Quantum Corp (QMCO) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quantum Corporation Fiscal Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I'd now like to introduce your host for today's conference, Mr. Shawn Hall, General Counsel. Sir, please go ahead.

Thank you. 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 the quantitative reconciliation of any GAAP and non-GAAP financial measures discussed today can be accessed at the Investor Relations section of our website at www.quantum.com, and will be archived for 1 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 February 2, 2017.

These risk factors are incorporated by reference into today's discussion, and we make -- 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 Q4 fiscal 2017 conference call. As we did in each of the previous 3 quarters this year, we again delivered year-over-year growth and non-GAAP profit in Q4, resulting in full year revenue growth of 6% over fiscal 2016, and a $19 million improvement in non-GAAP full year net income over the prior year. This was the first full year of both year-over-year total revenue growth and profitability since Quantum and ADIC merged in 2006.

I will talk briefly about our Q4 and full year results; Fuad will then provide more detail; and I will close with a discussion of our plans and expectations for fiscal 2018 as we build on our strong performance this past year.

Overall, our Q4 results were in line with our guidance as we generated $121 million in total revenue and $2 million of non-GAAP net income, or $0.05 per share adjusted for the reverse stock split that went into effect in mid-April. Compared to Q4 of the prior year, total revenue increased by $1 million, while non-GAAP net income declined $5 million, mainly due to lower royalty revenue and product mix. Despite this decline in Q4, non-GAAP net income for the full year improved by $19 million over fiscal 2016, as I previously mentioned.

Data protection was a clear highlight in Q4 with total revenue growing 5% year-over-year, the fourth consecutive quarter of year-over-year growth. Branded data protection sales were up 13% over Q4 of fiscal 2016 driven by a 19% increase in branded disk systems product and related service revenue.

Turning to scale-out tiered storage, we generated $31 million in product and related service revenue in Q4, which was below our expectations, and primarily reflected fewer large deals compared to the prior 2 quarters and the same quarter a year ago. However, even after the $2 million year-over-year decline in Q4, scale-out product and related service revenue for the full year grew $22 million or 17% over fiscal 2016 to just under $150 million. In addition, we believe our Q4 scale-out result is an aberration and not indicative of a negative trend. In fact, as I'll talk about later in the call, we feel very good about our ability to continue to drive strong scale-out storage growth in the new fiscal year.

We are off to a strong start in Q1. We have a solid sales pipeline. There are significant market opportunities for us to pursue, and we will continue to expand and enhance our industry-leading solutions portfolio and partner ecosystem.

In Q4, we generated $4 million in non-GAAP operating income and, as I mentioned, $2 million in non-GAAP net income. For the full year, we delivered improved non-GAAP net income of $16 million or $0.46 per diluted share adjusted for the reverse stock split. This compares to a non-GAAP net loss of $0.10 per share in fiscal 2016 on a post-split basis. In short, from fiscal 2016 through fiscal 2017, we generated a $19 million improvement in non-GAAP net income or $0.56 per share on a $29 million increase in total revenue. This demonstrates the positive changes we made in our cost structure over the past year and the leverage our financial model provides as we grow revenue.

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, starting with the revenue. Total revenue for the fourth quarter ended March 31 was $120.8 million, up slightly from $120 million a year ago. Branded revenue grew year-over-year, offsetting declines in our OEM and royalty revenue. Non-royalty revenue totaled $110.8 million, of which 93% was branded and 7% was OEM, compared to 89% branded and 11% OEM a year ago. On a full year basis, total revenue was $505.3 million compared to $476 million for the same period last year, a 6% increase.

I'll now walk through our results in more detail. Total product and related service revenue for our scale-out solutions was $31 million compared to $33.1 million a year ago. As Jon said, this decline was due primarily to a smaller number of big deals closing in Q4, including some in the video surveillance area. On a full year basis, total scale-out revenue grew by 17% to $148.4 million from $126.5 million in fiscal 2016. Even though total scale-out revenue for the quarter was below our expectations, we continue to drive growth beyond our traditional media and entertainment use cases, as we recorded number of big wins in unstructured data workflows with both private and government customers.

We also continued to make strides in our video surveillance vertical, closing the highest number of deals in the quarter-to-date, which included our first surveillance sales win in life sciences use cases. We also further expanded our certifications with video management software, or VMS, partners. In addition, we engaged -- we are engaged at a deep technical level in several large potential video surveillance opportunities globally. However, such projects have a fairly long sales cycles, and the result can be unpredictable in terms of projecting timing of closing such deals, which is why this part of our business hasn't grown as fast as we would like.

For scale-out overall, we continue to experience 70% win rates and a growing customer base, adding 85 new customers in the quarter and nearly 400 in fiscal 2017.

Turning to our data protection solutions. The business remains robust. Total revenue, which includes both branded and OEM product and related service revenue, was $79.7 million, an increase of $3.8 million or 5% compared to Q4 of fiscal 2016. This represents our fourth consecutive quarter of year-over-year growth in total revenue. On a full year basis, total data protection revenue was $318.2 million compared to $308.3 million a year ago, an increase of $9.9 million or 3%. As was the case in the prior 3 quarters, our data protection revenue growth was driven by our disk backup systems.

Total product and related service revenue for disk backup system was $21.5 million, up $3.4 million from the prior year. On a full year basis, total disk backup system product and related service revenue grew from $73.2 million in fiscal 2016 to $84.6 million in fiscal 2017, a 16% increase.

In Q4, we continued to see strong growth from our DXi6900-S Enterprise deduplication appliance. As a result, our win rates picked up to 65%, and we added 25 and 125 new customers for Q4 and the full year, respectively.

Total tape automation revenue, which, again, included both branded and OEM product and related service revenue, was $40.2 million for the quarter compared to $44.8 million in Q4 of fiscal 2016. On the branded side, total product and related service revenue for the quarter was essentially flat at $34.6 million for the same period last year. Strong sales of our new Scalar i3 and i6 tape automation products were the key revenue drivers in Q4. OEM tape automation product and related service revenue was $5.5 million in Q4 compared to $10.1 million in the prior year.

On a full year basis, total branded and OEM tape automation systems revenue was $172.7 million compared to $189.3 million for the same period, again, due largely to the successful launch of our new automation product, partially offsetting a substantial OEM revenue decline. Moreover, we continue to acquire new customers and maintain our 70% win rates. We added 50 new branded midrange and Enterprise tape automation customers during the quarter and approximately 250 for the fiscal year.

Turning to devices and media. Our Q4 revenue totaled $18.1 million, up $5 million or 38% from Q4 of last year. For the full year, devices and media revenue was $60.1 million (sic) [$60.9 million], a 33% increase over the prior year.

Moving to service revenue. Our total service revenue was $35.5 million in Q4, down 2% from $36.3 million in the same quarter last year. For the full year, service revenue totaled $144.3 million compared to $148.5 million a year earlier. The decrease was primarily driven by a decline in service contracts for tape automation systems.

Royalty revenue was $10.1 million, down 8% from $11 million in the same quarter a year ago. For fiscal 2017, royalty revenue totaled $38.8 million, down from $41.2 million in fiscal 2016, but still above what we had expected when we began the year. Royalty revenue continues to outperform our expectations, an indication of our belief that tape will continue to play a major role for us in long-term archiving and -- as part of our tiered solution.

Turning to gross margin. Non-GAAP gross margin was 43.3% in Q4, down 220 basis points from 45.5% in Q4 of fiscal '16. The decline was due to changes in overall revenue mix and decreases in both service and royalty revenue. On full year basis, non-GAAP gross margin was 42.4%, down from 43% in fiscal '16 for similar reasons.

Now looking at expenses. Non-GAAP operating expenses increased by $1.8 million from $46.4 million in Q4 of fiscal '16 to $48.1 million for the same period in fiscal '17. The growth was related primarily to R&D investments in our software-defined storage platform, which Jon will discuss in a few minutes, as well as higher commission expenses related to higher branded revenue in the period. However, for the year, our operating expenses decreased $9.2 million from fiscal '16, reflecting our strategy to optimize spend for near-term profitability given our capital structure.

As a result, our Q4 non-GAAP operating income was $4.2 million compared to $8.2 million in the same quarter a year ago. More importantly, we recorded non-GAAP operating income of $23 million in fiscal '17, an increase of $19 million over fiscal '16.

Cash interest expense for the quarter was $2.1 million and $6.7 million for the year.

We improved our cash flow from operations by over $20 million, generating $8.9 million of cash from operation in fiscal 2017 compared to $11.7 million of cash used in operations in the prior year.

We also retired $1.5 million of our 4.5% convertible notes in the quarter, realizing a 5.5% yield to the company.

Finally, to sum up. Q4 was a solid quarter that closed out a year of strong overall performance and execution. That can be encapsulated in 5 key points: one, we generated year-over-year growth and significantly improved profitability in a year of ongoing industry disruption; two, we delivered our ninth consecutive year of scale-out tiered storage growth, building on our leadership in traditional -- traditionally rich media markets and expanding our footprint in new verticals and use cases; three, despite continuing challenges in the data protection market, we turned around this part of our business, driving significant growth in disk backup system and extending our position as a market leader in tape automation; four, we delivered innovative new solutions and features for scale-out tiered storage, disk backup, and tape archive, including new ways to leverage flash technology and cloud; and finally, we secured a large financing package that addresses our November 2017 convertible debt and provides a stable, more flexible capital structure over the next 5 years. All this makes us well-positioned for further success in fiscal 2018 and beyond.

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

Thanks, Fuad. As Fuad highlighted, we delivered on our overarching fiscal 2017 objectives, most notably generating solid total revenue growth and improved profitability, completing a new financing package, and performing well across all product categories.

As we've talked about for the past 6 quarters, the overall storage market is undergoing a lot of change, and we are one of a handful of storage companies that grew this past year, and we did so while delivering profitability, too. Fiscal 2017 was a key step for Quantum, not only in delivering overall growth and increased profitability, but also in positioning the company to take advantage of the changing storage landscape, continue to the next level of growth, and create increased shareholder value. In fact, we've recently made several key announcements and continue to move forward on important initiatives that we expect will enable us to build on our momentum from fiscal 2017, and expand our scope of opportunity in fiscal 2018 and beyond.

First, we recently announced the results of extensive performance testing we conducted in 4K video environments that validated StorNext's industry-leading performance and formed the basis for a set of 4K reference architectures, both disk and flash-based. StorNext is the foundation for our scale-out tiered storage solutions, and these architectures will help customers decide which configuration is best for optimizing performance level according to their individual needs, particularly in media and entertainment environments, but also in other markets as 4K proliferates as a standard.

Another recent announcement was the introduction of our new StorNext 6 platform a few weeks ago. Providing a unique combination of industry-leading performance and automatic, policy-driven, advanced data management features, StorNext 6 is designed to help users overcome the challenges of working with growing volumes of high-resolution content, 4K and beyond, and enable them to capitalize on opportunities to remonetize or repurchase -- repurpose the content. Features include more efficient and cost-effective ways to meet project performance demands, share and access content across geographically distributed teams, and manage and protect archive content. This includes the ability to integrate third-party public and private cloud offerings in a StorNext management environment and also run embedded application, which are benefits we introduced in StorNext 5.4 last December.

Also, a few weeks ago, we announced the new partnership with Veritone, a leader in cognitive analytics. Under the partnership, Veritone aiWARE, a hybrid, on-premise and cloud version of Veritone's best-in-class, cloud-based artificial intelligence platform, will be offered as an integrated solution with StorNext. This combination will allow users to leverage the power of Veritone's cognitive analytics, along with top cognitive engines in areas such as face detection, object recognition, and transcription, to extract new value from their on-premise video and audio content without having to move it to the cloud. As a result, customers that have made significant investments in their on-premise storage and/or have cost or security concerns about storing their content in the cloud will be able to take advantage of Veritone's cognitive capabilities and analytics in a StorNext-based solution.

These 3 announcements offer significant benefits across our tiered storage markets, not just M&E. However, I'm talking about them in context of M&E because the recent National Association of Broadcasting Show, NAB, which is held in Vegas each year, is where we've had the most conversations with the users about these announcements. The response there was tremendously positive, and we've already deeply engaged with a number of customers regarding StorNext 6 and the Veritone aiWARE integration, even though the actual product offerings won't be available until this summer.

In addition, further validating the power of StorNext 6 in helping customers meet their evolving workflow demands, it won 2 top awards at NAB, NewBay Media Best of Show and Post Magazine Post Pick, and there was -- and was also a named finalist in the IABM Game Changer Awards. The NewBay Media Award recognizes technologies for innovation, future set, cost efficiency, and performance in serving the industry, and the Post Pick Award is given to a standout new product notably for its innovation. Finally, as an IABM Game Changer Award finalist, StorNext was selected not only for innovation but also for delivering significant operational and business benefits.

In addition to the 3 recent StorNext-related announcements, last week, we announced that Zhejiang Uniview Technologies Co. Ltd., one of the top 3 video surveillance integrators in China, has agreed to become a Quantum value-added reseller and strategic alliance partner. This gives us greater reach into what's expected to be the largest video surveillance market in the world by next year, and also reflects our focus on expanding our partnerships with global system integrators and surveillance.

I also want to say a bit more about the new software-defined storage platform that Fuad mentioned earlier. The platform we are developing will enable us to offer cloud native storage solutions for Kubernetes, Docker, and other container environments where enterprise-level persistence storage is a key challenge. This will expand our market opportunity and further differentiate Quantum while also improving our gross margin as we replace outside vendors with our own solution. We expect to launch our first product based on this platform later in this fiscal year. You can learn more about the open source aspects of this project at www.rook.io, that's www.rook.io.

Finally, I want to touch on the process of reconstituting the Quantum Board of Directors. Last week, we announced the addition of Adalio Sanchez and Marc Rothman to the board. Adalio and Marc have great experience that we look forward to leveraging as we drive Quantum forward. We expect to add the final new director in the reconstituted board soon, and we also expect that person to have great relevant experience and a perspective on technology and storage.

Fiscal 2017 was a key turning point for Quantum as we grew total revenue, strengthened our balance sheet, enhanced our product portfolio, and added multiple new partnerships to expand our market reach. Our strategy has been to take a balanced approach between delivering profitability and driving growth, and making sure we meet our debt obligations. We have delivered on those goals. In doing so, we have positioned Quantum to have multiple avenues and different opportunities to grow and generate cash and profit, which has also given us a choice to make on how to best drive the company forward and create value for all our shareholders.

Therefore, as soon as the new board is fully in place, we will go through a comprehensive strategic review and take a detailed look at the market and its trends, our products and solution capabilities, our sales model, R&D road maps, expenses and areas of investment, and our capital structure, and make decisions on how to take Quantum to the next level and drive shareholder value. We have a great opportunity and a lot to work with, and we want to leverage the experience and the insight of the new board to set our course and direction. When that process is complete, we will provide fiscal 2018 guidance and update our strategic direction for the rest of the year and beyond. In the meantime, our current expectation is that we will grow total revenue in Q1 driven by growth in scale-out revenue.

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

(Operator Instructions) Our first question comes from the line of Chad Bennett with Craig-Hallum.

So just relative to StorNext or scale-out growth, I think you indicated that this quarter was an anomaly in terms of what you think the potential growth rate of that business is. And just because throughout this year, it's been fairly volatile from a growth rate standpoint, I mean, in the September quarter, you grew north of 50%. But other quarters, it's kind of grown 10% or 11%, the other quarters of the year. So I guess, how should we think about the growth rate of scale-out over the next year or 2?

Well, without commenting on the rate, first. I think that we continue to believe and even as the year has progressed and we've communicated that StorNext -- the concept of what we have of high performance, tiering, and access is a solution set with a more and more broadening market opportunity. I think the fact that we've embraced the cloud is also a big asset. And the reaction that we got with StorNext 6 in terms of strategic direction kind of further validates that. So there's no question as we think about the company today that the market opportunity that exists for us in scale-out is the largest opportunity.

But even within that, we've broadened out -- in M&E, we've broadened out into new workflows. Surveillance, as Fuad pointed out, I think, a couple of times, it -- the deals are very lumpy. They're hard to predict. They're big. And in other technical workflow, which I affectionately just call other, we've definitely shown that there is market there as well. So I think, Chad, a lot of it has to do with, candidly, how much money we spend. I think, for sure, we'd have grown at a higher rate if we had spent more money.

We made a decision to spend, I don't know, $8 million or $9 million less? $8 million or $9 million less than we guided, because we were very focused on driving profitability and refinancing the debt. We don't feel opportunity constrained. I think win rates ticked up again. We're at 70%. So all that's to say, in the grand scheme, we think there's plenty of opportunity. It's a bit of a function of how much money we spend, how much we're actually going to grow. We'll -- like I said earlier in the prepared remarks, we're going to go through a strategic review, and we've added a bunch of capability even just since the end of the year.

We're really excited about the Veritone partnership. You can think of that as a fourth pillar to scale out where we're adding intelligence to what we're doing. And we're going to sit down and go through all the opportunities and what we're spending money on and where we want to head, and I think we'll be able to give you kind of the more detailed answer that you want to give.

Having said all that, we've been doing this for a while, and the strategy around investing in scale-out, I think, will -- is the key to growing in the future. And it's a matter of how much and in which marketplaces. So we've got -- I think our growth rates are 72%, 15%, 20% over the last 3 years-ish. I think 17% this year.

Final thing I'll say is growth companies, growth things like this are lumpy, and I think your quarterly point is a great one. You land a couple of large deals in a particular quarter, and it's going to make a difference in this quarter. I think we had planned on having a few of those land, and they're going to move out into this current fiscal year. I think I've said it, and Fuad did, too, we're off to a great start in scale-out for the quarter, and the growth that we see for this quarter will be driven by scale-out.

Great. And then maybe one for Fuad. Fuad, can you give us an update on the new credit facility kind of where we are covenant-wise, especially around EBITDA, and kind of how we did in the fourth quarter?

Sure, so we -- obviously, when we did the deal, we went through a pretty arduous process, including a complete business plan view. As of now, we are meeting or exceeding all the metrics on which the debt was raised. So in terms of EBITDA cover, the normal step, we're well within the ranges, in fact, better.

Okay. And then one -- maybe one last one, I think, probably for either of you. The $10 million in royalty revenue for the quarter was actually a bit better than what I was expecting. Maybe you can step out a limb on that, maybe you can't. But how should we think about royalty revenue going forward?

We talked about this. It's interesting. When we go through our planning, Chad, we basically put a haircut on that revenue on a go-forward basis because primarily, the installed base that is using tape had been backup-related, so we tend to have a declining revenue stream. So I think Fuad is going to correct me here, but I think we did around $41 million?

That's the year before.

The year before, we guided to $34 million and reported $38 million.

$39 million. $39 million.

$39 million. So the reason we do that, Chad, is obviously, it's a 100% margin, and if we hit -- it's hard to make up, if we turn out to be wrong there. The thing that's happening, and this is a good thing, this was in Fuad's comment, we see more and more media going into the scale-out like use case or the archive use case. And on a bit-by-bit basis, the media usage in a scale-out or an archive is much higher than it is in backup because in back up, the tapes get reused. In media, they do not. You put it there to be stored, and it's stored forever.

So I think, we're getting better at kind of understanding that, but the media guys don't know where the -- where it's going to land. We can see it in our own business. We feel like we've meaningfully moved the royalty for some of the large scale-out deals that we've done. And so we're tracking that closely. But I think you have to show some decline in a financial sort of model, and we normally were in the high single digits. And then we plan for it that way, and then we have done better the last 3 or 4 years. So hopefully, that helps you.

Yes, it does. I appreciate the answers.

Hey, Chad, one more thing on that, as you're -- we're thinking about it, this also public, LTO-8 will come out this year. That's a good thing. The bad thing is that the other generations will have one of their tick-downs in royalty. So generally, what happens is it ticks down and then it builds back up with a higher royalty rate on the new technology, just again, as you're thinking about a model.

Our next question comes from Eric Martinuzzi with Lake Street Capital.

I wanted to specifically dive into the Q4 shortfall, though, on the scale-out business. Does this come down to 1 or 2 large transactions? Or is this a handful of midsized transactions?

I'll start, and Fuad can give more color. I think it's a couple of things. I think it's some larger deals that we are tracking and felt like we'd close, and it also has some smaller deals that are just in sort of the normal competitive or a push-type format is what I would say. We feel good about how we started the quarter, if that helps, but we continue to feel like our opportunity set is increasing. And our win rates are going up, and so that's one of the reasons in answering Chad's question, we feel good about the scale-out growing. But specifically, a few big deals and a handful of medium-sized.

Fuad, is that a way to say it?

That's correct.

Because I know, normally, I mean, Q1 you talked historically that's been a good quarter for media and entertainment. Was there anything macro or just more Quantum-specific?

Basically, these deals, when they get bigger, are all about somebody's rearchitecting something, and often times, we're just a piece of the solution, not the whole solution. And we'll be reading and reading it closely, and we try to get executives active in those, too, so we know where they stand. But it's a great problem to have in terms of the opportunities. It's a challenge when you -- it's still the size of that product line is, it makes things lumpy. So Chad pointed out well at the beginning; we can't control when they all close. We'll take them, though.

And you did, just kind of shifting to the guidance, at least for Q1, there's many definitions of growth, and there is 1% growth, there's 6% growth. Does -- do you see Q1 from where you stand right now, is this more like you're feeling like Q1 should continue on average the growth rate that we saw in FY '17? Or is it slightly better than a year ago?

We would normally give a range. But again, given this process that we want to go through with the board, we're trying not to get too hung-up on guidance, but we wanted people to know that we expect to grow in Q1. And in fact, in January conference call, both Fuad and I talked about our trajectory on fiscal '18 was growth in both profitability and revenue, which is kind of the baseline of what we see underneath. So we'll -- again, as you know, we'll know when we know. But we're off to a really good start. It'll matter how we finish that will answer the question you asked.

Okay. And then I wanted to shift to the board, this comprehensive strategic review. This is normally the kind of thing that is done in advance of a fiscal year because it has, as you know, a massive trickle-down effect, everything from how much we're going to put into CapEx, to the sales compensation plan. To the extent this is going to be done kind of on the fly, I'm just curious to know, what -- we're going to have the final member of the Board of Directors, it appears, by the end of the month.

The time line here to me would suggest something that probably, this person, whoever he or she is, it'd be a kind of a 30- to 60-day process post their arrival, which would really put us to kind of the end of Q1, which means we might not hear about the outlook for the year until around the time of the Q1 earnings call. Is that a time line that you feel is realistic? Or could this stretch out to the next Annual Shareholder Meeting in August?

I think, we want to drive it forward. We've got -- we basically have 4 new directors to onboard, if you will, and we've already started that process to get people up to speed on what we do and how -- the details, if you will. So we are, for sure, management side of this, we want to push it forward and get it as soon as it's practical for everybody. And so the first step is to get the person on board, and then we'll drive from there. So we would definitely like to talk about it, especially if we're going to do anything different, sooner than later. But I think, as people come in -- and we've created a lot of optionality in where we see growth and where the market is kind of rewarding us for winning deals.

This unstructured data opportunity that Fuad is talking about, we saw that a little bit at the start of the year, but it has really broadened out in terms of use cases. So we want to go through that. We've got some great new industry expertise to leverage, and we want to get that input, and then come back out to you guys with -- basically, I want to make sure that we have guidance that is not just formulaic but is tied to what we're actually doing.

And then, Fuad, for the cash flow for Q4, I can't recall when you gave the outlook for what you thought FY '17 was going to be, but I had $19 million to $20 million for the year on the cash from ops. And it looks like we're coming out at $9 million. What's behind that? Is there some issue in the receivables? Or was it kind of a number of different factors?

It was primarily actually receivables. Basically, some of the payments came in about $6 million or $7 million -- about $7 million -- $6 million or $7 million later than we would have. And the other thing is that we've kind of instituted a much more, I want to say, conservative policy around how we do our payables. I think we -- in the past, the company has been -- as we were managing cash in anticipation of debt repayments or financing, I think we've kind of had more liberal policies on how often we paid our vendors. We've tightened that up. I think we have a good relationship with them. We're buying a lot, back-and-forth, so those have both been the factors.

Part of that's to drive discounting, too. Our capital structure is better, so you see, I think, payables is down $5 million -- $5 million or $6 million on a [big] business.

And just to kind of amplify on what Jon said about discounts, I mean, I think you'll see that manifest itself in inventory. Our inventory, what we carry on the balance sheet, has dropped significantly, and part of it has to do with us carrying less inventory, our vendors carrying more, or they're investing more in our business. So I think that has long-term benefits to the company.

Our next question comes from Brian Alger with ROTH Capital Partners.

A couple of questions. First, you guys talked about growth in the first fiscal quarter here and having that driven by scale-out. Should we infer from that, that you do not expect growth from the data protection side of the equation?

As we've talked about, we tend to not plan on that. We haven't all year, and, you know, we've delivered each quarter. It's a combination of things, Brian. But first, in the math sense kind of way, if you can see what the revenue was last year, I think, we did $118 million or $117 million, something like that.

$116 million.

$116 million. So mathematically, if one thing's going to go up and we're going to be in that range, other [things] will go down. Again, that's how we were thinking about it. We're off to a good strong start on scale-out, so that's the other factor. Both of us talked about it in our prepared remarks.

All right. I asked the question because it seems as though scale-out has been the bigger question mark this past fiscal year, and that is, it's been lumpy. It's been -- some quarters are fantastic and surprises to the upside; and this past quarter, obviously, a little bit light. But the data protection side, it seems to have been a little bit more consistent, at least over the past few quarters. And I'm curious if we haven't improved visibility in that end market.

Well, it's bigger, so there tends to just be more. It's about 2/3 of the company. And when we think about the sales force and what people are focused on, just you could use that roughly. The deals aren't quite as lumpy, as well. There's more run rate. There's more installed base. There's a bunch of factors that we kind of drive in a smooth line. It's interesting that we're -- the way we're talking about it, scale-out was up 17%, and data protection was up 6%. There's not -- and on the branded piece, it was even up more because the decline was really in OEM.

So when we think about the year, one of the reasons we talk about this as being such a baseline year for the company is the parts of the company that we really control and drive, branded versus the OEM and the royalty, we've had a really strong year, better than planned or more profitable than we planned. And I'm reticent to go spend more money on data center. It's not what we would plan on doing.

But one of the things that Fuad and I have seen is that both being up the product portfolio aperture to have are all of our reps being able to tell the full story and have technology that's applicable to outside of M&E companies, like the autonomous driving or a university or a bank gives us more relevance in the account, and we see that benefiting us in bigger deals. The number of stories that we have where we went and called on one thing as an opportunity and expand it into other things, they just continue to increase.

So I kind of went off of your question. I think it's a bit of a law of numbers and installed base, and it's just factual. Data protection as a segment in the market is going to continue to be under pressure just by these new architectures, and so we're pretty pleased about the fact it grew 6%. We're also pleased that it grew 7 -- scale-out grew 17%, again, compared to other peers and other people in the storage space. So we just don't see people putting up those kind of growth numbers, and we got something.

Yes, it's a well-made point. And I guess, I got 2 questions, then I'll hop off. First, if we have any clarity in terms of the operating expenses. It's one of the things you can't control in the current quarter. Do you have a sense if that's going to be something that's going to be flattish or increasing as you look to spend for growth.

And then, finally, and this is maybe a bit of a big-picture softball for you, Jon, but you had a number of developments over the past just couple of weeks, month or so, between StorNext 6, Veritone and now this surveillance reseller over in China. Is it just a matter of time before we see the inflection point? Or is it that need to actually spend in terms of the marketing and sales effort to reaccelerate the growth in that scale-out business? What's going to drive the inflection point, I guess, is the big-picture question?

Yes. I think having more access to more deals is the big inflection point, so all those announcements are important. I think the thing that people have to remember is, we finally jumped the chasm as our scale-out thing, our growth thing, has grown enough and it's gotten big enough that it can offset declines in other parts of the company. I mean, we replaced -- if you think about it in terms of a replacement strategy, we replaced $3 million or $4 million of royalty at 100% margin, and we replaced a significant amount of OEM revenue, and that's all data protection.

So when Fuad and I look at it, at some level, you can see that inflection point. We're going to have -- we're going to plan for that phenomenon again next year. What I mean by that is decline in royalty and further declines in backup for OEM. And so we've gotten to a spot now where we think the additions are greater than the declines going out, and that should give us leverage.

On top of that, some of these big deals that we have been pursuing and these new relationships that we've started, they're really hard to predict, and nobody is going to forecast them inside of sales organizations. So those items will drive the growth and will create the inflection point, we think. And I think, surveillance, as anybody has heard us present, surveillance is key, and other technical workflows is also key because the market is coming to us there.

Just to answer your question on the OpEx, we expect the OpEx will be generally flat with just one caveat being the variable cost of -- on the sales and marketing side on the revenue. But in terms of R&D and big portion of sales and marketing and G&A, it should be flat.

I'm showing no further questions in queue at this time. I'd like to turn the call back to management for any closing remarks.

Great. Thank you. We appreciate people taking the time. It's our fiscal year end, so we plan on getting our 10-K filed towards the end of the month, and we will be at a number of investor conferences over the next 1.5 months, and look forward to talking further about the progress. I really suggest you check out, rook.io.

And as people often ask, what should we be looking for from you guys to kind of tell where your growth is going? These announcements that we're talking about, these new partnerships and new routes to market are very important. So keep your eyes open on for those as well. And thanks very much for spending the afternoon with us. Talk to you soon.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.