Quantum Corporation (QMCO) Q1 2021 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to your Quantum Fiscal First Quarter 2021 Earnings Call and Webcast. All lines have been placed on a listen-only mode, and the floor will be open 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, Rob Fink. Sir, the floor is yours.

Thank you, operator. I'd like to welcome everyone to the call. Hosting on the call today remotely 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 in reliance on forward-looking statements. Forward-looking statements include, without limitation, any projection of revenue, margin, expenses, adjusted EBITDA, adjusted net income, cash flows and other financial items as well as anticipated impact COVID-19 and Quantum's financial results. Any statements concerning the expected development, performance, market share or competitive performance relating to products or service and the expected timing. 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, included unexpected changes in the company's business. More detailed information about these risk 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 applicable law. Also note that on this call, the company will be discussing non-GAAP financial information. Our CEO and CFO 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 and the reference affiliation table provided in the company's earnings release. I would like to remind everyone that the call will be available for replay on Quantum's website for at least 90 days. A link to a website replay of this call is also provided in the earnings release, which was issued this afternoon. And it's on the company's website at investors.quantum.com. With all that said, I'd like to turn the call over to Chairman and CEO of Quantum, Jamie Lerner. Jamie, the call is yours.

Thank you, Rob, and thank you all for joining us on today's call. While this was a challenging quarter, it's clear that the worst is behind us. I couldn't be more proud of the way our team has continued to deliver on our transformation strategy. As expected, the disruption of COVID-19 led to a decline in revenues and impacted our profitability. In our fourth quarter conference call, just a few weeks ago, we said we believe that the first fiscal quarter would represent a trough in our revenues. Now as we're nearly halfway through the second quarter. And based on our current visibility, we are increasingly confident that this is the case as we're seeing our business improve. We are seeing steady and gradual recovery across enterprise, cloud, government, media and entertainment and other sectors. We are seeing purchasing and procurement activity ramp up as well as encouraging signs of our customers starting to spend again on new projects and new business initiatives. We are expecting a very strong quarter for our federal government business. We are seeing activity pick back up in movie, TV and sports production, and we continue to see traction of our growth initiatives from F-Series, R-Series, distributed cloud services and archive. In response to the pandemic and the short-term stresses it created on our business, we have taken steps to reduce expenses and streamline operations. Our total operating expenses were 20% lower than in the period 1 year ago. These cuts meaningfully reduced our breakeven point. Combined with expected higher revenue, plus the typical seasonality, which historically has benefited our second fiscal quarter, should help us significantly narrow losses and cash burn in the second quarter. We continue to demonstrate crisp execution on our strategic transformation and innovation initiatives with the most product releases and innovation in our history. We have four hyperscalers that are in lab trials of our next-generation deep cloud archived technology. And the feedback we are getting is that we're pulling away from the competition. We continue to view this business as a growth driver for Quantum. And while we are getting positive signals, it is unclear when volume purchasing will begin. We are executing against our transition to a virtualized, software-defined and converged architecture, featuring next-generation policy driven data placement. We are also enabling our technology to run both on-premise and on the cloud, allowing our customers to operate in a hybrid and multi-cloud architecture. We are currently in limited customer release of StorNext 7 as well as our H-Series next-gen software-defined storage platform. We have also deployed our 100% cloud version of StorNext at one of our key customers. They're using this as the basis for their cloud studio initiative. We will be rolling this software out to additional customers this quarter on a limited basis. Later this quarter, we are also entering limited customer release for enhanced DXi software that can archive data to the cloud, followed by the ability to run DXi software entirely virtualized on-premise and in the cloud. We are driving our active scale technology road map with near-term enhancements for compliance and ransomware protection and making active scale available as software only. Our recent certification as a Veeam Ready object solution and Quantum's expanded partnership in the active Archive Alliance show the continued momentum from this recent acquisition. We have introduced NVMe based edge collection devices, which are key to our autonomous and assisted driving vertical. We've also established some key early wins in the video surveillance market with our newly expanded product line. We're also making progress within our services business. The usage of our cloud-based analytics, monitoring and management application has increased by over 250% year-over-year and is now connected to over 1,500 systems worldwide. 9 months after introducing our distributed cloud services, we have over 60 customers who depend on Quantum to remotely manage and operate their Quantum solutions. We're encouraged by this progress, which represents a significant year-on-year increase, recognizing it is a new business for us. I'd like to congratulate our services and support organization, led by Eve Rumia [ph], who have achieved a Net Promoter Score of 71 in June, the highest customer satisfaction score in our company's history and well above similar scores from our competitors. Looking ahead, we remain focused on growth, driven by the exponential growth of large unstructured data in all its forms, video, images and other large files being generated by machines and devices at unprecedented rates. We're confident the worst is behind us. We are seeing steady and gradual recovery, and we are continuing to demonstrate crisp execution on our strategic transformation and innovation initiatives. We're looking forward to our virtual Investor Day on August 26, where we can go into more depth on the progress we are making on our transformation, our long-term business and technology strategy and the opportunity we see for the future. With that, I'd like to turn the call over to Mike Dodson, our CFO, to discuss the financials. Mike?

Thank you, Jamie. Welcome to everyone that has joined our call today. As Jamie mentioned in his opening comments, the first fiscal quarter of 2021 was certainly a challenging quarter, driven by the disruption of COVID-19 and the related significant impact from many of our customers in a few of our key verticals. Revenue was $73.3 million in the first fiscal quarter compared to $105.6 million in the year ago quarter and in line with guidance we provided on our previous call. The decline was driven by a 40% decrease in product revenue primarily due to reduced demand for secondary storage systems as a result of COVID-19 pandemic and fluctuating purchase cycles in our hyperscale business. Service revenue was down 9% in the first fiscal quarter compared to the same quarter last year, which reflected additional downward pressure due to COVID-19, resulting in lower renewal rates and fewer system installations. We also experienced a decline in royalty revenue primarily due to an overall decline in market unit volumes. Royalty revenue of $3.2 million for the first fiscal quarter continued to be relatively light compared to historical periods. The adoption of LTO-8 has lagged expectations, primarily due to attractive pricing for LTO-7 and customer anticipation of the next-generation LTO-9, as is expected to be launched later this calendar year. Gross margin in the first fiscal quarter was 42.1% compared to 43.4% last year. Gross margins contracted modestly primarily due to spreading fixed overhead costs over lower revenue, combined with lower high-margin royalty revenues. In total, operating expenses in the first fiscal quarter decreased 20% to $34.3 million or 47% of revenue compared to $43.1 million or 41% of revenue in the same period of last year. The $8.7 million decrease in operating expenses was driven by a 38% decrease in general and administrative expenses and a 27% decrease in sales and marketing, which were partially offset by a 21% increase in research and development. The $7 million decrease in general and administrative expense in the first fiscal quarter compared to the same period a year ago, was primarily a function of higher costs in 2019 related to the financial restatement, IT infrastructure expenses and bad debt expenses. This was partially offset by an increase in head count and stock compensation. The decrease in sales and marketing expense in the first quarter compared to the same period a year ago was driven by an overall decrease in head count, reduced compensation on lower overall revenue, a decrease in marketing programs, professional services costs and reduced travel and entertainment expenses due to the current COVID-19-related restrictions. Research and development expenses were $10.2 million in the first fiscal quarter, up 21% compared to $8.4 million in the year ago quarter. This increase was primarily attributable to an increase in research and development head count focused on new product development. Related to our share count used for the per share calculations, I wanted to provide more color. Given the differences in calculations between a loss period and an earnings period and the further impact for the warrants issued in conjunction with our recent credit agreement amendment, our share count is not a straightforward calculation. At the end of Q1 in a loss position, our shares used to calculate the loss per share was 39.9 million. For the same period, assuming a profit and the warrants were outstanding the entire quarter, the share count for per share calculations would have been 47.1 million. Ultimately, a total number of shares outstanding when all employee awards are vested and warrants exercised is 53.9 million. The GAAP net loss in the first fiscal quarter was $10.7 million or $0.27 per diluted share compared to a net loss of $3.8 million or $0.11 per diluted share in the year ago quarter. Excluding stock compensation, restructuring charges and nonrecurring charges, adjusted net loss in the first fiscal quarter was $6.8 million or $0.17 per diluted share compared to adjusted net income of $5.4 million or $0.13 per diluted share in the year ago quarter. Adjusted EBITDA in the first quarter was $1.4 million compared to $13.1 million in the year ago quarter. There is a full reconciliation of our non-GAAP results to the most recently comparable GAAP measure in both the press release and Form 10-Q released today. Now looking at the balance sheet, liquidity and cash flows. Cash and cash equivalents were $29.1 million as of June 30, 2020, compared to $12.2 million as of March 31, 2020. Both balances include $5 million in restricted cash required under our credit agreement and $0.8 million of short-term restricted cash. During the first fiscal quarter, we completed several transactions that strengthened our balance sheet and improved liquidity. First, we amended our revolving credit line and term loan, securing an additional $20 million in incremental liquidity and negotiated more flexible loan terms and conditions. These credit facilities expire on December 27, 2023. In terms of the 2020 term loan credit agreement, our agreement, the terms of our 2020 term loan and credit agreement are substantially similar to the terms of the existing term loan, including in relation to maturity, security and pricing. In addition to the customary closing and amendment fees, we issued 3.4 million warrants with a strike price of $3 to our term loan lenders. Second, we secured an additional $10 million in liquidity from the Paycheck Protection Program or PPP. This loan bears interest at a fixed rate of 1% per year with interest deferred up to a maximum of 10 months, has an initial term of 2 years and is unsecured. Under the terms of this loan, we may apply for forgiveness of the amount due on the loan. We have utilized the proceeds from the PPP loan for qualifying expenses and intend to apply for forgiveness of this loan in accordance with the terms of the loan agreement. At this time, we cannot be assured that the PPP loan will be forgiven partially or in full. With these transactions, we have greater flexibility with our financial covenants as we continue to rationalize our cost structure and shift our focus to higher value, higher-margin sales opportunities aligned with our customers' needs. Outstanding debt as of June 30, 2020, on a gross basis, was $195.2 million, and on a net basis, was $170.6 million after netting $24.6 million in unamortized debt issuance costs. This compares to $167.8 million of outstanding debt as of March 31, 2020, on a gross basis. And on a net basis, was $154.1 million after netting $13.6 million in unamortized debt issuance costs. Net cash used in operating activities was $9 million for the first fiscal quarter. This compares to net cash provided by operating activities of $0.9 million in the comparable period last year. The approximate $10 million difference is primarily attributed to the higher net loss of $10.7 million in the first fiscal quarter as compared to a net loss of $3.8 million in the same period a year ago, plus almost $5 million more net working capital used in the first fiscal quarter compared to the same period in the prior year. Finally, turning to our financial outlook. The continuing uncertainty in the overall economy as a result of the COVID pandemic limits our visibility, and we, therefore, will not provide full year guidance at this time. However, as we discussed in the opening remarks on this call, we are increasingly confident that the first fiscal quarter represents a trough in our revenues, and we have a clear line of sight to second quarter revenues that represent a double-digit sequential increase. Our outlook for the second quarter includes revenues of $83 million, plus or minus $2 million, adjusted net loss of $3 million, plus or minus $0.5 million, adjusted net loss per share to be $0.08 per share, plus or minus $0.01 per share and adjusted EBITDA of $5 million plus or minus $1 million. With that, I'll turn the call back to Jamie for closing comments. Jamie?

Thanks, Mike. I'm proud of how the Quantum team executed in the first fiscal quarter, amidst a dynamic and challenging environment. We are advancing our long-term transformation strategy according to plan, and I'm confident that the rebuilt earnings power of Quantum will become increasingly apparent as we navigate through this crisis and expand our leadership in managing and retaining video and unstructured data. As I mentioned, we will be hosting a virtual Analyst and Investor Day on August 26. This event will provide us an opportunity to share a deeper and more comprehensive look into our long-term vision to transform into a leader of video and unstructured data solutions, overviewing our addressable markets, technology, strategy and financial goals. This event will serve as a unique opportunity to hear from the key executives that are driving our business transformation as well as some industry experts and customers. Additional information on this event will be made available on our IR website and I hope you will consider joining us for what we hope will be a meaningful opportunity to learn more about quantum. With that, we will now take any questions you may have. Operator?

[Operator Instructions] We'll take our first question from Craig Ellis with B. Riley FBR.

Yes. Congratulations on continuing to execute the transformation through a difficult period of guides. Jamie, in your prepared remarks, you mentioned that there are a number of areas of your end markets that are coming back and showing signs of strength. Government was one of them. I was hoping you could elaborate a little bit more on what you're seeing in that government vertical, not just for the current quarter, but as you look out over the next few quarters, how do you see that trajectory going?

Yes. I mean, clearly, this quarter is strong because it's the government end of year, it's government sweeps. So we're seeing a lot of strength, but not just in this quarter, but I think for subsequent quarters, we're seeing unstructured data being pervasive across civilian and DoD activities. We're seeing more data being archived, the data being richer and larger. And we're seeing increasingly the incredible speed of StorNext being used for more analytics and more storage applications, not just involving video but -- and photography, but expanding more into unstructured data, machine generated data, and we're just seeing wider applicability of our solutions. And I think it's also an area where we're just putting more sales execution investment. We're building our team out, we're building out our partner ecosystem and just putting more intense focus in and around not just our U.S. government, but our government business globally.

That's helpful. And I think in the past, you commented on strength in the health care vertical as well. So I'm just wondering if you could expand the scope of the discussion a little bit, as we look at the activity outside of the traditional media and entertainment vertical into some of these new verticals where you've got some good growth.

Yes. What we're seeing in health care is just an explosion in the generation of unstructured data. Clearly, everyone knows that medical imagery, X-Ray, MRI and patient records, but we're also seeing a lot of activity in bioinformatics, genomics, forms of drug development, drug testing that are just creating clinical trial data, machine-generated data, very complex correlations between data. And increasingly, we're seeing people turn to our primary storage technology for its speed. And then all of this data is just data that's never thrown away. So the fact that our high-speed data is very tightly coupled with our long-term 100-year archives, has really increased our relevancy in that area. I'd say we're at the beginning phases of becoming expert sellers into health care. We've played in health care for many years, but we're really beginning to sharpen our capabilities to work in the health care vertical, to have all the various certifications and compliance pieces that we need and then also with the partner ecosystem. And we're just starting to get better at that. I think that's -- we still got a few years to go to become world-class at that. But I think we've come a long way, and we're serving over 200 hospitals today.

That's helpful. And then, I wanted to follow-up on the hyperscale comments. I think you said you had 4 hyperscalers in advanced product evaluations. I think if I rebound the clock, maybe 3 months, 5 months, I would have expected a couple. So it seems like a couple more hyperscalers have come in. When maybe more in a better case view, could we expect to see material revenues from 1 or more? And what would be more of a base-case view for potentially meaningful revenue growth?

Yes. I mean I think the advancements that have occurred are -- we have a new next-generation deep cloud archive technology that is now physically available in shipping the customers. There are 4 of the world's largest hyperscalers that are using that technology, either in our laboratories or their laboratories. Several have paid for that hardware. And several are in volume trials, meaning 10 racks or more of equipment being tested. So we're much further along. I think we have also gotten very strong signals that we've been selected as the go-forward technology and the phase we are now entering into is demand planning. When are they going to need the equipment, at what volumes, how is it going to be supported. So we're moving from the trial phase into the manufacturing delivery phase. There's still much to be clarified there. But we are -- with one in particularly, we're exiting the trial phase and really beginning demand planning.

That's helpful. And then, one for Mike before I give the floor to others. Mike, repeatedly in the prepared remarks, that the current quarter was characterized as one of seasonal strength as we look beyond the current quarter, not looking for guidance, but how should we think about the seasonality of the business beyond the current quarter for the ensuing few quarters?

Yes. Sure. As we've discussed, the next quarter is a seasonally strong quarter with the federal government, the year-end. Beyond that, I think when we think of our strength and what we would expect revenues to be, we have the recovery from the COVID pandemic as a strength behind that. So I think that will overweigh any type of seasonal activity when you look at the last 2 quarters or the back half of this year. So we feel good about next quarter, and we'll give more guidance as we report next quarter. But I think it's going to be more recovery driven beyond this quarter.

We'll take our next question from Chad Bennett with Craig-Hallum.

I'll try to be brief. So just -- it's great to see the strong sequential rebound this quarter. And I think I remember, Jamie, if correctly, on your last call, you talked about your existing hyperscaler kind of coming back from a shipment standpoint, potentially this quarter. So I guess the question is, is that happening? And then how much of the strong sequential is from that existing hyperscaler versus the seasonal strength from the Fed and just getting back to business?

Yes. The -- our current installed base customer is I would say, back to steady shipments. They're not at the highs that they've been with us. But what I like about where we're at now is we're at a steady rate. And we're a little less of a high and low state or a lumpy state. They've got a much more steady -- we've worked with them to achieve a steady quarter-over-quarter delivery schedule instead of a start-and-stop delivery schedule, which obviously allows us to run our factory in a much more efficient way. And regarding military, I would say, the up we're seeing right now is mostly attributed to strength in U.S. federal and strength in -- or increasing rebound in general enterprise.

No, that's great color. And then maybe a follow-up for Mike. Mike, just in terms of a little bit of how we view a segment of revenue, that being royalty. Should we expect somewhat of a rebound there, kind of not only in the current quarter, but throughout the year based on what you see right now? And then second question is on gross margin. Obviously, we're getting a pretty good sequential increase here in revs and more scale to lower -- layer over the fixed costs there. How should we think about gross margin improvement from here?

Yes. Yes. So first, the royalty revenues. Really, I think the key there is going to be the adoption of LTO-9. So until we get to that point, I think you're going to see the business pretty much at the levels that we saw in Q1. And once they get to that level, there's always a little bit of a delay, right? So they're expecting to introduce this by the end of the year. So it may not be actually in our results by the end of the year. But beyond that, as it's adopted, we should see a healthy bounce back from that. As far as our margins, we would expect our margins to be a little better in Q2 with the government business typically is a better margin for us. So that will help us despite having a lower royalty expectation there. And of course, with a higher revenue forecast, it allows us to spread those fixed costs over a larger revenue base. So I think we should see a little bit of improvement on the margin front.

Good to hear. And it's good to see the business rebounding.

Okay. Thanks, Chad.

We'll take our next question from Ryan Meyers with Lake Street Capital Market.

Just one question for me. Can you give us some color on what you guys are seeing in the supply chain right now and if there's any sort of constraints?

Ryan, it's Jamie. Right now, supply chain is surprisingly healthy. We're not seeing long delays. There was a time where we were seeing some delays in just shipping lanes, whether they were true shipping lanes or flight availability just because the air traffic had been or flights had been so restricted. But right now, we're not taking any precautions or taking back what we think we could achieve because we're worried about supply chain. It's just not showing up as an issue for us at this time. This issue -- I mean if you want to pinpoint the biggest issue, we need New York and L.A. to start filming television and movies again. I mean, if you want to figure out how do we get from 83 back up to historic levels, the single-biggest thing would be for sports, movies and television to begin again. We're seeing them begin in Australia. People are filming in Iceland. People are filming in Europe. But I mean new York and L.A. are at a standstill in music recording and television and movies and sports is on shortened seasons and a stop-and-go state, that's really, I think, right now, if you were to put a -- what is COVID restraining that vertical, while it's opening up, it's still far from historic levels for those reasons.

That will conclude our question-and-answer session for today. We'll now turn the floor back over to Mr. Lerner. Please go ahead, sir.

All right. Well, thanks, everyone, for joining us today. We hope you meet us on August 26 for our investor conference, and we'll go for a deep dive on our strategy in a 4-hour session at that time. So thanks, everyone.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.