Quantum Corp (QMCO) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2017 Quantum Corporation Earnings Conference Call. (Operator Instructions)

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

Thank you, and good afternoon. Here with me today is Jon Gacek, our CEO; and Fuad Ahmad, 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 3, 2016, and our most recent 10-Q filed on August 5, 2016. 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 over the call over to Jon Gacek.

Thanks, Shawn. Welcome to our Q2 fiscal 2017 conference call. We are very pleased with our results for the quarter as we built on Q1 momentum to deliver year-over-year growth in total revenue, scale-out storage and branded data protection, as well as increased profitability. More specifically, we generated $135 million in total revenue, which was up 15% over Q2 of last year as we continue to see success in all product categories and achieved revenue upside from multiple large deals we closed during the quarter.

In Q2, we saw a continuation of the positive market dynamics we experienced in Q1, including an overall market improvement and increased visibility across the entire business, with our expanding funnel and closing of large deals driving additional growth. Scale-out storage and related service revenue was the main growth driver in Q2, up 56% year-over-year. In terms of profitability, we had $6 million of non-GAAP net income, an improvement of $13 million over Q2 of last year, which reflects the significant leverage our financial model provides as we grow revenue.

Before I turn the call over to Fuad to walk through the details of our results, I wanted to expand on the key highlights from the quarter and our strong execution on our primary objectives over the first half of the fiscal year, namely delivering growth and increased profitability as well as addressing external concerns about the maturity of our November 2017 convertible debt.

First, looking at total revenue, our 15% year-over-year growth in Q2 followed a 5% increase in the prior quarter, resulting in a 10% growth rate for the first half of fiscal year -- of the fiscal year, compared to the first half of fiscal 2016. Similarly, we grew branded revenue year-over-year in both Q1 and Q2 at a 20% clip in Q2, resulting in a first half growth rate, excuse me, of 14%. As I said, our Q2 growth was a 56% increase in scale-out storage and related service revenue, and we set a new record of total revenue of $47 million. That was our 21st consecutive quarter of year-over-year growth, contributing to a 34% growth rate for the first half of fiscal 2017 compared to the same period a year ago.

In addition, we generated growth across all our main scale-out storage use cases, media and entertainment, video surveillance and technical workflows. In media and entertainment, we increased sales in the traditional broadcast, production and postproduction environments, where we continued to extend our industry leadership while also further growing revenue from corporate and sports video deployments. Notable customer wins include million dollar plus deals with a major media company for a multifaceted project and a global consumer electronics company for corporate video, as well as significant deals with a top consumer technology provider, a cable network and a leading apparel company, with the latter also being a corporate video use case.

We also announced a new media reference architecture for animation and visual effects workflows that is built on our Xcellis high-performance storage. This architecture overcomes a key challenge for postproduction facilities, namely the time- and resource-consuming task of transferring content between animation and editorial departments over network. In some cases, entire facilities must essentially shut down for hours each day as they copy material over the network and dedicate storage systems on both sides of the divide to writing and reading data. Our new architecture addresses this issue by optimizing storage capabilities for both animation and editorial operations in a single shared environment, thereby streamlining workflows and boosting overall efficiency and productivity.

In fact, another key Q2 win was with a major advertising agency that needed end-to-end workflow storage for visual effects, graphic and editorial finishing with automated offsite protection for the content created. The agency chose an integrated solution combining Xcellis, our QXS disk storage and the Lattus Object Store (sic - see website, "Lattus Object Storage").

Turning to video surveillance. Key wins included large deals with a government customer in South Asia, a leading car company using surveillance at its manufacturing facility, and a solar company that uses surveillance for product line quality control. The solar company needed a solution to support its headquarters and its five subsidiary locations, including the ability to handle a petabyte of archived data over the next three to four years. To meet this need, the company purchased a combination of Xcellis and other StorNext appliances along with a tape library to minimize the long-term archive cost.

During Q2, we also continued to expand our technology partner ecosystem, which has tripled over the last six months. More and more camera and analytics vendors are recognizing the benefit of partnering with Quantum because our multi-tier storage makes the combination of storage performance and data retention more affordable, thereby freeing up budget for customers to spend on cameras and analytics.

Moving on to our growth in technical workflows and unstructured data archives. We had multiple large deals, including wins at a U.S. Military agency, an electric power administrator, a global laboratory testing services provider and a European geo-spatial company. Our momentum in this area reflects the tremendous growth in large unstructured data files and customers' desire to leverage that data more strategically, our expertise to manage this type of data and our comprehensive portfolio of archiving offerings, encompassing Object Storage, tape and cloud.

The final scale-out storage highlight I wanted to mention involves a previously announced win we had secured to support a large multiyear public cloud project. This project provided a significant contribution to our scale-out storage revenue in Q2, and we expect additional revenue from this customer over the balance of 2017 and beyond. The customer and the architecture are a validation of our strategy and view that data centers of the future will increasingly depend on storage tiering to drive the appropriate balance between performance and cost.

Turning to our data protection solutions. Branded products and related service revenue grew 4% in Q2 and was also up 4% in the first half of the fiscal year compared to the same period a year earlier. Branded disk backup systems and related service revenue grew 4% year-over-year in Q2. Taken together with our strong performance in Q1, this resulted in a growth rate of 14% in branded disk backup systems and related service revenue for the first half of 2017 compared to the same period in fiscal 2016.

Notable data protection wins include $1 million-plus deal at a European banking IT support operation, a large supermarket chain and a U.S. government department, with the first two involving our new DXi6900-S deduplication appliance. The DXi6900-S, which we announced in Q2, is the first deduplication appliance to incorporate 8 terabyte self-encrypting drive, delivering the highest density backup available today and enabling customers to reduce power consumption by 50% compared to competing deduplication appliances. It also integrates the latest SSD technology to provide metadata storage and access. As a result, the DXi6900-S dramatically speeds ingest, read, replication and space reclamation performance, enabling customers to complete all these tasks several times faster than with previous DXi systems and numerous competitive products.

In addition to delivering $18 million of year-over-year revenue growth in Q2, we also significantly improved our profitability. We generated $7 million in non-GAAP operating income and $6 million in non-GAAP net income, both of which were $13 million higher than Q2 of last year. Combining our Q1 and Q2 results, our non-GAAP net income for the first half of the fiscal year was $21 million higher than the same period last year. These results reflect our revenue growth, the actions we've taken over the last year to reduce our cost structure, and our ongoing expense management.

The key point, which is worth repeating, is that we have structured our financial model to drive significant improvement in operating income as we grow revenue, and our first half results are indicative of that positive leverage.

That brings me to the final point I wanted to discuss before turning the call over to Fuad. We began this fiscal year with a clear focus on delivering solid growth and profitability, and our results in the first two quarters demonstrate our strong execution in increasing momentum. In scale-out storage, we successfully leveraged our expertise differentiation and market opportunities to expand the use cases we can serve and achieve significant growth.

At the same time, we've done a good job of capitalizing on a more stable data protection market, drawing on our comprehensive backup and recovery solution portfolio to drive profit and cash flow. Finally, we've continued to expand and enhance our product portfolio in both scale-out storage and data protection, and have made changes to our go-to-market model to better identify and execute cross-selling opportunities.

All of this has increased our confidence in what we can achieve moving forward, and this positive outlook was validated by the new $170 million financing package we announced last week with PNC Bank and TCW Direct Lending.

In working with these lenders to develop the package, we shared the details of this year's operating plan, our sales funnel, our customer base, our product roadmap and our financial projections. As a result, the lenders had the opportunity to thoroughly evaluate Quantum's business and prospects, and the structure and the size of the resulting package is a clear indication of their confidence in the company's future.

Now I'll turn the call over to Fuad.

Thank you, 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.

Turning to our results. Following our strong first quarter performance, we continued to build momentum in the second quarter across nearly all facets of our business. Total revenue for the second quarter ended September 30, 2016, was $134.7 million compared to $117 million a year ago. Non-royalty revenue totaled $125.2 million, of which 93% was branded and 7% was OEM, compared to 90% branded and 10% OEM a year ago.

As Jon said, on an year-to-date basis, total revenue was 10% higher for the six months ended September 30, 2016, compared to the same period in fiscal 2016. Product and related services revenue for our scale-out storage solutions was $46.7 million compared to $29.9 million a year ago. Revenues from large deals that was in excess of $200,000 was up significantly compared to the same quarter in the prior year, reinforcing our strength as a solution provider in a highly demanding workflow environment.

We recorded year-over-year growth across all our main scale-out storage use cases, media and entertainment, media surveillance and technical workflows. Overall, win rates for the quarter were in the 60th percentile and we added approximately 85 new scale-out storage customers in Q2.

Turning to our data protection products. Tape automation systems and related services revenue was $45.2 million for the quarter compared to $48.7 million in Q2 of fiscal 2016. On the branded side, tape automation and related services revenue decreased $1.3 million or 4% year-over-year due to lower service revenue. OEM tape automation and related service revenue was $8.4 million, down $2.2 million from a year ago. Our win rates remained strong in the high 70% range, and we acquired approximately 60 new branded tape automation customers.

Moving to our disk backup systems and related service revenue, it was $18.7 million, up $600,000 from the prior year. Our overall disk backup system win rates remained strong in mid-60s percentile, and we added approximately 40 new customers in Q2. On a year-to-date basis, disk backup systems and related service revenue grew from $35.5 million in fiscal 2016 to $40.2 million in the fiscal 2017, a 13% increase.

Finally, devices and media revenue totaled $14.6 million in Q2, up $3 million from prior year, driven by higher branded media revenue.

Moving to service revenue. Service revenue was $36.6 million in Q2, down 2% from $37.2 million in same quarter last year. The decrease was primarily driven by a decline in service contracts with tape automation systems, offset by growth in contracts for scale-out storage solution and disk backup systems. Royalty revenue was $9.5 million, up 9% from $8.7 million in the same quarter a year ago, an increase in royalties for LTO generations 6 and 7, partially offsetting a decrease in royalties for LTO generations 1 through 5.

Turning to gross margin. Our non-GAAP gross margin was 41.4% in Q2, up 150 basis points and 39.9% in the second quarter of fiscal 2016. This increase is primarily due to improved fixed cost leverage as a result of our cost optimization efforts and better improved equipment margin as a result of general price stability compared to last year.

Looking at expenses, our non-GAAP operating expenses decreased by $4.2 million on a $17.7 million increase in total revenue. Our non-GAAP operating expenses were $48.3 million in Q2 compared to $52.5 million in the prior year.

Year-over-year, our sales and marketing costs decreased $1.7 million. Research and development expenses declined $1.8 million and G&A costs declined by $800,000, all as a result of cost management actions we undertook over the last few quarters. Moreover, we continue to look for efficiencies in our cost structure as we move forward.

Q2 non-GAAP operating income was $7.5 million compared to an operating loss of $5.8 million in the same quarter a year earlier, an improvement of $13.3 million. Non-GAAP operating margin was 5.6% in Q2, up from an operating loss of 5% in the prior year, reflecting our higher revenue in gross margin improvements.

Interest expense for the quarter was $1.5 million, which included cash interest expense of $1.3 million. The average interest rate of our approximately $130 million of debt at quarter end was 3.82%.

Cash flows used in operations for the quarter were $2.6 million, consistent with higher accounts receivable position as a result of substantially higher revenue in our latest quarter.

Lastly, I want to touch on our recently announced financing package. We are very pleased with the package and believe that it should address any lingering long-term liquidity concerns. We're also excited about the external validation of our business prospects, our key strategic initiatives that it represents. Our new lender has conducted a rigorous diligence process, and while the process was arduous, the end result was agreement on common goals and alignment on future initiatives.

Key highlights of the transaction include, facility size of $170 million, with $150 million fully committed at close; pricing ranging from LIBOR plus 250 on the revolver to LIBOR plus 750 on the term loan; substantial additional availability versus our Wells facility due to higher eligibility thresholds on accounts receivable and inventory; a $20 million delayed draw term loan to redeem our convertible notes that are due in November 2017, with no interest expense until drawn; and finally, at close, we drew about $25 million of the revolver along with the $50 million of the term loan to pay off the Wells facility and closing costs.

With that, let me turn it back to Jon.

Thanks, Fuad. As I said earlier, our strong Q1 and Q2 results reflected on our successful execution on our growth and profitability objectives for the fiscal year, and we are very focused on building on this success in the second half of the year and beyond. In scale-out storage, this means continuing to drive growth by extending our leadership in media and entertainment and further expanding our footprint in both video surveillance and technical workflows with unstructured data archive needs. In data protection, we are focused on continuing to leverage our technology leadership, extensive customer base and channels and technology partnerships to generate profit and cash.

With regard to extending our leadership in media and entertainment, as I've discussed in previous earnings calls, this goes beyond the traditional broadcast production and postproduction environment we have long served. It's about helping other customers, such as corporate departments, sports organizations and virtual reality companies, manage and monetize their growing video assets. We are also well positioned to do so, offering a unique combination of industry-leading streaming performance, low-cost capacity and easy access in a single, integrated, tiered storage solution encompassing flash, spinning disk, Object Storage, tape and the cloud.

In video surveillance, we are focused on further raising awareness of Quantum and our differentiation on a -- and on continuing to expand our broad range of ecosystem partnerships. At the same time, we are continuing to provide -- we're continuing to promote the surveillance and security reference architectures we announced earlier this year. These architectures address the storage challenges presented by new fixed cameras, expansions of existing security systems and law enforcement implementation. We see significant opportunity in the surveillance market as reflected in our growing sales funnel and the size of the deals we are working.

Turning to technical workflows. A key focus for Quantum continues to be large, unstructured data archives. Because of our StorNext history, we have a long-standing expertise in managing this type of data. And over the last few years, we've built out a comprehensive portfolio of archive offerings encompassing Object Storage, tape and the cloud.

In addition, with the introduction of our Artico archive appliance last year, we have been able to serve customers in non-StorNext NAS environments that want to move data to the Quantum archive tier. The response has been very positive, and we are working to capitalize further on this opportunity.

Most recently, we announced a new Scalar tape platform, which provides the most efficient and low-cost storage for unstructured data, spanning across scale-out storage archive and data protection use cases. The new platform offers best-in-class storage density twice that of the earlier generation rack-mounted libraries, enabling organizations of all sizes to reduce their data center footprint and further reduce their storage costs.

The new product -- the first new products based on this platform, the Scalar i3 and i6 tape libraries, and the StorNext AEL6 rich media archive appliance will begin shipping next month, and we are excited about the enhanced benefits they'll provide to customers and the resulting opportunities this will create for Quantum in both scale-out storage and data protection.

Speaking of data protection, the addition of the i3 and i6 to our data protection portfolio, along with the DXi6900-S, reinforces our continued innovation in this area. As we've said in the past, our best-of-class technology in both disk and tape and tight integration of the two are key strengths for the Quantum -- for Quantum in data protection. We will continue to leverage these strengths as we look to capitalize on a more stable market and drive further success in data protection.

Now I'll address our guidance for Q3. Fuad and I have both indicated that the core business has been stable for the last several quarters and has provided us good visibility in setting our guidance. However, while our sales funnel has been growing, it includes an increasing number of large deals that are not mature enough to forecast in a given quarter, so we did not include them in our guidance.

With that said, we are continuing to close large deals, and they have been driving our revenue upside. We think this approach to guidance is the best way to provide transparency to shareholders on the drivers of our financial results, given the nature of Quantum's business. We are continuing this practice in setting our Q3 guidance. One factor I want to highlight that we're taking into account is that we had a very strong tape royalty revenue in Q3 a year ago, and we don't think that level of revenue will repeat this year.

With that background, our guidance for Q3 is as follows. We expect total revenue of $125 million to $130 million; non-GAAP gross margin of 41% to 43%; non-GAAP operating expenses of $47 million to $49 million; interest expense of $2.4 million and income taxes of $400,000; and non-GAAP earnings per share of breakeven to $0.02. Finally, we are reaffirming our annual guidance, and as a reminder, we said we expect total revenue of at least $500 million for the year.

With that, I'll turn the call over to the operator for questions. Operator?

(Operator Instructions) Our first question comes from Eric Martinuzzi with Lake Street Capital. Your line is now open.

Thanks for taking my questions and congratulations on a very eventful quarter. Curious to know, you dove into a couple of things that I was going to ask about. The revenue guide, obviously, if I look at it at the midpoint here, we are flat year-on-year. You outlined two items of issue. Large deals, hard to predict, I get that, but also the tape royalty in the same quarter a year ago. That inability to predict the large deals, is that to say that the large vendor that contributed to the first half of your fiscal year is expected to be absent in Q3?

No. That's not. We're talking about large deals that include that, but beyond that. So no. We expect, I think, in my prepared remarks, we expect revenue from our new this year cloud partner, but what we're really talking about there, Eric, is we're trying to be as transparent as we can on the things that we see and can predict. And instead of extrapolating some amount of closed deals into our guidance, we just -- we're resisting the temptation to do that. We've closed a number of them this year. It's why we're ahead of our plan or our guidance in both these first two quarters.

The market is better, our visibility is better, and we're trying to take that into account. And it's been -- we've been having better results than what we thought at the beginning of the quarter.

So our funnels are growing, we have larger deals. There's just -- it's just harder to say, yes, we can put that one in there at this point. When they've closed, by the time we have this call, oftentimes we'll close a deal like that, we'll include those. But generally, we're excluding much more than we're including.

Yes. I see that. I mean, just looking at the Q3 guide and the implied Q4 guide, it's just -- it's flat in the back half of the year, which I know is not the message that you're -- your words are saying something different than the guidance, so I guess I'll just leave it at that. The gross margins, if I look at this current quarter's guide, we've got gross margins up on what's -- potentially, revenue down, at least sequentially. What's the explanation there?

That's just mix. There's really two things. One of the reasons we highlighted the real strong royalty of last year, it's about -- compared to our run rate for the year of around $35 million, $11.6 million in the quarter would stick out, [and I'd say that's] $3 million. That's a couple of 100 bps right there. Going the other way, we just -- the mix, as we roll it up looking forward for this quarter, is a richer mix than what we just achieved. I will note that we are about 150 basis points higher than a year ago in the quarter we just closed. So generally, for us, it's about mix and we try to make the best estimate of that going into the quarter when we're giving the guidance.

Okay. And then, Fuad, can you talk to me about the mechanics of clearing out. You've just had this major milestone in the refinance package that you put together, but it's obviously addressing the revolver, you've already taken care of that. What's the mechanics of addressing the convert? Because you've already -- you've kind of signed up for the new debt obligation, and yet, there's steps to be taken to retire the old.

I mean, first of all, I think, as we've said in the past, we have -- there's no legal mechanism to retire the debt any sooner at will. I mean, they don't come due until next year. We cannot take them out any sooner or retire them anytime before they mature next year. So the mechanism for us would be to have the liquidity available drawn and/or undrawn as in the form of the delayed drawn term loan, to have the liquidity on hand with all the sources that we've closed on. And when the bonds come due, have the ability to redeem them at that point, should that be necessary or if it gets refinanced. That's another one. But the object was to have the liquidity available at the time when they -- when those bonds come due. And with this financing, we will have that.

Our next question comes from Chad Bennett with Craig-Hallum. Your line is now open.

Nice job on the quarter, guys. So just following up on Eric's questions. On the December quarter guide, I appreciate the conservatism around large deals, which I think is absolutely correct. I guess, as much as we can dig into it, you typically see a seasonal increase in your tape and disk or your overall data protection business, sequentially, in the December quarter. And I don't know if you're kind of factoring out large deals out of that business also, but I guess, I know you don't like to get in the weeds a lot, but is there any reason why we wouldn't see a seasonal increase in your data protection business this quarter?

So it's a couple of things. I think the way to answer what you've asked is if you took out the large deals that we closed last quarter, from our perspective, those are -- and put them in a bucket, we do expect a seasonal increase across data center and scale-out, both. What we don't have as much visibility on is what you just pointed out. It's the large deals that we have on our funnel, how many of those will close during the period. And as we've talked about over the last three, four quarters, these large deals that we've now gotten ourselves in position to close; it's just hard to predict them. And so we expect a seasonal uptick. I think I've said in my prepared remarks, to be over the guide that we're giving for Q3, we'll be driven on these large deals that we're definitely going to try and close. We just don't feel comfortable putting them in the guidance.

Right.

Excuse me, seasonally stronger on an apples-to-apples basis, Chad, I guess, is maybe the way to think about that.

Got it, got it. So if we look at your outperformance this quarter relative to the guide, I mean, that was entirely large deal related across both sides of the business?

I don't know if it's dollar-for-dollar, but the last two quarters, we've said the same thing where our guidance is kind of at a growth element, but it's based upon the visibility that we have and without the large deals, and then the large deals have closed and pushed us forward. It's probably not dollar-for-dollar, but clearly, a much stronger market in both in terms of the base business and the ability to get the big deals closed.

Got it. And when you gave that original -- at least $500 million guide for the year, you obviously started that off excluding large deals. And first half of the year, you've done a really good job of closing some nice deals. And the large deals were positioned as upside to that, at least $500 million, and obviously, at least, define that your own way. So would we -- I mean, I guess what I'm asking, you would think there would be upside to that $500 million, but your guide is kind of the guide, and the seasonality in the March quarter is kind of the seasonality in the March quarter. Is there -- is the business -- is demand on the run rate business or the volume business better than you expected year-to-date, ex large deals?

I would say, if I took it down a layer, the data center products have been better than we planned, and that's a big piece of the revenue pie. Interestingly, I think if you take our first two quarters together, we're at about $250 million, $251 million. We're halfway to $500 million. As you pointed out, our seasonally stronger quarters are coming. So that's why we talk about momentum and feeling great about where we are to date. We just don't want to get ahead of ourselves in terms of forecasting things that have proven to be great opportunities for us, and we're clearly adding to them, but they're really hard to predict in a given quarter.

We feel good about where we are. We felt good at the start of the year. We feel better now, for sure, and we've closed some of these things that we knew were out there.

So your points are right. Seasonally, we're stronger. We're halfway to $500 million. It's why we said, at least $500 million at the start of the year and why we're saying at least $500 million now.

No, I get it. And then just last one for me, a follow-up on the gross margin question. So I appreciate the royalty difference year-over-year in terms of mix. I guess the other negative kind of impact on gross margin was devices and media, at least compared to what I thought it would be, was decently strong this quarter, which isn't advantageous to gross margins. But if we back out devices and media and we back out royalty from the mix, so to speak, has there been margin degradation on the scale-out side or the data protection side of the business?

No, actually, Fuad has that in his comments. There's probably been a slight improvement there, it's just the overall environment is better. But one thing you brought up, which I think is a really important point, and I know I'm sure our lenders are listening to this call today. We don't have any revenue covenants, and we don't have any percentage margin covenants. We have dollar profitability covenants. And so we're trying to generate cash flow and profitability. And we've talked about this in the past. In some of these commodity markets, if it's not advantageous for us to pursue them, we don't in any given quarter. In quarters where we can make gross profit dollars, we for sure are more aggressive.

So one of the things, I think, you'll see as we digest this new capital structure is we're going to continue to be aggressive about growth, but we're really trying to drive gross profit dollars in cash flow at any given point. And so media this quarter, for example, we were just really well positioned in some nice account opportunities where we could make money and have positive cash flow by selling media, and so we'll do that.

The same is true on scale-out when we're selling third-party disks because we sell a lot of disks attached to our scale-out solutions. And when there's opportunities to generate positive cash flow and positive earnings, we're going to do that. And the opposite is true. If it's not, we won't.

Our next question comes from Brian Alger with Roth Capital Partners. Your line is now open.

Good afternoon and I'll echo the congratulations. Obviously, a solid quarter. Looking at the prior quarter, the September quarter, how much of the revenues would you say came from deals that were greater than $1 million, or as you're cost buying as large deals in aggregate?

Yes. We didn't -- we've moved away from giving the specificity around that, Brian, because we've got some feedback when we had to break it out, that it was too much competitive information. But in terms of -- if you're -- and so don't think of them as mega deals, but just think about them in deals in terms of things we didn't feel comfortable forecasting.

You can extrapolate from our words that somewhere between the high end of our guidance or above the high end of our guidance where we ended up. We're trying to guide in the most transparent way to give you -- everybody a view of where we're headed and then these larger deals that are in the funnel. And in fairness, if Bill Britts were here, we closed deals that are smaller than mega deals too that we didn't know about, and deals that we thought we were going to close, probably didn't close.

So it's not a purely a mathematical scientific thing. I think it's really about our approach to providing the guidance, the overall market tenor and feel and momentum that's in the market, and then our own position. I mean, we just have a bigger funnel, and some of the deals are there -- I mean, they're just large and you -- knowing the sales guys, just aren't going to forecast them because they're so binary. And you spread that over territories across the world, and that's what you get.

No, I appreciate the candor and the color. And frankly, I appreciate and welcome the conservatism. We certainly had a history where this is a much better way to go, at least in my opinion.

If we look at the product margins for the business, there's obviously some variability in terms of the composition of which products are selling and what's going out the door. If we look specifically at the scale-out storage products, how do they relate in terms of the product margin standpoint relative to, say, the legacy data protection market? Are they still garnering a higher gross profit dollar? Or because of the large data size, does the JBOD aspect of it pull that down?

Just depends on the mix. But generally speaking, on the data protection side, think of it this way. Our core products are all Quantum IP products, and those tend to be very good margin. That's why we're so profitable and generating so much cash flow there. On the scale-out side, we have our own IP, for sure. We sell our own Scalar AEL tape when we have some of these scale-out deals. But we do sell a lot of third-party disks, as you're referencing to, and that we don't tend to have as high a margin on as our own IP.

But generally speaking, when Fuad and I talked about this, and a blended -- overall, all the deals on scale-out, it's right around the mid-40s corporate margin. Deal-by-deal, it can vary based upon, as you point out, how much software content, how much tape content, how much cloud content, how much disk content, how much flash content.

In one of our -- as we've spoken in the past, one of our strategic objectives has been to always add more routes to market, we continue to work on that, work on our capital structure, which we've solved this quarter. The third thing we've talked about is, again, having a more IP around our spinning disk portfolio as an initiative. And we've been talking about that more this year, and you'll hear us talk about that more in the coming period. We think we have a unique approach to continuing to expand our margin by adding more of our own IP to the scale-out portfolio.

Obviously, that's where we're getting a lot of the growth. Within scale-out and if we can flesh that out a little bit, one of the areas that certainly seems attractive to me beyond your advertising and media offers is the surveillance market. One can only help but think of all these body cams and traffic cams and security cams needing to be retained for longer and longer periods of time. How is that market shaping up for you guys now that you have some dedicated products targeting that workflow?

Yes. I would say, let me give you three data points. One, we've made a ton of progress and have been very well-received in the ecosystem in terms of qualification. Our solution is a bit unique because of our tiered architecture. So the software packages we need to qualify and the cameras we need to qualify have to be able to manage and work with our tiered approach. We've got -- [I don't know] the staff, I think I said 300%, but in terms of numbers, we've got all the real big guys done, and we'll keep adding partners and our partners are starting to take us in the deals.

Second point is these deals are large, and they have a lot of Quantum IP in them. Or they tend to be small and they're deals that we call sort of catch them in flight, where people are adding some capacity, adding some cameras. So there's kind of -- there's a big standard deviation for some of the bigger deals, and then things that we just -- we capture in flight in a normal quarter.

And then finally, I'd say, the bigger the deal, the longer the sales cycle. That's what we're finding. And as our funnel has grown immensely, we've closed some deals. I'll feel more confident about how big that market can be for us as some of these deals in our funnel close. But it is -- our approach is unique in terms of storage. We've been very well received in the industry. We have begun to win some of these deals, and we've got a lot of more on the horizon. So if you hear Fuad and I speak, we think it's key over the next few years as part of our -- a driver of our growth, and it's just starting to contribute right now.

I'm showing no further questions. I would now like to turn the call back over to Jon Gacek for any further remarks.

Thank you. Well, we appreciate you taking the time today to listen to the call. We think we have had a good start to the first year, but it's just the first half. And we're very focused on continuing our momentum and building on what we've been working on over the last few years. The financing that Fuad got done, I didn't give him credit earlier, but he's been on board for about six months. It's one of the reasons we've brought him on board. We've had a number of CFOs that are affiliated with the company actually call for assistance on what they're doing. So he did a great job there. We're very pleased on that package and what it means for the company going forward. And of course, we appreciate all the support of the shareholders that dialed in. So we will talk to you soon back at -- on the Q1 call, and we'll be out talking to shareholders over the next few weeks. Thanks very much.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect. Everyone, have a great day.