,000 and less than $0.01 per share in the same quarter a year earlier. For the year, we had non-GAAP net loss of $13.8 million, with fully diluted non-GAAP loss of $0.06 compared to non-GAAP net income of $29.9 million and $0.12 in fiscal 2012.

Let me also take a minute here to summarize the year-over-year results for Q4, and how to think about the headcount reductions implemented last fall and fully included in the March quarter. As we discussed in our Q3 earnings call, these actions were taken to align our spending levels with our adjusted revenue expectations, with a focus on generating cash and income while still driving growth in disk systems and software products.

In Q4, we recognized savings of approximately $3 million in operations, repair, and service. In addition, non-GAAP OpEx was down just over $3 million from Q4 '12. Together, these COGs and OpEx decreases totaled the $6 million Q4 targeted savings we discussed during our Q2 earnings call in October.

Focusing on cash flow for the quarter and the balance sheet at March 31, I would like to highlight several key points. Cash flows provided by operations for the quarter were $15.9 million. At March 31, our debt consisted of $205 million of convertible debt, which have no covenants. We ended the quarter with $72 million in cash. There were no amounts drawn on our revolver at quarter end. EBITDA for the last 12 months was $18.4 million. On a sequential basis, manufacturing inventory decreased $800,000; accounts receivables decreased $16.9 million; and we had an accelerated payment of $6.3 million from one customer.

CapEx was $700,000. We expect fiscal '14 CapEx to return to historical levels.

In our Q3 earnings call, we talked about restructuring the revolver to better align with our needs and our operating model. We completed an amendment to our senior secured credit agreement with Wells Fargo on January 31.

In summary, we reduced our overall revolver line from $75 million to $55 million. And under the amended agreement, we have no financial covenant compliance requirements unless we draw $45 million on the line. In this case, we would be required to maintain a slightly lower fixed coverage ratio as required in the initial agreement, and we no longer have a minimum liquidity requirement.

Now let me turn the call back over to Jon.

Thanks, Linda. Before I discuss fiscal '14, I want to spend a few minutes reiterating Quantum's strategy and overall direction. We are a specialist in providing customers with differentiated data protection and big data management solutions. We are the market share leader in open system tape automation, but tape is a mature market. As a result, with tape accounting for more than 70% of our revenue and driving most of our profitability, we are focused on building out other parts of our business where there are significant opportunities for growth, namely in targeted based de-duplication, virtual machine data protection, cloud, and big data workflow in archive.

Particularly over the last two years, we have greatly expanded our product portfolio in these areas. And, as I said earlier, now -- we now have the strongest set of products we've had since Quantum and ADIC merged nearly seven years ago. Our broad-based, go-to-market approach is through independent channel partners, value-added distributors, and strategic partners with Quantum-branded products, and through OEMs, including Fujitsu with our DXi software stack, and Dell, IBM, and HP, with our tape automation products. We also have a business model that provides substantial leverage, driving significant profitability with each incremental sales dollar.

Lastly, even with a much improved balance sheet, we remain focused on generating cash to deliver profit, continue our investment in growing disk and software, and driving overall growth. In fiscal '14, we are focusing on the unique market segments we addressed, with dedicated sales teams for both data protection and big data. We will continue to work on adding new partners, including channel, strategic, and OEM. Our channel model will continue to broaden the size and the type of partners we add and do business with.

We are also going to introduce new data protection products to address the continuing conversions between backup and archive, and we are going to aggressively add new StorNext appliances. To support all of this, we will continue to drive greater end-user awareness and demand. Finally, and most importantly, we will focus on generating cash and profit while still delivering growth.

For fiscal '14, we are taking a balanced view of going after the potential market opportunities amid an overall economic uncertainty, and reflected in the financial plan that is also balanced between revenue growth and operating profit. For the year, we are targeting revenue of $610 million to $630 million; non-GAAP gross margin in the mid-40% range; non-GAAP operating expenses of $245 million to $250 million; interest expense of $10 million; taxes of $2 million, resulting in a non-GAAP EPS range of $0.05 to $0.10 per share.

Now I'm going to spend a few minutes and tell you how we plan to get there. We expect growth in StorNext revenue, driven by growth in our appliances. Our appliances portfolio has excellent breadth. And that portfolio allows us to go deeper into our core markets, reach more broadly into new markets, increase the overall deal size, and most importantly, give the customer a better value and a better overall experience than just selling standalone software. Specifically, as I mentioned earlier, we have added appliances that are 100% compatible with the very large Apple Xsan installed base.

Also, with the combination of next-generation object storage and StorNext technologies in our new unique Lattus offerings, we believe we have a disruptive big data solution, and we know we have a StorNext installed base of customers who want this type of solution in their environments. Finally, we plan to build on our leadership position we have established with StorNext by integrating its archived capabilities with big data analytic applications, to enable customers to more easily monetize and/or otherwise leverage the full value of their data.

In addition to growth from big data opportunities, we expect growth in DXi, driven largely by DXi 6800; our DXi V1000 virtual appliance, and a new larger DXi appliance for virtual appliances, we plan to launch this year; as well as a new low-end DXi offering we will be introducing. We are focused on adding new customers, new partners, and new routes to market for DXi and selling more into our installed base.

We also see significant opportunity in selling Lattus in the data protection use cases, where customers can benefit from the combination of its unique object-based data protection architecture and a retention capability, all in a single solution. Just as Lattus will be an important element in both our data protection and big data businesses, this year, we will also be adding new cloud solutions for both big data and data protection.

Finally, with regard to tape automation, we have taken a conservative view of the overall tape market for fiscal '14, but we are aggressively going after growing our share, adding new customers, and driving profit and cash flow. We will leverage our industry-leading market share, the industry's strongest tape automation portfolio, and our installed base and channel relationships to do so. We will also continue to tightly integrate our tape solutions with DXi, using our Vision software, as well as incorporating new tape enhancements into our StorNext AEL appliances.

From a sales standpoint, the major structural change we've made as we start this year is organizing and aligning the sales team to be very focused on specific products and markets, but still leveraging our overall sales scale whenever we can. Specifically, our data protection sales reps will focus on selling tape automation, DXi, vmPRO, Q-Cloud, and Lattus products into general data center environments. However, they will also look for opportunities in their accounts for big data sales opportunities, and will bring in our StorNext sales representatives to close these.

We believe that data protection and archive are coming together in the data center, and we are aggressively positioning our technology and solutions to help customers solve that problem. We are focusing our big data sales team on the specific target vertical markets of media and entertainment and government, as well as use case-based opportunities such as research, natural resource exploration, and general corporate video. In these vertical markets and use cases, we have a very unique value proposition, an established market position; and, particularly in media and entertainment and government, a great installed base and references.

The big data sales team have added significant scale this year, and we now have dedicated sales reps, sales engineers, and sales leadership for this part of our business. This team will drive sales of StorNext and Lattus for both on-site and cloud uses. As I mentioned, we are going to be aggressive about adding new channel and strategic partners for both our data protection and big data products. We need to continue to grow the breadth of our partner base and leverage the strength of our product portfolio to drive more revenue through more channels.

We expect to generate cash this year, and now that our acquisition debt has been completely refinanced, we will accumulate cash. So to reiterate, we are guiding fiscal '14 to $610 million to $630 million, and non-GAAP EPS of $0.05 to $0.10. For Q1, we expect revenue -- or total revenue of $135 million to $140 million, gross margin of 42% to 43%, OpEx of $60 million to $62 million, interest expense of $2.5 million, and taxes of $500,000.

As we begin fiscal 2014, we believe we are in the right markets to drive growth and generate profit. Our product portfolio continues to be a strength, and we will continue to be aggressive about utilizing our technology assets to create products and solutions that are clearly differentiated and create superior value for our customers.

Now I will turn the call over to the operator for questions. Operator?

(Operator Instructions) Chad Bennett, Craig-Hallum.

So, good color on kind of what you're thinking about the segments this year. I guess I just want to dive more into that. And I know, typically, you guys don't give detailed breakdowns on growth rates, but considering the tape declines this year, and disk and software numbers that were probably a little bit below what you thought they were, how should we think about, for the next 12 months, the tape business versus the disk and software business, generally speaking, from a growth rate standpoint? And then, royalties also.

Okay. So I'm going to start and then I'll have Linda jump in here. I said in my comments, we are trying to take a even more conservative view on tape than we have. Up until this year, we had actually grown branded tape three consecutive years, even while the market was declining. And we entered the year thinking we were being pretty conservative, but making our assumptions at an at-market level, which was basically flat. And it turned out to be, as I mentioned, just a really tough tape market.

So we are assuming in our financial plans that tape will be down in the high-single digits, and we're driving to do better than that. And we think, at that rate, we would be doing better than the market a little bit, but it just depends on where you think market is going to shake out. The great thing about tape for us is that we are in the best market position. We have the best products. And so it's a place where we can drive incremental revenue and we're going to try and do that.

But given what happened last year, we made the decision to not plan for it being better and deliver upside as we execute. On DXi, it's slightly better than market growth. It's really leveraging the product portfolio investments that we've put in place over the last two years, grew a lot this year. And our sales team continuing to come up to speed on the products and the territories that we've added.

On StorNext -- which, in my comments, I put first, because I think in raw dollars, it has the most absolute growth in our plan -- it's really a combination of several things. One is, the appliance strategy, we definitely see the benefit for customers. Customers see the benefit. And it's -- we think that's the right strategy.

It has a number of factors. One, it allows us to go deeper into markets. It allows us to have an overall better revenue and gross margin dollar result. And the customers like the experience a lot better. And we're definitely picking up momentum. We didn't put it in the call, but our activity at NAB this year was unbelievable. I think we were 4 to 5 times more leads out of that show this year than last. I mean, we're talking in the $6000, $7000 type of number. Lots and lots of activity.

So StorNext is a key part of the growth. And then the addition of Lattus into the portfolio gives us a lot more flexibility to drive some very unique solutions, and also have cloud-based solutions.

And then, finally, on royalty, royalty is really acetating out. I think it's down from less than 10%, probably in the 7%, 8% kind of range, as we think about it. So 10 million-plus a quarter, mostly LTO at this point. And all of that is built into the guidance that we gave. We also are just, from a spending perspective, really adjusting our business model around where we are headed, which is a different model than where we have been.

An example would be, a lot of these products that we are launching now, the tech support people, a lot of that is software that you would solve from the phone, as compared to somebody going out and replacing a tape drive. So we are being aggressive about moving the business along that way as well. So you put all that together, and it's a growth plan that delivers some operating profit and some growth. There's no doubt that, if we grow more, the profit picture will be better just because of our leverage model.

Okay. And, Jon, in the StorNext business, specifically, I think this is kind of the first full year of kind of, if it's a word, appliance-sized StorNext products out there. Is there any way to talk about, as you're kind of -- you have appliance in kind of a solution-specific appliances out there -- how much that has expanded the market for you? And kind of the offset to that, do you think that stole some or cannibalized some peer's software StorNext sales out there in the market in the last 12 months?

What's happened is, it's a completely different channel. And one of the reasons that we did this is our historic go-to-market, when we were software-only, was really driven by hardware vendors. And they would use us when they wanted to and when they needed to win the deal, and the drag of hardware to StorNext is significant. I know it's like three, to six, to seven times depending on the deal.

So we were getting -- we were the key differentiator and the hardware vendors were driving the deal. And when it got competitive, we were paying the price and it was our value-add. So that's been the case a long time. As the market was coming to us three years ago or so, we decided to change that model. And I do think it's changed our partners. But what's amazing is, we kind of track it based upon software content, if you will. Our software content is definitely up, and I think it will go up even greater as we add these appliances.

The best example of expanding our market is, we're fully compatible with Apple Xsan, who has 40,000-plus customers -- I'm looking around the room here -- 40,000-plus customers -- or I guess it's even higher than that, of an installed base. And it's a market where we can connect and give replacement products right now. Six months ago, we really didn't have a product in that space. We enabled somebody else. Now we do, and we think it will drive substantial growth, and we saw that at NAB.

So we're going to continue to evolve. Linda and I both gave you a little bit of color on the call about the relative size of StorNext and DXi in our disk and software. And as we enter the year, we are going to provide a little more color along those business lines or those product lines as we are capable of it.

Are there -- a couple last ones for me. Jon, in your expectations that you gave for the year, I know you're talking, I think, more frontal about partnership opportunities, both on the StorNext side and the DXi side, I believe. Any kind of material partnership revenue embedded in that guidance that you gave for the year?

No. In fact, it's just the opposite. This is based upon stuff we have now. If we add some incremental channel or we have some technology partnerships, those would be -- the plan is for those to be incremental to the plan, which would be great. And as we talked about, for those to happen, we've got to have the product portfolio to do it. We think the products are very, very good now, and we're talking to a lot more people about how to expand the end-user reach.

Got it. A couple last ones for Linda. Linda, how should we think about cash flow from operations this year and in CapEx?

Yes. I'll start with CapEx. I made the comment this quarter it was unusually low at $700,000. I think we'll probably return more to the 12 million type CapEx annual run rate next year. We were probably at there a little bit lower, but this quarter was significantly lower than the typical $3 million spend a quarter we've been doing, from a CapEx perspective.

On cash flow, obviously, with -- depending on where you're picking that $610 million to $630 million range, we would be generating cash from operations throughout the year, probably less on the first quarter with the $135 million, $140 million guidance, but ramping through the year. So this past year, the first two quarters, we didn't generate cash from operations, and then turned around to do $20 million in cash from ops in the last half. And so you will see us put up numbers more typical to with what you've seen in the last two quarters and going forward.

Got it. Thanks.

Eric Martinuzzi, Lake Street Capital Markets.

Before I get into kind of more numeric questions, I just wanted to ask what the psychology of the guidance was here? I know, historically, you guys had given 90 days out, and then talked in broad strokes about hoping to grow for the fiscal year. Just curious as to why this time you felt like putting a number out there for the full year 2014 topline and bottom-line?

Hey, welcome back, by the way. You know, we talked about this a lot and we're -- we, as a company, we thought we were well-positioned this year to deliver growth and the market turned out to be harder. And we felt like we are well-positioned on where we are and we feel like we need to be clear. We've gotten a lot of questions from people about, where is the Company going and how are you going to get there? And felt like we are positioned to give that kind of guidance.

For sure, we have to go out and execute. We totally understand that. But it's been -- for me, in this job, it's been an interesting two years and I really feel like we're well-positioned product/market wise. And we feel like this is the time to start growing. I'd love to say we're going to grow every quarter year-over-year, but we need to get going here in Q1.

I think there is some -- we did have a thought about just the overall market dynamics, and as it makes sense to give guidance. But I think, again, given our capital structure and what we are doing and spending and that, we felt like we needed to share that where we are headed and do it in a transparent, but also in a direct way about the balance between profitability and growth.

Okay. And then, now, more into the numeric specifics. It's definitely -- I get the full year, but I also get the mixed message of a Q1 where you're talking about kind of down in the 2% range year-on-year; and yet a full year where you're talking about 6% growth at the midpoint. The math works out to -- if we're minus 2% in the first quarter, then we're about plus 8% for the remaining three quarters. Is there something that you see in the pipeline that gives you that expectation that, you know what, September is going to be such a big burst -- September, December, March -- is going to be such a big burst compared to what we see for June?

Yes. So that's a good math exercise. So again, we spent a long lot of time talking about that as well. What you just pointed out, though, is the fact, historically, our Q1 is not -- is our weakest quarter. And we are trying to be pretty clear about what that guidance is and share that. We're five, six weeks into the quarter -- five weeks. And we're obviously going to drive to the high end of that range.

A lot of the product changes that we made, Eric, and even the sales teams, the people we've added, those don't generate revenue immediately. And so we've got funnels and pipelines growing in these places as we look out. And I think the year will be driven by Q2 and Q3. The difference between [$140 million and $135 million], or if we do better than [$140 million] is not going to be material to the overall, really. It's going to be about how do we do in Q2 and Q3, which are our strong quarters. And that's pretty consistent. We've got a big Fed business, which drives our September quarter. This Lattus product that we had out, we just launched with StorNext, is an important part of driving the revenue in the Fed space, for sure.

Okay. And then just one on the competitive landscape. Specifically, I'm talking tape. I think you said you were expecting tape -- it was a little bit broken up for me. But you said down high-single digits for 2014. Could you address the competitive landscape in tape, and then address the disk system and software side as well for the full year?

For the growth rate?

Yes.

Okay. So on tape, yes, we said -- well, basically, we think we're somewhere, depending on where you go in the range of market, there's different expectations around tape. We tried to be conservative about our view internally. It's easy for us to add incremental because we're -- it's in our machine.

On the competitive side, with the addition of the HD version of the i6000, we can compete at any level in any metric, and we think we have a superior product, whether it's density, performance, ease of use, integration with the disk space backup product, integration with StorNext.

So we see the same players that we've always seen at some level, IBM, but generally it's StorageTek Oracle, Sun Oracle; we see SpectraLogic from time to time in the bigger installations. They have done a nice job on their high density product. We talked about that in the past. We are now denser than them and easier to maintain from a footprint perspective. So, same players there.

On the disk and software side, I didn't give specific growth rates. What I would say is the bulk of the growth in dollars is coming from StorNext, but you can see its relative size. But we are expecting significant market or slightly better than market growth on DXi as well. So we're not pulling back.

And then I think one point around the numbers to raise -- all to digest, these vehicles that we have for Lattus, they're going to be big. A lot of them will be big and they will be somewhat lumpy. We had one about a year ago. It was several million dollars for one deal. So these are big systems. They generally are going to be 300, 400, 500 terabytes to start and then much bigger. So as we get our feet wet on some of those deals, I think it will help solidify the direction on the big data side in the revenue guidance. It's a big (multiple speakers) data for sure.

Okay. Thanks for taking my questions.

You bet.

Cindy Shaw, DISCERN Group.

A couple questions. One was a lot of -- you've mentioned that the federal market being a good market for you, are you seeing or anticipating an impact from sequestration?

Yes. The federal space is always hard, because you go and you track your program, but you don't know exactly when it's going to come out of procurement. Having said that, with our portfolio and the addition of Lattus, we offer some solutions and alternatives that are less costly, provide a unique value proposition, and we've been in those discussions for a while. We'll see how it all plays out.

Cindy, I think it's going to ultimately depend on which projects get funded, which things actually make it all the way out of procurement. We feel like we are in the right places for our technology and generally where money is being spent, but it's an uncertainty for sure. But, with the visibility we have, we think it's an important part of our plan this year.

Okay. And we're hearing from some of your competitors about customers -- one term I hear is sweating their assets and really extending the life. Is that something that you are seeing? And are you finding that your better value proposition is an opportunity to take share?

Well, so, part -- what you just described is exactly part of our pitch. So the fact that we can provide a tiered architecture solution for somebody who has historically spent a lot of money on an all-disk solution, and it provides as much or more scalability and functionality at a lower cost, that's right on the messaging that we're providing.

I really think that a lot of this is company-by-company. I mean, even in our own scenario, we got off to a really good start this quarter; won some deals that were pretty far up in our funnel. And as the quarter wore on, more of the activity that you've just described was -- were conclusions that people made. And I really think a lot of that was just a sampling of the deals. So I think, in this economic environment, people are looking at sweating it, replacing it with something new, and replacing it with something new that's different. So it fits with our message, but we still have to execute on the opportunity.

Okay, thank you. And on the TIC front, I know LTO6 came out, and there was some thought that it might take several quarters to see what happened there. And also you were really training your sales force on tape. So if you could give us an update on the outlook for tape, what was LTO6 now being out and the sales force training, where you are on that?

Yes. Well, we're spending -- we still -- we're not going to stop with the team on this, because as we add new people, they generally aren't coming from an experience of selling tape. They generally come from software disk vendor today; now and then, we'll add a tape-person. So the training part is a key part of our onboarding of our new people.

But -- I'm looking around the room. What I think I remember on this, the LTO6 uptick actually after the first full quarter is better than any of the last two generations and maybe even the last three. So we think that that's an important technology element here. Again, I'm setting a financial plan that gives us upside when we do better than what we planned. And that's really the driver for us this year. We can scale up a lot easier than we can go the other way around tape. So, that's where we're starting on a lower baseline.

Okay. And then one final question. I think we've covered pretty well a lot of the assumptions going into fiscal '14 guidance. Is there anything in terms of the economy? Are you assuming steady? Anything that will provide substantial risk or upside or any changes to anything you're assuming, aside from what you discussed already in your prepared remarks and during the Q&A?

No. We're really assuming choppy, and hoping to have it be better and/or navigate the choppiness with our product portfolio messaging. Because, while people can be static, the data of growth still is there, and we think we have a unique proposition with the set of solutions that we have.

Okay. Thank you and good luck.

Thank you.

Catherine Trevithick, Northland Securities.

Well, thanks for taking my question. You know, Jon, we've been -- I've been covering this maybe not as long as several other people on the call, but every call, you hear about your channel and reaching the channel, et cetera. And I'd really like to understand, between the tape channel and the DX StorNext. I mean, is there movement there? Because sales were down this quarter. And I do believe if the channel doesn't understand the product, it doesn't matter how many new products you're going to come out with, you're still going to have a problem. So, sorry to be so pushback, but (laughter) --.

Yes. No, it's a good question. So let me address it and then -- I kind of covered it in one of the earlier ones, but let me cover it in the two places.

The data protection channel, or our historical tape channel, where we've sold the bulk of the Quantum products, is based -- as three or so tiers of partners. A group of partners that we call platinum that we have a lot of engagement with, and then a set of gold and a set of silver. And they get broader -- think of it as a triangle -- as they go.

And one of the things that we've been doing is both trying to get better alignment with the bigger partners -- and I'll come back to that -- but also this year, really driving additional new partners in the gold and silver space. And to do that, especially with DXi, we needed to get the products, and the level of maturity and simplicity that those could be sold and positioned by that channel. So one of the statistics Cindy -- Cynthia, I'm sorry -- I got names screwed up there -- one of the statistics we give is new customers. And we're still adding a lot of new customers.

I think the revenue challenge this quarter, in my prepared remarks I talked about, was really around some specific things. One was OEM, which isn't a channel thing. The other is the DXi, which Linda covered, and then two geography things. But there is no question, if I looked around the room, or you talked to any of my team on data protection, we are absolutely recruiting new and adding new partners to actually sell the product.

When I said I'd go back to the platinum partners, the platinum partners are a little tougher. Those are the partners that we have a strong relationship with and we are going to work with regardless. But EMC has a strong relationship with them. NetApp has a strong relationship with them. Symantec might have a strong relationship with them. And so, at some level, those bigger guys, while they are super important and we are aligned with them, the deals are more competitive and the opportunities are more competitive.

And so we're going to do both things. We're going to continue to be great partners with those guys who drive the bulk of the business, but we're also going to spread out in the independent channel. And then, last thing on data protection, we are going to continue to look for a little more leveraged ways to get to market, like the relationship we have with Teradata, where we touch a set of customers that we wouldn't otherwise get to.

On the StorNext side, it's actually a different story. We've been super successful there in transitioning our model from disk-based suppliers or hardware suppliers selling our product to a set of channel partners selling our product. And I don't have the stats, and we'll take a note for the next call and maybe give you guys some color. But I will say that at NAB -- and this is kind of a color stat -- but NAB this year, we had a partner meeting for our StorNext partners. And I won't get the numbers exactly right, but I'll be close.

We had somewhere around 25 partners show up last year for our Sunday night kickoff meeting with our channel partners. And this year, we were in excess of 110 new partners -- or total partners. And we're adding a lot of ISVs to the StorNext side too. So I would say, on the growth side of the business, we are making progress. Our real problem around revenue, and really for the year, was around tape. And it wasn't about the growth companies or the growth products or the channel. I mean, we can always do more there, for sure. But we wouldn't have got the 11% growth if we hadn't have done the things and had the progress of channel that we did.

Well, that was very good. I appreciate you doing that. Thanks.

You bet, Catharine.

(Operator Instructions) Glenn Hanus, Needham & Company.

Okay. I'll just throw in one quick one. Maybe, Jon, could you talk on the Lattus side a little more where you've gotten traction? You mentioned some few large government deals. And kind of what your pipeline and backlog looks like there for fiscal '14.

Sure. So we launched two products on Lattus. The first one was Lattus X and that was a NAS connectivity product that we launched, I think, in October, November time frame. And that product is being positioned, really, you know, what I would call a data protection-ish type use case. And what we've done in the last month or so is we're really driving that product into our broader sales team. And so that pipeline is filling -- you know, it's a fairly new product.

The product that we actually sold a year ago was really an early version. I think I called it a beta. It wasn't a beta, but it was a pre-GA version, of what we call Lattus M. And the reason there's so much excitement around Lattus M inside the Company is it fits right in with StorNext. So it is now a tier within StorNext. So if you have StorNext storage manager, you can buy this product and add it as a tier storage. And what you get is its unique capabilities around protection, power consumption, cost, ability to do what they call geo spread, and really get a unique tier in the StorNext environment.

And as you know, Glenn, we've got a lot of really big customers who are using StorNext. And so our target environment is rich, because it's anybody who's using StorNext storage manager today. We've obvious been talking about this with some of these customers previous to the product launch, but now we're here, and we're doing POCs, we're doing virtual POCs. And there's a lot of activity internally around it.

I think what you'll see is you'll see -- I think we'll have revenue this quarter, and you'll see a ramp throughout the year. Government is a big spot for it and post-POC is going to be a big spot for it as well.

But it's -- our website is actually quite good about the unique value here. The other thing is, is we're using the Amplidata software, then we create our own product. And to use it with StorNext, you have to buy the Lattus version of it from us. And we're going to -- and we'll support it that way. So we're going to focus on installed base and some net new customers. And then, as I mentioned earlier, we'll have a cloud offering out here shortly that utilizes the technology as well.

Thanks. And for the DXi, when you said kind of market growth rate, is there -- what is -- is there some third-party data that basically says roughly what either you or what the industry expects the market growth rate that you can share?

Yes. There is. I mean, I think -- what I was trying to do is, I'm not ready to totally break up our StorNext from DXi completely. I know I gave you the one-third/two-thirds. You know, I think that there's a substantial -- we're going to have substantial growth in StorNext and StorNext appliances. That's the plan. The market rate I think for DXi is in the 20% to 25%.

Yes.

Linda is looking at me, says it's a little higher than that. So, it's in that kind of range.

Thank you.

You bet.

(Operator Instructions) And there are no further questions at this time.

All right. Well, thank you very much for participating in the call. And, as typical this time of year, we had to be a little later with our audit. And we'll have the 10-K out in the next few weeks, and be talking to you again in July. So, thanks very much and we'll talk to you in a few months.

Ladies and gentlemen, this concludes the Quantum Corporation fourth-quarter 2013 conference call. If you'd like to listen to a replay of today's conference, please dial 303-590-3030 or toll-free at 1-800-406-7325, and please enter access code 4613904. ACT would like to thank you for your participation. You may now disconnect.