Good day, ladies and gentlemen and welcome to the Quantum Fiscal Third Quarter 2020 Earnings Conference Call. All lines have been placed on a listen-only mode and the floor will be opened for your questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host for today, Rob Fink of FNK IR. Sir, the floor is yours.

Thank you, operator. I would like to welcome everyone to the call. Hosting the call today are Quantum’s Chairman and CEO, Jamie Lerner and CFO, Mike Dodson. Please be aware that some of the comments made during our call may include forward-looking statements. All statements other than statements of historical facts are statements that could be deemed forward-looking. Quantum advises caution and reliance on forward-looking statements. Forward-looking statements include without limitation and projections of revenue, margins, expenses, adjusted EBITDA, adjusted net income, cash flows or other financial items, any statements concerning the expected development, performance, market share or competitive performance relating to products or services, and the expected timing of re-listing on securities on a national exchange. All forward-looking statements are based on information available to Quantum on the date hereof. These statements involve known and unknown risks, uncertainties and other factors that may cause Quantum’s actual results to differ materially from those implied by forward-looking statements, including unexpected changes in the company’s business. More detailed information about these risks factors and additional risk factors are set forth in Quantum’s periodic filings with the SEC including, but not limited to those risks and uncertainties listed in the section entitled Risk Factors in Quantum’s quarterly report on Form 10-Q and annual report on Form 10-K as filed with the Securities and Exchange Commission. Quantum expressly disclaims any obligation to update or alter its forward-looking statements whether as a result of new information, future events or otherwise except as required by law. Also note that on this call, the company will be discussing non-GAAP financial information. Jamie and Mike are providing this information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States or GAAP. You can find a reconciliation of these metrics to the reported GAAP results in the reconciliation table provided in the company’s earnings release. I would like to remind everyone that this call will be available for replay on Quantum’s website for at least 90 days. A link to the website replay of this call was also provided in the earnings release which was issued today and which is available on the company’s website at investors.quantum.com. With all that said, I would now like to turn the call over to Jamie Lerner. Jamie, the call is yours.

Thank you, Rob. Included with our earnings release today was the announcement that we have been approved to list our shares on the NASDAQ starting on Monday, February 3. I could not be more proud of this company and our new leadership team. Our re-listing marks the end of Phase 1 of our turnaround and transformation where we settled our legacy issues with the SEC, settled our shareholder lawsuits, removed $70 million in cost on an annual basis, became cash flow positive and profitable on a GAAP basis, returned to innovation and launched 6 new products in the last year, added key new leadership and technology talent re-listed on a national exchange. With our re-listing, we now enter a second phase of transformation where we will be moving from making the organization sustainable and stable on a long-term basis to growing on a long-term basis. The second phase of transformation brings a new set of challenges, which I believe we are well positioned to tackle. The core action items for this next set of growth transformation include winning additional hyperscaler and cloud business, increasing margins by selling our technology’s unique value versus winning by discounting. Scaling revenue from our new product introductions, especially software, entering new market verticals such as surveillance and autonomous and expanding into new international media and entertainment geographies, executing key inorganic growth initiatives. We could not be more relieved and related as Phase 1 of our transformation concludes with our re-listing on the NASDAQ. When we completed our restatement and conducted our first earnings call, I laid out a vision and roadmap for a leaner, more product and technology focused Quantum, a company poised not only for growth, but profitable growth. We will not repeat the mistakes of the past. We are focused on high-quality revenue.…

Thank you, Jamie. Welcome to everyone that has joined our call today. Now, turning to our financial results for the third quarter of fiscal 2020, revenue was $103.3 million in the third quarter compared to $102 million in the year ago quarter and represents an increase of $1.3 million or 1%. This increase was driven by a 5% increase in product revenue, which is partially offset by a 4% decrease in service revenue. More specifically, product revenue increased primarily as a result of $9.8 million increase in primary storage systems driven by a higher level of government sales and a $4.2 million increase in media sales. These increases were partially offset by $10.6 million in secondary storage systems, which was primarily driven by fluctuating purchasing cycles within our hyperscale business. Royalty revenue of $4 million for the third quarter continued to be relatively light. The LTO-8 adoption was lagging from expectations primarily due to attractive pricing for the LTO-7 and the next generation LTO-9 that is 12 to 18 months away from delivery. Gross profit in the third quarter was $47.1 million or 45.6% gross margin compared to $43 million in gross profit and a 42.2% gross margin in the year ago quarter. The increase in gross margin was primarily driven by higher product gross margin of 700 basis points which was due primarily to a sales mix weighted towards more profitable product lines and cost reductions across a wide range of product offerings. Total operating expenses were $35.4 million or 34% of revenue for the third quarter compared to $39.6 million or 39% of revenue in the year ago quarter. The decrease in dollars was driven by decreases in general and administrative expenses of $2.8 million, restructuring expense of $1.3 million and sales and marketing of $1.6 million which…

Thanks Mike. We are excited to re-list on the NASDAQ and conclude the stabilization phase of our transformation and begin Phase 2 where we focus on long-term sustainable growth. I would now like to open the line for questions. Operator?

Thank you. [Operator Instructions] We will go first to Eric Martinuzzi at Lake Street Capital Markets.

Thanks. Jamie and Mike, I am curious on the revenue reset if I take a look at the full year just so we don’t get into the puts and takes of individual quarters, the revenue midpoint previously was $427 million and now the revenue midpoint is $410 million, I am curious to know what are the variances of that $17 million variance, how much of that is due to hyperscaler not being what you thought it would be this fiscal year? How much of that is due to maybe royalty being below what you thought it would be this year? If you could parse that out, I would appreciate it.

Sure. When we look at our full year, we would attribute that decrease almost entirely to the hyperscaler, to volatility in the hyperscaler revenue. We saw part of that decrease in the current quarter. And when we look forward to the fourth quarter, obviously, it’s our softest quarter of the year, but the difference in our annual guidance would be almost entirely attributed to the hyperscaler just the timing of hyperscaler revenue. We don’t see the demand going down. We don’t see any competitive issues. But it’s just simply the timing of when the revenue will come in.

Okay. And that’s to say that it is volatile and I know obviously near-term it’s volatile to the bad, it can also be volatile to the good, but are you just proactively stripping it out and being overly conservative potentially here, or is it truly, hey, this isn’t going to be till FY ‘21?

Well, I would say that we are not in a position to be overly conservative, but we are being conservative in our guidance. But we do have relatively good guidance from our customers and that would be the basis of what we are providing.

Okay, okay. And then I wanted to shift over, obviously you are having good success with the F-Series there, you talked about it software defined architecture of the F-Series and I want to make sure I understand that, because I get the idea of slick technology in a box, but I want to make sure I understand the value-add of the software-defined on top of that?

Yes, the – part of the transformation we are making is to sell the software independent of the hardware, not have them bolted together or technically combined allowing us to transform into more of a software company, allow us to get the full value of our software, allow that software to run on commodity hardware or even let that software run directly on the cloud. So the F-Series is architected that way and we are removing with StorNext over the next couple of months as StorNext will actually just be sold as software and you will have to buy a software license for it and then you have a variety of different choices of hardware to run it on, but it will be actually completely unbundled and uncoupled going forward.

Okay. The gross margin on the product side terrific job there that I’ve got into 34% on the product, I look back as far as my current model shows and I don’t see it ever better than that? What should we be thinking about from product gross margin? Was that a one-time anomaly here or is that kind of a current run-rate from which we can improve?

Yes. I would say we were very pleased with the gross margin this quarter. We had a good mix. I wouldn’t say that, that is now the new norm per se. When you look at our products at the low end of our gross margin with media, we are in the mid to high single-digits and then you look at our royalty which is 100%. So we have a wide range of margin contribution and when we look at the mix of what goes into our revenue. So we do everything we can from a managing our business. We really are driven by gross margin dollars and providing earnings to the bottom line. We are not going to do discounting at the end of the quarter to get revenue. We are not going to sell for the sake of empty calories. So everything we do is to maximize the gross margin and we will continue to take those actions to ensure that we have very strong gross margins, very strong earnings. Where that settles out? It’s difficult to predict within the gross margin percentage just because of the variability we have in our different products.

Got to understand those hyperscalers can really swing things too, I am sure. Okay. Well, that covers it for me. Congrats on the NASDAQ up-list and I will see the floor.

Thanks, Eric.

We’ll go next to Craig Ellis at FBR Riley.

Yes thanks for taking the question and it’s B. Riley FBR. Jamie, my congratulations on all the things that you accomplished in Phase 1 and now embarking on Phase 2 I wanted to go back and clarify the first question so just with regard to hyperscalers is it the company sense that what’s at play is that it is something that’s really more seasonal and an artifact of what often happens between the calendar fourth and first quarter or is it something that maybe similar to what a large server MPU maker said last week when they said that they just saw that hyperscalers were starting to move from a capacity absorption pace to more of a capacity digestion pace I think it feels more like what the second item which is you got to understand a single unit that we sell to a hyperscaler can be over 90 feet long and take a team of people to install and integrate and when they receive scores of these are over a 100 of these it safe to assume they need thousands of square feet or tens of thousands even hundreds of thousands of square feet of building to put them in with the power to support that with a cooling to support that with a system administrative and monitoring software to put that in place so the digestion of these systems as you put it is non trivial and there is a lot of logistics and I think in this case I would think of it as they need these units they need them as much as they have ever needed them they want to install them as quick as they can but just we had to kind of harmonize our manufacturing line to their ability to digest the systems and install them and cool them and power them.

That’s really helpful color. Jamie thanks for that. And then the follow-up question is related to that customer said the company has been pursuing diversity with it is hyperscaler customers can you provide some color on how you are progressing and when there might be an opportunity to diversify beyond the current customer side?

Right. We have test equipment so, physical equipment in most cases bought by hyperscalers delivered now to three additional hyperscalers who are testing the equipment the feedback from the tests continue to be positive and we feel that we are viable and meet all requirements all stated requirements both technical and economic and I believe those it would be safe to think about those trials to continue for another several months followed by more detailed financial negotiations where orders I would not expect volume orders for another six months I think it will happen within the fiscal years so within the next 12 months but I think there is another solid six months or more of testing tuning and negotiation before there is a second volume customer.

Thanks for that. And then I will ask one more before I jump back in the queue, you mentioned in response to an earlier question the movement of StorNext out into something that’s sold individually I am wondering if you or may be even Mike could provide some color on it and how we should think about that just mechanically would we expect to see a fourth segment come into the model and have something that’s reported long with products and services and royalty and more importantly how should we think about the revenue potential over the first year to as the company move to that direction?

Yes I mean I think we are going to stay with kind of our three large pillars which are primary storage which I would think of is our high speed products secondary storage which are back up achieve and think of them as cheap and deep storage products and then our services business I think those are the right measurements as we start to build up our software business I think what you will see is margin shaping differently in those businesses and that’s really what we are attempting to do as well as I think the software separation and some of the other work we are doing with our products to make them easier to use easier to install applicable to more cases than just movie making and television we are trying to drive growth in those products as well by appealing to other segments so I think that’s really as we are going to Phase 2 our focus is really value engineering I mean a lot of this software separation allows us to combine more things on a single box which is a form of value engineering so a big part of Phase 2 is building the same product but building it less expensively from margin expansion making it less expensive so we can enter different markets and different markets segments making it more flexible so it could be combined with other pieces of software like video surveillance software, MAM software, all with an effort to enter additional markets, appeal to different segments and expand margins those are all things we are doing to drive the growth side of the business and you can only imagine what a massive distraction all this stabilization work has been over the last 18 months I think we have done an unbelievable body work to stabilize the company and now with that behind us and the company is now stable operating efficiently every man women and child in this company is now focused on our value engineering and growth initiatives.

Thanks, Jamie and congratulations on the up-listing.

Thanks Craig.

We will move next to Chad Bennett at Craig-Hallum Capital.

Great, thanks for taking my questions. So, just following up on the Hyperscaler volatility comment mike did you have any hyperscaler revenue last December quarter?

Yes.

Are you able to quantify it?

I know we never break that out separately but it would be fair that when we look year over year the level of revenue will be pretty much in the same ball park between fiscal year ‘19 or fiscal year ‘20 but the distribution between quarters can swing quite a bit

Okay. I guess is it fair to say that decline the $10.6 million decline year over year in secondary storage that would be representative of?

Yes

Okay, got it. Okay perfect. That’s enough. And so as we look as much as I can push into in the early next year first half of next year do we believe that company returns back to overall revenue growth and specifically product revenue growth in the first half of ‘21?

Yes we will come out with that those thoughts on the next quarter Chad. Really, we are just looking at this one quarter working to get this year done and we will provide that view next quarter.

Okay. And then Mike how should we think about may be you have a little more visibility here just into the royalty revenue run rate for the March quarter and if you can say at least into the early part of next year?

Yes, the visibility that we have at least one quarter out we would expect in the same range or may be a little better but I would say that range would be four to five to give you a range.

And that’s looking out a couple of quarters or?

Just for the next quarter.

Okay, got it. And then may be last one for me for Jamie. Jamie is there any way to think about how significant the new products could be may be as we look in to the second half of next year whether it’s F-Series VS-Series I believe R-Series on the autonomous side I mean are we at a point where those products in aggregate could contribute 10% of product revenue or any type of color there as we look out a few quarters, three or four quarters. I mean, our goal as a leadership team is to be able to grow organically 10% next year. So that will be a combination of new products that will be a combination of entering new markets, greater sales of the products we have today. So I would think of it in that way as we want to be able to take what we accomplish this year and grow 10% organically. And organically meaning growing the products we currently have and our engineers building new products and selling new products. And I think 10% is about the right place for us to be.

For overall revenue?

Overall revenue.

On product revenue.

Product revenue growth.

Product, okay, got it. Alright, guys. Nice job on managing the business, love seeing the gross margins and the EBITDA performance. Thanks.

Thanks, Chad.

We’ll move to George [indiscernible] at Oppenheimer.

Hi, George.

Hi and congrats on finishing Phase 1 of the transformation. So maybe just digging into the visibility a little bit more, so if you exclude cloud and you look at your other markets, that’s meeting at your expectations for the fourth quarter and then maybe can you give us a reminder of what normal seasonality is X the cloud business?

Yes. The normal seasonality, I would put a range of 5% to 10% on the product revenue. It’s just a softness, just that we have experienced and I would exclude the hyperscaler from that, because I can just be lumpy and we have discussed those revenue trends. As far as the demand that we have seen outside of the hyperscalers, it is as we have expected. There was – we haven’t experienced any surprises outside of the guidance that we would have given are understood into the industry.

Okay. And Jamie, could you maybe give us a little bit more color on how the value based selling is going and where you are seeing the sales productivity gains?

Yes. I mean, our customers want more from us. They don’t want us just to sell them a product. Increasingly, they want us to help them solve a problem and more importantly solve a business problem, right. We have – customers that want us to help them genomes and create new drugs we have customers who want us to help them produce more television shows, more rapidly and efficiently. And we have always historically said look, our answer to everything is to sell you a box. And if you call our support line with a problem, if something is broken we will fix it. But now we are transforming to see we are more focused on our customer’s success. So they are buying multiple products, multiple products that are integrated together to help them solve a problem and ultimately a customer is going to pay a lot more money, a lot more attention and a lot more margin is someone that helps them solve a critical business problem, then you just dropped a box off at the loading dock. And that’s the transformation we are making with our sales team and that’s why we are seeing less of. The old behaviors here were hey, it’s the end of the year, hit the revenue target, no matter how much you have to discount or sell whatever you have to sell to go hit the revenue target and Mike and I just don’t look at things that way. And so we come in and say, look, we are going to hold to our prices. If you want some incredible discount, it’s not going to happen. And if you are going to buy the product a couple of months from now, buy it a couple of months from now. We are not going…

Alright. And one more question for me just with that evolution, can you give us a sense of on the software side how you see that progressing over the next year or so?

Yes. I mean, we are building a series of layers, think of it as a layered cake. At the most basic layer, there is storage hardware and our goal is to increasingly commoditize that use commodity equipment, use basic equipment, use the lowest price equipment that we can find for our customers. And that commodity equipment has given differentiation and flavor and given the personality by the software that we placed on it. So we can take a generic server and turn it into a file server, turn it into a movie making piece of technology, turn it into a genomic sequencing piece of technology, turn it into a video surveillance platform, a cheap and deep archive platform. And so what the first step is separate the software from the hardware and sell that software separately and increasingly sell that software on a subscription. So our sales are less episodic and they are more reliable. That’s a big transformation for us. Now, those two layers, software-defined storage and hardware allow us to store video and video-like data, but our customers want more from us. They say, okay, you have stored my video data, but now help me manage it. Where is that data? Is it on the cloud? Is it on hardware? What hardware is it on? Is it on the right priced hardware at any given time, help us move data, help us backup that data, help us protect that data and help us administrate access to that data? So we are moving to a layer, if you think of the lowest layers hardware, software-defined storage above that and then data management software above that and also the other software we are getting into is manage these enormous quantities of video, photographs and build catalogs of it. How do…

We will move next to David Dooley at Steelhead Securities.

Thanks for taking my questions. Just kind of a recap on the sequential gross margin improvement, I think another gentleman mentioned, it all came from – or a vast majority of it came from the product gross margin improvement, could you help us understand which exact products you have this vast improvement in gross margins in and how far you are along I guess on the total product set on this series of layers that you just went through with the previous questioner? Are we on this layer take with all of the products now or is it just one or two or just kind of – from a macro perspective, how far along are we?

Yes. I mean, from a macro perspective, the product gross margin improvement was in the primary products. As Jamie has been describing, the positions we are taking, the direction we are moving there is to offer solutions and to move north, right and as well as the customer base that we are selling to. As I mentioned in the prepared remarks, the increase there was predominantly government business which is good margin business and what we are providing them, the solutions we are providing them. So that is – that’s here today, right.

And Mike, what I’d add to that is we have a company that has gotten really good at doing many, many $120,000 to $200,000 transactions. And what we are able to do with the DoD is we are able to do a north of a $5 million sale. So we are selling as I described a more complex solution we are working on solving a large complicated problem with them and that drives higher value, then again these kind of quick hit sales. And I think we want to keep our baseline of quick hit, $120,000 to $200,000 highly transactional sales, but now, we are layering over these strategic $5 million sales, $7 million sales where they have higher margin because a sale of that size is not really a box sale, it’s a series of things that we are selling someone to solve a more complex business problem or strategic problem.

Okay. And then as far as how far are you along, so that would lead that hyper, which products have you not, I guess transitioned to selling more software-oriented mix?

Yes. I mean, we are just in the beginning of that right. We are doing the engineering work, but I mean, StorNext today is no sold as software, it’s not there yet. DXi is not there yet. We are just making that transformation. So those products, even the F-Series is – it has a software and hardware separated, but you still buy them together. So this – we are at the very early days of this. So I think we are in the early days of solution selling and architecturally it will take a few more product provisions to actually sell all of our products as separated software, but all of that is on our – the roadmaps that we are sharing with our customers today.

Okay. And I guess on the hyperscale business, you guys have mentioned that it’s lumpy, how long would you expect this to last, because it sounds frankly from your explanation that it’s a facility readiness issue, so in that you lasted very long, but I am just wanted to know what you guys think?

Yes. I mean, I think it usually takes them about 6 months to deal with these digestion issues, 6 to 9 months. And really, it’s safe to think about some of these are about digesting, but some of these things are actually for all of us who sell large amounts of equipment, some of it is tied to construction, right. You have to construct the building you have to construct a co-gen electric facility to provide the electrical power. So depending on if you are tied to basic logistics or in some cases, the equipment is waiting on a building to be built or waiting on power to be – additional power to be brought to the facility. So that just gives you a sense of what the hyperscalers are dealing with it. They build out their infrastructure. It’s not just installing the equipment. Sometimes, you actually need to build additional buildings or additional square footage or additional cooling capability to receive them.

So if the customer had their facility ready, then we wouldn’t be having this issue?

It mean – I wouldn’t draw direct conclusions, but I mean, there is a whole set of these issues from, it can be power, it can be cooling, it can be getting access to personnel, it can be the ability to support the equipment. I mean, there is just a big complex infrastructure to receive and install the equipment. And I would – it isn’t just directly linear and it isn’t something that we necessarily are always given a lot of insight into, right. They operate fairly privately and are quite quiet about how they run their building and they give us like in this case, we got notification as late as December about what their demand would be and it was received late in quarter that they had to slowdown significantly for their own reasons.

Okay, thank you.

Thanks, Dave.

With no other questions, that will conclude today’s conference. We thank you for your participation. You may disconnect at this time and have a great day.