Quantum Corp (QMCO) 2016 Q2 法說會逐字稿

Good day and welcome to the Quantum second-quarter earnings call conference. 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 sir.

Thank you and good afternoon. Here with me today our 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. 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 expectations currently 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 through our reports filed with the Securities and Exchange Commission from time to time, including our most recent 10-K filed on June 12, 2015 and 10-Q filed on August 13, 2015. These risk factors are incorporated by reference into today's discussion and we undertake no obligation to update them in the future.

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

Thanks, Shawn. Welcome to our Q2 fiscal 2016 conference call. As we said in our preannouncement, our momentum and scale-out stores continued and we also saw a sequential uptick in our data protection revenue. However, our total revenue of $117 million was slightly below our guidance due primarily to three main factors.

First, as explained in our preannouncement and other companies in the industry has since similarly reported, our results were impacted by an unusually high number of customers placing orders on the last day of the quarter, particularly in scale-out storage. And due to the magnitude and the timing of the orders along with a shortage of parts from our disk suppliers, we did not complete production and shipping of all the orders received. This resulted in a very atypical situation for us. Whereas our usually quarterly backlog is approximately $1 million, we ended the quarter with sales backlog of approximately $8 million, basically all of which we have now shipped.

A second key factor in our revenue results for the quarter was lower revenue from large and megadeals, even when we include the backlog. As we said before, large deals are those over $200,000 and megadeals are those over $1 million. In part, the lower revenue from such deals was due to the continued softness in the overall enterprise storage market, but it also reflected the lumpiness in large scale-out deals we've noted and experienced from time to time in the past.

We had no megadeals for the quarter, i.e. no deals over $1 million, for either data protection or for scale-out storage, versus several deals in Q2 of last year. In addition, more specifically with regard to scale-out, revenue from deals over $200,000 was approximately 10% lower than the same period in the prior year.

The final key factor in our revenue results was continued pricing pressure on commodity, low-margin devices in media. While other suppliers aggressively priced these products during the quarter, we chose not to pursue some opportunities that would have provided little or no margin. Doing so would have not been consistent with our business model of taking a balanced approach to growth and profit and data protection while focusing more exclusively on driving growth in scale-out storage. Looking forward, we are going to maximize -- we're going to be very disciplined around driving media revenue for profit and not trying to maximize revenue.

Before turning the call over to Linda to walk through the details of our results, I wanted to mention several highlights from the quarter, starting with scale-out storage. Total scale-out storage and related service revenue grew 17% year-over-year and 33% if we include the backlog. For the first six months of fiscal 2016, scale-out storage and related service grew 33% year-over-year and it's 42% if you include the backlog.

The significance of including the backlog is it provides a measure of the health of the market, our opportunity and our sales execution. But we are still below our 50% target, so I wanted to go down another layer to provide more color on what we think is going on.

First, as I mentioned, we had no scale-out storage megadeals in the quarter, including any in backlog, whereas, in Q2 of last year, we had 3.4 million of deals over $1 million. We believe the reason for the lack of large deals closing are the overall market conditions and the significance of the architectural decisions involved, both of which appear to have elongated sales cycles.

The second point I want to make about our scale-out storage and related service revenue outside of the megadeals are those deals $1 million and less. For the quarter, such deals increased 54% year-over-year, 71% if we include the backlog, and for the first six months of fiscal 2016, those deals grew 90%, including the backlog. In other words, our run rate revenue and scale-out has grown significantly, and we delivered overall growth despite a year-over-year decline in both large and megadeals.

Building a recurring revenue stream and expanding our vertical markets has been a key focus for us in scale-out storage and our underlying trends show that we are executing well and there's more opportunity for us. Over time, as our scale-out storage product line grows, we expect both increased run rate revenue and less lumpiness in our large and megadeals. Given all of this and as I'll discuss further when we talk about our plans for the remainder of the year, we continue to feel we have opportunities to achieve our 50% scale-out growth target for the full fiscal year, but I want to make it clear that we need to see a higher closure rate of large and we would definitely like to get some of the megadeals closed to achieve those results.

We continue to see momentum in corporate video where product revenue with backlog increased 14% year-over-year and key wins, including a deal of nearly $1 million with a global consumer company. Another highlight in scale-out storage was momentum beyond media and entertainment. Video surveillance revenue grew more than 200% year-over-year and our key wins included a major sale to a US metropolitan transit agency and several deals in APAC. In addition, we also completed certification with another one of the top five video management software companies, or VMS providers, and finalized a global distribution agreement with one of the largest security focused distributors in the world.

Scale-out storage revenue from technical applications, which includes genomics, oil and gas, geospatial use cases and intelligence, increased 140% year-over-year and 200% when we include the backlog. Among the key wins in this category were a $700,000 deal, $400,000 seismic analysis deal at one of the world's top oil companies, and a $170,000 deal at a leading provider of data management solutions in the oil and gas market that is building its new private cloud offering on our StorNext platform, including our Lattus ObjectStore and StorNext AEL tape archive systems.

We also had a key win in Europe, a European genomics Institute, and a top electronics company in APAC using our solutions to support geospatial applications.

Another key contributor to our scale-out storage momentum was strong sales of disk into all use cases. This reflects the fact that customers like buying complete scale-out solutions from us and that have primary storage -- and that having primary storage disks in our portfolio strengthens our overall story with our prospects. We will continue to focus on attaching disk in our scale-out storage deals, and as our disk sales further increase, we are focused on improving gross profits from these sales.

Turning to data protection, although total revenue declined year-over-year for the reasons I stated at the beginning of the call, data protection and related service revenue was up approximately 8% sequentially with higher sales across the board, including tape automation, disk-based backup, and devices and media.

One of the notable highlights was sales of our DXi4700 de-duplication appliance which serves the entry-level and lower mid-reach market. Revenue from this product was up 39% year-over-year and 144% sequentially.

In August, we also announced a new partnership with Veeam to maximize data availability for virtual environments, and we have already begun to see the benefits. By bringing together Veeam backup and replication software and the Quantum DXi, we are enabling customers to restore files in just seconds and virtual machines in minutes while reducing both on-premise and SaaS to recovery site storage costs compared to traditional backup applications. This combination also shortens backup windows and dramatically simplifies VM backups. We think this is a key partnership for us and we are quickly aligning with their sales and channel team.

The final item I wanted to highlight, which cuts across both can scale-out storage and data protection, is the growth in our US federal government business, which nearly doubled year-over-year. Our solutions portfolio is resonating with government customers as they look for ways to more easily and cost-effectively manage, analyze, and protect ever-larger data files. As a result, we are getting into new projects where our expertise and product offerings provide significant value.

In summary, we did not meet our overall financial goals for Q2, primarily due to the challenging market environment. I remain very positive about our future opportunities. We delivered our 17th consecutive quarter of year-over-year revenue growth in scale-out storage, increased data protection revenue over the prior quarter, and generated cash from operations. As I'll discuss later in the call, we also have a growing sales funnel which is 15% larger than it was at a comparable time last quarter, and we believe we are well-positioned to capitalize on it.

Now let me turn the call over to 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.

Total revenue for our second quarter ended September 30, excluding the backlog of $7.8 million, was $117 million compared to $135.1 million a year ago. Non-royalty revenue totaled $108.3 million, of which 90% was branded and 10% was OEM, compared to 86% branded and 14% OEM a year ago. In scale-out storage solutions, our product and related service revenue was $29.9 million, an all-time second-quarter record and a 17% year-over-year increase. We have grown quarterly revenue from our scale-out storage solutions on a year-over-year basis for 17 consecutive quarters. Including scale-out storage backlog of $4.1 million, we grew 33% year-over-year and 42% for the first six months of fiscal 2016, as Jon said.

Revenue from large deals, those in excess of $200,000, were down just over 10% as Q2 of 2015 included a couple of deals that were well in excess of $1 million each whereas, this quarter, we had no deals in excess of $1 million. This is the lumpiness we have talked about in comparing scale-out product revenue.

In addition to the points Jon made about our scale-out storage momentum across different products, verticals and use cases, I would note that our growth was driven by North America and EMEA and that the number of worldwide partners selling our scale-out storage solutions increased 20% over the same period last year. Overall win rates for the quarter remained strong, in the 70th percentile, and we added approximately 130 new scale-out storage customers in Q2.

Turning to our data protection products, as Jon indicated, our revenues in this area were impacted by overall market weakness in general storage and backup. In total, tape automation systems and related service revenue was $48.7 million for the quarter compared to $64.7 million in Q2 of fiscal 2015. OEM tape automation and related service revenue was down $5.2 million or 33% year-over-year. This reflected lower sales in all product categories with the largest decline in midrange libraries.

On the branded side, tape automation and related service revenue decreased $10.7 million or 22% year-over-year due to lower revenues in all product categories. As we ship the backlog, Q2 OEM and branded tape automation revenue would have been $300,000 and $1.2 million higher, respectively. Revenue from large deals, those over $200,000, was down over 30% from the same period in the prior year. However, our win rate remains strong at 77%, and we acquired approximately 90 new branded midrange and enterprise customers.

Disk systems backup and related service revenue was $18.2 million, down $3 million from the prior year. Including the backlog, quarterly revenue would have been higher by $1.6 million. We saw revenue growth in systems over 80 terabytes with revenue increasing 13% over the same period last year. However, revenue from large deals decreased more than 30%. Our overall DXi win rates remained in the 60th percentile and we added approximately 65 new customers in Q2.

Finally, as it relates to data protection revenue, devices and media totaled $11.5 million in Q2 compared to $13 million in the prior year. There was $600,000 in revenue related to devices and media and backlog at the end of the quarter. Excluding backlog, devices and media declined 11%, primarily driven by lower media revenue. However, to reiterate what Jon said, there was significant pricing pressure in the devices and media market, and we continue to make a conscious decision not to pursue some opportunities with little or no margin.

Moving to service revenue, it was $37.3 million in Q2, down 5% from $39.2 million in the same quarter last year. The decrease was primarily driven by a decline in service contracts for tape automation systems partially offset by growth in contracts for scale out storage solutions.

Royalty revenue was $8.7 million, down 19% from $10.7 million a year ago. LTO-6 royalties grew 87%, offset by a decrease in royalties for LTO generations 1 through 5.

Turning to gross margins, non-GAAP gross margin was 39.9% in Q2 compared to 46.3% in the second quarter of fiscal 2015. This decline is attributable to the year-over-year decrease in total revenue and a decrease in material margin related to changes in our overall revenue mix for the quarter.

Higher-margin service and royalty revenue decreased $3.9 million and lower margin products comprised a larger portion of our product revenue. In addition, we are experiencing overall pricing pressure in the storage market in general.

Looking at expenses, non-GAAP operating expenses decreased $600,000 totaling $52.5 million in Q2 compared to $53.1 million in the prior year. Year-over-year, our research and development expenses declined $1.6 million, primarily as a result of lower headcount and no bonus expense in Q2 of fiscal 2016.

Sales and marketing cost increased $900,000, primarily due to the higher marketing spend in markets with significant growth opportunities partially offset by lower commissions due to lower revenue. General and administrative costs were relatively flat.

Q2 non-GAAP operating loss was $5.8 million compared to operating income of $9.4 million in the same quarter a year earlier. This represents a non-GAAP operating loss of 5% in Q2, down from operating income of 6.9% in the prior year and reflecting our lower revenue and gross margin.

Interest expense for the quarter was $2 million, which included cash interest expense of $1.7 million and amortization of debt issue costs of $300,000. Interest expense decreased $500,000 from a year ago as we repaid $50 million of our convertible debt in January 2015. The average interest rate for our $153.7 million of convertible debt was slightly less than 4%.

In Q2, we had other income $700,000 primarily related to foreign-currency and investment gains in private technology venture limited partnerships. We also recognized tax expense of $300,000, primarily related to foreign and state taxes.

We had a non-GAAP net loss of $7.4 million, or $0.03 per share, compared to non-GAAP net income of $6.8 million, or $0.03 per share, in the same quarter a year earlier.

Let me now turn to cash flow for the quarter and the balance sheet at September 30. Cash flows provided by operations for the quarter were $11.2 million. On a sequential basis, accounts receivable decreased $5.1 million and manufacturing inventories decreased $11.2 million.

EBITDA for the last 12 months was $18.7 million. CapEx was $800,000. At September 30, our debt consisted of $153.7 million of convertible debt. At quarter end, there were no amounts drawn on our revolver, so we had no financial covenant compliance requirements.

On October 5, we've repaid $81 million of convertible debt due November 15, 2015 for $82.4 million, which included $1.1 million of accrued interest. During Q3, we will record a $400,000 loss on extinguishment of debt related to this transaction. To fund this transaction, we used $16.3 million in cash and $66.1 million from our $75 million revolver. We will repay holders of the remaining $2.7 million of the convertible debt no later than the November 15 maturity date.

Looking forward, we will have approximately $69 million on the revolver and $70 million in convertible debt which is due November 2017 and has a strike price of $165. The $139 million in outstanding debt will have an average interest rate of approximately 3.75%, which equates to approximately $1.5 million in interest expense per quarter.

We are currently in compliance with our debt covenants and expect to be in compliance for the next 12 months.

Now let me turn the call back over to Jon.

Thanks, Linda. As we enter the second half of the fiscal year, the storage market continues to undergo significant change and the overall economic environment remains challenging. Technologies such as flash and the cloud are proving more and more disruptive to large longtime systems vendors, resulting in a flurry of M&A activity with more expected to come. At the same time, customers are pushing out large new purchases as they try to determine the right architecture to meet their future needs while protecting prior investments.

Although Quantum is impacted by these dynamics, as evident from our first-half results not being what we had planned, we see opportunities to capitalize on the changing landscape through our tiered storage approach. For example, with the incorporation of our QXS disk arrays into our portfolio, we now offer customers primary storage that automatically moves data among flash and different types of hard disk storage within the same array and can easily be integrated into a comprehensive solution that extends this tiering to object storage, tape, and the cloud.

And when it comes to the cloud, we both provide public and private cloud options and the ability to move data between the two in a hybrid cloud architecture. In short, we can help customers incorporate new technologies into their storage architectures in nondisruptive ways that protect past investments while providing greater flexibility for the future.

So as we look forward to the remainder of the fiscal year, we continue to believe we are well-positioned to deliver significant value to customers with long-standing expertise and a powerful product portfolio. We also believe that our focus on growing scale-out storage revenue, on leveraging our data center installed base infrastructure and on increasing our overall profitability is how we can best deliver shareholder value.

In terms of scale-out storage, our strategy is to continue to expand our footprint in key vertical markets and use cases, invest in new solutions, and dedicating specialized resources to capitalize on the opportunities and leveraging our broader sales force for market coverage and customer relationships. In doing so, we will build on our momentum in three main overarching categories:

first, video production, which includes M&E generally and specific use cases such as corporate and sports video; two, intelligence and surveillance, which encompasses government, video surveillance and network forensic use cases; and three, technical applications, a very broad category that includes oil and gas, geospatial applications, genomics, and other scientific research. What all of these have in common is demanding workflows involving large, valuable data files that must be quickly captured, cost-effectively retained for analysis or reuse, and made easily available for sharing and collaboration. In other words, these markets and use cases require storage that provides high performance, low-cost capacity and easy access. And our ability to provide all three attributes in a single integrated tiered storage solution encompassing flash, spinning disk, object storage, tape and the cloud is differentiated.

To further illustrate the scale-out storage opportunity we see, I want to talk further about video surveillance and archiving of unstructured data in general IT workflows. As I said previously, these opportunities are very strategic for us as they represent increasing demands for performance and data retention and are also geographically dispersed in nature, all of which aligns very well with our solutions, our customer calling patterns, and our channel.

Video surveillance is a rapidly growing market with more and more cameras operating at higher resolutions being deployed and with requirements that capture data to be retained for increasingly longer periods of time. All of this makes the underlying storage infrastructure critically important.

Performance is essential to ensure that no video frames are dropped during ingest of the footage as dropped frames result in incomplete or degraded images, and that can undermine analysis, because budgets are not unlimited. The footage must also be retained as cost-effectively as possible. We are well-positioned to capitalize on this opportunity based on our long-standing expertise in managing video, industry-leading streaming performance, and the ability to provide multiple tiers of storage for cost efficiency within a single managed system.

Reflecting the opportunity in video surveillance, our current sales funnel in this area is up over 156% with the comparable quarter last year. Similarly, the funnel for our Artico NAS Archive appliance, which is a key element of our offerings for archiving of unstructured data in general IT workflows, is up 45% from last quarter.

Artico Provides those use case for scale (technical difficulty) and a flexible, low-cost entry point for establishing archives outside of StorNext environments. It offers substantial savings by the ability to move large, unstructured data files off primary storage to a lower-cost tier such as Lattus, tape or the cloud while maintaining full access to all files.

With this NAS connectivity, Artico expanded our adjustable market in scale-out storage. And this week we, announced another solution that goes even further.

Excellus is our next-generation high-performance storage system and overcomes the limitations of scale-out NAS by automating and simplifying data management through a unique combination of converged architecture, continuous scalability, and unified access in a single system. Powered by StorNext, it consolidates multiple workflow components, simplifying the overall storage architecture, operation and management, as well as access for third-party applications in a StorNext environment.

Excellus users can also start with a small system and smoothly scale to the largest possible system without having to replace original hardware or take the system down, thereby protecting past investments.

Lastly, by providing direct NAS support to StorNext environments, it allows all users, regardless of where they connect via SAN or NAS, to access the same data and take a multi-tier storage architecture encompassing object storage tape and cloud. All of this helps drive increased productivity and collaboration in a very cost-effective way.

In addition to adding Excellus to our scale-out storage portfolio this quarter, we also began offering Q-Cloud Vault service. Announced earlier this year and complementing Q-Cloud Archive, the new service will provide cold storage in a public cloud for long-term data retention and disaster recovery. Key features and benefits beyond general cloud advantages include, first, full integration as a tier in StorNext managed workflows with automated policy and data movement; second, no additional hardware, separate applications or programming needed; and third, straightforward pricing and billing directly from Quantum.

Customers will be able to use Q-Cloud Vault in conjunction with Lattus, including easily moving data to it from a Lattus-based cloud on-site. All of this reinforces the fact that we are fully embracing the cloud as part of a hybrid architecture, helping customers to migrate data and maximize its value in the most cost-effective way possible. This is also the case in data protection, which I'll turn to now and shortly discuss in regards to the cloud.

Our strategy in data protection is to continue to leverage our technology leadership, our extensive customer base, and our channel and technology partnerships to generate profit and cash from our offerings. While the enterprise storage market is clearly challenging, our best-of-class technology in both disk and tape and tight integration of the two are key strengths in data protection.

In December, we plan to begin offering LTO-7 technology in our scale or tape libraries with our StorNext AEL archives, libraries, to follow in subsequent months. This latest generation of LTO tape offers a low-cost, highly energy-efficient long-term storage solution for organizations struggling to manage the massive growth of unstructured data and maximize the value of their digital content. We are well-positioned to capitalize and LTO-7 as the long-standing market share leader in LTO tape automation and the fact that our Scalar an StorNext AEL systems deliver best-in-class management, monitoring, and data protection.

We also continue to engage with other ecosystem players in data protection around opportunities for collaboration, as this is the case with our new partnership with Veeam. As I mentioned earlier, by bringing together Veeam backup and replication software and our DXi de-duplication appliances, we are enabling customers to restore files in just seconds and virtual machines in minutes while reducing both on-premise and disaster recovery site storage costs compared to traditional backup applications. This combination also shortens backup windows and dramatically simplifies VM backups.

This quarter, we will also begin offering a third cloud solution in the form of Q-Cloud Protect for Amazon Web services. It enables customers to replicate from either a physical or a virtual DXi appliance on-premise to a DXi instance in the Amazon Web Services cloud. Key features -- requiring no additional changes to application or processes, it provides easy access to the Amazon public cloud and its benefits, along with cost savings from using the most efficient method of data de-duplication.

Finally, we are at the midpoint of our fiscal year and the leadership team and the Board of Directors have reaffirmed our strategy and direction of driving growth with our scale-out solutions by investing in media entertainment, surveillance and technical workflows, embracing public and private cloud architectures, driving cash flow and profit from our data protection products, and by leveraging our installed base and infrastructure to drive results across the business.

As we critically assess the market opportunities for Quantum and consider the recent M&A activity, we along with our advisors believe our strategy is aligned with the key market trends and is disruptive to traditional storage solution providers.

Now, let me close with our guidance for Q3. Based on current market conditions and the challenge in forecasting large deals given their complexity and long sales cycles, we expect total revenue of $130 million to $140 million. One uncertainty that will impact our actual revenue results for the quarter is the pricing of the commodity products in the market, specifically tape media, as we will manage our tape media revenue to maximize profit versus trying to maximize revenue.

We expect non-GAAP gross margin of 42% to 43%, non-GAAP OpEx of $48 million to $50 million, $1.4 million in interest, $400,000 in taxes, resulting in a non-GAAP EPS range of $0.02 to $0.03.

Now I would like to turn the call over to the operator to answer any questions. Operator?

(Operator Instructions). Brian Alger, ROTH Capital Partners.

I'm curious about the guidance for the operating expenses. I'm pleasantly surprised to see it ticking down quarter-on-quarter. Is that just the tightening of the belt or is there a restructuring involved allowing for the reduction?

Yes, we're going to -- Brian, thanks for the question. As we have talked about the past, we are always assessing how we are doing versus what we're spending and what we're spending it on. And so we are doing some of each. We're going to change some things where we can more aggressively make investments, but more importantly, we're just going to spend less money in places where we see less opportunity.

Great, great. Glad to see it. As we look at the surveillance market, obviously it was a nice press release the other day with the Excellus line and talking about some vertically specific products coming. Are those vertical targets?

I guess, when you bring out a new product, is that something where you're working with known customers and configuring a new product lineup for existing customers that are maybe helping you design the architecture, or is that you guys trying to assess the marketplace and then going to market, I guess creating a solution before having demand?

Yes, so in the case of Excellus, it's really a next generational step of the appliances. It has our next generation of software and has all the features that I talked about where we're really trying to simplify the implementation and management of the solution. As you know, we have a set of specific solutions that we target at the M&E market today. And those are -- think of those as being tuned for that particular use case. What we're talking about in our release is that we'll have a set of tuned appliances in surveillance as well. It's a little bit of a different market.

What we're finding, to be candid, is that, as we add VMS vendors, we've now added two of the five largest, that's where we're getting our input about how to really maximize the opportunity and experience for the customer. And as I mentioned earlier, and I won't repeat it all, our ability to have performance, scalability, and ease of access has really been well received with the surveillance community. Storage is just going to be too big of a cost of these new architectures. There is lots of input from software vendors.

Right. And it seems like a huge opportunity, just knowing how many cameras there are out there in the world. Given the complexity of that marketplace, is that going to be a longer sales cycle than what we've seen in M&E?

So yes and no. We're getting pulled into deals right away where people are either making structural changes or want to add to their existing environment. The key for us, candidly, is getting qualified with these partners. We really started this effort six months ago. We've made amazing progress in a short period of time, and the feedback has been great. And so you'll see both short sale cycle deals and then some of the real large deals, some of which I referred to as megadeals. They are just going to take a little longer because of the overall size and scale and breadth of them. But there's no shortage of interest from the surveillance community about what we're doing here. And we're all over it. I mean we're camera vendors, VMS vendors, distributors, again, a lot of progress in a short period of time.

Great. And one last one, probably for Linda here. Just a slight tick down in the royalty revenues. You mentioned that was mostly in the LTO-1 through 5. Do we expect a recovery in that as LTO-7 rolls out, or should we think of the sub $10 million level as a baseline here?

I would say we talked about the last couple of quarters, Brian, royalties coming in above our expectations, which has been a pleasant surprise. I think we'll get some uptick from LTO-7 when it's released. Offsetting that, we'll continue to have some of the downward pressure from the legacy LTO-1 through LTO-5 level. So, I expect we'll be within the ballpark of kind of where we are at today in the near term.

Great. Thanks.

Chad Bennett, Craig-Hallum.

Good afternoon. Thanks for taking my questions. So, I guess how should we think about the tape and disk business going forward considering, the first half, I think the tape business was probably down mid-upper 30s% year-over-year and the disk business was probably up -- or down mid to high teens. I mean you mentioned the tough storage environment multiple times in the call. Do these businesses just kind of run off at this rate, or do we expect any change there?

Yes, I think as we've kind of reflected in the guidance, Chad, it is definitely -- and a couple of companies reported in the last day or two. For more of the traditional types of storage environments, the market has been super choppy, super difficult and much tougher than last year. We don't see these technologies going away. We think people are evaluating different things. And we are being cautious about how we think about it in terms of both what we are spending on it and how were guiding for it.

Having said that, our funnels have grown dramatically.

And one thing we've seen over time is people can only delay purchases for so long. So, we'll see how that plays out. You know, last year, if you looked at the trend, everything was going up and pretty positive. And it has taken a decidedly downward turn in the last two quarters. We're going to have to -- we're going to continue just to monitor and evaluate. We're going to take it a quarter at a time and close all of the business that we can and adjust as necessary.

So, I guess what happens if, a couple of quarters from now, we are kind of in the same position we're in today? Do we look at the business differently at that point?

Again, I tried to spend a fair amount of time talking about how we are looking at the next two quarters. These are traditionally strong quarters for us. We'll see how they play out. We think we have the right strategy around -- you know, we're using the data center product portfolio and customers to access them for the next generation solutions. There's no question of how we're running that part of the business. It's to maximize cash and profit and leveraging the installed base and the assets and investing in trying to grow. And we're showing growth on the scale-out side. The scale-out piece, even at 45% or 42%, there's not too many storage companies growing at that rate. They are there -- it's one of the new guys that have similarly disruptive technologies. So, we have kind of been through the various parameters here.

The one thing that is true, and in a couple of quarters we'll have a better feel, is our product offerings around surveillance. Artico and Excellus have a much broader applicability than vertical markets. And we believe we'll get some really nice synergy around that. Our data center sales reps are all trained on those products now and are, in various degrees, driving or finding deals. We think that will yield a positive result going forward, and we're going to just keep monitoring it.

Okay. And then maybe one quick one for Linda. Linda, payables went up a little over $20 million sequentially. Is there anything -- any reason for that?

I'll kind of refer back to the call last quarter where we talked about balance sheet and managing the balance sheet tightly. So, I would say we are doing both that as you saw inventory come down in AR in a number of things and AP go up. And just kind of the quarter-end back-end load brings that up.

Okay. All right. Thank you.

Eric Martinuzzi, Lake Street Capital Markets.

This is Nate Fisher on the line for Eric. Thanks for taking my questions. More or less on our end, we're kind of looking out in the next few quarters in the second half, you know. Do you see kind of some seasonality in kind of the scale-out business? And I'll let you touch on that and then a couple of follow-ups.

Generally, our corporate seasonality is -- and if you look at last year, Q3 and Q4 were our strongest quarters. Historically, Q3 is up from Q2. We'd obviously like to see that occur here and our guidance reflects some of that.

The biggest challenge that I see in sort of seasonality around scale-out is really this concept of large and megadeals. Those are hard to forecast because they're so binary. And so we have multiples of those in our funnel and are working. And a lot of the sort of seasonality element will be predicated on how do we do getting those deals closed? Do customers make decisions and buy?

M&E used to be seasonally impacted in the December quarter. There might be a little bit of that for some of the verticals, but we have such a broader base now, I think our typical seasonality is more likely. And then in Q4, we'll see how Q3 ends up but, historically, or at least last year, Q4 was very strong for us.

Okay, thanks. Do you guys kind of anticipate, looking at what happened in Q2 and Q3, kind of mass people coming in at the last minute to kind of purchase some orders and kind of stuff the backlog? Do you guys kind of anticipate that again, or do you think Q3 will kind of play out as kind of a normal quarter?

It's funny you ask that. We talk about that a lot. We're expecting a more normal backlog. Part of that is just the way the holidays fall, and looking at credit order patterns and over the Christmas period. We're going to make some adjustments so that we are able to react a little bit quicker. It was an amazing last 24 hours in terms of orders. And as I mentioned earlier, we weren't the only ones that felt that. But we think it will be more in the normal course this particular quarter end.

Okay. And then kind of on the pipeline front, I'm kind of surprised to see some oil and gas wins come through just kind of the macro backdrop there as well as the kind of CapEx budgets on that side. Can you touch a little bit more on do you guys see the pipeline kind of growing in that space, or are these kind of one-off type wins for you guys?

No, we have a -- oil and gas is not a huge part of what we do, but we have some real important customers. And the reason I like your question is that both businesses are still operating. It's not as if the companies are going away. They're having to adjust what they spend money on and think about doing things differently. And there is absolutely no question that a StorNext solution or an Excellus solution where you use multiple tiers of storage is a much different solution than buying disk arrays and replicating them, and it's a lot less expensive.

So, some of what you see there is these businesses are trying to operate and deliver their results and to deal with the price of oil and all the pressures they have. They have to think about doing things differently. That actually is a very good scenario for us, and it's similar to what's happening in surveillance, to be honest. They have to think about solving the problem differently.

That makes sense. I think that's all on my end. Thanks for taking my questions, guys.

Brian Alger, ROTH Capital Partners.

Just a quick follow up. As we look at the growth in this quarter, obviously there's a seasonal impact. Are we expecting more of that growth to be coming from the scale-out, or is it going to be balanced between the data protection and the scale-out solutions?

Are you talking about the [US] sequentially?

Yes.

(inaudible). You know, overall, and as we look just down the hill or not just at the tip of our skis, growth is going to be driven by scale-out. That is the place where the market is expanding for us. We have unique positioning against the competitors. That's where we're investing money. So overall and generally, that's the case.

One of the things about this quarter, and we'll just have to see how it plays out with the economic environment, but oftentimes there's a lot of spending that occurs, often referred to as budget flush. But people -- it's a time when people true-up their systems to make sure they are prepared for the coming periods. Because of the size of our installed base, we'll probably get some of that too in this period. That's certainly what's happened historically. So, I would expect both of them would be better sequentially. And again we'll see.

I tried to not be coy and be super transparent. It was not an easy period to give guidance in because we have kind of disparate things going on. We've got a media market which we may choose to not participate in, or we may choose to participate in. That impacts revenue $5 million to $10 million. And then we've got these growing funnels with large deals that are very, very hard to forecast for the sales guys and even harder for me to give guidance about. So, we'll see how it plays out.

I like how we are positioned. I don't really like the feeling in the market, but if I give ourselves kind of a grade on last quarter, despite the backlog issue, we kind of came in midpoint of the range. We would've come in midpoint of the range. That would have been more scale-out and a little bit more data protection, as you can tell from the prepared remarks.

So, a long-winded answer to say it's some of both and we try to reflect sort of uncertainty in our guidance.

Okay. So, I guess I was hearing that the backlog was mostly -- the backlog that wasn't booked was mostly scale-out. And to a large degree, that's already shipped. So it seems like a pretty good tailwind for growth coming into this quarter, but we are still, in spite of the macro backdrop and in spite of the pricing on media and whatnot, we think the data protection side should see a sequential increase as well. Is that summarizing correctly?

Yes, that's right. That's correct.

Great. Okay. Thanks guys.

And it does appear, at this time, that there are no additional questions. I would like to turn it back to Jon Gacek for any closing or additional remarks.

Thank you. Thanks for joining us today. We look forward to talking to you in the January timeframe. There's obviously a few conferences between now and then, and we'll see how the market shapes up over the coming quarter. Thanks again.

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