Quantum Corp (QMCO) 2015 Q3 法說會逐字稿

Good day and welcome to the Quantum third-quarter earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Shawn Hall, General Counsel. Please go ahead.

Thank you and good afternoon and welcome. Here with me today are Jon Gacek, our CEO and Linda Breard, our CFO. The webcast of this call, our earnings release and a quantitative reconciliation of any GAAP and non-GAAP financial measures discussed today can be accessed at the Investor Relations section of our website at www.quantum.com and will be archived for one year.

During the course of today's discussion, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements regarding our business strategy, opportunities and priorities, anticipated product launches and plans and future financial performance. We'd like to caution you that our statements are based on current expectations and involve risks and uncertainties that could cause actual results to differ materially. We refer you to the risk factors and cautionary language contained in today's press release, as well as to our reports filed with the Securities and Exchange Commission from time to time, including our most recent 10-K filed on June 6, 2014 and our 10-Q filed on November 7, 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 the call over to Jon Gacek.

Thanks, Shawn. We want to welcome you to our Q3 fiscal 2015 conference call. Overall, we are very pleased with our results for the quarter as we continue to build on the momentum we saw in the first half of the year driving branded revenue growth and generating strong operating profit and EPS. While total revenue was slightly below the low end of our guidance due primarily to the decline of 33% in our OEM tape automation revenue, our Quantum branded business grew year-over-year for the third consecutive quarter and was up 2% over Q3 of last year. Branded growth was largely driven by scale-out storage and related service revenue, which increased nearly 80% year-over-year to a record $27 million.

In addition, DXi and related service revenue grew 5% year-over-year and 14% sequentially. The combination of DXi and scale-out storage revenue, or what we've referred to in the past as disk and software revenue, totaled $51 million, which is the highest quarterly level to date. We had a non-GAAP operating margin of nearly 10%, the highest level in four years and non-GAAP net income improved nearly $5 million over Q3 of last year. Non-GAAP EPS was $0.04 per share in line with our guidance despite the lower revenue and demonstrating the leverage of our overall financial model.

Finally, I would like to note that our GAAP net income was the highest in more than five years.

Before I turn the call over to Linda to walk through the details of the results, I want to highlight several key points regarding execution on our strategy to drive increased growth and profit. First, our results continue to reflect the actions we've taken to further strengthen our business model and the significant leverage it provides. These actions helped increase non-GAAP gross margins in the first nine months of fiscal 2015 to 45.5% compared to 42.1% in the same period two years ago. We've also reduced non-GAAP operating expenses approximately 17% during this period.

Looking at non-GAAP operating income, we've generated $28 million in the first nine months of this fiscal year compared to being breakeven in the same period of fiscal 2013. And finally, we generated $20 million in non-GAAP net income for the first three quarters of this fiscal year, a $28 million improvement from an $8 million loss in the first nine months of fiscal 2013.

The second point I wanted to highlight on our strategic execution is the tremendous growth we've continued to derive in what we call scale-out storage. We've gone from year-over-year revenue growth of 41% in Q1 to 58% in Q2 to nearly 80% in Q3. This reflects our continued success in both building on our leadership in media entertainment and extending our reach to other verticals and use cases where we are uniquely positioned to address their workflow needs.

More and more customers are realizing that no other vendor can provide the combination of industry-leading performance, unlimited scalability and cost-effectiveness in an end-to-end data management solution that we offer with StorNext and Lattus. In fact, since StorNext 5 became generally available early last year, StorNext and Lattus combined solutions have been adopted in some of the largest, most demanding workflows around the world. This was one of the key contributors to our overall media and entertainment product revenue growing more than 150% year-over-year in Q3 and our mid-market media and entertainment product sales nearly tripling.

Our largest M&E during the quarter was a $4 million StorNext Lattus deal for managing video at one of the world's largest consumer electronics companies. $3 million of that has been recognized in Q3. Other major M&E wins include a StorNext Lattus sale of nearly $3000 to a large media production company and StorNext sales of more than $3000 each to two of the top US broadcast networks and a major international radio broadcaster.

In addition, our new StorNext Pro solutions continue to gain further market momentum with customer wins including a leading US graduate business school and a large magazine and website publisher. Beyond media and entertainment, total Q3 scale-out revenue from other nongovernment customers such as oil and gas, life sciences, high performance computing and geospatial applications grew 25% year-over-year. Key wins from these verticals include StorNext deals with a major genome sequencing center, a large national oil company in Asia and one of the world's top nonprofit research institutes, as well as a Lattus sale to a leading provider of commercial satellites.

Another highlight of the quarter was the continued momentum we saw with our DXi backup and deduplication appliances where we grew 5% year-over-year and 14% sequentially. This reflects the strategy that we've been pursuing to drive growth and profit, namely capitalizing on evolving customer needs by leveraging our marketshare leadership in tape automation, our industry-leading deduplication technology, a more simplified DXi portfolio and a more cost-effective solutions-level approach in our sales and marketing efforts.

We are particularly pleased with the strong adoption of the DXi6900, which only became generally available in Q2, which was last quarter. DXi6900 product revenue doubled from Q2 with key wins including deals of more than $200,000 each at a large European banking group, a global financial service provider, multinational biopharmaceutical company and a major insurance company in Asia. Our strategy is selling DXi into our tape automation installed base and selling Quantum DXi and tape together reinforce one of our key strengths in data protection, providing customers with a combination of best-in-class disk and tape systems tightly integrated to deliver unmatched value.

The strength of our product portfolio and the continued innovation has been recently reinforced with several award honors. Our StorNext Pro solutions received a visionary product award for enabling collaborative storage technology at the Storage Visions Conference, which is a major forum for the media and entertainment industry. In addition, StorNext 5 has been named as a product of the year finalist by Storage Magazine and searchstorage.com and it's also in the UK-based network computing awards with winners for both of these to be announced next month. Finally, our DXi6900 has also been named as a product of the year finalist by Storage Magazine and searchstorage.com.

Before I turn the call over to Linda, I wanted to touch on the 33% year-over-year decline in OEM tape automation sales and two other contributors to the overall revenue being slightly below our guidance. First, regarding the OEM results, we aren't really able to impact or influence our OEMs on their sales opportunities, but we are aggressively working with them to make sure they have the support they need to generate revenue.

Second, branded tape automation revenue was down 16% year-over-year, but the most significant impact being fairly specific to North America sales in data center environments where we did not see as many large deals or the typical budget flush in the form of upgrades or new purchases that we've seen in the December quarter of the past. However, we will continue to leverage our tape automation marketshare leadership to maximize our revenue and profit opportunities in this market. Finally, the significant shift in foreign exchange rates that occurred this quarter reduced revenue by $1.4 million on a constant currency basis.

To sum it up, the strength of our business model and the growth engines of scale-out storage solutions and DXi resulted in solid financial results for the December quarter. Taken together with the previous two quarters, we are very pleased with what we've accomplished in the first nine months of fiscal 2015 in driving branded growth and increased profit and continuing to build market momentum in key areas that position us well for the future. I'll say more about this after Linda discusses our Q3 results in more detail. Now I will turn the call over to her.

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.

Total revenue for our third quarter ended December 31 was $142.1 million compared to $145.9 million a year ago, a decrease of 3%. As Jon said, branded revenue grew year-over-year for the third quarter in a row, up 2% to $116.2 million. Scale-out storage and related service revenue was up 77% year-over-year to an all-time high driven by revenue growth across all geos and an increase in revenue from big deals. Disk backup systems and related service revenue was up 5% year-over-year driven by revenue growth in EMEA and APAC and an increase in big deals.

Offsetting these increases were year-over-year declines of 22% in revenue for both overall tape automation systems, that's OEM and branded combined and devices and media. We are pleased with the continued growth in our branded business, which helped offset a 30% decline in our overall OEM business. In total, our OEM business contributed $15.2 million of revenue in the quarter. For the quarter, non-royalty revenue totaled $131.4 million of which 88% was branded and 12% was OEM compared to 84% branded and 16% OEM a year ago.

I'll now walk through our revenue results starting with our data protection products. Tape automation systems revenue was $40.5 million compared to $52.1 million in Q3 of fiscal 2014. Branded tape automation revenue declined $5.3 million, or 16% year-over-year, primarily due to declines in enterprise and midrange revenue, which were slightly offset by Europe year-over-year growth in entry-level sales. Revenue from large deals, those over $200,000, was down 34% from the same period in the prior year.

Despite the year-over-year decline in overall branded automation revenue, our win rate remained in the mid 70th percentile and we acquired approximately 130 new branded midrange and enterprise customers. From an OEM perspective, tape automation revenue was down $6.2 million or 33% from Q3 of fiscal 2014. The decline in OEM tape automation revenue was driven by reductions in sales of all tape automation categories with the largest decrease in midrange products.

Moving to DXi and related service revenue, it was $24.1 million, up $1.1 million. Increased revenue in EMEA and APAC drove the year-over-year growth, but was somewhat offset by reduced spend in North America. We saw strong growth in revenue in our over 80 terabyte systems with revenue nearly doubling over the same period last year. We had a 22% increase in revenue from big deals and our overall DXi win rates remain strong in the mid-50th percentile. We also added approximately 85 new customers in Q3.

Finally, as it relates to data protection revenue, devices and media totaled $13.5 million in Q3 compared to $17.2 million in the prior year. Lower media revenue was the primary driver of the decline.

Turning to scale-out storage solutions, as I mentioned, our product and related service revenue increased 77% year-over-year to an all-time quarterly record of $27.2 million. We have grown quarterly revenue from our scale-out storage solutions on a year-over-year basis for more than three years straight. In Q3, we delivered strong year-over-year growth across StorNext, Lattus and related scale-out storage service offerings. We were particularly pleased with the increasing adoption of our StorNext appliances and Pro solutions, as well as the Lattus momentum.

Revenue from big deals more than tripled over the same quarter and the prior year. We delivered revenue growth in all geos over the same period in the prior year and the number of worldwide partners selling our StorNext products increased nearly 20%. Overall, scale-out storage win rates increased significantly for the quarter to the mid-80th percentile. From a customer acquisition standpoint, we added approximately 80 new scale-out storage customers in Q3.

Moving to service revenue, it was $39.2 million in Q3, up 6% from $36.9 million in the same quarter of the prior year. The increase was primarily driven by growth in branded contracts related to our StorNext appliance strategy. Royalty revenue was $10.7 million, which is flat with a year ago. A 40% year-over-year increase in LTO-6 royalties and a moderate increase in LTO-5 royalties were offset by a decrease in royalties for LTO generations 1 through 4.

Turning to gross margin, non-GAAP gross margin was 46.2% in Q3, up nearly 300 basis points when compared to 43.5% in the third quarter of fiscal 2014. The improvement reflects the positive impact of the changes we have driven in our operations, repair and service business models. In addition, we had better than expected gross margin in Q3 due to mix. Specifically, we had higher than planned royalties, which contribute approximately 100% gross margin and significantly lower OEM and media revenue, which carry lower product margins.

Looking at expenses, non-GAAP operating expenses were down $2.9 million or approximately 5%, totaling $52 million in Q3 compared to $54.9 million in the prior year. Year-over-year, our sales and marketing costs were flat. Lower salaries and benefits resulting from headcount reductions we've implemented, as well as lower marketing program spend were offset by an increase in sales commissions related to the growth and branded revenue.

Research and development expenses decreased approximately $1.9 million primarily as a result of lower headcount. General and administrative costs declined by approximately $1 million primarily related to lower facility costs. Q3 non-GAAP operating income was $13.6 million compared to operating income of $8.6 million in the same quarter a year earlier. This resulted in a non-GAAP operating margin of nearly 10%, a year-over-year improvement of nearly 400 basis points on 3% lower revenue due to the business model changes we have implemented.

Interest expense for the quarter was $2.5 million, which was flat with Q3 a year ago. This included cash interest expense of $2.1 million and amortization of debt issue cost of $400,000. The average interest rate for our convertible debt is slightly less than 4%. In Q3, we had other income of $125,000 primarily related to foreign currency gains. We recognized tax expense of $336,000 primarily related to state and foreign taxes.

Summing it up for Q3, we had non-GAAP net income of $10.9 million, or $0.04 per share, compared to non-GAAP net income of $6.2 million or $0.02 per share in the same quarter a year earlier. Our bottom line improved $4.7 million driven by changes we've made in our business model to drive profit and cash flow. Given that our non-GAAP net income level this quarter requires the inclusion of shares for our $70 million convertible debt in the EPS denominator, let me take a minute to provide additional guidance around computing non-GAAP EPS with this convert in place.

Using the if-converted method, we have included approximately 43 million additional shares related to the convert in the denominator and added $900,000 of related interest expense back to the numerator. Focusing on cash flow for the quarter and the balance sheet at December 31, I would like to highlight several key points. Cash flows provided by operations for the quarter were $2.6 million. We have generated cash from operations for five consecutive quarters and eight of the last nine quarters. EBITDA for the last 12 months was $39.3 million. CapEx was $1 million. At December 31, our debt consisted of $203.7 million of convertible debt with no covenants and no early call provisions. There were no amounts drawn on our revolver at quarter-end; therefore, we have no financial covenant compliance requirements. We ended the quarter with $109.7 million in cash and cash equivalents, our highest cash balance in nearly five years.

I want to summarize where we are for the first nine months of fiscal 2015 compared to the first nine months of fiscal 2014 excluding the one-time payment from Microsoft we received in Q1 of last year. While overall revenue is relatively flat, branded revenue is up 3% or $10 million, even with nearly 4% reduction in non-GAAP sales and marketing spend. Revenue from our scale-out storage solutions is up 60% to $71 million from $44 million in the first nine months of last year. Non-GAAP gross margins have increased 240 basis points to 45.5% from 43.1%. Non-GAAP OpEx is down 7% to $157 million compared to $168 million. We've generated $28 million of non-GAAP operating income and $20 million of non-GAAP net income in the first nine months of this fiscal year, over $19 million ahead of the first nine months of fiscal 2014.

Cash generated from operations is up more than $10 million from $500,000 and free cash flow has improved $13 million. Ending cash at December 31, 2014 was $110 million compared to $83 million a year ago. As we move into the last quarter of our fiscal year, we are well-positioned given the strong year-to-date results, the opportunity we see in our scale-out storage solutions and our business model, which is delivering better than planned operating leverage. In addition, we are further deleveraging the Company with the repurchase of $50 million of convertible notes due November 2015 in an all-cash transaction expected to close tomorrow. Now let me turn the call back over to Jon.

Thanks, Linda. Before providing guidance and turning the call over to questions, I want to reiterate some of the key things that I've been talking about last quarter regarding the near-term market opportunity and our plans for driving growth and profit and building on our strong performance to date in fiscal 2015.

First, we continue to see significant market opportunities in both scale-out storage and data protection. Customers continue to struggle with managing the data growth, particularly unstructured data such as video, audio and images, which is increasing at a rate of 60% to 80% a year according to Gartner. In addition, with data becoming more and more strategically valuable, IT departments are faced with the demand for fast access to data anytime and anywhere it's needed. Greater simplicity and ease of use is also a top priority as is finding solutions for mixed physical, virtual and cloud environments, including public, private and hybrid. And this is all occurring in a time of continued cost restraints.

These market dynamics play into the core strengths of our scale-out storage solutions. More specifically, the ability to manage large, unstructured files that are critical to driving new revenue opportunities or meeting an organization's mission is becoming a bigger issue in vertical markets such as media and entertainment, government intelligence, geospatial and oil and gas. It is also playing an increasing role in use cases such as corporate video, for example, managing marketing and training video content, as well as cyber security and surveillance where fast access to data and large scale retention are critical. These trends explain why the market for scale-out storage is expected to grow at a compound annual growth rate of nearly 20% between 2013 and 2017 according to analysts.

For data protection, the combined market for the disk-based backup appliances and tape is forecast to grow on a 10% compound annual growth rate during this period reflecting many of the trends I've mentioned and the fact that the traditional model of doing massive batch backups that treat all data the same is increasingly too inefficient and costly.

Now I've combined those growth rates and we look at that growth on a combined basis because it's how we've strategically positioned our data protection portfolio and investments to drive both growth and profitability through leveraging our large installed base of customers and our go-to-market model. Quantum is well-positioned to capitalize on the overall market opportunity as our specialized expertise in technology is ideally suited to addressing customers' evolving needs.

The latest example of this is Tuesday's announcement regarding new Quantum public cloud solutions. Although the cloud offers compelling advantages such as shifting CapEx to OpEx and enable users to scale up or down as needed, organizations with demanding data intensive workflows have been hesitant about moving data to the public cloud. The reasons include concerns about performance, security and a disruption to their existing applications and processes to implement such a use.

With this in mind, the three new Q-Cloud solutions we announced this week all center on integrating the public cloud into multitier architectures that include on-site storage, are guided by customers' existing workflow and don't require any changes in existing applications or processes. With Q-Cloud Archive and Q-Cloud Vault, the public cloud becomes an off-site storage tier for fast, on-demand access in the case of Q-Cloud Archive and long-term data retention and disaster recovery in the case of Q-Cloud Vault, but with all the data movement and storage managed by Quantum's StorNext 5 software.

Similarly, our new Q-Cloud Protect for Amazon Web Services enables customers to use physical or virtual DXi appliances on-site to easily replicate data to AWS cloud thereby incorporating the cloud and its benefits into their data protection strategies. Q-Cloud Archive and Q-Cloud Vault leverage StorNext 5's unique combination of the industry's fastest streaming file system performance and its policy-driven software that enables automated policy-based movement of data amongst multiple storage tiers. These tiers include disk, our Lattus object storage, tape and now our cloud offering both on-site and off-site thereby providing the optimal mix of performance, access, scale and efficiency.

The integration of cloud into our StorNext portfolio is similar to the introduction of our StorNext 5 based StorNext Pro solutions last spring in terms of expanding our value to the customers and expanding our market reach. In the case of StorNext Pro Solutions, which are seeing strong market adoption as we mentioned earlier, we have extended the power and the benefits of our enterprise-level StorNext offering to midmarket users with the ease of use that they require.

As we finish fiscal 2015 and look forward to 2016, we plan to capitalize on these strengths and stay focused on the growth-driving priorities we've established. First, we will continue to provide an increasingly broad range of complete StorNext solutions that improve the customer experience, significantly grow our addressable market and also entail higher ASPs.

Second, we will focus on increasing our StorNext 5 appliance footprint with large installed base customers, particularly by deploying more disk, object and tape and now cloud storage. Another priority is to continue to expand or actually extend our M&E enterprise leadership to the midmarket with particular focus on 4K workflows and Apple Xsan environments. We have a unique advantage when it comes to helping customers grow, enhance or replace their Xsan solutions because StorNext 5 and StorNext generally is 100%, yes, 100%, compatible with Xsan.

In addition to M&E workflows where we have been very strong, a fourth priority is to continue opportunistically to expand in other vertical use cases. These include, first, places where we already have a foothold such as oil and gas, geospatial applications and genomics; second, corporate video where we are seeing strong momentum; and third, new areas of opportunity like surveillance and cyber security. With the amount of data to be stored and the retention periods dramatically increasing, all of these applications or verticals are well suited to StorNext combinations of extremely high performance and policy-based management of data access to multiple tiers that I highlighted earlier.

Our final two scale-out priorities are to drive success in the cloud through our new offerings and others to come and to build on the growing interest in object storage through Lattus integrated with StorNext as an active archive in data center environments.

I also wanted to briefly mention a new focused go-to-market initiative that we have with NetApp in North America. In conjunction with NetApp, we have begun selling their branded E series disk as a part of a larger StorNext workflow solution through select media and entertainment and federal government reseller partners. Depending on how the initial period goes, we may expand the initiative in the coming fiscal year.

Now turning to data protection, our best-in-class technology in both tape and disk and the tight integration of the two are key strengths and we will continue to focus on increasing our combined tape disk marketshare to drive more profit and cash, as well as future growth.

In the area of tape, leveraging our marketshare leadership to capitalize on specific growth opportunities remains a top priority. On the DXi side, we will continue to focus on increasing our customer base and expanding our go-to-market partnerships, taking advantage of the recent portfolio refresh and the simplification we completed in Q2 with the launch of 6900. In fact, we've entered into a new partnership agreement with NetApp in this case. This relationship is a joint sales effort in Europe around a cobranded NetApp and Quantum branded DXi6900 incorporating NetApp's E series disk. This partnership is just getting started, including field training and channel and field engagement. However, we have had an early joint customer win and we expect this arrangement will increase our access to new customers. At this time, we are not in a position to give any specifics around the magnitude of the opportunity, but we are excited about it and look forward to that partnership.

Another data protection priority is to further extend the reach of our DXi technology through both Q-Cloud Protect for AWS and our original Q-Cloud Protect service, which enables managed field service providers to offer cloud-based data protection based on our DXi.

Finally, we will continue to take advantage of the increasing cost challenges posed by keeping so much data on primary storage and the related need for a new approach to backup given the problems with traditional batch backup.

With that background, I'm going to turn to guidance. For fiscal Q4, we expect revenue of $130 million to $135 million, down from Q3 based on typical seasonality. The range reflects momentum we have in scale-out storage and DXi offset by uncertainty around OEM tape and foreign currency risks. However, we also have multiple large deals and new partnerships that are difficult to forecast at this point.

Beyond revenue, we expect non-GAAP gross margin of approximately 43% to 45%, non-GAAP operating expenses of $52 million to $53 million and non-GAAP operating income of $6 million to $7 million. We also expect interest expense of $2.1 million, taxes of $500,000 and that results in non-GAAP net income of $3 million to $4 million or $0.01 to $0.02 per diluted share.

In summary, the market opportunities we are seeing, the strength of our solutions portfolio, the momentum in our business and the significant leverage in our financial model all position us well to drive year-over-year growth and increase profit as we begin the last quarter of fiscal 2015 and we get ready for fiscal 2016. Now I'll turn the call over to the operator for questions. Operator?

(Operator Instructions). Chad Bennett, Craig-Hallum.

Good afternoon. A couple of questions from me. First, congrats on the NetApp partnership and I guess can you give us an idea of why NetApp entered into the agreement and what kind of needs they have relative to dedupe and DXi? And I assume you're not factoring in any material NetApp-related revenue into your March quarter guide, but I assume longer term you wouldn't have did the deal unless you thought there was a real opportunity there. Any comments there would be great.

Sure. Let me cover why we think it's great for us and then I think that helps maybe give you my two cents. I don't like speaking for the partner, but I'll give you some color. We believe that there is a real opportunity for our technology to be in front of more customers just given the product strength. And I'm talking about DXi right now and NetApp has a great portfolio of products and they have a series of partnerships. They don't really have a product that has the heterogeneous capabilities and the performance capabilities that DXi6900 has.

If you recall, we just launched the 6900 last quarter. It is based on an OEM version of the most recent NetApp disk. And I think for them a cobranded solution, which we expect will get into some of their accounts that we don't have access to, is a really nice product to position against the competition when performance and scalability in a heterogeneous environment is necessary.

I think Europe is a good place to start because both they and us have had a lot of success in I'm not going to say deduplication, but backup appliances. I don't know if you recall, they used to have a backup appliance years ago that did quite well in Europe. So we're going to start in Europe. That was a good place for them and a good place for us.

As I said in my prepared remarks, we've got a number of very large opportunities and obviously a couple new partnerships with them that makes it hard to forecast any deals. I certainly hope and believe we'll have some, but we haven't directly incorporated them in the guidance.

And then the StorNext opportunity in North America is a little different. It's less formal, it's more -- we don't have a signed written agreement, I don't believe. What we have is an agreement where they have accounts in a couple vertical markets that are not our accounts where I think we both believe working together will result in the best overall result for the customer. Again, their E series disk is one of the tiers that we sell as a Quantum-branded product, so from an R&D perspective and getting implemented, it's pretty straightforward. And for them, it gives them an ability, when their core products aren't the right fit and that's generally I think going to be in 4K and performance type environments, they can work with us to increase the odds of getting their disk in and our tape, Lattus and software.

So I'm excited about both of them. I think the sales teams in those that are affected are excited. So for sure, we think there's opportunities. Obviously, there's the rest of the world too, but we're just going to take it a step at a time and make it as successful as possible.

Okay and that was my next question that you ended on. Do they have the same type of disk backup needs in the rest of the world or kind of holes if you want to call it?

Yes, yes, the solution portfolio is the same. I think just in a go-to-market motion and a customer need, Europe is probably the best place for us to start this and roll it out and that's what we jointly agreed with too.

Makes sense. Okay. Good enough. A couple other questions hopefully real quick. So scale-out obviously had another phenomenal quarter for you guys and based on your guide and the puts and takes of the guide, it appears it's going to have another probably 50% type plus growth quarter again.

The deal you closed in the quarter, the $4 million deal and you recognized $3 million, I don't know if you forecast those in your guidance, but can you give us a sense of if that type of -- size of deal is in your guide for the March quarter and then just give us a sense for large deals in the pipeline in the scale-out business currently?

Yes, so let me just acknowledge a couple things. We've had an increasing growth rate, sort of rough and tough, 40/60/80. I think we will grow closer to 100 than we will to 50 this quarter for sure. I just think when I look at the funnel and the opportunity that's occurring there, so I feel good about that. In addition to that, and as I also said in my prepared comments, these bigger deals are harder to forecast unless we've closed them before we show up for the call. For sure, I would say there are some large deals in our forecast, but these real big ones we tend to bucketize in what we call upside and don't really move them into forecast until we get closer. So it's a little bit of each; it just depends on the deal.

I think the thing that I'm most excited about is these are -- the places we're winning with the big solutions, these are highly competitive, very, very important and complex workflows that we do better than everybody else. And they are going to be replicable and the more we have, the more references we have, all the ones we've done are working fantastically. So we're real excited about what we have with 5 and Lattus and the disk tiers that we have and the addition of cloud is just going to differentiate us that much more. I don't think we're going to drive meaningful material cloud revenue because it's a subscription type model. You pay as you go. But I think having that feature is going to increase the number of deals that we can win in total because people are going to buy hardware on-site and in addition, they'll add the cloud as a tier. This won't be all about just adding the cloud as a tier. And that I think is also upside in our trajectory.

Then finally you and I have talked about this and we just got back from a conference where we talked about this. We feel increasingly confident about our ability to apply the technology outside of just M&E and we also see video and streaming, big streaming files as becoming more and more prevalent in other verticals. The surveillance one is a great example with the upgrade of cameras from SD to HD and the retention periods going up from 30 days to a year to forever. All those are great for us. So the scale-out thing has momentum and we started the year with a brand-new product and it's really done very well and we look forward to more growth next year.

Okay. One last for me and then I will jump off. Going into the StorNext growth rate a little bit more, you obviously went into the year with a 50% target. Last two quarters, you've beat it. Sounds like this quarter, you are probably going to beat it again unless something changes. Considering the early nature of the new verticals that you're going into and even in the media and entertainment verticals that you've had and the changes going on there with 4K and whatnot, is there any reason that that 50% target should change heading into next year?

So I know what your question is. I'm going to answer it probably in a roundabout way. I don't think we feel real opportunity-constrained as it relates to market. I think we did a really good job of focusing on an M&E vertical and it drove great results. We're going to pick one or two additional ones to focus on; surveillance will definitely be one. Cyber security, our partnership with FireEye is starting to create leads, but also their team is being trained on the solution. They're kicking off their fiscal year. Their software application's an important part of their quota program. So that will probably be the second.

So the answer to the question is I don't know what the rate's going to be; we will give some guidance next quarter, but I don't feel like we're tapped out or we're topped out in any sense of the imagination. It's really going to be about where do we invest and where do we focus.

Got it. Thanks. Nice job.

You bet. Thank you.

Eric Martinuzzi, Lake Street Capital Markets.

Thanks. I'm curious to know the seasonality of the M&E buyer. I'm used to being kind of a tech-oriented investor with a Q4 budget flush and then a reset in Q1. It sounds like you're very bullish on M&E here in what would be your Q4, calendar Q1. What is the normal seasonality for those guys?

Well, it's certainly in the big accounts where we've had a lot of history. The December quarter is not traditionally a strong M&E quarter. As we broaden out here, Eric, I think we're kind of in different types of M&E customers to be candid, not just big broadcasters as you know are in the middle of their season, etc. But the budgeting and the spend for M&E starts a little earlier and you have NAB coming in early April.

So part of -- I do think part of the strength we're seeing in or funnels is positive seasonality compared to overall negative seasonality that's just in the budget flush of December. So I think that's helping us for sure. I think year-over-year last year I think we were just flat or down a little bit if I remember right and we're talking here about real solid growth again.

Okay. And then taking it back to a high level, I notice, per usual, you gave a little bit of color into your coming fiscal year. I'm wondering is the way to look at 2016 -- is Q4 a microcosm into -- view into 2016? In other words, you've just given guidance at the midpoint for Q4 of $132.5 million. That compares to $128 million a year ago. That's 3%, 4% in Q4. Is that the same way to think about this growth that you expect in FY16?

I'm not sure I've thought about it that way. I think the way that we've talked about it is that the data center side of the house, the part we can control, we are trying to manage that as a group and have that stay as stable as possible on the branded site. On the OEM side, we're getting to a spot now -- I think we gave the percentage. So at a revenue level, I think we're almost half the size -- maybe a little bit more than half of what scale-out is. So I view that there's stabilization there, maybe a little bit of upside as these companies get stabilized.

The big thing is just how big is scale-out going to be? We're on a $110 million run rate on that. DXi is also growing, which I think is an important point to make. So 3% is a number. I think that the trend and where we're headed we would be better than that, but we haven't gotten that far in our plan yet and I actually don't know where everybody has guided.

I really -- we really like where we're positioned on scale-out and I think the data center stuff will stabilize, but there's a lot of factors outside of our control that we don't know for sure, but as a whole I think it will definitely be a growth year next year; it's just a question of how much.

Okay. And I didn't mean to ambush you there, but I just felt like we've got a little bit of growth here in Q4; it sounds like we're on that same trajectory for the coming fiscal year. Just a layer deeper, and I don't know maybe it's something to talk about, you always supply us with some trended financials. It may be time -- just I know in my own conversations, sometimes less information is actually more useful and if we could create three buckets and just talk about the growth rates of those three buckets. And by that, I mean tape and devices as bucket one and then DSS and service as bucket two and then royalty as number three. Then it actually makes it easier to communicate with investors because we can talk about those growth rates. And I know OEM's a wildcard, but in simplifying the message, I think it may actually help you guys -- an editorial comment as opposed to a question.

Hey, Eric, on that real quick, the one thing that that does, and we've tried to -- we'll probably keep doing this -- is we want to break out DXi from scale-out as I think maybe you said. We used to combine them; we're breaking them out. We aggregate them just for historical sake, but we really want to have scale-out, be standalone and we want to keep giving DXi because we think it will grow over time. But we appreciate the feedback. Maybe you and Linda can follow up on that afterwards just to talk through it.

Okay. And then the relationship that you've had with Starboard, I think we've passed the two-year anniversary at this point. Initially you started out maybe not so friendly and then I think it got friendly this past summer. And by friendly I mean they said, hey, you guys have a plan, it looks like you're making progress on it. I think the way you've characterized it in the past is if we execute our fundamentals then it's win-win all around. How does that relationship change now that we're -- as we exit FY15 and head into FY16?

Well, it doesn't change now. We've got a set of objectives we're targeted at. We expect to meet those objectives. I think your observation -- any time you add -- we've added a number of new board members, not just Starboard Board members and we went through a restructuring and we've come out of a market timing and I think they've been a part of all that. I can't speak for any director individually. I think our results, if you measure things like how profitable we are, and you measure the scale-out growth in particular ahead of what we talked about, I think everybody sees that and they all -- all the Board members see the types of deals we're winning and how the cloud stuff fits into a strategy. So I feel good about all the progress that we've made. I think the stock has responded. I think there's more stock responding that should happen and we're driving growth and profitability and paying off debt and we think that will be great for shareholders all across the board.

Okay. One more. You mentioned the debt and I forgot to ask this. You are coming up on the expiration -- not the expiration, but the ability to retire the convert in November. You cleared out $50 million of it. Could you discuss the logic there?

Yes, sure. Linda can summarize maybe afterwards. A couple quarters ago, maybe two or three, we wanted to make sure that shareholders understood what our base plan was, which was to have enough resources onhand in November to pay off the debt with the combination of our cash and our line of credit. Then we said we would opportunistically retire it sooner if it made sense for Quantum and we were able to do that in this case where we used our excess cash, we paid less than we would pay otherwise, got a positive yield and we were able to do that, so we did. We will continue to be opportunistic with the goal -- or not the goal -- the plan to have -- it will be gone before November or by November. So we were able to do it and we took advantage of it and we think that will -- again, sort of consistent with what we've been saying and how we think about it.

Okay, thank you.

Tim Klasell, Northland Securities.

Good afternoon, everybody. Just a quick question, and I'm sorry I jumped on the call a bit late. On the OEM weakness, did that happen late in the quarter or was it fairly linear throughout the quarter?

We have three OEMs on tape and I can't speak for -- they all have different quarter-ends. Their quarter-ends, a couple of them are different than ours and the one that is the same as ours is just historically a big fourth-quarter entity. So I can tell you that we were surprised where it ended up, I guess I should say it that way.

Okay, okay, fair enough. And then on the large deal, what were they using before and where were they running into trouble with that?

Yes, so there's a couple things that we provide that the historic solution didn't. One is we're -- as we've talked about, we're 100% compatible with Xsan. So any Apple-based solutions we tie in very well with. But the real driver here was the consolidation of content, the desire to have it be online and protected and to have -- able to deal with 4K and beyond performance requirements. So in this case, I believe it was a series of different solutions that we pulled together into one large one for them and provide all of that. Some of the pieces, some of the servers or some of the use of data was being backed up in a traditional sense; others were not. So it was really an infrastructure and a new large video archive that I would say fits right with our buzzwords of scalable, cost-effective, protected and probably most important in this one, performance.

Okay, great, great.

4K is a real phenomenon and it's very early and we are incredibly strong in 4K. If it's a 4K workflow and we're in it, we're going to win it. We're not in all of them, but we're hoping to be and we believe we'll be in a lot more of them given just our ability to perform.

Okay, good. And then you mentioned how hard it is to predict the pipeline with these large deals. How long of a sales cycle was this?

I'm looking around, it was probably a quarter or two, I think. These are going to be 90 day to longer. They are all different. Every deal -- when you get to deals of this size, it's why it's hard to predict them, is you just don't know when they are actually going to close or if you are going to win them until you get to the end. And it's very difficult to put in a percentage of potential wins. So we try to lump these outside of our forecast and they move into the forecast over the course of the quarter.

Perfect. Thank you very much.

You bet. Thank you.

It appears there are no further questions at this time. I'd like to turn the conference over to the speakers for any additional or closing remarks.

Well, thank you very much for attending. Just as a reminder, the March quarter is our fiscal Q4. So our call will be several weeks later just because of the audit, but we are definitely going to be out. We're at a number of conferences this quarter, a high number actually and if we haven't said it before, we do have a new IR presentation on our website with a lot of detail that further explains some of the things that Linda and I talked about today. So there's some resources there that haven't been there in a while. Thank you very much and we look forward to talking to you in May. Thanks very much.

That does conclude today's conference. Thank you for your participation.