Quantum Corp (QMCO) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quantum Corporation Third Quarter Earnings Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Shawn Hall. Sir, you may begin.

Thank you, and good afternoon, and welcome. 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 November 4, 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 the call over to Jon Gacek.

Thanks, Shawn. Welcome to our Q3 fiscal 2017 conference call. As was the case in the first two quarters of the year, we again delivered strong results, increasing both total revenue and profitability year-over-year for the third straight quarter and executing well across all of the business. More specifically, we generated $133 million in total revenue, which was up 4% over Q3 of last year, and we increased branded revenue 11% year-over-year.

Scale-out tiered storage, previously referred to as just scale-out storage, was again a key growth driver. Product and related service revenue in this category was $40 million, a 12% increase over the same period a year ago and the 22nd straight quarter of year-over-year growth. Within scale-out, we increased revenues across all three of our main scale-out verticals or use cases, media and entertainment, video surveillance and technical workflows, which includes unstructured data archiving.

At the same time, we grew total data protection revenue year-over-year for the third consecutive quarter. It increased 3% driven by branded data protection revenue, which was up 11%.

In terms of profitability, we generated $7 million of non-GAAP net income, a $2 million improvement over Q3 of last year. 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 over the first nine months of the fiscal year in delivering on our objectives of driving both revenue and increased profitability.

First, looking at year-to-date revenue, we've now grown total revenue 8% and branded revenue 13% over the same period in fiscal 2016, which is notable in an overall storage market that continues to present challenges. As I mentioned, scale-out tiered storage is a key driver of our growth.

For the first three quarters of the year, scale-out product and related service revenue is up 26% and comprises 31% of our total year-to-date revenue as we've continued to leverage our unique combination of high-performance, low-cost capacity and ready data access to help customers maximize the value of their data.

In media and entertainment, notable Q wins -- Q3 wins include large deals with several leading broadcasters and postproduction companies both in the U.S. and overseas as well as sales to one of the world's most renowned mass media publishers, a major league baseball team, a global consumer electronics company and a leading appliance manufacturer, with the last two deals centered on corporate video.

Turning to video surveillance, we generated significant year-over-year growth and closed the highest number of deals in any quarter to date. They include two large wins at police departments in Canada and India as well as smaller wins at local law enforcement agencies and a company focused on emerging cannabis growth market, where surveillance of the facility is critical. All of these deals included a combined disk-tape solution, reinforcing the power of our tiered storage value and our expertise. We also continued to expand on our technology part of ecosystem in Q3, which now consists of more than 40 companies.

As storage has taken on a larger role in users achieving their surveillance and security objectives, camera and analytics vendors in this market have begun to recognize the advantages of working closely with us. Our multi-tier storage offerings make the combination of storage performance and data retention more affordable, thereby freeing up budget for customers to spend on other elements of their surveillance infrastructure. In fact, Access Communications, the market leader in network video, recently named Quantum 2016's Technology Partner of the Year. In addition, American Security today recently named our Xcellis storage system as the Platinum award winner for the Best Video Data Storage Solution. The award recognizes outstanding product development achievements and new technology for addressing growing homeland security threats.

Moving on to technical workflows. Customers continue to turn to Quantum because of our long-standing expertise in managing large unstructured data files and our comprehensive portfolio of archive offerings encompassing object storage, tape and the cloud.

In addition to revenue from large public cloud deal we've announced and secured earlier in the year and talked about in the last few calls, we had a number of large technical workflow deals in Q3. This included wins at a leading provider of IT solution to governments at every level, a major government agency, an automotive electronics supplier that is one of the leaders in self-driving technology, an international weather forecasting agency, a top medical research institute in Australia and a major energy company. The breadth of these wins, several of which are new Quantum customers, are indicative of the opportunity we have expanded in our market reach in scale-out tiered storage.

Another highlight in Q3 which applies to all scale-out storage verticals and use cases was the release of the StorNext 5.4. This latest version of our award-winning StorNext file system and data management software enables customers to integrate their existing public cloud storage account and/or third party object storage-based private cloud as tiers in the StorNext managed environment. As a result, users can get all the benefits of StorNext while protecting prior investments and reducing the cost and the complexity of cloud administration. Another feature provides the ability to embed asset manager, data management and data application -- sharing applications in StorNext-powered Xcellis workflow storage appliances. This eliminates the need for dedicated servers and additional networking, and thereby reduces the time, cost and complexity of deploying and maintaining applications.

Turning to our data protection solutions. We are particularly pleased with our growth in the disk-based backup revenue, which was up 17% year-over-year in Q3 and 14% for the first three quarters of the year compared to the same period in fiscal 2016. This growth has been driven by strong performance in sales of our Enterprise DXi6900 products, including our new DXi6900-S introduced in Q2. The DXi6900-S incorporates flash technology to deliver ultrafast ingest, read, replication and space reclamation performance. It was also the first deduplication appliance to incorporate 8 terabyte self-encrypting drives, providing the highest density backup available and consumes 50% less power than competitive offerings.

Notable DXi6900 product family wins in Q3 included million-dollar-plus deals at an Asian taxation department, a major European insurance company and two large banks as well as large deals at a top European supermarket chain, a state-owned energy provider in Asia and a leading U.S. telecom company.

Turning to profitability. As I mentioned earlier, our non-GAAP net income of $7 million in Q3 represented a $2 million year-over-year improvement. And for the first three quarters of the year, we've generated $13 million in non-GAAP net income, a $24 million improvement over the same period in fiscal 2016 on a revenue increase of $29 million. So a $24 million profit improvement on an increase in revenue of $29 million. This demonstrates the improvements we've made in our cost structure over the past year and the leverage our financial model provides as we grow revenue.

The final point I wanted to highlight before turning the call over to Fuad is the $170 million financing package we completed in Q3. This financing package enables us to address our November 17 convertible debt and gives us substantially more operational and financial flexibility from a capital allocation and investment standpoint. We completed the financing in October after a long process where we evaluated a number of alternatives, and we are pleased with the overall package. In addition, our bank group is happy with our Q3 results and the strategic direction we're taking.

Now let me 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 the 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. As Jon said, we continue to build on the momentum of increasing revenue and rapidly improving profitability. And to that end, let me start with our revenue performance.

Total revenue for the third quarter ended December 31 was $133.5 million compared to $128 million a year ago. We grew our revenue year-over-year in both scale-out tiered storage as well as data protection. Non-royalty revenue totaled $123 million, of which 94% was branded and 6% was OEM compared to 89% branded and 11% OEM a year ago. On a year-to-date basis, total revenue was $384.5 million compared to $355.9 million for the same period last year, an 8% increase.

I will now walk through our results in more detail starting with our scale-out tiered storage solutions, also referred to in my comments as scale-out or scale-out solutions. Total product and related service revenue for our scale-out solutions was up 12% to $39.8 million compared to $35.7 million a year ago. The increase reflects the growth in our target market as well as increase in average deal size. On a year-to-date basis, total scale-out revenue grew by 26% to $117.3 million from $93.4 million in fiscal 2016. While maintaining growth in the traditionally strong media and entertainment area, we made significant progress in expanding our footprint in the video surveillance vertical and in other technical workflows, also referred to as unstructured data archive.

Overall win rates for the quarter were in the 70% range, and we added over 100 new scale-out customers in Q3.

Now turning to data protection. Total revenue, which includes both branded and OEM product and related service revenue, was $83.1 million, an increase of $2.1 million or 3% compared to Q3 of fiscal 2016. On a year-to-date basis, total data protection revenue was $238.5 million compared to $232.4 million a year ago, an increase of $6.1 million or 3%. Total tape automation systems revenue, which again, includes both branded and OEM product and related service revenue, was $44.8 million for the quarter compared to $51.2 million in Q3 of fiscal 2016. On the branded side, product and related service revenue for the quarter was $37.4 million compared to $38.5 million from the same period last year. OEM tape automation and related service revenue was $7.3 million in Q3 compared to $12.7 million in the prior year. In other words, of the $6.4 million decline in total automation revenue, $5.4 million was mostly due to the lower OEM revenue. On a year-to-date basis, total tape automation systems revenue was $132.5 million compared to $144.6 million for the same period last year, again due to lower OEM revenue.

Our tape automation win rates remain in the high 70% range, and we acquired approximately 90 new branded Enterprise and midrange customers.

Moving to our disk backup systems and related service revenue. Our total revenue was $22.9 million, up $3.3 million from the prior year. Revenue from large deals was up significantly compared to the prior year due to strong sales of our new Enterprise DXi6900-S deduplication appliance. Our overall DXi win rates were again strong in 60% range and we added 30 new customers in Q3. On a year-to-date basis, total disk backup systems and related service revenue grew from $55.1 million in fiscal 2016 to $63.1 million in fiscal '17, a 14% increase.

Finally, devices and media totaled -- media revenue totaled $15.5 million in Q3, up 51% from the prior year, driven by higher branded media revenue. On a year-to-date basis, total device and media revenue grew $10.2 million from $32.6 million in fiscal 2016 to $42.8 million in fiscal 2017.

Moving to service revenue. Our total service revenue was $36.4 million in Q3, down 2% from $37.1 million in the same quarter last year. The decrease was primarily driven by a decline in service contracts with tape automation systems partially offset by growth in our contracts for our scale-out solution.

Royalty revenue was $10.5 million, down 7% from $11.3 million in the same quarter a year ago. This primarily is a result of decreasing royalties for LTO generations 1 through 6 partially offset by increasing royalties for LTO generation 7.

Turning to gross margin. Non-GAAP gross margin was 41.4% in Q3, down from 44.2% in the same quarter of fiscal 2016. The decline essentially changes in our overall revenue mix and decreased royalty revenue. However, our year-to-date non-GAAP gross margin was essentially flat at 42.2% compared to last year.

Looking at expenses. Non-GAAP operating expenses decreased by $3.4 million on a $5.5 million increase in total revenue. Our non-GAAP operating expenses were $46.5 million in Q3 compared to $49.9 million in the prior year. Year-over-year, our sales and marketing costs decreased $3 million, consistent with our continued strategy of optimizing sales and marketing spend. R&D and G&A costs were relatively flat. On a year-to-date basis, our operating expenses decreased $11 million on $28.6 million of additional revenue.

Q3 non-GAAP operating income was $8.8 million compared to $6.7 million in the same quarter a year earlier, a 32% increase. More importantly, our year-to-date non-GAAP operating income was $18.9 million, an increase of $23.2 million. Interest expense for the quarter was $2.4 million. The average interest rate for our $140.6 million of remaining debt is 5.7%. We improved our cash flow from operations by over $26 million, generating $10.5 million of cash from operation in year-to-date period ending in Q3 2017 compared to $15.9 million of cash used in operations in the prior year. Finally, we also retired $5.4 million of our 4.5% convertible notes, realizing a 6.6% yield to the company. On that note, we will continue to look at additional buybacks if economically prudent.

With that, let me turn the call back over to Jon.

Thanks, Fuad. We began the fiscal year with a clear focus on generating solid growth and profitability and closing on a new financial package to address our November 2017 convertible debt and provide a stable capital structure into the future. As our strong performance over the first three quarters demonstrate, we've been executing well across the business, and the $170 million financial package we completed in Q3 addresses our capital needs. From a product perspective, in scale-out tiered storage, we successfully leveraged our expertise, differentiation and market opportunities to expand the use cases we can serve and drive significant growth. At the same time, we've capitalized on a more stable data protection market, drawing on our comprehensive backup and recovery solutions portfolio to deliver profit and cash flow. Finally, we've continued to expand and enhance our product portfolio in both scale-out tiered storage and data protection and made changes to our go-to-market model to better identify and execute on cross-selling opportunities. All of these actions and positive results along with the $170 million financing package we secured in Q3 provide strong validation of our strategy.

In Q4, our primary focus is to continue to expand on this strategy and build on our momentum. As a reminder, in scale-out tiered 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 media and entertainment, we will continue to capitalize on our long-standing support for traditional broadcast, production and postproduction environments, while helping to answer -- helping newer customers and prospects such as corporate, departments, sports organizations and ad agencies manage and monetize their growing video assets. In video surveillance, we remain focused on further raising the awareness of Quantum and our differentiation. Having established a broad range of ecosystem partners, we also now have a more compelling value proposition for integrators, and a key priority is making sure they understand the benefits we bring to them and their customers.

Turning to technical workflows. We will continue to leverage our industry-leading performance, our long-standing expertise in managing large unstructured data and our comprehensive portfolio of archived offerings, encompassing Object Storage, tape and the cloud. Key areas of focus will continue to include higher education, scientific research including genomics, and autonomous driving. As we've seen from a number of major wins this year, we're also very positioned to address the needs of customers that have relied on traditional NAS, but increasingly finding it can't meet their growing demands. Across all of these scale-out tiered storage verticals and use cases, we will also capitalize on the new features and benefits that StorNext 5.4 delivers, most notably, the integration with third-party public cloud offerings and the ability to run embedded applications.

With the new scale-out tape platform we announced in October, we can also provide both scale-out tiered storage and data protection customers with the most efficient and low-cost storage for unstructured data. The new platform, which includes our Scalar i3 and i6 libraries and StorNext AEL rich media archive appliance, offers best-in-class storage density, twice that of early generation rack-mounted storage libraries. This enables organizations of all sizes to reduce their data center footprint and further reduce their storage costs.

With that, let me talk briefly about data protection, where our strategic focus continues to be leveraging our technology leadership, extensive customer base and channel and technology partnerships to generate profit and cash.

In Q4, we plan to build on our momentum in enterprise deduplication, most notably with the DXi6900-S and its integrated flash technology. We also intend to capitalize on the strength of the new Scalar tape platform, which has reinforced our long-standing leadership in tape among both existing and new customers.

Now I'll address guidance for Q4. With our sales funnel continues to grow and we continue to close large deals and setting our guidance, we are not including large deals that are not mature enough to forecast in the current quarter. This is consistent with the approach to guidance we've taken this year, and as we said before, we think it's the best way to provide transparency to shareholders on the drivers of our financial results given the nature of Quantum's business.

With that background, our Q4 guidance is as follows. We expect total revenue of $120 million to $125 million, non-GAAP gross margin of 41% to 43%, non-GAAP operating expenses of $47 million to $48 million, interest expense of $2.4 million, and income taxes of $400,000 and non-GAAP earnings per share of breakeven.

Based on our year-to-date results and our Q4 guidance, we are also raising our revenue and profitability guidance for fiscal 2017. We now expect the following for the full year, total revenue increasing to $505 million to $510 million -- in the range of $505 million to $510 million; royalty revenue of at least $35 million; non-GAAP gross margin of approximately 42%; non-GAAP operating expenses of $192 million; interest expense of $8 million; and taxes of approximately $1.5 million. Non-GAAP earnings per share increasing to a range of $0.04 to $0.05.

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

(Operator Instructions) And our first question comes from the line of Eric Martinuzzi of Lake Street Capital Markets. Your line is now open.

Thanks, and congratulations on the December quarter. The growth overall, you talked about a 26% growth rate for the nine months ended December on the scale-out side, but in the December quarter, so in Q3, it was only up 11.5%, and I was interested as to why that growth rate slowed down so much in Q3.

Yes, it's a good question. I put in there the percentage of revenue that we're seeing from scale-out. Scale-out is a part of the overall company and certainly a big focus on our growth. We didn't really see any change in the market per se. In M&E, this particular quarter is never really a big growth quarter, just because you're in the middle of seasons and you're in the middle of sport seasons. Our funnels are strong there. We think we'll have a strong Q4 in that space, and again, we just -- we think our overall opportunity there continues to just increase.

So timing of deals, seasonality, it wasn't too much different than we expected as some of the deals were different, but it was pretty much where he thought we would come out, and we're off to a good start in this fiscal quarter.

Okay. And then just kind of stepping back to the total company, the revenue growth rate for the company for the nine months period, I think gives us a 7%?

8%. Yes, it's about 8%, I think.

Okay. And then based on the guidance for Q4, it's I think, the Q4 standalone is like a 2%. So blended for the year, it's about 7%. Is that conservativism in Q4? You talked about seasonally media and entertainment should be stronger here in Q4, so I'm kind of surprised that we're only getting kind of a 2% number for Q4 on the revenue front.

Yes. Again, we're -- that's why we talked about the year as well. We started the year at $500 million. I think you and the other analysts were all in the high 400s. And we just kind of continually uptick-ed that across the course of the year. That's why we raised the annual number to $510 million -- $505 million to $510 million.

Again, the nature of where the business is, I put this in the prepared comments and Fuad can address it as well, we're trying to guide consistently the same as we have all year. We've been over the high end of the range in each of the three quarters. And we're really trying not to get sucked into forecasting deals that are big and interesting, but we're not sure about. So we're comfortable with the $505 million to $510 million for the year, which is up, as you said, 7% from last year. And then we'll go execute on the quarter.

We've talked about this. I'm sure it's one of your next questions, I mean, we have some very large deals in our pipeline that we continue to pursue and believe they're nice opportunities for us and will give us a lot more veracity around some of the growth objectives that we think are capable of. A lot of it is video surveillance. We had a nice video surveillance quarter this quarter. We're teed up for a good one next quarter, but we know -- I'm not using superlatives like great and fantastic yet, which I think we have potential for.

Okay. And I know you typically give guidance for the coming year when you report your current fiscal year, and that's usually around the May timeframe. But just in broad strokes here, I'm not looking for kind of second decimal place, but do you still see Quantum as a growth story in FY '18 versus if you were to achieve the 2017 guide you got there?

Yes. You're right about the timing. We'll give detailed guidance on the next call. But in terms of direction, Fuad can add comments here, too. We think the strategy, the direction and the overall thesis is the same, that we'll see pressure on backup-like opportunities, backup tape in particular, and we'll factor those in. Growth will be delivered and driven by scale-out. And yes, we expect to grow overall revenue, we expect to grow scale-out revenue and we expect to grow profitability, all those things next year is what we're targeting. So we feel good about the overall drivers.

I'd say one more thing -- just around the numbers and the like. We're quite a bit under the expense guidance that we gave, I think $8 million or so, and we're over on revenue. And so as we always are walking this line of should we spend or to grow or should we drive profitability, and we think we've done a good job this year of balancing those. We could have spent another $8 million and our revenue probably would be higher. But those will be in investment-type areas and our profitability probably would be lower.

So this year we're very focused on profitability, growth. We've exceeded both of those. And probably more important for the long-term direction of the company, we set off this year wanting to get the company recapitalized. I think we surprised the market with what we were able to secure and what a great package that was. And so that was one of the key focuses for this year. And I think we're well set up to sort of fund the business and easily pay off the upcoming maturity.

So kind of a balancing act, Eric. I don't know, Fuad, you want to add anything there?

No. I mean, I think just to kind of amplify Jon's last comment. We are -- it is a balancing act for us. I think there's constituents that want growth and there are constituents that want profitability, and both are our shareholders. So we try to manage and balance the best we can to make sure that we have that balance. But it remains a struggle within the company for resources that are always going to be scarce and sales guys are always want more, but we have to kind of play that referee at times.

Okay. Well, that covers it for me. I certainly in -- in full disclosure mode, I wasn't a believer when you gave the outlook back in May. So you've got three quarters of evidence that says I was too much of a skeptic. So good luck on Q4.

Thanks. We appreciate you sharing that. I know we had that conversation.

And our next question comes from the line of Chad Bennett of Craig-Hallum. Your line is now open.

Great. Thanks for taking my questions. Nice job and another good quarter, guys.

Thanks, appreciate it.

So yes, just digging in a little bit on the scale-out side, and I know you guys are trying to get away from what's a large deal or what's not. But were large deals a material contributor to the business this quarter?

Are you talking about the megadeal concept?

Yes. I don't know how you -- $1 million plus. I don't know where your break point is, but yes.

We track them all separately. We haven't been disclosing them as we did last year just because we got feedback from customers that it was too transparent.

Yes.

But for sure, as the business grows, Chad, and this has happened in other times in the company's history when we were in growth mode, the deals can get lumpy that way. We definitely had some solid, a couple seven-figure type deals. And actually, I think we've had -- we might even have had one in data center this time around.

We had a couple of deals in that.

And I think the thing about that that's good is it -- we're trying to develop a run rate business. But the scale-out message and what we tell customers lends itself to these large architectural restructuring, cloud utilization, and that's going to be part of our go-forward client base and where the money is going to come from. But what we're starting to see though is that they're not so one-off that they're making the quarters lumpy. We're just adding to them. And we have a few every quarter, and we just kind of keep growing. So I think broadening out our use cases, video surveillance probably is the next impetus for lumpiness because some of those deals are really large to be candid.

Right.

And they're harder to predict. I mean, we've expected -- we've had some very large deals on our funnel for a while that we're actively working in. They can close at any point in time. What we've learned is they tend to be tied to bigger decisions and other things going around. But they're still active and they exist and they're actually growing. So I think the next place we'll cause everybody anxiety around lumpiness is when we started adding some of these large video surveillance deals that we're pursuing.

Okay, great. And so when you talked about the $500 million at the start of the year, and you talked about a scale-out growth rate that I think was a range there that was above where you're at today, can you kind of give us an update, kind of how you're thinking about the scale-out business today versus when we started the year?

Yes. So actually what we gave was a percentage of the total that we thought would be scale-out, which we said was 35% to 40%, which implied a growth. Yes, and I put in my prepared comments, we're at about 31% right now.

Yes.

And so the way that Fuad and I, and I'll have him jump in here too, it's back to this balancing act a little bit. We're not just running the business for one metric, which is scale-out revenue. I mean, we have to be balanced about it. There's no doubt that if Fuad had let the company spend another $8 million on demand generation and all that, our scale-out would be higher, but we'd probably be less profitable.

So I think I'll let him go in a second. I think we feel even better a year later in terms of the market opportunity and our relevance in some of these new markets. And I think we still have a shot to get to the 35% of total. But remember, we're doing it on higher revenue than we told -- than we predicted, and we're doing it with less expense. And so we're having a hard time being too angstful about where we are. If anything, what we're trying to do is decide what's the best place to invest in the coming year given all the traction we've seen, where we're having success and how it is kind of push forward. You want to add to that?

No, I mean, I think as you've seen year-to-date performance, it has been strong. And I think we've been pretty up front that in order to kind of look at the lumpiness, in order to avoid the lumpiness, and in your analysis, you look at everything on a year-to-date basis because that will nullify some of those big deal dynamics. So if you look at it on a year-to-date basis, our revenue is over 30%. Scale-out revenue is over 30% of the total revenue. And actually, if you take out the royalty, it's much greater than that because royalty is not related to our core product set.

So we are -- the team is performing. But we're not going to ignore the data center business at the expense of the scale-out. I mean, that's a profitable business that generates cash flow. And it is, at least on the DXi side, is growing rapidly. It's up 14%. So it's hard for me from an economic standpoint to ignore that, not be focused on the growth there. So we're going to get growth where we can. But the long-term focus is going to be scale-out.

Okay. I guess, because of the lumpiness you cited kind of quarter-to-quarter, I think what I'm trying to get, and probably not just me is, have our growth expectations for that business changed looking out over the next two years? And just to be more specific on my end, maybe you guys don't care to, is this more of a 20% growth business or a 40% growth business? Or is it somewhere in between?

So we haven't really changed our expectations without translating to the math. I think the one thing along the -- I know you people cover lots of different companies, but in storage there's not too many growth businesses at all. And so I think one of the things you're hearing us say, Chad, is we feel market opportunity to grow 20% to 40%. What we're trying to do is balance how much we spend to do that and [may] -- and decide, which investments we want to make it on.

And I think our veracity around the opportunity hasn't changed. In fact, as I've mentioned, I think we feel better. So we're going to give you better -- we'll give you more guidance. We'll get through another quarter here.

I've alluded to this. I've been specific about it. How video surveillance develop is going to matter just because of the size and the number of the deals. And so a little bit the reason we're deferring the detailed answer is we both like to see continued progress and getting some of these large deals closed, that will give us more confidence in -- when we start getting down to the numbers. But directionally, high level, 20% to 40% is reasonable. I don't know where it fits in that range for next year. I think we're going to be close to, I don't know what, is it like 160?

(Inaudible).

Yes. And so it's a bigger base than we've had. The customer base is growing well. We'll help with the modeling when we get to next quarter, but all the signs of the things that we thought were there are there absent we haven't closed any of these really large surveillance deals yet, which we think makes a difference.

Okay. One last question for me and then I'll hop off. I think that on a relative basis, the biggest upside driver that I've seen or upside part of the business that I've seen year-to-date that surprised me has been your disk growth rate and kind of your execution there. I know you talked about the 6900 and specifically the 6900-S contributing more recently to that kind of mid-teens growth rate. I guess, how much of it is the lead you have there on the 6900-S? How much of it is your main competitor now having a new parent? And how much of it is just the general dedup market kind of growth rate? Is there any way to look at it?

Yes. I think -- I believe, based upon some of the statistics, we're growing faster than the market this year.

At least in the most recent [report].

The most recent report. I mean actually we moved sort of out of the top five back into the top five in terms of market share. So two things. I'll answer your question. The 6900-S is a really good product. It's got -- it has flash, which is actually super [in vogue], and -- now you guys saw Seagate's results yesterday. They cited their 8 terabyte drive volume. That's the product -- that's the drive that we put into this technology. And both in terms of density and power consumption, it's very differentiated. So I think the product has a lot to do with it. I do think the market is better, and I guess, it's two ways. It's better overall for just traditional storage. We've also done a lot of work to develop new partnerships. With Veeam, we've announced that. We have continuing partnership with NetApp. And so, like I always say on every call, we're trying to driving more routes to market and we want to have excellent products. And I think right now, we've got a good combination of those things. And we think there is even more to do there.

What we're trying to do, though, is do it and not spend a lot of incremental money. Because if we want to spend incremental money to drive revenue, we tend to focus on scale-out on the sales side.

Right. Yes.

But as you point out, I mean, we've won some really nice deals there, and what we're finding is, it drags other products, too. So we're pretty bullish on the dedup platform, to be honest. And we've got some interesting things coming to augment it. And we -- I think we just have a very differentiated product in the market that's better than it was. I can't really tell you the numbers.

Yes. Just kind of directionally, you'd still expect that business to grow in the near future. Is that a fair assessment?

Yes. I just -- the thing I'm just hesitating on is, again, when you start growing and you get to some, right, you've got to throw money at it. You have to invest. I'll put it more positively. And really in which we want to invest, we want to invest in some of these places where we're even more differentiated. So that, again, it's back to this balancing act that Fuad and I are both referring to.

Okay, great. Nice job, guys.

Thank you.

And our next question comes from the line of Brian Alger of ROTH Capital Partners. Your line is now open.

Right, thank you. And I'll echo the congrats, guys, nice quarter.

Thank you.

You've been [fleshing] out quite a bit of the business. One of the things that surprised me at least was how strong the media came in, in the quarter. And frankly, it's been doing a little bit better this year than last year than I had expected. Are you guys taking share there? Or is there some reason why that devices and media businesses is maybe doing better than the market?

We continue -- so really good question. We've talked about this in prior years. We operate that really around profit dollars, not anything else. And there are -- because it's a commodity market, there are times when you just can't sell it and make money. And there's times when you can sell it and can make good money. And we try to take advantage of those with our brand and our position in the marketplace.

The other thing that's happening, Brian, is we believe there is a shift in tape usage to the archive, scale-out, cloud-like architectures. And that's something that we've embraced early. And as you know, our tiered storage, the way our system works, that's one of the things we try to exploit. And I think you're going to see tape media usage go up quite dramatically in an archive use case, and we're benefiting from some of that too. So it's a combination of our position in the market, a better market overall and then just the shift from media being used just as a backup media -- tape media being used as a backup media to a long-term retention target, which, as you know, is a key part of our message. And so as that grows, media will grow too.

Okay. And I guess that kind of gets to my next question. Maybe this is more for Fuad, but when I think about your business, I kind of think about the data protection as one thing, the royalty as another, and then, obviously, the scale-tiered initiatives in the various verticals you're chasing as the third. And each of those three have much different profit dynamics to each of them, not just gross margin but on an operating profit basis. If we're seeing greater value and maybe less pricing pressure for your legacy tape-based or data protection products, whether that's the media or the automation systems or even the DXi, shouldn't that be driving more EBITDA profit margin to the bottom line for the company?

I think it is. Right. I mean, I think you're seeing that. If we compare what we're -- what we did last year on a year-to-date basis versus today, I mean, it's essentially night and day. So it is driving profitability. And you're seeing that in our numbers. I think that's the correct way of looking at it.

That's right. I mean, I think your [analysis] is right and Fuad's answer is right. We could, in terms of back to the guidance, we could take that $8 million and reinvest it, and let's just say it's in scale-out. For sure, we would have a higher scale-out number. But again, we're trying to balance on profitability.

So we've said for a long time the data center side is an asset to the company, both in terms of customer base, channel partners, profitability and cash flow. And when we -- it's a lot easier to grow overall when the big part of the company is not shrinking. And so for sure, that's helped contribute. No question about it.

Conceptually, I know you guys don't segment out your costs because it's impossible and they're so intertwined and the cross-selling and cross-development is obviously pervasive. But conceptually, if I think about Quantum today, is it correct to think that the data protection portion of the business would be a profitable business and you guys are investing in the continuing growth of scale-out to the degree where that isn't adding to call it the EBITDA profits yet?

I mean, on the -- obviously, on the gross margin basis, they're all -- data protection is the highest margin. The highest margin is actually the royalty, which is nearly a profit, and data protection and then scale-out. So they are all profitable, meaningfully profitable. But their profile is little different. And Jon can tell you some of the nuances of why that is and our IP versus other people's IP that we use.

That's the gross margin line you're talking about.

And the gross margin level.

Yes.

But on a OpEx level, they are very intertwined. And some of the changes that the company has made over the last few quarters where more and more of our sales guys were selling -- they have a toolkit that includes everything. We do have some specialists but most guys on the team include everything. It's almost impossible to take that out. We incent them on -- their quotas are based on all the product sets. So it is hard to do that.

And I think -- as we've -- as our sales team has matured, they realize that they can always go into a customer with one product, but then the follow-on question is going to be what are you doing for your corporate video as an example and then you come in with another product. So it's been helpful for the company to do that. I think it's contributed to the growth on both overall growth on data protection and the scale-out side. But to unwind this, it will be -- it's difficult.

To meet a segment reporting guideline, it'd be really hard. It'd be full of allocations. In terms of the products and kind of where things go, we know what we spend on engineering. We know the gross margins. It's really sales and marketing expenses that -- and with G&A, we could allocate too. But sales and marketing is where it's very direct, but it's very difficult to allocate. But I think your intuition is right, especially this year with the data center products up. But I will tell you, this depends on if we had a GM of StorNext, he would probably be asking for an allocation, because we're selling more data center products because of the scale-out portfolio and vice versa. And so it is very intertwined. I think it's healthier at the bottom line, to be honest. It gets a better result. And we don't put multiple people calling on the same customer, which is what you would do in a more pure model.

So they are very intertwined and actually probably most important is the market is coming together and people are protect -- they use terms like protection now in scale-out because they don't want to lose these very valuable assets they have. And really the market's come together in a way that allows us to do this more than anything else. It happens to be our product portfolio supports it too, but the market has really kind of collided.

Right. And just one follow-up, last one if I might. It seems as though you guys have been pretty steady in your total OpEx this year. Congratulations, Fuad, on that. If we see the growth in the revenues, whether it's through some of these video surveillance deals coming over that's [Ransom] or -- and maybe a continuing growth in the DXi business. Is it reasonable to think that a lot of that incremental gross profit dollar would flow right through the model? Or is there a variable expense that's going to come into play?

Well, you'll pay some commissions which is variable, but it's not meaningful in terms of the gross margin that's there. So yes, those would be growth from here with this cost structure would be super accretive. I think, I thought you were going to go someplace else. As we -- as that begins to happen, we're going to have the challenge of where is the next place we want to invest. Again, as you know, we don't even have sales coverage, a person in every NFL city in the U.S. And so if we had -- our next set of investments, if you will, will be about coverage. But in terms of the opportunity and the leverage on the model, we get a lot of leverage as we grow. And so some of these video surveillance type deals, or any of these -- any growth that we get, there's a lot that makes it through to the bottom line for sure. And that's the strategy. And that gives us more confidence to be able to make some of the investment choices.

Got it. Good job, guys. Keep up the good work.

Thank you, appreciate it.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call over to management for closing remarks.

Great. Well thanks for joining today. Just as a reminder, our Q4 call will be a couple of weeks later than our typical schedule because it's our audit period. And we will be out at a few conferences over the -- several conferences, actually, over the next few months. So we hope to talk to shareholders and new shareholders then. And in the meantime, thanks for support. And we'll talk to you in May. Thanks very much.

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