Quantum Corporation - Q3 2023

Transcript

Operator (participant)

Greetings. Welcome to the Quantum Corporation's third quarter fiscal 2023 financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Brian Cabrera. You may begin.

Brian Cabrera (CAO)

Good afternoon, and thank you for joining today's conference call to discuss Quantum's third quarter fiscal year 2023 financial results. I'm Brian Cabrera, Quantum's Chief Administrative Officer. Joining me today are Jamie Lerner, our Chairman and CEO, and Ken Gianella, our CFO. This afternoon, we issued a press release which you can access under the investor relations section of our website at www.quantum.com. We are using a slide presentation in conjunction with today's call, also accessible under the same section of our website. During today's call, our comments may include forward-looking statements. All statements other than statements of historical fact should be viewed as forward-looking. These statements include any projections of revenue, margins, expenses, adjusted EBITDA, adjusted net income, cash flows, or other financial items. These statements may also concern the expected development, performance, and market share or competitive performance of our products or services.

All forward-looking statements are based on information available to Quantum as of today's date. We advise caution in relying on these statements as they involve known and unknown risks and uncertainties we refer to as risk factors. Risk factors may cause our actual results to differ materially from those implied by the forward-looking statements, including unexpected changes in our business. We include detailed information about these and additional risk factors under the sections labeled Risk Factors in our quarterly report on Form 10-Q and annual report on Form 10-K, which we file with the Securities and Exchange Commission. We do not intend to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise, except of course, as we are required by applicable law.

Please note that our press release and the management statements we make during today's call will include certain financial information in GAAP and non-GAAP measures. We include definitions and reconciliations of GAAP to non-GAAP items in our press release. If you're unable to listen to the entire call at this time, we will make a recording available for at least 90 days in the investor relations section of our website. Now I would like to turn the call over to our Chairman and CEO, Jamie Lerner. Jamie?

Jamie Lerner (Chairman and CEO)

Thank you, Brian, and thank you all for joining us today. Earlier today, we announced our results for our third quarter of fiscal 2023, with revenue results that exceeded the high end of guidance and a significant year-over-year improvement in our operational performance. Turning to slide three, here's a brief overview of the results from the quarter. We finished the quarter with $111.2 million in revenue, which is above the preliminary results we announced in January, and represents an increase of 17% year-over-year, and also the highest quarterly revenue results since I joined the company. Gross margin improved sequentially to approximately 36%. Adjusted EBITDA increased sequentially and year-over-year to $6.3 million, driven by improved product mix and lower operating expenses.

We exited the quarter with approximately $15 million of shippable backlog, which is within the range we expect to maintain going forward. Turning to slide four, I would like to share some operational insights from the quarter. We delivered year-on-year revenue growth in almost all segments of our business, including another strong quarter of hyperscale tape sales. We still see several hot pockets of supply constraints, but see promising signs as the supply chain for tape drives and other components continues to improve. Inflationary costs remain elevated in most cases, but as lead times come down and the market improves, we are cautiously optimistic. I would like to give an update on the rest of our portfolio.

We had a strong quarter in our video surveillance business. Although that market is characterized by large deals and long sales cycles, we're encouraged by the traction we have seen since we acquired the Pivot3 surveillance business last year. We continue to be recognized for our technical innovation. In December, we were acknowledged with three more surveillance industry awards. We also saw positive year-on-year growth with our data protection business in all three geographies as enterprise IT departments continue to invest in their data protection infrastructure and strengthening cybersecurity. Turning to slide five, I would like to give you an update on our transformation progress. Our end-to-end portfolio is really coming together. It is resonating with customers and partners. Our customers want to do more with Quantum.

As we introduce new products and convert and expand our customer base, we will continue to grow recurring software revenue as we laid out during our investor day in November. One of our key strategies to drive growth is to expand our selling motion from point products to selling end-to-end solutions within large organizations. I'm encouraged by the evidence of early success we are seeing with this model, particularly in Europe and Asia. I would characterize those regions as being approximately a year ahead of our North American business in terms of their ability to sell the whole portfolio. As I've stated in the past, growing our software and systems business in North America will be a key driver for both future revenue growth and improved gross margins.

We have made investments in the North American sales teams to drive growth in historically strong segments for us, such as media and entertainment and the U.S. federal government. Over the past year, we have also invested in the infrastructure and tools to expand our enterprise selling capabilities and broaden our footprint in large accounts. While I anticipate this transformation to continue into fiscal 2024, we are pleased with the progress we are making. We are also continuing to innovate. We are introducing new software features of entire portfolio, and we have begun briefing key customers and industry analysts on the next-generation storage software that we mentioned at our investor day. The feedback has been very positive, and we expect to begin early access trials this quarter in advance of announcing publicly in the first half of next fiscal year.

This new product will further strengthen and differentiate our portfolio and allow us to participate in some of the fastest-growing segments in data storage. We'll be able to talk more about this exciting new offering in the near future. Turning to slide six, I would now like to introduce our new CFO, Ken Gianella. Ken joined Quantum on January 12th as our Chief Financial Officer and succeeds Mike Dodson. I'd like to take a moment to thank Mike and acknowledge the transformational work he accomplished at Quantum, as well as his financial leadership through a very challenging period. Mike will remain with the company in an advisory role until August.

Ken has extensive financial and operational experience at technology companies, and his background makes him well suited to help lead us through the next phase of our strategic priorities, which include driving EBITDA expansion, delivering consistent operating results, and delivering improved value to our shareholders. Ken, welcome to the team, and I'll turn it over to you to walk through the financial results.

Ken Gianella (CFO)

Thank you, Jamie. It's a pleasure to be on a call today and I'm extremely excited to be here at Quantum and for the opportunity that lies ahead as we advance the strategy that you, Mike, and the rest of the leadership team started. With that, let's get into it. Please turn to slide seven. I'll provide an overview of the financial results for our fiscal third quarter. As previously highlighted by Jamie, revenue increased 12% sequentially and 17% year-over-year to approximately $111 million, which was above the preliminary results we announced in early January. This also represented the highest quarterly revenue in the last five years.

Earnings per share improved over 89% year-on-year to a $0.02 per share loss on a combination of improved operational performance and lower operational expenses, which were down 9% year-on-year. Both GAAP operating income and adjusted EBITDA were the highest since fiscal 2021. Looking at other metrics in Q3, shippable backlog at quarter end decreased to approximately $15 million from $20 million last quarter as supply constraints improved. As we are cautiously optimistic about the improving supply chain situation, we expect to maintain shippable backlog in a range of $10 million-$15 million going forward. Active subscription software's annual recurring revenue, or ARR, increased approximately 20% sequentially and approximate 84% year-over-year to $11.2 million on over 660 cumulative active customers as our subscription software continues to gain traction.

Now turning to slide eight, I would like to break down this quarter's revenue results. Primary storage revenue was up 1% compared to prior year and up 42% sequentially to $14 million. Contributing to the sequential growth in primary storage was a solid uptick in both our StorNext file storage software and Pivot3 video surveillance solutions. As with the last few quarters, the biggest mover continues to be our secondary storage systems. With revenue increasing 66% year-over-year and 15% sequentially to $50.7 million, or 44% of total revenue, as we saw strong orders from both our enterprise and hyperscale customers. Next, turning to devices and media. While there was some sequential improvement, revenue is down approximately $3 million or 24% year-over-year, primarily due to less global demand for tape cartridges in the period.

Turning to our services business, the revenue was essentially flat year-over-year. The results reflect year-over-year growth in ARR driven by new active subscriptions, offset by a continued decline in support renewal revenue due to end of support life on legacy products. We anticipate services revenue will be maintained around this level in the near term. Finally, royalties declined year-on-year as we saw less global demand for tape cartridges. Turning to slide nine, let's review our third quarter fiscal 2023 GAAP results. GAAP net loss in the third quarter was $2.2 million, or a loss of $0.02 per share, compared to a net loss of $11.1 million, or a loss of $0.19 per share in the prior year third quarter.

This improvement was driven by significantly higher revenues and lower operating expenses due to prior restructuring actions and other cost controls. Now please turn to slide 10 for non-GAAP metrics. Non-GAAP gross margin was 36%, compared with 37.3% in the prior year and 35.4% sequentially, both driven primarily by product mix. With the significant revenue contribution from lower margin hyperscale sales, this product mix largely offsets the cost reduction initiatives and other favorable pricing actions taken over the last year. As Jamie mentioned, sales and product mix improvements are a top priority in support of expanding gross margins and driving increased EBITDA. On a non-GAAP basis, operating expenses decreased approximately 5% year-over-year to $34.5 million in the third quarter due to cost controls and a traditionally lower end of calendar year costs.

We expect operating expenses to be approximately $1 million higher in the fourth quarter due to end of year commissions, seasonally higher payroll taxes and other inflationary pressures. Non-GAAP adjusted net income in the third quarter was $1.6 million, or $0.02 per diluted share, compared to an adjusted net loss of $4.6 million or a loss of $0.08 per share in the prior year. The significant year-over-year improvement in both bottom line results reflects the company's previously implemented cost reduction actions combined with strong top line growth. Finally, adjusted EBITDA increased to $6.3 million compared with $758,000 in the prior year. The improvement EBITDA for the quarter is a combination of achieving scale at higher revenue levels, improving product mix, and continuing to implement cost controls.

Now please turn to slide 11, where I'll give an overview of our debt and liquidity at the end of December. Outstanding debt split between term and our revolver was $103.6 million, slightly down from prior year levels. Cash and equivalents at the end of the third quarter were $26 million, compared with $4 million a year ago. Our net debt position of $77.6 million gives us a straight net leverage of 7x our trailing 12-month adjusted EBITDA. When looking at our bank calculation, there are a few adjustments to the trailing 12-month adjusted EBITDA calculation, such as FX and inventory provisions, which give us a bank net leverage of 4.6x. All of these factors put us in a good place heading into the fourth quarter.

Turning to other liquidity metrics, interest expense in the third quarter was $2.7 million, compared with $2.4 million in the prior year. Adjusted working capital was approximately $73 million up year-over-year and sequentially on higher inventory receipts at the end of the quarter. Finally, we would like to work down our DIO numbers over the next few quarters, but overall cash conversion metrics remain strong. Please turn to slide 12 for a look at the company's fiscal fourth quarter guidance. First, we anticipate total revenue in the fourth quarter to be $102 million ± $2 million. At a midpoint, this would equate to a year-over-year growth of approximately 7%. The expected sequential decrease from the third quarter primarily reflects seasonality experienced at the beginning of the calendar year.

This is combined with the expected normalization of shippable backlog in the supply chain going forward. We expect non-GAAP adjusted net loss per share to be $0.04 ± $0.02 per share, based on an estimated 93.3 million shares outstanding. Adjusted EBITDA for the fourth quarter is expected to be approximately $500,000. To give some color on the non-GAAP EPS and adjusted EBITDA guide, there are a few factors I would like to highlight. For the fiscal fourth quarter, we anticipate a two to three point reduction in gross margin sequentially due to product mix that will temporarily impact our performance this quarter. This is combined with the previously discussed operating expense factoring in, such as end of year commissions and other inflationary increases that will have a near-term impact to our results.

Looking forward, we do anticipate margins and EBITDA to bounce back as we take actions to improve in future quarters. Before turning the call back to Jamie, I want to emphasize that although I've been here a few weeks, I've hit the ground running. In conjunction with Jamie and our executive team, we are actively exploring ways to accelerate our operational plan with margin expansion, improving profitability with product and structural cost initiatives, and looking to accelerate growth and innovation with the introduction of new software, products, and services in the coming year. Thank you for your time, and I look forward to meeting you all soon. With that, I'll now hand the call back to Jamie for closing remarks.

Jamie Lerner (Chairman and CEO)

Thanks, Ken. We had a great quarter, and we're constructive on the progress we're making. While not always a straight line, I'm really encouraged by the direction and improvements to our sales model by the recovery in the supply chain and our development of an end-to-end portfolio and upcoming new product introductions. As Ken mentioned, while we are cautiously optimistic heading into this new year, we're not standing still. We are actively working to increase margins and profitability, looking to accelerate efforts to drive cost out of our operations, and we'll continue our innovation to remain a global leader in managing and storing unstructured data. With that, let's open it up for questions. Operator?

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for your questions. Our first questions come from the line of George Iwanyc with Oppenheimer. Please proceed with your questions.

George Iwanyc (Executive Director and Senior Equity Research Analyst)

Thank you for taking my question. Jamie, maybe, starting with the progress you're seeing on the sales front. You know, you highlighted pretty strong results in, Asia and Europe. You know, how do you see those type of patterns, you know, being replicated in North America? Like, what are you focusing on near-term?

Jamie Lerner (Chairman and CEO)

The, the model is based on deploying sales resources into our highest margin end markets, and that has traditionally been large enterprise, certain segments of media and entertainment and large federal governments. What we've been doing is going into the largest geographies, going after the largest companies, and also, going after segments of, again, government business, public sector business that, you know, have traditionally been very successful for us. You know, it's really been about, you know, going to where the margin is.

George Iwanyc (Executive Director and Senior Equity Research Analyst)

Okay. Thank you. you know, maybe digging into the seasonality you're seeing, when you maybe look further in the year, what kind of patterns should we anticipate, you know, given the visibility you have right now?

Jamie Lerner (Chairman and CEO)

I would expect, you know, we have a pretty well-worn pattern that's played out for quite a few years. I would expect us, you know. Some of those patterns we came off of a little bit with upheaval from supply chain or upheaval from the pandemic. We see ourselves returning to more the Quantum classic seasonality, you know, with, you know, kind of a softer Q4 and then it building up for, you know, our strongest quarter being Q3.

George Iwanyc (Executive Director and Senior Equity Research Analyst)

Thank you. Then, you know, maybe just one more question for you, Ken, and, you know, congratulations on joining, Quantum. When you look at product mix, can you kinda give us a sense of how you see that progressing, from a margin perspective through the year?

Ken Gianella (CFO)

Yeah. Thank you, George. Well, one of the things that we wanted to focus on with this Q4 is gonna be a bit of an anomaly with what we saw the growth coming back with. If you look at the work that we've done over the prior year, we had a lot of work on margin improvement and fixing that mix. This quarter coming up, Q4, we see particularly large volume of hyperscale coupled with a unique customer deal that we had to be a little bit of aggressive on because we wanted a real good proof point in the healthcare space, particularly genomics. To be more precise, in gaining that proof point in a sector that has a lot of unstructured data, modeling management of large quantities of that unstructured data, was important for us to grab.

We got a little bit ahead on the pricing than where we saw our cost downs coming on that product set, but we think that's gonna start normalizing heading into Q1 and into the rest of the 2024 fiscal year. I think you're gonna start seeing that normalize. As Jamie said, we're seeing progress across the geos, particularly in our primary storage space. We see that continuing into the new year, and that's really where we feel more comfortable with the strength on the margins.

George Iwanyc (Executive Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

Thank you. Our next questions come from the line of Craig Ellis with B. Riley Securities. Please proceed with your question.

Craig Ellis (Senior Managing Director and Director of Research)

Yeah, thanks for taking the question. Jamie, congratulations on the five-year high quarterly revenues, and Ken, welcome to the team. I look forward to working with you. I'll start with a clarification just on the quarter's revenue upside versus initial guidance. Can you give us some further color on where that came from? Was it more on the hyperscale side, the enterprise side? What was the linearity of the strength to the quarter? Pretty steady, or was it more back-end loaded?

Ken Gianella (CFO)

Well, I'll start with that. It came a little bit more back-end, the first thing we saw was strength in the supply chain coming back. Having that kind of loosen up gave us the ability to fulfill more demand, particularly within the hyperscale side of things. The linearity side, it's we tend to be month one, month two, a little bit lighter with month three coming on strong, and that linearity kind of held true to it. We were able to fulfill a little bit more demand because the free up of the supply chain allowed us to ship some more of that pent-up demand and backlog.

Craig Ellis (Senior Managing Director and Director of Research)

Got it. Jamie, I think when we spoke three months ago, one of the things you were looking for is that for some of the sales changes you were making to really help accelerate primary storage. Is that what you're seeing with the strength in Europe and Asia? Because headline primary was pretty flattish, but just walk us through the impact you're getting as you make some of the adjustments to the sales team.

Jamie Lerner (Chairman and CEO)

Yeah. I mean, I wouldn't over-rotate on primary in that we can achieve the same or even stronger margins in secondary. The DXi product is our highest margin product. ActiveScale is also often sold software only at, you know, north of 80% margin. There's a lot of margin in the secondary products, and there's a lot of products in secondary that are beyond just, you know, tape hardware. What we're seeing and what we're most focused on is the ability to sell the whole portfolio. You know, we have a lot of historic accounts that bought a product from us.

What we're seeing through the new sales teams, the new sales training, and the new sales incentives is going into our accounts and selling them a primary product, StorNext or Surveillance, selling them secondary products, selling them management software, you know, selling multiple products, and often those products as a solution where we combine multiple products to solve a business problem or solve a management initiative. You know, I think that's been going well in Europe and Asia. You know, the teams we said are about a year behind in North America, but I'm seeing the pipeline, the initial deals, and I think that's gonna flow right through North America and it should have a meaningful impact on our margins as that, you know, as we roll through the, predominantly the U.S. sales team.

Craig Ellis (Senior Managing Director and Director of Research)

Got it. Related to that and selling the solution, subscription adds new customers, were about 100 in the quarter. It looks like that was about the third consecutive quarter, getting that many new customers on subscription.

Jamie Lerner (Chairman and CEO)

Mm-hmm.

Craig Ellis (Senior Managing Director and Director of Research)

What should we think through calendar 2023 for new customer adds to the program? Should it click along around 100 a quarter, or do you see an inflection coming, and if so, what's the catalyst?

Ken Gianella (CFO)

Not giving an exact number, we're really pleased about how we're seeing the active subscription sales going. I think the thing to highlight to everybody out there is that the product set that we started with for the first set really only touches about 30% of our install base. Focusing with these initial set of sales and these initial set of products, we're really pleased with where the product is going, and we'd expect to continue to see strong growth and momentum there 'cause we're gonna be focusing on this and trying to acquire as our customers, and more importantly, our sales channel becomes more comfortable with the selling motions around this new product set versus just a point sale.

Craig Ellis (Senior Managing Director and Director of Research)

Got it. That install base scoping is good context. Lastly, regarding the gross margin outlook, the decline of about 250 basis points to around 33.5%, how much of that is the big healthcare deal that you flagged versus other things? Is the recovery back north of 35% and towards 40% really just working that through? Are there new initiatives that you and the team are executing? If so, what are they, and when do you expect to get a payoff from them?

Ken Gianella (CFO)

Predominantly, the headwind was this large deal that we were talking about. I don't wanna downplay the other work that we're doing to continue that rotation and the margin back up. There's a lot of things that we have on deck that even in my short time here, people have been really active in showing the game plan of how we get there, of making sure that we're very focused on manufacturing in our services team. You know, as we highlighted before, there's been a pretty steady decline within the services business, with our legacy side of the business. As we rotate away from these end of life older products, that starts bleeding off, and we're really doing a job of rationalizing how that team looks to service that base.

Also leaning into the active subscriptions to continue to fill that growth. I think you're gonna start seeing that help in 2024 going forward, as well as some of these actions we're taking in cost downs of products and narrowing that product portfolio to be more effective and efficient. It's not just the one customer flushing through a deal. I think there's gonna be other factors involved and a lot of self-help that is gonna get us to where we need to be going forward.

Craig Ellis (Senior Managing Director and Director of Research)

Got it. Thanks, Ken. Thanks, Jamie.

Jamie Lerner (Chairman and CEO)

Thanks, Craig.

Operator (participant)

Thank you. Our next question is coming from the line of Nehal Chokshi with Northland Capital Markets. Please proceed with your question.

Nehal Chokshi (Managing Director)

Yeah. Thank you. Congratulations on strong results, both on the top and bottom line. Jamie, you've talking about the progress you're making with solution selling, and note that APAC is ahead of North America. Why are they ahead?

Jamie Lerner (Chairman and CEO)

Uh, they started earlier. Um, you know, they were smaller geographies that were less of a risk to our business. So we consciously said, "Look, let's start there." Um, North America is such a important part of our revenue engine. It-it's just kind of an unsafe place to experiment with. So Asia and parts of Europe, we could do some trials of these new models, um, you know, with a much lower... It's a lower risk. And so we started there, um, had some really good success in Australia, some good success, um, across, uh, Korea, and, um, have been having a lot of success in France, Germany, England, and now, you know, we're sweeping that across North America.

Nehal Chokshi (Managing Director)

What are the metrics that you're looking at in these smaller geos in APAC that tells you this is indeed working well?

Jamie Lerner (Chairman and CEO)

We look for a couple signs. One is, are there multiple product families on a single quote? You know, versus instead of just selling, you know, movie making or just selling video surveillance, are you able to sell multiple product families, high-speed storage, archive storage, surveillance storage, all part of a single deal. Multiple product families. The second thing you'd expect with multiple product families is a larger ASP. Lastly, and because you're solving a business problem versus selling terabytes, you know, capacity or terabytes, you'd expect to get a higher margin when you're solving a business problem. That's really the trifecta is multiple product families on one quote, higher ASP and higher margins.

Ken Gianella (CFO)

Which I'll just add in, Jamie, that goes to the higher contribution per rep, so-

Jamie Lerner (Chairman and CEO)

Correct.

Ken Gianella (CFO)

You have the body out there that is upselling multiple products and solutions, and you're getting more yield per rep.

Jamie Lerner (Chairman and CEO)

Right. With that, a lot of that run rate business where we sell a single product, and we're not walking away from that business. Instead of having an outside sales rep with a very high comp plan selling a run rate product, we're pushing more of that to the channel and more of that to our inside sales organization. The transactional part of our business, we're doing that more cost effectively, and focusing the most skilled experience and expensive part of our selling engine to a multi-product family sale versus a transactional sale.

Nehal Chokshi (Managing Director)

Okay. That's a great color. What is the actual uplifts you're seeing in terms of ASP and margin in these, you know, small geos?

Jamie Lerner (Chairman and CEO)

Yeah, I mean, we're not putting those metrics into our package of metrics at this time, but we are seeing ASPs going up. We are seeing relevance go up. I would measure that in the number of CIOs that are meeting with us. You know, when we're a transactional vendor versus you're helping them solve one of their top initiatives, I just think we're seeing more relevance, we're getting more time, we're getting more mind share. You know, I have visibility into the quotes that we're putting out in the future, and I'm seeing the quotes get bigger. Another sign of it working is when you're solving a business problem, you can't win with a quote, you have to write a proposal and describe what you're doing, describe how you're gonna change their business or help their business.

It's amazing how many more proposals we're putting out than where we used to just kinda drop a quote and you're basically winning on price or, you know, winning on availability of materials. Now we're winning on the merits of the solution and the uniqueness of the solution. That's, you know, it's taken a number of years to get here, but we really have the portfolio now where we can assemble highly differentiated proposals versus cost-effective quotes.

Nehal Chokshi (Managing Director)

Okay, great. Ken, this is a much tighter range of revenue guidance than what I think we've typically been seeing over the past four or six quarters. Is this one of the philosophies that you're bringing to the table, or is this just simply a reflection of better visibility?

Ken Gianella (CFO)

A little bit of both, right? I mean, I think number one, it's important we wanna send a signal to our investor base that as we look down the road, this is what we have a feel for. Also more importantly, we didn't wanna put such a large range out there that it would skew people's thoughts. Again, great quarter we had in Q3, the seasonality that we saw coming in this quarter, we really wanted to send a signal that, you know, we had visibility into the range and we didn't want people to get ahead of themselves on the numbers. That's the reason why we put a little bit of a tighter range this time.

As we go into the new year, you know, we're gonna be looking at, as we get more visibility, some other metrics and way to give you guys a little bit more of a near-term view, not just a quarter view of what we're thinking and where we're going. As I work with the team and Jamie, you know, we're gonna see where we can expand some of that visibility for you all in the future.

Nehal Chokshi (Managing Director)

Okay, great. Then, any early thoughts on fiscal year 2024? It looks like, you know, based on what you're guiding to here, even excluding the drain of backlog you've had, probably about 5% year-over-year growth in demand here. Is that how we should be thinking about for fiscal year 2024, or is, you know, a different framework we should think about here?

Ken Gianella (CFO)

I appreciate the effort, but we're not guiding 2024. We did wanna give people a view on a couple key metrics that were slightly down this quarter that we don't believe that that is going to be a trend going forward, particularly on the margin side of it. you know, I think we'll give you guys the 2024 guidance in a couple of months here.

Nehal Chokshi (Managing Director)

Okay. Any thoughts on what the macro backdrop looks like for you guys?

Jamie Lerner (Chairman and CEO)

I mean, I know a lot of my peers are signaling slowdowns and conservativeness and I don't wanna second-guess them. You know, we're guiding up 7% year-on-year, right? We're guiding the strongest revenue quarter in quite a few years in our Q4. You know, we're not guiding to signaling we're seeing a big slowdown. I mean, it may just be a reflection of the segments we play in. I mean, our biggest segment is secondary storage, which is protecting and backing up data, I don't think that correlates to global economies. Meaning if the economy is doing poorly, people don't say, "Well, I guess we're not gonna back up our data." You're still gonna back up and protect your data.

The trend we're dealing with is less of a macroeconomic trend. It's a trend that the world is creating more data, regardless what the economy does, and that data needs to be protected and backed up. I do think the movie-making industry is seeing a recovery, and they're making just as many movies as they did in the past. I think ransomware, whether there's a good economy or a poor economy, I think people are spending money to protect against ransomware. The segments that we plan, predominantly do not seem to be negatively affected the way laptops and other parts of other segments are being impacted. Right now, you know, our guide does not guide to, you know, seeing major negative macroeconomic trends.

Nehal Chokshi (Managing Director)

Great. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Eric Martinuzzi with Lake Street Capital Markets. Please proceed with your questions.

Eric Martinuzzi (Senior Research Analyst)

Yeah, I had a question regarding the guidance. If I go back the past couple of years, the sequential revenue Q3 to Q4, last year we were flat. The year prior to that, we were down about $6 million sequentially. I understand there's seasonality, but it seems like a pretty dramatic step down Q3 to Q4. Would you care to comment on that?

Ken Gianella (CFO)

I think the prior flat, I'll start with, was more supply chain driven than anything. I think the other step down, if you will, you know, going back to what this current quarter looked at, the supply chain loosening back up allowed us to fulfill a little bit more of that hyperscale demand, you know, which had a little bit of elevation in the quarter. I go back to what Jamie said, though. A 7% year-on-year number, and if you look, it's the strongest Q4 that we've had in several years, even before the supply chain impacting it, that, you know, we think it's a strong indication heading into 2024.

Eric Martinuzzi (Senior Research Analyst)

Really the supply chain-- The outperformance in Q3, you're saying that supply chain loosening helps, or created kind of a bigger starting point? Okay. Then on the-

Ken Gianella (CFO)

It helped us.

Eric Martinuzzi (Senior Research Analyst)

Yep. Then, just again, the sequential guide on the adjusted EBITDA also seems. I know we're talking about the product mix taking, you know, roughly 2.5% out of that $102 million midpoint guide, another $1 million for the OpEx higher, but that still seems, you know, the $500,000 of adjusted EBITDA seems like a pretty dramatic step down. Is that conservatism that you're kind of baking in there? Or just from the $6.3 or the $0.5 seems dramatic.

Ken Gianella (CFO)

I think mix has a lot to do with it. You know, if you start with your top line and looking what you're shipping out there, the mix with the hyperscale plus this one customer, that's a lot of fall through to EBITDA. That was an impact. We were purposely mindful to also point out the OpEx increase with the commissions and the other end of year elements. We are seeing some inflationary pieces where, you know, the OpEx run rate will probably be more around that $35 million, $36 million range going forward with some of that inflationary and merit pressures going forward.

you know, you take the $1 million from the OpEx piece that we called out, give or take, and then you call out the points of margin, you know, that's about $2 million-$3 million, you know, plus of EBITDA that fell off.

Eric Martinuzzi (Senior Research Analyst)

Okay. Royalty continues to dwindle here. I think on a year-on-year basis, i'm looking at, if I just replicate what you did in Q3 into Q4, we'd be off about 20%. I know you're not guiding at the product line, but just at a high level, is this the new normal? Should we anticipate continued erosion on the royalty?

Jamie Lerner (Chairman and CEO)

Yeah. I think it's probably safe to say, you know, I think we're at $2.8 million. I think $2.8 million is the new normal. you know, none of us have a crystal ball, but I'd say unless something changes, I think running around $2.8 is about right for your model.

Eric Martinuzzi (Senior Research Analyst)

Got it. Thanks for taking my questions.

Jamie Lerner (Chairman and CEO)

Yeah.

Operator (participant)

Thank you. There are no further questions at this time. I would now like to hand the call back over to Jamie Lerner for any closing comments.

Jamie Lerner (Chairman and CEO)

Thanks, everyone, for joining us today. We're pleased with the results and have a lot of work in front of us, but it's great to have Ken on board and have some fresh legs here, and we're excited about Q4 and entering the new year. Thanks, everyone. Thanks for joining.

Operator (participant)

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.