Quantum Corp (QMCO) 2014 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by and welcome to the Quantum Corporation first-quarter 2014 conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, there will be a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this call is being recorded today August 1, 2013.

I would now like to turn the call over to Shawn Hall, General Counsel. Please go ahead.

Thank you and I apologize for a bit of a delay there. We had some technical difficulties so we will get started now.

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 would like to caution you that our statements are based on current expectations and involve risk 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 7, 2013. The risk factors are incorporated by reference into today's discussion and we undertake no obligation to update them in the future.

With that, I will turn the call over to Jon Gacek.

Thanks again. We apologize. We had a problem with the conference call set up.

Welcome to our Q1 fiscal 2014 conference call. Today we reported revenue of $148 million including a one-time $15 million payment related to an intellectual property agreement we reached with Microsoft during the quarter. This is a 5% increase over the $140.9 million we recorded last year. Non-GAAP operating income was $14 million compared to a $5 million operating loss a year ago with the improved results driven by increased revenue of $7 million, higher gross margin, and $6 million in lower operating expenses.

Non-GAAP net income was $11.5 million or $0.04 per share on a diluted basis compared to a non-GAAP net loss of $7.8 million in Q1 of last year. We generated $9.2 million of cash from operations and finished the June quarter with $80 million in cash. If you exclude the $15 million from the IP agreement, non-GAAP gross margin was 42% compared to 41% a year ago and that improvement plus the $6 million decrease in OpEx resulted in a $4 million improvement in non-GAAP operating income over the prior year.

Linda will walk through the detailed results for the quarter in a few minutes but before I turn the call over to her, I'm going to discuss several significant aspects of our performance and recent announcement that we made.

First, revenue performance. Our Quantum branded tape, StorNext software and appliances, and devices and media revenue along with our royalty and OEM revenues were all reasonably good during Q1. Where our results were less than anticipated was primarily DXi principally in the Enterprise DXi or the 8500. This enterprise weakness was across all Geos and was a combination of large deals that didn't close during the quarter and lower than expected sales into our installed base customers.

However, we still grew midrange DXi by 23% year-over-year, added new DXi customers at a good rate with approximately 105 new customers and had an overall win rate of nearly 55%.

After two record DXi quarters in a row, the last two quarters have not yielded the results we expected. While Q4 and Q1 are our two weakest seasonal quarters, the DXi result still needs to improve. We are focused on driving DXi growth while also maintaining focus on controlling expenses.

As I mentioned, we had good success in the midrange in adding new customers in Q1 and that needs to continue. In addition, we are making extra effort selling into our installed base. We are going to continue to expand our VAR and strategic partners to extend the reach of our DXi technology into the market.

Finally with the new DXi 6800 and DXi V4000, the enhancements we have made to the DXi 8500 and the new entry-level DXi offering we will be introducing this year, we still believe we are well positioned with our DXi portfolio including the unique advantages it provides in combination with vmPRO as a foundation for Q-Cloud and our partner Cloud Services.

The other revenue point I wanted to mention is that we did not recognize any Lattus revenue in Q1, we announced the product in Q1. We did ship systems to several customers during the quarter and we expect to have Lattus revenue in Q2. The Lattus-M products combine next generation object storage technology with the automatic tiering capabilities of StorNext Storage Manager was launched in Q1. We feel that Lattus is an important driver of revenue growth and a key technology in big data, data protection and cloud-based solutions.

Let me now touch on the IP arrangement with Microsoft we announced in June. The agreement is multifaceted, covers technology from both companies and resulted in the $15 million payment to Quantum. We are very pleased with the agreement and believe it is another validation of the value of our IP and the strategic technology investments we have made.

As I have said in prior calls, we have a focus on adding strategic partnerships to get our technology more broadly to end-user customers. These partnerships could take different forms and could include licensing arrangements, OEM arrangements, strategic go-to-market arrangements and resale agreements. We have a lot of activity going on in this area.

Moving beyond Q1, we recently announced the expansion of our long-term partnership with Benchmark Electronics. BEI has been manufacturing our tape product since 2003 including the Scalar i500 which surpassed $1 billion in revenue during Q1 over its lifetime. The i500 is a Quantum branded product and also has been sold as an OEM product to Dell and IBM for the past eight years. We are leveraging benchmark scale and manufacturing expertise by adding our Scalar i6000, i40 and i80 and SuperLoader products to the existing manufacturing they do for Quantum.

BEI is a public company with annual revenues of $2.5 billion and is a supplier to other major technology companies and has been a great manufacturing partner for Quantum the past 10 years.

Once implemented, we estimate this change to our manufacturing model will result in annualized improvement in non-GAAP income of approximately $10 million per year.

Moving forward, we will continue to invest heavily and wisely in our Scalar tape library portfolio and build on our number one market share position in open system tape automation.

The other announcement we recently made that I wanted to touch on was the change in our sales leadership with Bill Britts taking over worldwide sales and marketing. Bill has nearly 20 years of executive management experience including 11 as head of sales and marketing at ADIC where he grew annual revenue from approximately $20 million to just over $450 million.

Since joining Quantum in 2006 through the ADIC acquisition, he has served as Senior Global Leader for various functions including sales, marketing, operations, service and business development and played a key role in growing our annual disk revenue and software from $10 million to more than $150 million. Bill has a good hands-on style and he is good with end users and partners. In short, he will be an excellent leader for the sales and marketing organization given where Quantum is today and where we are heading.

Now I will turn the call over to Linda who will address the detailed results for Q1.

Thanks, Jon. Before I walk through our results, I would like to refer everyone to the financial statement and supporting schedules included in the press release and on our website. It will be helpful to reference those documents as I comment.

As Jon said, revenue for our first quarter ended June 30th was $148 million compared to $140.9 million a year ago, a 5% increase. The primary driver of this growth was the $15 million one-time payment from Microsoft. For the eighth consecutive quarter, we grew disk systems and software revenue including related service revenue on a year-over-year basis.

StorNext revenue was up 13% but was partially 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 $5.8 million in tape automation systems. For the quarter, non-royalty revenue totaled $122.5 million of which 83% was branded and 17% was OEM.

Royalty revenue was $25.5 million for Q1 compared to $11 million in the same quarter a year ago. The primary driver of the increase was the $15 million of royalty revenue related to the intellectual property agreement. LTO royalties were up slightly year-over-year offset by expected reductions in DLT royalties.

Looking further at various revenue classifications, devices and media totaled $18.1 million in Q1 compared to $18.6 million in the prior year. Expected revenue reductions from branded devices were the primary driver of the year-over-year decline. Tape automation systems revenue was in line with our expectations at $44.7 million compared to $50.5 million in Q1 of fiscal 2013.

As we saw last year, our branded business performed better than our OEM business this quarter. In Q1, branded revenue declined 10% or approximately $3.1 million year-over-year compared to OEM revenue being down 13% or $2.7 million. On a percentage basis, year-over-year revenues were down in the high single digits to low teens across our enterprise, midrange and entry branded tape automation business.

Win rates remained fairly constant compared to the same period last year. There were just fewer deals in this quarter than Q1 of fiscal 2013. The decline in OEM tape automation revenues was primarily driven by a reduction in enterprise revenue.

Despite the year-over-year revenue decline, we acquired approximately 105 new branded midrange and enterprise customers in Q1. In addition, revenue from our Scalar i500 tape library surpassed $1 billion and our Scalar i6000 won Tape-Based Product of the Year at the 2013 Storage Awards in London.

Disk systems, software and related maintenance revenue which includes our DXi and vmPRO appliance and software data protection offerings as well as Lattus object storage solutions and our StorNext software and appliances for big data management and archive was $31.5 million in Q1. This was up 2% from $30.7 million in the prior year.

Looking more specifically at disk systems and related maintenance revenue it was down 4% year-over-year. As John said, we added approximately 105 new disk customers during the quarter and our overall DXi win rate was nearly 55%.

The year-over-year revenue decline was mainly driven by our enterprise business being down from the same period in the prior year. This is partly due to the lumpiness we experienced with large deals coming in and out of quarters. In general, the larger the deal, the longer the sales cycle.

In addition, we believe some enterprise customers are transitioning to our DXi 6800 which scales up to 156 terabytes but is reported within our midrange category.

Our midrange DXi business driven by the continued strong performance of the DXi 6800 grew 23% over Q1 of fiscal 2013. We have been especially pleased with our midrange DXi platform introductions particularly the DXi 6800 which has cemented our leadership in delivering best in class performance, scalability and overall value and has been very well received by customers.

Our entry DXi revenue was up slightly compared to the prior year with unit shipments up 20% year-over-year.

Turning to StorNext software and appliances, revenue including maintenance increased 13% year-over-year. StorNext AEL, server based appliances and related disk revenue combined increased over 60% from Q1 of the prior year. This growth was somewhat offset by standalone StorNext software sales which declined over Q1 of last year due to one large deal in Q1 2013 that was not repeated in the same quarter this year.

From a customer acquisition standpoint, we added approximately 55 new StorNext customers in Q1 and continued to see strong win rates in our StorNext solutions offering.

Moving to service revenue, it was $36.5 million in Q1, slightly up from $36.1 million in the same quarter of the prior year. The increase was driven by growth in branded contracts related to our appliance strategy in big data.

Turning to gross margins, non-GAAP gross margin in Q1 was 47.9%, an increase of nearly 17% from the 41% gross margin in the first quarter of fiscal 2013. The $15 million increase in royalty revenue which contributed 100% gross margin was the primary driver of the increase. Excluding the incremental royalty revenue, non-GAAP gross margin was up 100 basis points to 42% in Q1 of 2014 compared to the same quarter of the prior year. The primary driver of the non-royalty related improvement in gross margin was reduced costs in our operations, repair and service department of approximately $3 million related to cost reduction actions we completed in the last year.

Looking at expenses, non-GAAP operating expenses were down $5.9 million or approximately 9% totaling $56.9 million in Q1 compared to $62.8 million in the prior year. Year-over-year, our sales and marketing costs decreased by $2.9 million. The primary driver of the reduction relates to lower salaries, benefits and associated costs resulting from the headcount reductions we have implemented over the past year. Similarly, research and development spend decreased approximately $1.8 million and general and administrative costs declined by $1.2 million. In both cases, primarily as a result of headcount and other cost reduction actions taken over the past year.

Non-GAAP operating income for the quarter was $14 million compared to an operating loss of $5.1 million in the same quarter a year earlier. The largest contributor to the increase in operating profit on a quarterly basis were the overall revenue increase due to higher royalty revenues and approximately $9 million in cost reductions in both cost of goods sold and OpEx which were slightly offset by lower overall product revenue.

Excluding the higher royalty revenue, we would have reported a non-GAAP operating loss of $1 million, an 80% improvement from the same quarter in the prior year.

Interest expense for the quarter was $2.4 million compared to $1.8 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 3.84%.

For the fourth quarter, we had other income of $400,000 and we recognized tax expense of $400,000 primarily related to foreign and state taxes.

Summing it up for Q1, we had non-GAAP net income of $11.5 million which is a non-GAAP diluted earnings per share of $0.04. This is compared to non-GAAP net loss of $7.8 million and a loss of $0.03 per share in the same quarter a year earlier.

Given that our non-GAAP net income level this quarter requires the inclusion of shares for both our convertible debt and the EPS denominator, let me take a minute to provide additional guidance around computing non-GAAP EPS with both our converts in place.

Using the if converted method, we have included approximately 24 million additional shares related to the convert in the denominator and added $2 million of related interest expense back to the numerator for Q1 2014.

Focusing on cash flow for the quarter and the balance sheet at June 30, I would like to highlight several key points. Cash flows provided by operations for the quarter were $9.2 million. At June 30, our debt consisted of $205 million of convertible debt which have no covenants. We ended the quarter with $79.8 million in cash. There were no amounts drawn on our revolver at quarter end; therefore we have no financial covenant compliance requirements.

EBITDA for the last 12 months was $39.5 million and on a sequential basis, manufacturing inventories decreased $1.8 million, accounts receivable decreased $10.6 million, and we had an accelerated payment of $5.6 million from one customer. CapEx was $1.2 million.

In closing, I wanted to highlight the progress we have made over the last several quarters in better aligning spending and revenue further improving our balance sheet and increasing our operational flexibility. We have made incremental reductions in our cost structure since last fall that have resulted in savings that are greater than we had forecasted in our October 2012 earnings call. And in Q1, we again saw the leverage we have in our business model beating expectations on the bottom line even as our revenue came in slightly lower than expected.

In terms of further strengthening our balance sheet, I talked last quarter about the benefits from restructuring our revolver in January and after using cash from operations in the first half of fiscal year 2013, we have returned to generating cash over the last three quarters.

Finally, although primarily driven by the evolution in our business with more of our value adds coming through the software we incorporate into our solutions, our decision to move to a fully outsourced manufacturing model will enable us to better manage the ebbs and flows in our business.

Now let me turn the call back over to Jon.

Thanks, Linda. Our Q1 results were certainly positively impacted in all financial aspects by the IP agreement with Microsoft. Even without this, we demonstrated improvement in gross margin and operating expense control and generated solid growth in key product areas. At the same time, we know we must continue to improve revenue performance and our sales execution. Our financial model is leveraged and we drive profit with incremental revenue.

As I have said, our goal this year is to drive revenue growth, spend wisely and generate cash and profit. We expect to do this by driving growth in DXi, StorNext software and appliances, Lattus for big data, data protection and cloud and performing better than the overall (inaudible) market.

We are very focused on our go-to-market activities across all product lines continuing our aggressive launches and pursuing additional routes to market and strategic partnerships for all our products building on our technology leadership and proven expertise in data protection and big data management.

As just an example, this quarter we will be launching two new offerings. The first is a data center archive solution that will allow customers to proactively tier archived data to our Lattus product and includes the ability to mix on premise, off-site and cloud-based data protection even more efficiently and cost-effectively by leveraging our next generation object storage, its geographic dispersion capabilities and our industry-leading deduplication technology.

In addition, we will be launching a new managed service provider program enabling partners to deliver backup and disaster recovery cloud services to their customers based on our deduplication technology and optimized for both physical and virtual environments.

Let me close by providing guidance for Q2. We expect revenue of $135 million to $140 million. We are taking into account uncertainty that we see around spending by the US Federal Government as they close their fiscal year. We have numerous large federal opportunities that we are working but our visibility as to their closure is limited.

We expect non-GAAP gross margin of 42% to 43%, non-GAAP operating expense of $58 million to $60 million, interest expense of $2.5 million and taxes of $500,000.

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

(Operator Instructions). Alex Kurtz, Sterne, Agee.

Thanks for taking the questions, guys. Jon, I think a lot of investors on this call have really focused on the opportunity around DXi and StorNext and I think a lot of their valuation analysis and our valuation analysis are really predicated on that business executing and showing upside. I look at this for the last couple of quarters here and look at last year's performance and I just -- trying to understand from the outside looking in what is happening here because I think otherwise the rest of the business is challenged as it is. So any kind of color on what is going on with that business would be helpful.

Yes, let me -- you commented on investors and you talk to a lot of them. Last year in Q2 and Q3, we had record DXi quarters, record StorNext quarters actually and the stock got particularly hammered by the tape performance. So I think what you are pointing out is we have a mixed set of variables and we are trying to drive bulk. We are trying to generate cash and profit from tape, grab share, leverage our installed base, that's where we make money, and grow disk and software at the same time.

We did take a series of cost reduction actions over the last couple quarters, which clearly money came out of sales and marketing and we knew that, but we needed to get back to making money. So it's a balancing act for us for sure.

On the StorNext side, I would say our progress has been good. This quarter we had some Lattus opportunities that we just didn't quite meet all the criteria for, but that product is going to be a good product in the appliance strategy. People like the appliance benefit. Our real issue this quarter and last has been DXi and I gave a few comments in my remarks. When you drill down into it, we did pretty well with new customers in our midrange space and where we didn't do as well as we thought was around our installed base customers and some of our bigger deals.

I could go through deal by deal with you. I think that without sounding defensive at all, we only had two record quarters in a row in Q2 and Q3 and these last two have been more of a struggle. You struggle in a context of -- it still grew but not as much as we would have liked.

So we are focused on the things I said and we still think the market is there. EMC put out some new products recently. We don't think that those products still are -- while they are more scalable for them, they still aren't -- as much performance as that as we have, but they are clearly a dominant player here that we compete against regularly.

I think finally, the last thing I would say is we are pursuing and have pursued new channels to market. That's where I think we are constrained. It isn't really about product and we are going to continue to do that.

Let me just finish up here. Ted Stinson was brought in to take us to the next level. I think that is what sort of how it was outlined at the time and I think he left for a start up. What was that process about and sort of a little bit more color, obviously Bill has been with the Company for a long time. Is he prepared to really take it to the next level? Just sort of what you think about strategically what you need to have to do with the sales organization to get more consistent around our results.

Yes, so I can't speak to Ted exactly on what his thought process was. I will say that some of the points that I made, we have a lot of moving pieces within the Company around managing, paid, installed base, DXi, StorNext. I don't know a lot about Ted's opportunity to be candid. I think he came in and did a good job of putting some processes in place and some things that he brought from Symantec and again, I am not going to try -- I don't want to sound defensive. Tape was hard last year and storage was a struggle for the whole fiscal year. We actually performed better than most of our competitors, grew disk and software faster than the market.

So I think there's some good things that have happened. I think storage was tough.

I think it's an interesting time for Bill. I think Bill has spent a couple years, looked in the business and working with customers in a different way and I think if he was on the call today -- he's not -- he would tell you that he is excited about the products that we have today and the solutions that we have for customers as compared to last time he was responsible for the product.

So we will see where we head next. The Federal spend, this is a big Federal quarter for us typically. We will hope that there is upside from where we guided to.

Thanks, Jon.

Chad Bennett, Craig-Hallum.

Good afternoon. So help me understand since you gave your outlook for this year a few months ago, what has really changed since then? And I know you like to compare your growth to the market and you are either in line or better or whatever, so I think back then you talked about the de-dupe market growing roughly 20% to maybe even 25% and then I think you roughly outlined StorNext growth of 40% or in line with what was the year before. And then tape kind of backing into that kind of single-digit declines. So hopefully I'm not putting the words in your mouth. What has really changed or have the assumptions changed behind any of those growth rates or the growth rates of your businesses?

We haven't changed anything on the annual guidance yet and part of the reason that we haven't is as I started with my opening remarks, everything but DXi was sort of in the range of where we thought we would be, so all the products that you mentioned -- tape, StorNext, appliances -- the only other exception would be Lattus. The Lattus deals that we didn't get revenue, we shipped them but we had rev rec criteria that we didn't get to.

DXi is clearly the spot where I have the most just anxiety about the result. When I look into those deals, a number of them I know about and I would say it's a combination of customer execution and sales execution both. We are understanding those. Linda talked about the enterprise and big data and big deals, so I am not ready to change anything yet because I see all the activity that we have going on.

Having said that, we haven't broken out either and we didn't really expect to in Q1. We gave guidance of $135 million to $140 million. We did $133 million. Our own expectations were higher than that, so we are going to continue pressing the buttons that we think need to be pressed.

Bill and I spent a bunch of time and will next week with sales leadership and the market is definitely there and I could talk about different geos and different places, but we think we are in the right markets. We think our products continue to be the class of the field. It's about go-to-market and sales execution and it's not confusing for what we need to focus on.

All right, so you mentioned a couple times in the call we have different businesses, many moving parts. I guess do you have the ability or resources to manage the businesses you have right now effectively? And probably a more important question would be from a strategic value standpoint, do you still think all these businesses make sense together?

Yes, it's interesting. I think -- I talked about it from a sales perspective. One of the things we have tried to do with the investor community is give you more transparency because we do have a mature business that is generating profit and has historically been growing, but this last year didn't, so we tried to get a lot of visibility on that.

On DXi, we've got a referenced competitor, so we try to give it. And StorNext is a relatively new markets in the way that we are attacking it and an example would be on the same day we got an order from one of the national professional sports organizations for the big product and then we got an order from one of -- for the appliances from one of the teams. That's an example of something that's brand new for us.

So I don't really feel resource-constrained per se other than we are not running it like a startup. If we were a startup and we were doing nothing but growing, we would spend more money than just trying to grow, but we are trying to balance growth and profitability and there's trade-offs there. That is part of the complexity that we are trying to give visibility on.

I think from a logic perspective, data protection is logical and our two products fit together in that market and then big data is a market we've been in in a long time. We're trying to expand our footprint with the appliances and we see good traction around that.

I think the other trend we are seeing, which makes me think that this is going to come back together, is a lot of what we are doing in StorNext for the specialized industries is becoming more applicable to general purpose industries in what I call data center type solutions.

So at some level we are going to get synergy just out of the market and then the whole cloud infrastructure play, it could be in any market and you get synergies there as well.

So I get the question. We told people we were going to try -- we are going to drive for profitability because last year was not the result that we wanted. We're trying to balance out some growth. We got growth, not as much as we would've gotten if we spent more, but we are not going to spend more. We are going to execute better.

Glenn Hanus, Needham & Company.

Good afternoon, guys. So maybe from a business model perspective, could you give us some kind of update on what you think you are kind of running for a breakeven level on the disks, sort of the disk software, disk and StorNext business if you will combined? How you are thinking about that and I know you are not going to tell us your operating margins with the tape business but maybe you could talk about the trend there over the last year. And the question there would be as the tape market shrinks and you slowly decline there, can you maintain your operating margin there or would there be some decline?

Yes, so whole bunch of different questions there. We haven't talked about breakeven because it's a bit of a moving target because with tape coming down, it put more pressure on the infrastructure going the other way. I will tell you that -- and you will recall this ADIC without a royalty, a tape margin of sort of 2% to 4% on the products was pretty good. We were best around at the time, which I still think is achievable along this cycle that we are on with tape.

And then you add the royalty to that but the real goal is to get some leverage off of that investment into these other businesses. And so by doing the changes that we've made over the last year, that's what got us back in line. You can see even to your guy's models, I think we're a couple -- $2.5 million higher in net income even without the Microsoft deal and that's around cost structure. So I think we've made those changes.

Something like the BEI arrangement that we put into place, that's going to contribute because that's all about tape and so I think there are steps that we have already taken, will continue to take to make tape a nice cash flow positive business plus the royalty.

On StorNext, I don't know the exact numbers but it's a pretty close to if not within the quarter a positive operating profit business. It depends on which quarter you look at. There's no question that the growth strategy this year is principally around it in pure percentage.

Then on DXi, we continue to take steps to make it more profitable. Our breakeven number has gotten lower for sure. And we are -- there's not a lot of technology innovation anymore. It's really about building on the foundation that we have, leveraging it into new hardware. We announced the new virtual machine that's 24 terabytes up from 2. We will do those kinds of things and try to manage it wisely.

But it is a trade-off. If we were just being a growth company, we might do a few things differently, but we are trying to be balanced.

Okay, it sounds like close to breakeven on StorNext, DXi may be losing a little at this point and you gave us the numbers on tape, 2% to 4% plus the royalty. Then on the tape side, do you think you can kind of maintain that as you -- that sort of a 5% to 10% downish kind of market?

Yes, while tape was shrinking, our branded tape was growing so there's a lot of dynamics in the tape market amongst -- in the tape market and we think we are well-positioned there. Tape profitability, I think we've got. I think the business, broader business issue is growth in the growth businesses I think as Chad pointed out and to me that's about access to customers, closing the deals that we have. It's not about technology positioning or market. I think we are in the right ones and you're going to see us continue to be aggressive of adding partners to help us get to markets and that's one of the things we are pushing on.

When do you -- so the benchmark I think you give a number out. When would we expect to see that fully implemented?

We are targeting to get moved by the end of December is what we are shooting for. So we would start seeing the benefit in Q4. That's the goal. There might be some transition costs growing over there but for sure in fiscal 2015, we will see that kind of benefit. It is a good deal for them, a good deal for us and it builds on a long-term partnership that we have had around quality and our expectations and all the things that make products successful.

Are you starting to see any revenue related to cloud services?

We are in two ways. I think I talked about this last quarter. We are -- we were formalizing this program I mentioned in the script to provide infrastructure and software to MSPs or VARs who want to offer cloud solutions to their end-users and we have had a couple really nice, successful wins doing that. Then we also have the relationship with Xerox that has yielded a lot of infrastructure sales into their model where they are providing outsourced data protection as well.

So we are seeing it in bulk. We have a lot of interest. We just announced our new Q-Cloud in Canada with a partner. So I think the cloud, the nomenclature is really going to be about channel more than technology and we are active with a number of people and that's why we put this program in place because people wanted to be able to go out with their own solution to protect their customers.

Maybe lastly on the StorNext appliances, did you see decent quarter-on-quarter growth there?

I think Linda had it in her script. I think it was about 60%

I thought that was year on year.

On a year basis. I don't know what the quarter --

But you saw a sequential growth there. Maybe just talk about what part of that you think is really resonating and it sort of sounds like the standalone software business will kind of be a little lumpy and flattish as we go forward and the real growth is going to come on the appliance side.

For sure. What we are seeing, we will sell some ongoing software only because we are going to support existing customers and partners who have aligned with, we will partner with as well.

But customers like the ability to have one provider providing the software and the hardware. They like the way that we have tuned the product for the hardware. It's super simple. It's easy for them to add new pieces. It actually is getting pretty appliance-ized from a server perspective and manageability.

And then when we had Lattus on top of that, that is -- we think that is going to -- we see customers excited about what that does for them and we had two very, very nice deals, very high profile customers who we will revenue this quarter, had product at June 30 but we weren't quite ready to revenue it yet.

So it's a combination of simplifying the solution, having a better experience overall, and tuning, and then we know we have a next version of StorNext coming out this year that further positions the appliances uniquely against the competition.

Then on the channel side tied to StorNext, where are you in -- how far along are you in really having the partners you need to accelerate growth on the appliance side there it StorNext?

There's a couple things going on there. One, we are continuing to add partners. I think it is up dramatically year-over-year. But we are also starting to find people partnering with people who are more of ISVs who take our solution and bundle it in with other parts that they sell, which gives us a lot of leverage. We are up 90% in new partners in North America. I think we are farther along in North America with partners and we are probably farther along in Europe with ISVs depending on which market you are in.

All right, thank you.

(Operator Instructions). Joshua Reilly, Northland Securities.

This is Joshua Reilly in for Catherine Gignac. I just had a question. Is there any way that you guys can improve your OpEx efficiency through channel management?

We are a channel company today and 90% of business is through the channel. So you are talking about sales and marketing there. The best way to improve that ratio right now is in sales utilization. In other words, we have territories who we are trying to improve their overall utilization and get that channel leverage that's built into the model. We have about a third of our territories in any given period are over than plan and we are really focused on keeping them there and then building up the ones that aren't.

Okay, that was my next question. (multiple speakers) Okay, thank you.

At this time there are no further questions. I would like to turn the call back over to management for any closing comments.

Actually it looks like we did have a follow-up from Alex Kurtz, Sterne, Agee.

Jon, I just thought I would save us some time here. Just to be clear, you guys are reaffirming the OpEx for the year of $245 million to $250 million?

Yes, actually we will probably be lower than that. I'm not changing anything for the year is what I was saying, Alex, but we will probably be lower.

How should we think about OpEx going into next year then? Should we think about it -- is it too early to think about it or do you think we could have a down year in OpEx for 2015 or you think flattish?

I think -- so a couple things. I think on the things that I am focused on for growth, this is an important quarter for us from a Q2 perspective. Lattus is a key part of our plan. We have a lot of Lattus deals that we are working, a couple that we have already shipped, and they drag a bunch of StorNext as well. So I think what you're going to see us do is be thoughtful around StorNext in particular about how do we want to add spend based on traction. Because the market is there. The product is unique and we have high expectations for growth.

On tape, we are trying to just be smart about where we spend money in sales and marketing and make sure we pick up every tape dollar we can get.

Then on DXi, we need to see some more traction there because I'm not going to get out ahead of us on spending money on the revenue side.

And as I said to your question earlier, if I looked at the last four quarters and I know I'm a sports person, the first half was great. We had two record quarters in a row. These last half, these last two quarters have not been great. I actually feel better about this one than last one because I know about a lot of the deals but we have got to show traction

So we are going to be balanced and the higher we get in revenue and the more traction we see, the more comfortable we are going to be about investing and vice versa.

Thanks.

Thanks for putting that in. Again, we apologize for the technical difficulties on the call. Just gremlins. We will be back in October. We appreciate the support and I'm happy to answer any questions. Thanks again.

Thank you very much. Ladies and gentlemen, that will conclude the conference for today. If you would like to listen to a replay of this conference you may do so by dialing either 303-590-3030 or 1-800-406-7325. You will need to enter the access code of 463-0902. (Operator Instructions).

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