Quantum - Earnings Call - Q3 2021

Transcript

Speaker 0

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Quantum's Financial Results for the Third Quarter of its Fiscal Year twenty twenty one. At this time, all participants are in a listen only mode. The question and answer session will follow the formal presentation. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Leanne Sievers with Shelton Group.

Speaker 1

Good afternoon and thank you for joining today's conference call to discuss Quantum's 2021 financial results. I'm Leanne Sievers, President of Shelton Group, Quantum's Investor Relations firm. Joining me today are Jamie Lerner, Chairman and CEO and Mike Dodson, CFO. This afternoon we issued a press release which you can access a copy on Quantum's website at www.quantum.com under the Investor Relations section. There is also a slide presentation that we will be using in conjunction with today's call that may be accessed through the website link on the IR website and is also posted as a PDF in the Investor Relations section.

As a reminder, comments made during today's conference call may include forward looking statements. All statements other than statements of historical fact can be deemed as forward looking. Quantum advises caution and reliance on forward looking statements. These statements include without limitation any projections of revenue, margins, expenses, adjusted EBITDA, adjusted net income, cash flows, or other financial items, as well as the anticipated impact of the COVID nineteen pandemic on Quantum's financial results, any statements concerning the expected development, performance, and market share, or competitive performance relating to products or services. All forward looking statements are based on information available to Quantum on the day 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 the forward looking statement, including 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 Securities and Exchange Commission, 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 ks as filed with the SEC. 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. Additionally, the company's press release and management statements during this conference call will include discussions of certain measures and financial information in GAAP and non GAAP terms. Included in the company's press release are definitions and reconciliations of GAAP to non GAAP items which provide additional details.

For those of you unable to listen to the entire call at this time, a recording will be available for at least ninety days in the Investor Relations section of Quantum's Web site. Now I'd like to turn the call over to Chairman and CEO, Jamie Lerner. Jamie, please go ahead.

Speaker 2

Thank you, Leanne. And thank you all for joining us on today's call. Earlier today we announced very solid results for our fiscal third quarter with revenue exceeding our guidance and demonstrating our second consecutive quarter of sequential growth coming off the COVID related lows in the first fiscal quarter. Also as outlined in the press release, we expect next quarter revenues to be well over the current Street consensus and sequentially flat in what is typically a seasonally weak quarter. I'm encouraged by the progress we are making in our transformational growth initiatives as well as the gradual recovery we are seeing in some of our core vertical markets.

Our results in the third quarter reflected a combination of factors including initial recovery in our core media and entertainment protection businesses as well as sequential and year on year growth in new use cases and markets driven by new product introductions and our recent acquisitions. I'll talk about some of these highlights in a moment. We also made significant progress during the quarter in terms of advancing our strategy and vision to be the leader in video and unstructured data solutions. During the quarter we expanded our portfolio of solutions to store, manage, and protect unstructured data across its lifecycle while advancing our transition from a hardware centric business that is representative of a one time purchase to a software solutions oriented company with a recurring revenue model. In November we introduced StorNext seven, our All Terrain File System, ATFS, and an expanded active scale object storage portfolio all of which are targeted to be available on a subscription basis.

StorNext seven is the latest version of our award winning file system. We've added new features so that our customers can leverage the performance of NVMe storage to speed up production, reduce data center costs, and simplify their network infrastructure. We've also made STORE Next seven easier to manage with a streamlined and simplified user interface. Our ATFS network attached storage platform offers new levels of visibility into data by integrated data classification. It is easy to deploy, easy to use, and prospects can download and install ATFS to trial it and see how it can help them better manage their valuable file data.

We also expanded our active scale product line with new models and new features to help customers secure their data against ransomware and other forms of cyber attacks. Although in the very early stages of ramp up with customers, we are encouraged by the early traction we are seeing in fiscal Q3 from these new products. Also earlier this week we announced the launch of the H2000 series of hybrid storage arrays based on the same software defined architecture as our award winning F series. This new line is more tightly integrated with StorNext. And as a platform, it is the basis for future product offerings such as an all in one media appliance that will run StorNext and CatDB in a single H series hyper converged storage server.

We also added CatDB to our portfolio in December through our acquisition of Square Box Systems. Kathy V is an AI analytics software platform that helps customers unlock the business value in their data and also adds a growing and profitable software business unit to our portfolio. We are already working on integrating Cat TV with our StorNext product to expand our market reach in growing video production segments such as corporate video, sports, government, and education markets. We see potential to eventually expand the software to other markets such as genomic research, autonomous vehicle design, geospatial exploration, and any use case dealing with large unstructured data. We are excited about the potential to grow and scale this business as an AI analytics platform for video, digital images, and other forms of valuable file data.

With the addition of CatDV along with other new products we've introduced in the last year, we have now built a comprehensive portfolio for analyzing and enriching video, storing and protecting data, and managing it across its lifecycle. Our expanded portfolio further solidifies our leadership position in video and unstructured data solutions. And we are seeing the results materialize with our average deal sizes steadily increasing as we sell more solutions with more services wrapped around them. Some of the additional highlights from fiscal Q3 include 24% sequential product growth driven by a combination of market recovery and contributions from our new products and initiatives. Our revenue contribution from new products was up significantly year over year and quarter over quarter.

And although starting from a small base, we are encouraged with how our expanded portfolio is resonating with customers and partners. We closed our first software subscription deals for the new products we introduced in November. And we had solid active scale quarter after rebuilding the pipeline in the first part of this year. We are also pleased with the progress we've made transitioning from product to solution sales. Our average deal sizes have been increasing steadily over the past two years and increased 24% year over year.

We closed a record number of 6 and 7 figure deals in the quarter. We are deploying larger and more complex solutions. And as a result are increasing our footprint and relevance at key customers and partners. We're also doing a better job of attaching services which further contributed to the robust size of these wins. Although our hyperscale business is lower in the first nine months of our fiscal year than the same period last year, for the current quarter hyperscale revenues grew sequentially.

And year over year we expect for the full year the hyperscale business will be nearly at the same level as last fiscal year. As I've been discussing with you in the past, working with these important hyperscale customers has enabled us to truly showcase the competitive advantages Quantum offers and the unrivaled expertise and unique customization that our engineering team is able to provide. These relationships not only help establish strong market credibility for Quantum, but it also enables us the opportunity to sell high value solutions to meet their archiving storage needs. Providing archive solutions and infrastructure to the world's largest hyperscalers will continue to be a growth driver for us. And we are now extending our leadership position in that market and bringing it to web scale companies as well as large enterprises.

Many of these organizations are also generating massive amounts of valuable unstructured data that must be kept indefinitely. And much of this will not reside in the public cloud. This will be a key initiative for us as we move forward and represents a larger opportunity to deploy quantum software and services along with tape hardware. Lastly, as further validation of our vision and transformation strategy, over the past few months we have continued to attract a very high level of top storage, software, and services talent to Quantum. Most recently Brian Pawlowski joined us as our Chief Development Officer bringing years of experience developing leading innovative storage solutions.

As Chief Architect at Pure Storage, Brian improved overall user experience for all flash storage platforms. Previously at NetApp he was the eighteenth employee playing a key role in the company's expansion over nearly two decades. And early in his career he served as co architect of the Network File System Protocol at Sun Microsystems. We also appointed Rick Valentine as our SVP and Customer Service Officer with deep expertise in building and leading services and as a service businesses including Silver Peak Systems where his work in improving the overall customer experience contributed to its acquisition by Hewlett Packard Enterprise. Rick also worked as Chief Customer Office at Symantec, Veritas Software leading customer success for the technical support software portfolio.

We have also added key executive talent in international and channel sales with a specific focus on expanding our depth of expertise in advanced software solutions. Dave Klack, the former CEO of Square Box Systems has been appointed General Manager for our newly formed Cloud Software and Analytics Business Unit. Prior to Square Box Systems Dave worked as Head of Technology Delivery and Deputy Chief Technology Officer at Elmax, a diversified financial technology company. In addition Dave was Director of Engineering, Project and Program Management at McAfee. This success in attracting key experienced industry talent is a testament of our business transformation strategy and will accelerate our transition to a software and services led business.

With that I'll turn the call over to Mike Dodson, our CFO, to discuss the financials. Mike?

Speaker 3

Thank you, Jamie. Welcome to everyone who has joined our call today. As Jamie mentioned in his opening comments, our third fiscal quarter twenty twenty one demonstrated continued sequential revenue growth for the second consecutive quarter from the COVID related low reported in the March. Revenue increased 14% sequentially to $98,000,000 exceeding our guidance of $91,000,000 to 95,000,000 compared to $85,800,000 in the previous fiscal quarter. Revenue growth in the quarter was driven by sequential increases across the revenue categories, primary and secondary storage systems, royalty, devices and media.

This reflects a broad based recovery across our traditional market verticals combined with increasing contribution from our new products as our software strategy is resonating with customers. We are also encouraged by the early signs of a recovery in our media and entertainment business, keeping in mind that year to date revenue is running just over half of last year's level for the same period. This reflects the significant impact COVID has had on this end market segment. Gross margin in the third fiscal quarter was 43.1% compared to 45.1% in the prior quarter and 45.6% last year. The sequential and year over year decline is primarily due to product mix with product revenues up 24% sequentially and to a lesser extent lower contribution from service and royalty revenues on a year over year basis.

GAAP operating expenses in the third quarter increased $1,000,000 to $36,200,000 or 36.9% of revenue compared to $35,200,000 or 41.1% of revenue in the prior quarter and $35,400,000 or 34.3% of revenue in the year ago period. Non GAAP operating expenses during the third fiscal quarter were $33,700,000 an increase of $2,600,000 sequentially and $700,000 on a year over year basis. The sequential increase in operating expenses was primarily due to an increase in sales commissions due to the higher product revenues as well as an increase in marketing efforts to support our new product releases and expansion of our leadership team. GAAP net loss in the third fiscal quarter was $2,700,000 or a loss of $07 per share compared to a net loss of 4,600,000.0 or a loss of $0.11 per share in the prior fiscal quarter and net income of $4,700,000 or $0.10 per diluted share in the year ago quarter. Excluding stock compensation, restructuring charges and non recurring charges, the non GAAP adjusted net income in the third fiscal quarter was $10,000 or breakeven on a per share basis compared to adjusted net loss of $212,000 or a loss of $01 per share in the prior quarter and adjusted net income of $7,300,000 or $0.16 per diluted share in the prior year period.

The share count used to calculate GAAP loss per share was 40,300,000.0 shares whereas for non GAAP to fully diluted share count used was 49,200,000.0 shares due to the profit in the quarter. Adjusted EBITDA during the third fiscal quarter was 9,400,000 an increase from $8,900,000 in the prior quarter, but down from the pre COVID peak of $14,700,000 in the 2020. There's a full reconciliation of our non GAAP results to the most directly comparable GAAP measure in both the press release and the Form 10 Q released today. Now turning to the balance sheet, liquidity, and cash flows. Cash and cash equivalents were $17,400,000 at 12/31/2020 compared to $12,300,000 at 03/31/2020.

Both balances include $5,000,000 in restricted cash required under the credit agreements and $800,000 of short term restricted cash. Adjusted working capital increased by $6,800,000 during the third fiscal quarter to $66,700,000 from $59,900,000 at the end of the prior fiscal quarter. This increase was primarily a result of the build of accounts receivable reflective of the higher revenue levels for the quarter. Outstanding debt at 12/31/2020 on a gross basis was $201,200,000 and on a net basis was $180,200,000 after netting $21,000,000 in unamortized debt issuance costs. This compares to $195,200,000 of outstanding debt at September 3020 on a gross basis.

And on a net basis, it was 172,400,000.0 after netting 22,800,000.0 in unamortized debt issuance costs. Related to the term debt credit facilities, there's a holiday period for certain financial covenants through 06/30/2021. During the third fiscal quarter, there was a small draw on the company's credit line in the amount of approximately 6,000,000 which was due primarily to the timing of cash receipts at the end of the quarter used to pay the balance. This amount has been paid down during the fiscal fourth quarter. Since our Analyst Day back in August, we've outlined a strategy to address the overhang on our valuation created by the legacy high cost term debt.

As you may recall, we had negotiated a more favorable equity clawback provision that allows us to pay down up to 50% of the outstanding term debt at a reduced call premium of 5%. This is available to us until the expensive make whole call provision expires on June 27. As such, on November 25, we filed an S3 registration statement for $200,000,000 $50,000,000 of which has been allocated to the market or ATM equity facility. We have not yet sold any shares under this facility since we've been in our quiet period related to our quarterly release of financial results. We plan to utilize this ATM facility opportunistically since it's not something we need to do, but rather it is a tool to take advantage of the equity clawback provision to help us reduce the debt over the next several months.

Excluding up to $3,000,000 representing the initial cash payment for the Square Box acquisition, all proceeds from this offering will be used to pay down the term debt. Following the expiration of the make whole provision in June, the optionality to address our capital structure increases significantly. And we have stated previously, we will be considering a number of refinancing alternatives. Related to cash generated from operations for the first nine months of fiscal twenty twenty one, before the effect of changes in assets and liabilities, net cash generated by operations was $4,400,000 The use of cash resulting from changes in working capital accounts represented 24,500,000 consisting primarily increases in inventories and decreases in accounts payable and deferred revenue. Other uses of cash during the period included capital expenditures of 4,900,000.0 and $2,600,000 net for the initial cash payment for Square Box Systems.

Other sources of cash during the first nine month period of fiscal twenty twenty one included net borrowings of term debt of $19,400,000 and borrowings of $10,000,000 under the Payment Protection Program, which we expect to be forgiven in accordance with the terms of the loan agreement. As our business approaches the pre COVID levels and we address the significant interest payments on the current term debt, we expect free cash flows on an annual basis to surpass the 20,000,000 modeled from fiscal year twenty twenty, which represented a limited impact from COVID. Finally, turning to our financial outlook. As Jamie mentioned, we expect continued recovery across our market verticals and increasing contribution from our new software solutions resulting in our expectation of revenue for the fourth fiscal quarter to be $98,000,000 plus or minus $3,000,000 well over the current Street consensus and represents sequentially flat revenue in what is typically a seasonally weak quarter for the company. Non GAAP adjusted net incomeloss is expected to be breakeven plus or minus $1,000,000 adjusted earnings per sharenet loss per share of breakeven plus or minus $02 per share and adjusted EBITDA of $9,000,000 plus or minus $1,000,000 With that I'll turn the call back to Jamie for closing comments.

Speaker 2

Thanks, Mike. In summary, this was a very solid quarter for Quantum, the second consecutive quarter of growth and the second quarter of exceeding guidance. We demonstrated significant progress toward our transformational initiatives, grew our business sequentially both in our core markets and outside of our core markets and added key new products to our portfolio to drive software and recurring revenue growth. With that, we will now take any questions you may have. Operator?

Speaker 0

Ladies and gentlemen, the floor is now open for your questions. If you have any questions and are dialed in via the phone, Your first question from the phone lines is coming from Craig Ellis. Your line is live.

Speaker 4

Thanks for taking the questions and congratulations on the strong results and outlook guys. Just a housekeeping item to start, Mike, versus the fiscal third quarter's $93,000,000 guidance midpoint, where was the primary source of upside in the different businesses? And then I think Jim you mentioned that the fiscal fourth quarter is typically seasonally weaker. So given that you're outperforming that, what are some of the gives and takes across either customer groups or different product groups?

Speaker 3

Yeah. Relative to our guidance, as we outlined in in the script, we really saw an increase across all the products, all the verticals. Everything, was up with the exception of service was plus or minus flat. So we really saw a broad based recovery, in our business really, explains for large part the $98,000,000 for the quarter.

Speaker 4

And then gives and takes in the fourth quarter, Mike?

Speaker 3

Yes. We have given guidance of $98,000,000 staying flat. That is it's reflective again of a stronger business environment that than than the typical seasonal decline. Again, it's we see strength in the hyperscale scaler business. We expect meeting entertainment to continue to recover.

We're cautious there, but, that should, you know, be stronger going forward. Those are the key drivers.

Speaker 4

Got it. And maybe turning to some of the comments about the new products. So one segue into the question noting that for the second consecutive quarter, product gross margins was 31%. So nice gross margin, I think consistent with what you've suggested in the past, Jamie, that you wanted to drive the portfolio towards higher value. So the gross margin question is this: one, is that 31% level in products really a level that is now sustainable?

Or would we expect there to be gives and takes with that with regard to Square Box and ActiveScale and some of the products that were refreshed and were launched in the calendar fourth quarter, what should our expectation be for their materiality as we go through calendar twenty twenty one? How substantially could those businesses grow and become?

Speaker 2

Yeah. Strategically, I mean, goal is to sell larger deals. Larger deals are a result of combining multiple products together into a solution versus a point product sale. And more and more, the glue that ties multiple products together is software, whether it be deployed on premise or in the cloud. And so our goal is to be driving higher margins through a greater mix of software, greater mix of services, and a greater value by taking on more complex solutions than just an individual product sale.

Now exactly how to model that and, you know, how that's gonna take place, You know, from my point of view, we're in the very early days of that and simply don't have enough customer and sales data to be able to characterize the speed in which that transition is going to take place. I mean, Mike, you may be able to give better detail than that. But, you know, we really just started putting these software products out in November, and I just don't think we have enough data as to the speed in which we're going to make this transformation yet to be able to, you know, characterize a multi quarter trend.

Speaker 3

Yeah. Craig, what what I would add to that is it is very difficult for us to to forecast the rate of the transition. I mean, every quarter, as it builds more scale, we intend to provide, you know, more metrics and information related to the software business, the subscription business. But at this point, you know, it's just hard to tell. We just started it.

We just announced these products in November. So we're just starting down the path.

Speaker 4

Fair enough, Mike. And thanks for the color, Jamie. Lastly, guys, nice progress with the hyperscale revenues within secondary. I'm wondering if you can just give us an update on just engagement with that customer set more broadly. As we go through calendar 'twenty one, should we expect the number of customer engagements, the number of customers for which you can derive revenue to expand beyond the current three?

And if so, any color on geographic mix or other dynamics would be helpful.

Speaker 2

Yes. Mean, I can speak to our strategy. I mean, clearly, you know, we've got a tiered strategy. You know, we put a lot of energy in our sales efforts with the top eight to 10 cloud and hyperscale customers just because of just how massive their buying power is. But we also put energy to the, you know, next 200 or so accounts beneath that in the web scale companies.

Maybe not at hyperscale, but they certainly are certainly of scale, and then the Global 2,000, all of which have data they need to archive for decades, if not longer. And our strategy there is to increasingly solve archive problems with more software, cataloging software, data movement software, all the software that's needed to organize an archive that could have a 100,000,000 to several billion files in it. And, you know, that's our strategy. Obviously, we started at the top of the pyramid, but we're pressing down. And the goal is we need much more diversity in our installed base.

You know, having one or two very large customers is great, but that comes with all the issues of having just a handful of customers. So we're broadening out that base much more widely and broadening it to customers that place more value on our software and more value on our services so that we can drive the margin more aggressively than you can with the top three or four players at the top of that pyramid.

Speaker 4

That's helpful. Thanks, Jim. Thanks, Mike.

Speaker 3

Thanks, Greg.

Speaker 0

Your next question is coming from Eric Martinuzzi. Your line is live.

Speaker 5

Hey, I had a follow-up question regarding the media and entertainment vertical. Curious to know if you qualified the recovery by saying kind of initial recovery. Obviously, with the business, with that vertical being off about 50% versus a year ago, is your qualifier to say then that we think things get better in December and we think they get better in March? Or is it just to say, hey, they got better, but it's all relative versus a year ago?

Speaker 2

Yeah. I would say they got better this quarter, significantly better. And it's touch and go, right? We know that you cannot easily get, you know, filming permits in New York and Los Angeles as you once were able to do. We know that sports are still playing short or limited seasons.

Certainly sports that rely on ticket sales are, you know, are still under pressure. So it's an industry that's still significantly under pressure. Now it's there was a point in time when it was an industry that stopped. Right? I mean, movie, television, and sports in the in our first fiscal fiscal quarter, I mean, they just stopped.

I mean, now it's it's moving again but at a slower pace. And it's my belief that it will continue to recover almost in alignment to the rollout of the vaccine. And we're cautious, though, because we've seen variants. We've seen slowdowns in vaccine rollout. And so I'm I'm optimistic about its recovery, but I'm also cautious that we don't exactly know at what speed, what rate, what new twists and turns lay in front of us.

So we're seeing improvement, but we're also we're not euphoric. We're cautious.

Speaker 5

Yeah. Well, so if you were to look at pipeline in media and entertainment now versus ninety days ago, how has that changed?

Speaker 2

I'd say it's building in strength, but I think people are still spending where they have to, and they're not leaning into projects. I think they're behaving with caution as well. They're not buying for one year, two years out. They're buying for very short range projects. So I think there's a lot of pent up demand, but there's a lot of caution there too.

And, you know, I think it's going to recover in correlation to how quickly they can roll out a vaccine and how effective that vaccine is. I mean, it's a business that's entirely characterized by humans assembling. Right? Sports is about human assembly. Making a movie, especially a feature film, is 200 to 300 people assembled in close contact.

It's entirely about our ability to come in close contact and assemble people. And to the extent that we can assemble people quickly with a vaccine, it'll recover. And the extent that it's drawn out, it will take longer. So it's directly correlated to the vaccine and human assembly.

Speaker 5

Okay. And then the progress with the hyperscalers, I think last quarter you said you were going to add two new, in the December and then a fourth in the fourth quarter. Is that still on track?

Speaker 2

Yeah. The business is is on that trajectory. Again, they don't always share their plans with us. But, yeah, we're we're loading more hyperscalers. We're starting to load some web scale, some telcos, some other businesses as well further down that pyramid, but I think you characterized the rollout accurately.

Speaker 5

Okay. And then, Mike, on the margin side, given the revenue roughly equivalent, at least at the midpoint for Q4 versus Q3, and I guess it's a two part question. Should we anticipate similar OpEx in Q4 and similar gross margin to get us to this EBITDA that's roughly equivalent to the Q at least at the midpoint versus Q3?

Speaker 3

Yes. The the gross margin should be relatively flat, product mix relatively flat between q three and q four. We had a little bit of an unfavorable product mix in q three relative to q two, and we saw that decrease in margin ref reflected. And then when we your second part of the question was?

Speaker 5

Yeah. The operating expenses

Speaker 6

Oh, yeah. The OpEx

Speaker 5

30 go ahead.

Speaker 3

Yeah. Plus or minus, you know, as we enter q four, you know, some of the operating expenses become under pressure as it relates to the annual audit and those types of things. But plus or minus, they're gonna be in the same range.

Speaker 5

Okay. And then lastly, you certainly, you've been able to attract some quality talent, Jamie. The you've kinda got two lines not kinda. You do have sort of two lines of business inside of Quantum. There's your primary storage systems.

You got your secondary storage systems. You've been adding new products in both those areas. As you're attracting this new talent, from a product perspective, what do you think is the appeal for what's attracting people to Quantum?

Speaker 2

Yeah. You know, I mean, would characterize we have, you know, four core lines of business, certainly primary and secondary storage. But, you know, our cloud and analytics software is really where we're really expanding the business and differentiating. And then our fourth line of business and our biggest business is our services business. And more and more of our products are gonna be delivered as a service.

So as we press that out, there's really, I think, two things, maybe three that are bringing, you know, the top industry insiders here. First is strategy. I think the strategy is resonating with a lot of people who've been at very large bulge bracket infrastructure and storage companies. I think they view the strategy as thought leadership. And they actually combine that with a culture that they feel and I certainly feel that allows us to not only have that strategy but to execute on it, make the acquisition, build the products, make the moves we have to move to get it done.

So I think it's a it's both a validation of the strategy and a validation of this is a culture where we can just get that work done. You know, I think those things were question marks two years ago, and now with the amount of customers it's resonating with, with the top executives, I think people just view it as it's a good strategy and a culture where people can come and execute and be successful.

Speaker 5

Thanks for taking my questions and good luck on Q4.

Speaker 3

Thanks, Eric.

Speaker 0

Your next question is coming from Chad Bennett. Your line is live.

Speaker 7

Great. Thanks for taking my questions. So a few questions just around the hyperscaler progress that you have made. And I think it was Jamie on last call, I think you indicated production buys by the end of the fourth quarter. Are we still on track for that?

Speaker 2

Yes. I think we're on track with them finishing their qualifications. Production wise, you know, as many of you track this closely, there have been delays in the LTO-nine rollout. So a lot of the rollout that's happening, you know, with these three newcomers coming on around now, it's not coincidental that they correlate to the rollout of LTO-nine. And LTO-nine has now been delayed at least till June.

So there may be some impact of these newer customers, particularly the fourth player, maybe holding out till LTO-nine, and we'll have to see. But they're certainly coming to the end of their analysis, their trials, their testing, and they're coming down to their production rollout. And I think we'll just have to see how hard they hit the throttle on LTO eight or if they wait a little longer for LTO nine.

Speaker 7

Got it.

Speaker 2

And, yep, we're just gonna have to see how it plays out. But I I think the end result is the same. I just I just don't know how much they buy stuff when there's a whole new generation that's only ninety days or, you know, ninety days to a hundred and eighty days away.

Speaker 7

No. I appreciate the color on that. And then, probably a different different one of them. But you also mentioned, which I thought was pretty interesting, you know, a new primary storage product into, I think it was one of your hyperscalers that you thought you'd be able to sell into in in early fourth quarter. Yeah.

And then also, on the software side, some management software around primary storage or or maybe, both primary secondary that you thought you'd make headway in this quarter. Can you address those? I assume those aren't really LTO tied, right?

Speaker 2

Not necessarily. I mean, I think you're pointing at two trends. One is for the you know, a cloud company has many different types of storage, fast storage, slow storage, cheap storage. They have tiers of storage capability. And what we're seeing now as we add more customers is more of them are saying, we don't just want your hardware.

We actually want your software that allows us to write data to tape, retrieve data, organize data. So we're seeing a higher attach rate of software where, you know, some hyperscales are like, we just want your hardware, nothing else. We'll take care of everything by ourselves. I'm seeing more so the trend being we want tape and the software that manages tape and the the storage software and management software that allow us to build enormous archives on that tape. We're also seeing some of them saying, hey.

There's some high speed you know, we're not just interested in you for slow speed archive software and archive storage. We're also interested in some of your high speed products for other use cases. And you're seeing increasingly, we are rolling out our high speed storage on, the top three cloud players, and we'll we'll be making more announcements about that. We're deploying on their edge storage, and there's other engagements where we're working with a variety of different hyperscalers on different tiers of storage. So, yeah, I think we're we went from just selling tape hardware to now selling tape hardware, tape management software, storage software and now some of our primary software and hardware.

Speaker 7

Got it. And maybe you addressed a little bit. Just kind of now that we're now that the new software products are out there, and I understand it's still early, but you are seeing some early success in software and solutions selling, and you're breaking into new use cases. And the fact that your product revenue has held up, especially in the December as much as it has in light of kind of a huge headwind on M and E. You just us a sense, Jamie, and I know it's early, kind of the use cases and the solutions you're selling now and and kinda incrementally where you're playing, in whether it's in primary storage or in software or in in in any type of management, level layer of the overall storage ecosystem relative to where you were a year ago?

And kind of what the what are you replacing or what potentially would be competitive to you today that wasn't a year ago, if that makes sense?

Speaker 2

Yes. I mean, think a technical question in there and then I think there's also a kind of vertical markets question. You know, I would say two years ago, we sold predominantly to media and entertainment and enterprises wanting to do backup. If you fast forward to today, we now can offer to the traditional customers both enterprise backup and media and entertainment. We just have more to sell them.

So there were tiers of storage we didn't used to have. Right? We didn't used to have flash storage. We we gave up those sales to other people. Now we have that.

We didn't have midrange storage. We would give that up to someone like I Salon, at EMC. Now we with the ATFS, we actually have that midrange. And so we're filling out the tiers. So the existing customers where we had gaps, we now can sell them the full range of storage they need instead of saying, you know, you can buy some from Quantum, but you have to fill the gaps with other competitive vendors, we can now do end to end sales.

So for the customers who we've had for many years, we can just sell them more. Now we're also gaining traction in new areas. Genomics. I mean genomics is becoming really important. Right?

Everyone who gets COVID-nineteen has their genome sequenced to understand the impact of vaccinations upon their genome, the impact of the illness on their genome. And so just as a society, we're collecting more genes, we're analyzing more genes, And a gene is kind of like a TV commercial, you know, in the sense that it eats up about that much data. And so you have millions and millions of humans with lots of different genes and and sequences of their genes, and those repositories end up looking like gigantic repositories like you'd see at a news station. And more and more companies are coming to us saying, help me organize those genes. I want to keep metadata software.

So they're looking at things like ATFS and CatDV that allow you to you know, if you have 40,000,000 genes, you can't just give them a file name. Have to say this file is from a male, and this person is of this age, and this is their patient number. And you need to really build a lot of metadata around that file. And, you know, we've now built software that we just never had before to do that. So I think in verticals, you know, we're selling more into the existing verticals.

We're expanding into genomics. We're expanding into medical imagery. MRI, X-ray, CAT scan, increasingly seeing just more deals in that area. Autonomous everything, again, where they're collecting a lot of video. Video surveillance.

We're making more and more inroads in our surveillance business. So we're selling more to the customers we've had historically, and we're branching into these new verticals. And when we branch into the new vertical, we just have instead of having a single product to sell them, we are now selling them multiple products, software products, and then solutions engineering to tie it all together and help them solve a business problem. And I think that's why, know, we are seeing recovery, but I think our good fortune this quarter and our strong guidance is a function of the compounding impact of recovery and successful traction on new products. We're seeing the combined impact of both of those trends.

Speaker 7

Got it. Great insight on the future and nice job on the quarter, guys.

Speaker 3

Thank you. Thanks, Jeff.

Speaker 0

Your next question is coming from Eric Suppiger. Your line is live.

Speaker 8

Yes. Thanks for taking the question and congrats on a solid quarter. Can you talk about your supply chain and if there was any component constraints or anything like that? Obviously, you were able to deliver, but can you just talk about kind of the state of supply chain and and and where you get your components from?

Speaker 3

Yeah. We really didn't see any constraints in the supply chain during the quarter. We subcontract out the majority of our of our manufacturing on the hardware side. We use, you know, one of the largest firms with a Mexico footprint. So we really haven't seen any impact on that front.

Speaker 8

Okay. Can you talk about any customer concentration issues? Any customers that were of size?

Speaker 3

Yeah. Historically, we haven't had any 10% customers, with the exception of, every now and then, we'll have a distributor, that really doesn't represent concentration per se, you know, in the in the classic customer concentration, meaning. So, you know, we have very limited impact from that standpoint. Historically, our largest customer, would have been our hyperscaler customer, and that customer, historically hasn't reached the 10. So, really, you know, not much of an issue from our standpoint, our business model standpoint.

Speaker 8

Okay. And then you talked a little bit about NVMe. In in the NVMe environments, can can you discuss how how broadly NVMe has been adopted by the customers? Is it is it end to end, or how how are they using that?

Speaker 2

Yeah. I think the way they're using it is in a tiered model in that they put the data that needs to be processed, accessed, modified in very high speed. They put that data on flash NVMe, and then when they're done with it, they get it off of there. So, you know, if you're a wealthy organization, you could do end to end NVMe, but I I just rarely see that. What I typically see is a thin tier of NVMe, then a broader tier of DiSC, and then the biggest tier of object storage or tape archive storage.

And they use our software, which is there's a new very deeply developed technology that we've launched in StorNext seven that dynamically organizes that for you. It decides for you when does your does your storage need to be on high speed NVMe, when should it be on disk, and when should it be archived. And they could do it based on policies or rules. And the idea would be, if you're sequencing a gene or doing visual effects on a movie, you're gonna be up in NVMe. And then as soon as you're done doing that work, it can slide down to disk where it's still fast enough to watch that movie, review the movie, have, you know, editorial review.

You could even play it out to movie theaters. And then when that movie's kinda come and gone, it can then slide down to an object store or a, a deep or cold archive. And we have the software that organizes that, and and that's the way we see it deployed. So and I'm seeing more and more customers buying all of those tiers from us. And even when they tier to cloud, they use our software to tier things to cloud and move it back from the cloud and use our policy engine to orchestrate all the movements of those files as they go through their workflows.

Speaker 8

Okay. And then a last one, the s three. I think you introduced an s three solution to work with AWS. Any comment in terms of adoption there?

Speaker 2

I think I think what we talked about regarding s three was that our object store active scale has the most complete, most thorough s three implementation in the object storage space. And we have had just very strong pickup of that product in part because of the thoroughness of the s three implementation, but also just how incredibly elegantly that product scales, how robust it is and easy to run. And we've recently added a lot of ransomware protection functions in it to make it not only very scalable, very easy to use, but really lock down your data so that it's near impossible to or someone from the outside to, you know, lock up your files or modify your files and lock you out of them and hold you for ransom.

Speaker 8

Very good. Thank you.

Speaker 3

Thanks, Eric.

Speaker 0

Your next question is coming from David Dooley. Your line is live.

Speaker 6

Yes. Thanks for taking my question. Most of them have already been asked, but I'll just have a couple of follow ups. You mentioned Q, the current quarter seasonality, the March seasonality. Typically, what is the seasonality for the March on a historical basis?

Speaker 3

I'd say it rang from the mid to high single digits, decrease quarter over quarter.

Speaker 6

Okay. And, when you think about transitioning all of your, hardware products to software or a lot of them, what percentage do you actually think will ultimately, let's say, a three to five year period transcend transition to a software model. And why I ask it that way is I'm I'm sure there's some pieces that won't that you know that won't transfer. So I'm just trying to get an idea over a three to five year period what you would expect to transfer to this software oriented model.

Speaker 3

Yeah. On our analyst day, when we when we did our three to five year model, as we transition, what we characterized as recurring revenue would be 70% of our total revenue. Today, it's plus or minus 40% that is nonproduct. So we're really looking at, you know, the 60% that is product today. Half of that will will move to to software, and half of it will remain, you know, round numbers.

Speaker 6

Okay. And then you in your slide presentation, you have a pyramid slide there where you have the hyperscalers on top and then a couple of other incremental opportunities. I'm just wondering how much bigger do you view the web scale guys in the Fortune 2,000? How much bigger are those markets than that top tier of the top 10 hyperscalers? Just trying to understand what sort of market opportunity you have here with these two big new pieces?

Speaker 2

I mean, I think I would characterize the difference between those tiers less in size and more in value. And what I mean by that is a hyperscaler by design wants to deliver all the technical value themselves and wants as little dependence on third parties as possible. And they and that's their business model. But when you go to a web scale company or to an enterprise, they don't feel that way. They're happy to work with tech other technology companies, and they're happy to use your software.

They're happy to use your services. They're happy for you to help them, and they don't view that as a problem in their business model. And so while the deals may be much, much smaller, their the percentage of software and the percentage of services is much higher. And so the margins, the profitability of those two lower pieces is drastically larger. So it may be may not be any bigger dollar wise to the company, but it could be over double the margins that we get from hyperscalers in those two lower tiers.

Speaker 6

Okay. Thank you.

Speaker 3

Thanks, Thanks,

Speaker 0

further questions at this time. I would now like to turn it back to Jamie for closing remarks.

Speaker 2

All right. Well, everyone. It was a great quarter. We're looking forward to more quarters and we'll keep everyone updated on our transformation as we move as quickly as we can to transform ourselves into a more profitable, more earnings rich company as we transition to software services and subscriptions. So thanks, everyone, and we'll be talking soon.

Speaker 0

Thank you for your participation, ladies and gentlemen. You may now disconnect.