Quantum Corp (QMCO) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Quantum Corporation Fourth Quarter 2014 Conference Call. During today's presentation all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions).

This conference is being recorded today, Wednesday, May 7th, 2014, and I would now like to turn the conference over the Shawn Hall, General Counsel. Please go ahead.

Thank you. 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 the 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. 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 caution you that are statements are based on current expectations that involve risks and uncertainties that could cause actual results to differ materially.

We refer you to the risk factors and cautionary language contained in today's press release as well as to our reports filed with the Securities and Exchange Commission from time to time, including our most recent 10-Q filed on February 7th, 2014.

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 this call over to Jon Gacek.

Thanks, Shawn. Welcome to our Q4 fiscal 2014 conference call. Today we reported revenue and bottom-line results above the midpoint of our guidance range we provided in our Q3 earnings call.

In addition, we generated $20 million in cash from operation and ended the period with over $100 million in cash, the highest level in four years.

Before I turn the call over to Linda to walk through the details, I wanted to take some time to highlight the significant progress we made in fiscal 2014 financially, operationally and strategically, which positions us well for growth in our core business and increased profitability in fiscal 2015.

First, improvement in our financial model; during the year we undertook a series of steps that while lowering revenue had the intended result of reducing our cost structure and increasing our profitability and cash flow but still positioned Quantum for revenue growth in fiscal 2015.

Total revenue declined from $587 million in fiscal 2013 to $553 million in fiscal 2014. However, non-gross margin increased from 42% to 44.3% and non-GAAP operating expenses declined from $251 million in fiscal 2013 to $222 million in fiscal 2014.

In addition, non-GAAP operating income and net income increased $27.2 million to $23.3 million and $13.7 million respectively. We generated $35 million in cash from operations in fiscal 2014 compared to $8 million in fiscal 2013 and we ended the year with $102 million in cash, up from $72 million a year earlier.

Our second area of progress was in operational efficiency and effectiveness. During the year we successfully completed our outsourcing of our remaining manufacturing operation, streamlined our service capabilities and refined our sales model. We also aligned our engineering and product groups to leverage our product development strength from our data center products, mostly tape and DXi, to be applied to our scale-out products, StorNext and Lattus, with the goal of increasing our overall product development capabilities, improving our time to market and launching new scale-out storage products, as the market opportunity continues to grow, lowering our operational cost and increasing our operational leverage across the Company.

The first example of this was our new StorNext growth solution announced at the end of the quarter. Built on our re-architected StorNext 5 platform launched in February of this year, these solutions are optimized for the modern digital workload in media and entertainment enabling us to expand our market reach.

Another action we took was focusing our StorNext and Lattus to go-to-market activities and sales teams on the vertical market of media and entertainment and Federal Government intelligent and surveillance to drive results in those specific markets while enabling our larger data center sales team to focus on driving tape and DXi revenue while still identifying StorNext and Lattus opportunities in the data center around very specific use cases.

We have a large installed base of data center customers that we are leveraging, not only to sell DXi and tape but also to sell StorNext and Lattus for addressing such needs as managing marketing and training videos and preserving large content volumes in disk archives ready for ready access.

This sales structure gives us both a focus in the key vertical markets and leverage in the broader market and we saw the benefit the past year.

We generated record StorNext revenue with key vertical wins amongst the top studios, major broadcasters and new cutting edge content creators and began to see traction selling StorNext and Lattus to data center customers.

To cite just a few examples, we sold Lattus to one of the top US public universities and just last quarter turned several small tape library opportunities into $200,000 plus sized deals incorporating StorNext for video storage streamlining including at one of the largest athletic shoe companies in the world, which uses our systems to manage its marketing videos.

To sum up, the operational and organizational changes we made over the past year lowered our headcount from 1,700 to 1,300 people, reduced our operating expenses, provided greater leverage for our strength and scale across the Company and positioned us for growth in fiscal 2015.

The third area of progress I wanted to discuss is our strategic positioning and relevance to end-user customers and channel partners in our core markets of tape, purpose filled de-dupe appliances, DXi and our scale-out storage solution, StorNext and Lattus.

Starting with tape, which represented approximately 65% of our total revenue in fiscal 2014, based on analyst data, the overall tape market, automation, drives and media declined 7% in calendar 2013. And the open systems automation market was down 11%.

During that same period Quantum remained the market share leader in the open systems market at 31%, the same level as last year. We were followed by Oracle and IBM at 20% and 18% respectively.

During the year we launched our Scalar i6000 high density enterprise library offering best-in-class scalability and density, dual robotics and new high availability in management features. This library scales to more than 75 petabytes and was designed to address customer's large archive and long-term retention needs.

Tape is a mature market but the growth and data overall, longer retention requirement and even the potential for tape as a low-cost here in the cloud, it's our goal to invest in technology and go-to-market resources where we can add unique value to the solution, leverage our installed base and grow our overall tape market share.

Moving to the DXi product family, which represented approximately 15% of our total revenue in fiscal 2014, according to IDC the open systems, purpose built backup appliance market was $2.7 billion in calendar 2013.

Looking at the market for open systems target appliances, which is a segment that we participate in, our share was 4% compared to EMC at 75%, HP at 9% and Fujitsu at 3% and IBM at 1%. Despite our overall market share, our DXi line is very strong with industry leading technology and win rates over 50%. And we further expanded the portfolio during fiscal 2014.

In addition to introducing a larger DXi virtual appliance and making it a key part of our own cloud and MSC partner offerings last summer, in Q4 we launched the DXi 4700. It provides best in class scalability, density and a cost per terabyte under a pay-as-you grow model along with security performance and value features that make it a particularly a good fit in the data center, hosted environment and remote sites.

To this point we expedited our DXi 4700 forecast for the quarter we just completed.

Looking forward the open systems purpose built backup market is projected to grow at an annual rate of 18% to $5.3 billion in 2017 and we will continue to enhance our DXi line.

We also see significant customer overlap at the solution level between tape as a backup target and DXi as a backup target and have therefore organized our data center sales model to focus on selling both tape and DXi and to leverage our installed-based for both tape and DXi customers.

However, our main challenge is that we compete with the much larger companies that have significantly greater end user access including leading primary disk vendors. So our goal is to leverage our strong product portfolio to target our growth at the market-rate growth and focus on adding strategic or channel partners to gain greater access to end users and grab additional share.

Turning to StorNext and Lattus product, which we also refer to as scale out storage offerings, these products represented 10% of our total revenue in fiscal 2014 with 12% year-over-year growth.

This market is very large and encompasses many different storage solutions and capabilities. While there is no analyst's data that encompasses all the elements of StorNext and Lattus, scale out file systems like StorNext are currently at $3 billion market and are expected to grow nearly 20% annually over the next five years.

In the case of object storage solutions such as Lattus, the market is approximately $300 million and growing at about 20% annually according to analysts.

As I mentioned, for StorNext and Lattus we are focused on the media and entertainment and Federal Government intelligence and surveillance verticals and we are increasingly getting opportunities in general corporate video and disk archive applications across many industries.

Fiscal 2014 was a year of significant product development and launches and in our scale-out storage portfolio, which I'll discuss in context of four cornerstones that support this portfolio.

The first important cornerstone is our StorNext software. Last fall we announced StorNext 5, our new software platform. As a reminder, StorNext 5 was built from the ground up to provide the most advanced end-to-end work flow management including best-in-class performance and scalability for file sharing and collaboration while enabling customers to leverage the vast StorNext ecosystem developed over the past 10 years.

With the product launch of StorNext 5, which actually occurred in January, we have dramatically improved our differentiation and have also opened up potential new addressable use cases in such areas as high performance computing and cyber security.

The second cornerstone of our scale-out storage portfolio is our StorNext appliances, which tightly integrate StorNext software into a server and storage hardware. In fiscal 2014 we introduced five new StorNext appliances including a flash-based metadata appliance, primary disk offerings optimized for collaborative work flow environment and archive enabled libraries designed for smaller work groups.

As I mentioned earlier, we also introduced our new StorNext Pro Solutions complete storage solution based on StorNext 5 software and our StorNext appliances designed and optimized to meet today's toughest work flow challenges.

The initial three Pro Solution offerings provide high performance storage for refreshing or enhancing older Apple Xsan environment, meeting the new 4-K work flow demand of M and E customers and supporting end-to-end content production and library management.

Third cornerstone is StorNext Connect, which is our new storage management framework. StorNext Connect provides simplified installation management and maintenance to StorNext Appliances, Lattus and tape systems providing optimization and monitoring at a glance on any browser enabled PC, Mac, tablet or smartphone. This is similar to how we manage our data-center products today.

The final cornerstone of our scale out storage portfolio is Lattus, an instantly scalable, forever disk archive providing much greater durability than traditional [RAID] including true self-healing and self-protection capabilities and delivering multi-site protection without the need for replication. Based on next generation object storage technology, it can be deployed as near-line tier storage and also serve as the foundation for a private cloud.

In fiscal 2014 we introduced Lattus D, a lower capacity, lower cost system targeted towards data center environment and also announced joint solutions combining Lattus and CommVault Simpana 10 backup and archiving software as well as Lattus and Rocket Arkivio archiving software.

Last month at NAB we illustrated the unique value we can provide to the integration of Lattus and StorNext by demonstrating StorNext in the cloud, StorNext enabled, cloud enabled media work flow running concurrently in both our booth and in our customer demonstration facility at Switches SuperNet Data Center.

In the demonstration we partnered with Adobe, Levels Beyond and Telestream to show Automated, Ingest, Edit, Transcode and Distribution in the cloud. A private demonstration for 30 prospective customers at SuperNap was extremely well received and a number of attendees visited our booth the following day to discuss the solution in greater depth. We were very excited about what we were able to actually do in the cloud with these technologies.

To sum it up before I turn the call over to Linda, in fiscal 2014 we delivered improved profitability in cash flow, reorganized to leverage our scale and drive greater efficiency and focus and significantly expanded both our data center and scale out storage portfolios. We believe all this has position quantum's to achieve growth in our core business and higher profitability in fiscal 2015 and I'll discuss this further after Linda provides further details on the quarter. Linda?

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 31st was $128 million compared to $139.9 million a year ago, a 9% decrease. Revenue from our StorNext and Lattus scale out storage solutions was up 9% year-over-year driven by a 50% increase in North America revenue.

Offsetting our scale out storage growth was a year-over-year decline in tape automation and disk systems and related service revenue of approximately 20% each.

For the quarter non-royalty revenue totaled $117 million of which 87% was branded and 13% was OEM, slightly up from 85% branded and 15% OEM a year ago. Royalty revenue was $11 million in Q4 (inaudible) the same quarter a year ago. LTO royalty showed growth year-over-year mostly offset by declines in DLC.

Looking further at various revenue classifications, devices and media totaled $18.7 million in Q4 compared to $16.9 million in the prior year. The primary driver of the increase was in LTO media.

Tape automation systems revenue was $36.2 million compared to $45.5 million in Q4 of fiscal 2013. Branded tape revenue declined 20% or approximately $5.7 million year-over-year primarily due to a decline in revenue from our enterprise tape automation system.

In the midrange branded revenue was relatively flat year-over-year while branded entry sales were moderately down over the same period.

In Q4 year-over-year declines in North America commercial business were the primary geographic driver along with reduced revenues from the Federal sector.

While win rates remained strong, overall tape automation system deals that closed in Q4 were down 9% and revenue from large deals, those over $200,000, was down 50% from the same period in the prior year.

Despite the year-over-year revenue declines, we acquired nearly 115 new branded mid-range and enterprise customers in Q4, which was up slightly from the prior year for a total of approximately 445 new customers in fiscal 2014.

From an OEM perspective tape automation revenue was down 24% or $4 million over Q4 of 2013. The decline in OEM tape automation revenue was driven by reductions across entry, mid-range and enterprise tape automation sales.

This systems software and related service revenues was $34.1 million in Q4. This was down 10% from the prior year. Of the $34.1 million approximately 57% of this systems and related service revenue and 43% was from StorNext and Lattus solutions and related service revenues.

For the year this systems software and related service revenue was $139 million. Approximately 60% was from disk systems and related service and approximately 40% was from StorNext and Lattus scale-out storage and archive solutions and related service revenue.

Disk systems and related service revenue, as I mentioned, was down approximately 20% from a year earlier. The primary contributor to the lower year-over-year revenue was a 42% decline in revenue from big deals as we had a number of very big deals in Q4 of last year.

Revenue in our over 80 terabyte systems was flat year-over-year. Where we saw our year-over-year decline was in our 10 to 80 terabyte systems primarily related to the higher number of big deals last year.

In the entry space where we introduced our DXi 4700 during Q4 we saw strong year-over-year revenue growth and new customer adoption. Our overall DXi win rate remains strong, approximately 55% in the quarter. We also added 90 new customers in Q4 and approximately 375 in fiscal 2014.

Turning to StorNext and Lattus scale-out storage solutions, our prior related service revenue increased 9% year-over-year. In addition, revenue from big deals again defined as deals over $200,000, increased by 20% over the same quarter in the prior year.

We also saw an increase in the number of worldwide partners selling our StorNext products compared to Q4 of last year and continue to experience strong win rates in our solutions offerings.

On a geographic basis, we continue to see strength in our North American business where revenue is up 50% on a year-over-year basis. Our business in North America is more mature and further along in implementation of our business plan and demonstrates the strength of the opportunities.

APAC increased revenues approximately 35% while EMEA was down over 40% from the same quarter in the prior year.

StorNext appliances and related disk revenue continued to ramp nicely from the prior year and standalone StorNext software sales were up moderately compared to Q4 of last year.

Overall from a customer acquisition standpoint we added over 70 new StorNext and Lattus customers in Q4 and approximately 285 new customers at this support team.

Moving to service revenue, it was $37.6 million in Q4, up 2% from $36.9 million in the same quarter the prior year. The increase was driven by growth in branded contracts related to our StorNext Appliance strategy.

Turning to gross margins, non-GAAP gross margin was relatively consistent at 41.9% in Q4 compared to 41.8% in the fourth quarter of fiscal 2013 despite the reduced revenue level. This reflects the positive impact of the cost of (inaudible) have driven over the past year and a half.

Looking at expenses, non-GAAP operating expenses were down $8.3 million or approximately 13% totaling $54 million in Q4 compared to $62.2 million in the prior year.

Year-over-year our sales and marketing costs decreased by $5.1 million. The primary driver of the reduction relates to lower salaries and benefits resulting from the headcount reduction we had implemented over the past year as well as lower commissions associated with the year-over-year revenue decline.

Similarly research and development spend decreased approximately $1.9 million primarily as a result of headcount and other cost reduction actions taken over the past year.

General and administrative costs declined by $1.3 million, primarily related to lower infrastructure costs.

Q4 non-GAAP operating loss was $159,000 compared to an operating loss of $3.7 million in the same quarter a year earlier. This resulted in a 250 basis point improvement in operating margins. The largest contributor to this improved operating performance was the cost reduction actions which were somewhat offset by lower overall revenue.

Interest expense for the quarter was $2.4 million, which is the same as it was a year ago. This included cash interest express of $2 million and amortization of debt issued cost of $400,000. The average interest rate for our $230.7 million in convertible debt is 3.96%.

For the fourth quarter we had other income of $500,000 primarily related to an investment in a private technology venture limited partnership. We also recognized a net tax benefit of $15,000 primarily related to a refund of foreign taxes which more than offset our state income taxes.

Summing it up for Q4, we had non-GAAP net loss of $2.1 million or $0.01 per share compared to a non-GAAP net loss of $6 million and $0.03 per share in the same quarter a year earlier.

On a 9% year-over-year revenue decline our bottom line improved 65% due to the changes we made in our business model over the past year and a half. Particularly there were reductions in our cost structure and increased focus on driving profit and cash flow.

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 $19.9 million and $35.5 million for the fiscal year.

We ended the quarter with $101.9 million in cash and cash equivalent, up over 40% from $72 million in the same quarter last year and our highest cash balance in four years.

We were able to repurchase $1.3 million of the November 2010 convertible debt at a discount and retire it. At March 31 our debt consisted of $203.7 million of convertible debt with no covenants. 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 $44 million compared to $18.7 million a year ago. On a sequential basis due to our outsourcing to third-party manufacturers, manufacturing inventory decreased $8.8 million to $34.8 million and will continue to decline over the upcoming quarters to a quarter-end level of approximately $20 million to $25 million.

Accounts receivable decreased $2.7 million due to lower sequential revenues offset by the discontinuation of accelerated payments from one customer. CapEx was $900,000.

Last week, as filed in our form 8-K and press release, we finalized an amendment to our credit agreement with Wells Fargo Capital Finance. This amendment increased the availability on our lines from $55 million to $75 million and allowed for additional flexibility and utilization of the lines to prepay or pay when due the convertible debt.

With over $100 million in cash on our balance sheet as of march 31, the availability of the $75 million line and the cash we expect to continue to generate over the next year and a half, we feel very confident in our ability to retire the November 2010 bonds when they become due in November, 2015 or earlier if it makes economic sense for Quantum. After payoff we would have sufficient cash remaining to operate the business.

Now, let me turn the call back over to Jon.

Thanks, Linda. In my opening comments I described the progress we made in fiscal 2014. Let me now turn to fiscal 2015 where we will focus on driving results and shareholder value through several strategic initiatives that will leverage our products, installed base strength and capitalize on the market trends in data protection and scale out storage.

First, we will drive the data center products for profitability and growth. The Scalar Tape libraries and the DXi de-dupe products are the best, our best-in-class products. We are the market share leader in open system tape automation and we have a very, very large installed base. As I said earlier, we have organized our data center sales and marketing team to drive revenue in both these products and to leverage the fact that they are both backup targets for data.

In addition, the tiered archive workflow and video in the enterprise use cases are becoming more and more applicable in general commercial enterprises so that we expect to identify opportunities and get leverage in our data center installed base for our StorNext and Lattus products. We believe that focusing on these products together will enable us to hold combined revenue roughly flat on a year-over-year basis despite the overall decline in the tape market.

Our second strategic initiative is to drive growth in our scale-out storage product with a focus on media and entertainment and Federal government intelligence and surveillance verticals. For media and entertainment we have a dedicated sales and marketing resources as well as specific product combinations in our StorNext Pro Solutions to drive growth.

We are focused on expanding our footprint among the large broadcasters, studios and new cutting edge content creators as they implement 4K and 8K workflows. StorNext 5's performance capabilities combined with Lattus create unique solution.

In the midmarket we are focused on using the Pro Solutions to replace or add to existing Apple Xsan installations, leveraging StorNext 100% compatibility with the Apple product. This market is growing dramatically as content is being created by an increasing number of entities and the demand of the 4K workflows create a large opportunity for Quantum.

We also have increased our channel partners tenfold in this space over the past few years to over 200. On the government side we continue to get design into solutions because of our installed base and strong product portfolio. In fiscal 2015 we believe we are in programs that will get funding and we expect growth in our Federal space for the year.

Finally, we will build on our scale-out storage success we had in North America this past year, nearly 50% growth despite a very soft Federal market by implementing a similar model in Europe and Asia. Given all this, we have targeted 50% overall revenue growth for scale-out storage in fiscal 2015.

Our third initiative relates to our single biggest strategic challenge, greater access to end users. We will continue to focus on adding new routes to market through both ecosystem and channel partners. Over the past few years we've expanded our ecosystem partnership in tape with Teradata, in DXi with Fujitsu, in StorNext with Adobe, Apple, AutoDesk, Gillette, Dell, Quantel, Snell, Reach Engine, Telestream and Vizrt and in Latta with CommVault and Arkivio.

We've also added a range of new VAR partners. As we begin fiscal 2015 we have the strongest product portfolio we've ever had and we will be aggressive in leveraging it to add new partners, which will generate incremental revenue and profit to our financial results this year.

Leveraging our technology in public, private and hybrid cloud opportunities is our fourth initiative. Fiscal 2014 we launched Q-Cloud, our MSP program, managed service provider program, and just recently at NAB we demonstrated a StorNext cloud workflow solution. The combination of performance, tiering, scalability and value make our solutions very unique and specific workflows and verticals. Over the course of fiscal 2015 we will increase our capabilities and partnerships related to providing solutions in and for cloud-based architectures.

And finally, we will continue to generate cash and opportunistically look to improve our balance sheet. As Linda said, our recent amendment to our Wells Fargo credit line agreement along with our March 31 cash balance of $102 million give us the resources to pay off our $135 million November 2010 convert right now, as in today, and still effectively operate the business.

In addition, we expect to generate free cash flow of $30 million to $40 million in fiscal 2015, which in total will give us liquidity of approximately $205 million $215 million a year from now. Between now and November 2015 we will opportunistically look to refinance or pay off the convert early if it makes economic sense for Quantum.

With that background for fiscal 2015, let me now turn to guidance. For Q1 we expect revenue of $125 million to $130 million based upon typical seasonality. We expect non-GAAP gross margin of 44% to 45%, non-GAAP operating expense of $54 million, interest expense of $2.5 million and taxes of $500,000.

For the full fiscal year we are targeting a revenue of $540 million to $550 million, non-GAAP gross margin of 45% to 46%, non-GAAP operating expenses of $215 million to $220 million, interest expense of $10 million and taxes of $2 million.

In summary, we have positioned Quantum to profitably grow total revenue in our core business for fiscal 2015 and beyond by one, leveraging our market leadership position in tape automation; two, penetrating growing markets where we are well positioned from a technology and go-to-market perspective with DXi, StorNext and Lattus; three, leveraging our large installed base across our entire product portfolio to achieve efficiency and scale and four, enabling customers to implement public, private and hybrid cloud solutions using Quantum technology.

We are also aggressively pursuing go-to-market partnerships that would drive incremental revenue and profit. And our current cash and balance sheet resources are sufficient to pay off our 2010 debt and fund additional investments to drive additional growth opportunities.

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

Thank you, sir. (Operator Instructions). And our first question comes from the line of Chad Bennett with Craig-Hallum.

I guess on the fiscal 2015 guidance I think you gave some good color into kind of what you think could potentially grow and I think you were even more specific about your scale-out storage business growth rate there but I guess how do we get there and any more detail there and how should we think about the different segments if you can give kind of a in line with market growth rates, better than growth, market growth rates, kind of in that qualitatively directionally, however you want to put it?

Yes those are in the script but let me summarize them again for you and I'm happy to because I think it's a key point. We specifically put those in there so let me start, work my way through. With tape we think we will be a share grabber. That's our goal. We grew share slightly this last year but our goal to grab share but we also recognize that market has pressure on certain segments.

On DXi we think we're in a position to grow with the market and if we were to add more incremental channel or routes to market we could do better than that. The combination of those two, tape and DXi, we think will be pretty flat for the year. So, in other words, whatever decline we might have in tape we expect to see some growth in DXi. Now, even within tape, it's hard for us to take anything but the market when we're dealing with our OEM partners because we don't control what they're doing.

On the branded side, we think we have an ability to do better than the market. On scale out and StorNext we've -- there really isn't market data. Our target is to double or sorry, to grow 50%, and we actually, in my part of the script gave some color about how big the StorNext business is. So we were looking at growing 50%. That's a total combination of things, Chad. It's new StorNext 5; it's Pro Solutions for the M and E space; it's Lattus; it's we think some of the Federal programs we're in we're pretty well positioned. We think we've won. We're just waiting for funding, which we think will happen during the year.

We also are starting to get traction in deals outside of our traditional verticals but for our traditional workflows so I used an example on the call about an apparel company who is a long-term customer who brought in us to solve their marketing video problem. We had a deal recently at a very large police force that was a long-term data center customer. So we think we'll get further penetration in the verticals where we're strong and we see a growing set of opportunities in our general population where our specific solutions can be deployed.

And then finally the things that are more speculative that really aren't in our numbers are adding verticals to StorNext because we think with 5 we're already seeing we're getting pulled into vertical markets for use cases that aren't generally our sweet spot but with the new technology we solve problems for people.

And then laid over all of that is incremental growth that could occur as we add more channel or strategic partnerships so that's kind of a summarization of that last section.

Okay and then one other thing I wanted to ask on the DXi business I think you talked about an industry growth rate for 2014. I don't think I heard a growth rate for last year. Do you have that?

The growth rate we gave actually was for 2014 and we said it was going to grow in the future 18% I believe.

Yes.

Yes I'm getting a nod on that. I don't know what growth, in that kind of range. Our shares remain relatively flattish. We are around 4% in the open systems space.

So how does that math work? Because if it grew and your DXi business was down pretty decently, how does that math work?

Yes I'm looking at math guys. Let me get back to you on that. I think what we're -- the discussion we're having is around what's included but -- and timing. I think it's a timing issue. You know, we're March versus fiscal for calendar.

Okay, all right.

But for sure as a strategy we pulled back on revenue, well we pulled back on expense which had the result of pulling back on revenue. Now we think with the leverage we're getting and the way that Bill has organized the sales force, we'll be able to grow at a market rate and that's what our goal is. And so combining tape and DXi together really tightly in a sales force kind of way, some of that will matter less because the margin profiles are good in both products and we were going to try and hold that flat to slightly up in fiscal 2015.

Okay and I'm not sure -- it's probably more of kind of strategic question but -- and I'm not sure how investment is allocated but considering the movement you have between high end tape, midrange tape, entry tape every quarter in the same thing on the DXi business and also a little bit on the OEM and branded side across products in probably product ranges, I -- do we need to have -- do we need to be in all these segments of the markets we're in? And maybe from an investment standpoint it's just not enough to matter or kind of segment them but it just seems like we're getting dinged by the high end or the low end or something like that every quarter. Does it make sense to focus a little bit more?

Well, I think in some ways we have focused a lot more but not so much around the products but where we're selling and we've reduced our sales resources. Really we've pulled back from investment markets where we just didn't have traction yet. All of those segments that you talk about are now to a spot where they contribute incremental profitability and so a lot of what we've done is financially what you just described and so we think about them discretely but also in a leveraged way. So you get benefit of having a complete product portfolio when you go in and sell to a big Fortune 1000 company where you can sell them all the products.

So we definitely look at that data center business from a profitability perspective overall and then within the major categories, so we do that. And a lot of what we've done to make the Company more profitable even over the last seven years is to do exactly what you asked about, which is get out of businesses where we're not making money and we think that's where we've done that on those products you mentioned.

Okay. A couple -- hopefully a couple of last quick ones for me, probably for Linda, but I'd take if it's Jon or Linda talked about free cash flow $30 million to $40 million this year based on kind of the revenue range that you gave. You saw pretty big benefit this year on the working capital line and as you outsourced manufacturing obviously inventories came down quite a bit. How should we think about cash flow from operations or free cash flow this year, you know, just pure net income versus kind of working capital benefits from a mix standpoint if you can look at it like that?

Yes I think we'll still get some benefit off the balance sheet but if you go through the guidance that we gave you can calculate an EBITDA number. I think frankly I think this probably one of the more conservative estimates that we've put out because we're -- the balance sheet is still working its way through.

We didn't completely sell everything that we have previously manufactured, if you will, just because there's mix and it's not financially or efficiently. So inventory will continue to come down. Receivables probably will go up some because we're planning on growing revenue so those get offset but we'll definitely get some balance sheet benefit. The majority though is based upon the operating model.

Linda, D&A for this year, do you have a kind of estimate?

I think depreciation is going to be around probably $8 million to $10 million I would say for the year. And then amortization comes slightly down from last year. We have some things that are falling off in the year, Chad. So it's down probably closer to $8 million, $10 million also.

Okay thanks a bunch.

Eric Martinuzzi, Lake Street Capital Markets.

Thanks for taking the questions and congratulations on the good finish there in Q4. It's nice to see the results at the high end of the revenue, higher end of that guided revenue range. Just curious to know on the gross margins you've laid out for the year a gross margin scenario and I'm talking non-GAAP here of 45% to 46% and that would be definitely up and I understand it's in large part due to the manufacturing outsourcing just wanted to know for modeling purposed does that kind of stair step throughout the year beginning with the Q1 44%, 45% guidance range and then kind of tweaking higher or is there seasonality to take into account there?

I think there's a couple things; you hit on two of them. One is we're still kind of, as I mentioned and when I was answering Chad's question around the balance sheet. We still have some of the inventory that we built so our -- while our manufacturing model is now one, our balance sheet still has sort of mixed Quantum manufactured and we'll have new manufactured from the outsourced partner so that transition occurs mathematically we think during the year. I think we'll get most of that out. We'll certainly know at the end of the year.

And the next is really sort of volume and mix related and while we are outsourced we still have fixed cost around procurement and the inventory management on the service side and service so there are still fixed elements within the COG piece so as revenue grows the margin will be better for that too so for our modeling purposes Q1 would be the low point I would say by sort of Q3 and Q4 would be the more on track to that and then Q4 gets a little bit of a negative impact based upon just volume. That makes sense.

Yes that makes sense. And then shifting down to the operating expenses, we just finished out the year on 220 -- what have I got? 223 or so? What was the OpEx? I'm talking non-GAAP on the OpEx for 2014, what was that?

[222].

222? Okay and then we're looking for 215 to 220 is the guided range for 2015, just curious to know if the headcount that you talked about where you've got I think you were at 1,300 exiting 2014, does that headcount stay the same and maybe we throttle back some of the non-personnel issues? How does the -- well let's start with that question. How does the headcount change in 2015?

Yes I think it will be flattish. We have open [rec] and we have -- you know, we've had people churning through. I think the thing that you're hitting on two points. One, our sales cost on a run rate level will go up some, right, because to get the growth number we're talking about the branded revenue is going to grow so we'll have a little bit of higher sales cost in commissions, which I would gladly pay more as we grow more.

The second is is that you haven't really seen the full benefit of all the changes that we made so that pushes it the other way, right? And then that gets worked into fiscal 2015. So it's really those two things offsetting each other and, as you know, people drag expenses I think was really what your point is and so having fewer overall tape numbers will have less travel, will have less cell phones, will have less stuff that impacts as well.

Okay and then shifting back to the revenue, just kind of from a macro storage perspective as we've come through the calendar Q1 earnings cycle, there's definitely been some hiccups out there, certainly on the hardware side from people who saw delays at quarter end so towards the tail end of March on high-end systems tails, elongated sales cycles. Obviously you guys hit the higher end of your guided range but was that due to maybe being more conservatism or did you not see some of those things that other hardware folks have spoken about?

You're really -- I mean you're kind of asking a market perspective and I think we had a solid quarter. We were actually thought we even could have been better and so I'd -- you know, there's always some deals that slip. Our biggest area of surprise really was on our OEM business, which is in the list. A number of those companies are on the list of companies who you're referring to who's struggled this quarter.

Our branded business was -- I mean we were actually quite strong. Having said that, we always think we can do better so I think the market is pretty good. I think we're in the right markets for the growth opportunities. Chad asked about it earlier. Our --the feedback we've gotten on StorNext 5 and the Pro Solutions has been very strong. Lattus technology is really starting to get some momentum underneath it. It's going to be lumpy and we'll have to be cautious about that and we'll try to share that with people as we land those deals but overall the market feels pretty good other than I would say in the Federal government and eventually everybody believes they're going to have to spend money.

Our results I don't -- I'm not going to use it as an excuse but our results could have been better even with sort of a more normal Fed season. Our Fed Team has actually been rebuilt and we're really strong there. We like the Team and we're in some very, very good deals and we think we're in the right programs. I think Linda mentioned that and so I expect that to rebound this year and actually be better than this past year so long winded answer to say I appreciate the comment about where we sit relative to everybody else. We think we've got good momentum. We think we have the right product and we think we've got the right overall structure financially to drive growth still but have it be at increased profitable level.

Okay thanks.

Ryan MacDonald, Northland Capital Markets.

I guess first and foremost in with StorNext and Lattus obviously North America has been very strong or has had strong production offering with those products and (inaudible). I am just wondering I think you said in the quarter Europe was down or EMEA was down about 40%. I mean looking ahead to fiscal 2015 I mean where do you expect the improvement in that market and then obviously how do you expect with those products outside of North America? What's your guys' goals for that?

Yes so we made some changes in North America when Bill took over sales, which was in July in this past year, to drive this vertical focus and to expand our channel and we've hired great people. I mean, we've hired some really, really strong people in North America and we've seen the results and the markets and let's start with Europe. In Europe are a little bit different; they're more fragmented. The channel partners are different.

The go-to-market motion is different and so it isn't like we're just starting. We actually started during the year but we have a lot more confidence about our model to really drive it into Europe -- I'm going to start with Europe in particular -- drive it into Europe this year and so a number of those partners that I mentioned, Gillette, Snell, VIZRT, they all have a real European presence so we're going to take what we've done well here and we've been in process of replicating it. We think we'll get uptick from just how we're structured, the type of people we've hired and then what we've asked them to do.

In Asia it's similar but it's even more of a partner centric model so we'll be looking for go-to-market partners over there. We have some in the works already that are -- that should help expand it but the same is true. Focusing on the right market, focusing on the right partners and really positioning the bundled product and M and E in particular will be the focus for this coming year. We expect both Asia and Europe to grow but we expect -- our highest expectation is around North America in this coming year.

Okay got you and can you talk a little bit more about what your expectations for Q-Cloud are for the year? I mean obviously it's still very, very small in terms of the overall business but how -- I mean is it mostly Greenfield opportunities or is this something that you're going to focus more on leveraging existing customer base to help grow that?

Yes so Q-Cloud has really more involved it's how we think about it but also how it's utilized so what tends to happen is by having our own cloud, and this is today it's just for DXi, by offering our own sort of off [ex] based cloud solution for DXi, it allows us to enter the conversations differently than some of the competition. Oftentimes the result of it is we still end up selling them hardware.

The other thing that it's led to though is we are selling our template, if you will, to particularly VARs but also MSPs that then take our hardware and implement their own branded version of what we would have called Q-Cloud and that led to the MSP program that I referred to that we launched during the year. I think our biggest deal on DXi this last quarter was in fact an MSP deal for DXi. It was over $1 million, so think of it as both we're selling the OpEx but we're then also selling the template to other people who implement it.

The other leg on the Q-Cloud tool is we will add more than just DXi to it over time. We mentioned the StorNext and Lattus work flow in the cloud. We called it that so you guys could understand what it is but that would ultimately be part of our Q-Cloud offering. We are -- a number of our big installed base customers would like to have hybrid type solutions where they have some data and we have some data but those architecturally take some time to implement. So you're going to see us expand it.

It's not -- I don't think it will be a -- it's not going to be something we report separately I don't think but we're going to talk about it a lot more because it's clearly where the market is going and we have a unique technology foundation that really gives customers a different kind of solution. The response we got I was at this presentation at SuperNAP. The response we got from these CIOs was unbelievable. I mean we were the -- we were actually demonstrating something that changed their business in a way that nobody else could do so you're going to hear us talk about it more and I think it's going to be a key part of our growth in 2015 and beyond.

And then finally, I guess with sort of the cash flow levels you talked a lot about really using where you're at right now to improve the balance sheet. I mean any other ideas or goals for uses of the cash for the year? I mean just looking at obviously you're over $100 million cash right now and it sounds like you're pretty positive on the amount of cash flow that will be generated throughout the year. I mean any thoughts of using that towards M&A opportunities to technology or in terms of like a share buyback? What's your thoughts around it?

Yes so you know, it's funny that in the first time in I can remember since we merged with -- or Quantum and ADIC merged our balance sheet really is -- feels taken care of and so talking about those things has begun. The first time in a long time I've been able to discuss with the Board the possibility even of strategic acquisition to further accelerate our growth and progress, particularly in the scale out business.

I don't really think we need anything right now but as this business takes off it's good to be in a position to start looking forward more and talking about it at the Board level what can we do to further accelerate our growth and not being constrained by our capital structure. So that's a long-winded answer to say it feels like we're back on offense a little bit. We don't really need anything but as we get momentum here and there's a lot of activity, we're going to be balanced about growth and profitability for sure but the balance sheet constraint feels gone.

All right thank you very much.

Glenn Smith, Needham & Company.

Good afternoon, nice report. Let me just sort of give you the high level question and you gave us a lot of good stuff there so thank you for that. so have you just kind of at a high level look at what your real -- if you take the 2015 guidance you gave us, particularly the revenue and the gross margins, where do you see sort of the greatest risk and where do you see sort of the greatest opportunity to sort of show some upside?

You know, just kind of go through it, the tape and StorNext and where do you -- where does the risk and the opportunity here and sort of rank some of that stuff for us?

Yes I think the first risk is the one that we've -- that we faced a couple years ago, which are things that we just aren't in control of, market dynamics, IT spending, all of that. We can't -- we're super conscious of that. We think we've done the right things around our model. We gave some stats in there as tape still 65% of our revenue. It is a market that's mature. We're hyper focused on it but it is a mature market so--

So the tape market this year like what are four either yours or the forecasts for the rate of decline of the tape market this year?

I think it's the mid-teens. There was mid single-digit is what I recall. I think it's 7%.

Yes about the same as last year.

Yes and that actually turned out to be slightly higher than that last year so I mean because the big part of our market for sure that's on the risk side of the house. We're still -- we still have customer access challenges and so I mean challenges in that that's a hurdle for us so we haven't really built into the model adding any new channel. I think that's a big opportunity given what's going on in the market around us and so on the opportunity side of those products I think there is an opportunity to add channel. We're going to pursue them. That makes sense for us. We've talked about this a lot.

As you know, you and I have talked about this. It takes two parties to agree on something like that so we're going to continue to pursue there. On DXi generally I just think it's a good product. It's better than I think the market share leaders' product. It's well positioned. A risk always is. We've got to compete with the Goliaths. It's just the world that we live in.

And then on the scale out side I think there's much more opportunity than risk to the 50% growth. I think we have done it a really good job of positioning the portfolio and the roadmap in markets where we have unique capabilities and we've hired some really good people, people from industry-leading companies who have helped drive changes into the productization. We're good at getting products out and we've hired some great sales people so I think the most upside opportunity is around the scale out stuff and/or adding new channel on the data center stuff would be the two.

Okay thank you very much.

You bet. I mean just in closing on that, we feel good about where we're positioned and good about the guidance that we gave on the parts that we can control in the markets that we're in.

Thank you and that's all the time we have for questions. I would like to turn the conference back to management for closing remarks.

Well, thank you. I know this was a long quiet period for us given our audit period and we're a couple weeks farther along than typical but we appreciate all the support on the call. We'll be out this quarter at least one or two conferences and we look forward to talking everybody again at the end of Q1. Thank you very much.

Ladies and gentlemen, this does conclude our conference for today. If you would like to listen to a replay of today's call, please dial 303 590-3030 or 1 800 406-7325 with access code 4678239. Thank you for your participation. You may now disconnect.