Quantum Corporation - Q4 2022

Transcript

Operator (participant)

Good afternoon, everyone, and Thank you for participating in today's conference call to discuss Quantum's financial results for the fourth quarter and full fiscal year 2022. 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. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Brian Cabrera from Quantum.

Brian Cabrera (Chief Administrative Officer)

Good afternoon and thank you for joining today's conference call to discuss Quantum's fourth quarter and fiscal 2022 financial results. I'm Brian Cabrera, Quantum's Chief Legal and Compliance Officer. Joining me today are Jamie Lerner, our Chairman and CEO, and Mike Dodson, 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, and this is 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 are 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 this afternoon, we announced results for our fourth fiscal quarter and fiscal year 2022. I'm encouraged by the progress we made throughout the year, delivering growth in recurring software revenue, integrating three acquisitions to build out our portfolio of solutions for video and unstructured data, and resetting our balance sheet with a recently completed rights offering. Today, I will talk more about the progress we are making in our supply chain and how we plan to improve Quantum's earning power going forward. Our fourth fiscal quarter revenue was up year-on-year and exceeded our preliminary results, and our backlog remains at near record levels. Our fiscal year 2022 revenue grew 6.7% year-on-year, and we made significant progress toward building recurring revenue.

Exiting fiscal year 2022 with $7.4 million of subscription software ARR and $160.5 million in high-value recurring revenue. The number of active subscription customers grew to 356, an increase of 290% year-over-year. We expect continued growth in the fiscal year 2023 based on all the work we have done over the last four quarters to transition our product lines. Earlier this quarter, we completed an oversubscribed rights offering to strengthen our balance sheet by reducing debt and increasing our cash position. With the completion of the rights offering, we have reduced our net debt balance by 2/3 from just under $150 million at the end of fiscal 2019 to currently just under $50 million.

In addition, we have reduced cash paid for interest expense from $24.3 million in fiscal year 2021 to an estimated $8 million annual interest expense in fiscal year 2023. Mike will discuss more about our balance sheet in his section, as well as how we have reset all debt covenants to more favorable levels. Now I'd like to talk about our plans to increase earnings over the next four quarters. Through sales growth, operational expense reductions, and price increases, combined with supply chain initiatives to drive margin expansion. Our goal is to deliver substantial year-on-year improvements to adjusted EBITDA. While our sales are ramping, we are tightening operational expenses across the company. We are reducing discretionary spending, reducing our facilities footprint, and expanding our global engineering presence as we continue to integrate recent acquisitions. Now I'd like to talk about supply chain.

As we stated in the press release, our backlog remains just over $60 million. Much of this backlog is tape storage systems for our hyperscale and enterprise customers. We are seeing signs of improved tape drive supply from our key supplier, though we expect the environment will remain constrained in the short to medium term. Starting last year under the new supply chain leadership of Eric Isom, we put in place a strategy to improve supply chain execution, and this is now starting to show results. Our strategy is based on four main elements, reducing reliance on broker buys by purchasing long lead components well in advance, replacing components that are supply-constrained with more common and often cheaper components, stronger engagement with and management of critical suppliers, localizing supply of tape storage components in Mexico near our contract manufacturer.

The first encouraging sign we are seeing is that POs placed last year for long lead time items are now being delivered, which is reducing the number of components we need to buy on the broker market. Certain components last year had lead times that increased to 60 weeks almost overnight. This left us gapped on supply, so we had to purchase components on the broker market at higher prices to cover the gap. During this period, we also qualified over 70 alternative components in our tape storage systems. These efforts are now showing results, with broker buys decreasing 80% from fiscal Q4 to this quarter. In addition, as we are starting to get ahead of demand, we have started to see reduction in freight expedite charges from Asia, particularly this quarter. Going forward, we expect to use all ocean freight for key bulk materials.

Longer term, as we localize more materials in Mexico, we will further reduce freight costs and geopolitical risks. I'm confident that by executing on the programs above, we'll be able to increase the earnings power of Quantum while building high-value recurring revenue based on software and services. Now I'd like to turn the call over to Mike to provide more detail on the results. We can take questions. Mike?

Mike Dodson (CFO)

Thank you, Jamie. Welcome to the call today. During the current year, we grew recurring software subscription revenue to a total ARR of $7.4 million as we transitioned StorNext, ActiveScale, DXi, and CatDV products to a software subscription model. We also completed two acquisitions that established us as a serious player in a multi-billion dollar video surveillance storage market. Also during the year, we saw a record-breaking backlog driven in large part by the demands of our hyperscale customers that we were not able to fulfill due to ongoing supply chain constraints. Fiscal 2022 was productive, but also a year with challenges. Our revenue, although higher than the prior year, was lower than expected, primarily driven by supply chain constraints seen by much of the industry, as well as the lack of a recovery for our U.S. federal business.

Our gross margins were under pressure by unprecedented component prices and supply chain logistics cost increases, and to a lesser extent, a less favorable product revenue mix. Finally, our operating expenses increased primarily due to the integration of the operations from recently acquired businesses. These factors contributed to a weaker than expected operating result and significantly lower EBITDA. Jamie has already touched upon our plans to address these challenges, and I will go into more details later in my prepared remarks. In conjunction with our focus on driving the transition to a recurring software subscription model, we wanted to introduce the supplemental metrics that we will use to track and report our progress. The first key metric that we will be reporting is annual recurring revenue or ARR. We ended fiscal 2022 with ARR at $7.4 million.

The actual related revenue recorded for the year was $8.4 million. The number of customers under active contract at year-end was 356. Another key metric is total contract value or TCV, and it was $13.8 million at the end of the fiscal year. Finally, the last key metric that we will be reporting is total recurring revenue. That includes our service and support contracts, software subscription revenue, and royalty revenues that totaled $160.5 million for the year. Turning to results for the fourth quarter. Revenue was $95.2 million, an increase of 3% year-over-year and flat compared to the prior quarter, and above the preliminary revenue results we provided in mid-April.

Backlog decreased slightly to $60 million compared to $62 million last quarter as we continue to be supply constrained primarily on tape drives as well as broad-based shortages of components for servers, network cards, and circuit boards. Approximately $32 million of orders in the ending backlog could have shipped to customers in the quarter if we would have had supply. This is an increase of $6 million from the prior quarter. Similar to last quarter, approximately $50 million of the ending backlog represented tape products for which the majority was orders from our hyperscale customers. During the fourth fiscal quarter, secondary storage revenues were up 6% sequentially, primarily driven by ongoing strong demand from hyperscaler customers. We continue to see improving supply of tape drives that has helped support the sequential revenue growth.

Primary storage system saw a modest rebound in the quarter and was up 3.4% sequentially, primarily due to a continued gradual recovery in the media and entertainment business, partially offset by a continued weakness in our U.S. federal business. Also in the fourth quarter, we continued to close multimillion-dollar video surveillance deals that we were not able to fulfill due to ongoing supply chain constraints. We expect this business to contribute more significant product revenue in fiscal 2023, though this business is expected to be lumpy and characterized by large deals with long sales cycles.

For fiscal year 2022, total revenue increased 6.7% to $372.8 million, with year-over-year growth primarily driven by strong demand from the hyperscaler customers, combined with an increase in software subscription revenue and video surveillance product and services revenue related to our recent acquisitions. These increases were partially offset by lower U.S. federal business and the gradual decline of lower services support revenues for end-of-life products. Gross margin in the fourth fiscal quarter improved 110 basis points to 38% from 36.9% in the prior quarter, reflecting less than full benefit from the price increases we implemented. These improvements were partially offset by continued inflationary costs in the supply chain and product revenue mix.

For the full fiscal year, gross margin decreased by 370 basis points to 39.4% from 43.1% in the prior fiscal year, which primarily reflects the substantially higher component, freight, warehouse, and related logistics costs, and to a lesser extent, a less favorable revenue mix of higher hyperscale revenue and lower U.S. federal revenue. Despite the upside from increased pricing on our products, we expect the pressure on gross margins to continue at the levels experienced in the back half of fiscal 2022 into the first half of fiscal 2023, given that we expect it will take additional time to realize meaningful improvements in terms of both product mix and the inflationary cost environment.

In addition, the deferred PPV will be amortized during the first quarter, and therefore, we don't expect any improvements from PPV margin pressure until the second quarter of next year. GAAP operating expenses in the fourth quarter were $41.8 million compared to $42.4 million in the prior quarter. Non-GAAP operating expenses during the fourth fiscal quarter increased $0.9 million to $37.2 million as compared to $36.3 million in the prior quarter. The prior quarter expense level reflects a one-time, non-recurring benefit of $1.8 million from reduced ERP support costs related to the legacy ERP installation that is being replaced. When you exclude this one-time prior quarter benefit, the operating expense run rate decreased by $0.9 million for the current quarter or just under the range of $1-$2 million that we noted on our call last quarter.

In addition, the fourth quarter fiscal operating expense run rate does not reflect any anticipated benefit of additional cost reductions to be fully implemented by the end of the first quarter of fiscal 2023. For fiscal 2022, GAAP operating expenses were $160.9 million, compared to $142.4 million in the prior year. Non-GAAP operating expenses for fiscal 2022 increased $14.9 million to $142.2 million, as compared to the prior year of $127.3 million. Just over three-quarters of the annual increase in non-GAAP operating expenses reflect the costs associated with the company's recent acquisitions and are primarily in R&D and sales and marketing.

Other increases in operating expenses included travel costs as the global COVID travel restrictions were relaxed, as well as increased investment for the development of the next-generation LTO technology. As I mentioned last quarter, and Jamie mentioned earlier, we are implementing a series of cost reduction programs to right size and align the business with current revenue and margin levels during this supply-constrained environment. We are focused on reducing spending in areas such as R&D, T&E, facility costs, and continued integration efforts related to recent acquisitions. We're also continuing our efforts to improve our geographic headcount mix to better leverage global facilities with a focus in Asia. We expect these actions will reduce our current operating expense run rate by $1.5-$2 million per quarter by the second half of fiscal 2023.

GAAP net loss in the fourth fiscal quarter was $7.8 million, or a loss of $0.13 per share, compared to a net loss of $11.1 million, or a loss of $0.19 per share in the prior fiscal quarter. Excluding stock compensation, restructuring charges, and non-recurring charges, non-GAAP adjusted net loss in the fourth quarter was $2.8 million or $0.05 per share, compared to adjusted net loss of $4.6 million or $0.08 per share in the prior quarter. For the fiscal year 2022, non-GAAP adjusted net loss was $7.2 million or $0.12 per share, compared to adjusted net loss of $4.9 million or $0.11 per share in the prior fiscal quarter. Adjusted EBITDA for the fourth fiscal quarter was $0.4 million compared to $0.8 million in the prior quarter.

For the fiscal year 2022, adjusted EBITDA was $11.8 million compared to $28 million in the fiscal year 2021. The year-over-year adjusted EBITDA decrease was driven by the previously discussed challenges, including lower gross margins and higher operating costs. As we have been discussing, our priority is to drive improvements in our adjusted EBITDA by growing revenues, increasing gross margins, and reducing operating expenses. We expect the cost reduction actions combined with the product price increases and supply chain initiatives will begin to show increasing benefits to our EBITDA results by the second half of fiscal 2023. When discussing EBITDA trends, it's also important to understand the underlying cash implications of the company's efforts to reduce the outstanding debt balances and related interest rates. For example, in the prior year, the adjusted EBITDA was $28 million, but interest paid was $24.3 million.

While in the current year, the adjusted EBITDA was $11.8 million, and interest paid was only $9.1 million. The net cash implications of these two factors for these two years is within $1 million. 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-K released today. Now turning to the balance sheet, liquidity, and cash flows. Given that our recently completed rights offering closed in late April, I'll first review the balance sheet and cash flows through the end of the fiscal quarter, then provide some commentary on the changes in our cash and debt balances subsequent to the rights offering. Cash and cash equivalents as of March 31st, 2022 were $5.5 million compared to $4.3 million on December 31st, 2021.

Outstanding term debt as of March 31st, 2022 was $98.7 million. This compares to outstanding term debt of $98.8 million as of December 31st, 2021. At the end of the fourth fiscal quarter, the outstanding balance on the company's revolving line of credit was $17.7 million, compared to $7.6 million in the prior quarter. Interest expense was $2.5 million and $11.9 million for the three and 12 months ended March 31st, 2022, respectively. Net cash used during the quarter was $1.2 million. Excluding changes in assets and liabilities, net cash used by operating activities for the quarter was $0.3 million.

The net cash used related to changes in assets and liabilities was $6.6 million and primarily represented increases in accounts receivable, inventories, and a pay down of accounts payable, partially offset by increases in deferred revenue. CapEx for the quarter was $2.4 million. The cash provided by financing activities during the quarter was $10.5 million and primarily represents the increase in the revolver balance by $10.2 million to $17.7 million at the end of the quarter, compared to $7.5 million at the end of the prior quarter. Net cash used during fiscal 2022 was $27.6 million. Excluding changes in assets and liabilities, net cash used by operating activities for the year was $3.2 million.

The net cash used related to changes in assets and liabilities was $30.5 million and primarily represented increases in inventories, including pre-buys of inventory for the contract manufacturer of approximately $19 million. Reductions in liabilities that include AP, accrued compensation, restructuring, and deferred revenue in total approximated $11 million. CapEx for the year was $6.3 million, and cash used for business acquisitions was $7.8 million. Cash provided during the year by financing activities was $20.2 million, and primarily represents the $17.7 million outstanding on the revolver at the end of the year, and $1.8 million from the issuance of common stock in connection with the employee stock purchase plan.

Turning to the improvements in the balance sheet subsequent to our oversubscribed rights offering, the company raised the maximum available of $67.5 million, in which we used $20 million of the proceeds to reduce outstanding term debt and added $45 million to our cash position. We plan to use the added cash for working capital for such purposes as purchasing key material or for paying certain manufacturing fees to gain access to additional supply. I want to make it clear these funds are not earmarked for acquisitions. To provide more flexibility with managing the ebbs and flows of the working capital requirements of the business, we increased our revolving line of credit by $10 million-$40 million.

By using a portion of the proceeds from the rights offering to reduce our term debt, we were in a more favorable position to work with our lenders to substantially reset all of the debt covenants to more favorable terms. For example, related to the revolving line of credit, we secured a waiver on compliance with the fixed charge coverage ratio until the fiscal quarter ended March 31st, 2025, and amended the covenant levels for the total leverage ratio and minimum liquidity, commencing with the current fiscal quarter ended June 30th, 2022, at conservative levels that provide comfortable cushions through the current challenging business environment. Related to the term loan covenants, we amended the covenant levels for the total net leverage covenant and the minimum liquidity financial covenant to match the revolver covenants. These commenced with the current fiscal quarter ended June 30th, 2022.

Collectively, the reduction of debt, increase in cash balances, and resetting the covenants to more favorable terms significantly strengthen our balance sheet and financial position for the foreseeable future. Now, moving to our financial outlook. As we have outlined, our fiscal 2023 plan is to continue to grow our revenues while implementing cost reduction plans. We anticipate the most challenging area will be to address the pressure on the gross margins. We are beginning to see traction with our price increases and supply chain initiatives, but the inflationary cost environment is difficult to predict. We do expect, especially in the back half of fiscal 2023, to see measurable improvements in adjusted EBITDA, all while keeping the interest payments at the historical annual low level of approximately $8 million.

As we discussed last quarter, we have implemented a more conservative approach to forecasting, primarily based on deals we have already closed and taking into consideration parts that we already have in inventory or are on the way. Based on this approach, we expect revenue for the first quarter to be in the range of $94 million ± $3 million. Non-GAAP adjusted net loss is expected to be $3 million ± $1 million, and adjusted net loss per share of $0.04 ± $0.01 per share, using a share count of 83.6 million to reflect the shares issued during the first quarter related to the rights offering. We expect adjusted EBITDA in the fiscal first quarter to be breakeven ± $1 million. With that, I'll turn the call back to Jamie for closing remarks. Jamie.

Jamie Lerner (Chairman and CEO)

Thanks, Mike. Even as we navigate a challenging global supply environment and an increasingly challenging economic environment, Quantum is well positioned to execute on our long-term strategy. In the last three years, we have built a leading portfolio of solutions for video and unstructured data that has dramatically expanded our addressable market. Our balance sheet is stronger than ever, and we have reduced our debt and associated interest expenses by two-thirds. We have a strong base of $160 million of recurring revenue, and we have demonstrated the ability to grow recurring software revenue across our product lines. We are committed to our long-term vision of becoming predominantly a software company focused on storing, protecting, archiving, and enriching video and unstructured data in all its forms. With that, we will now take any questions you may have. Operator?

Operator (participant)

At this time, we'll be conducting a question and answer session. If you'd 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'd 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. In addition, we ask that you please limit to one question followed by one follow-up. One moment, please, while we pull for questions. Our first question is from George Iwanyc with Oppenheimer. Please proceed with your question.

George Iwanyc (Executive Director)

Thank you for taking my questions. Jamie, you know, could you give us maybe a little bit more color on what you're seeing in the macro environment? Have there been any changes to the length of sales cycles? Are you having different types of conversations with customers in any regions?

Jamie Lerner (Chairman and CEO)

Yeah. Hey, George. Thanks for the question. I am seeing a more value-oriented customer. What I mean by that is a customer. I think during the best of times, people are less price and value sensitive, and they wanna be with what is viewed as the hottest startup or what is the, you know, the widest hot trends. I'm seeing people returning more to value, where they're looking at Quantum as, you know, many of our products are value oriented. People use tape because it's really good, you know, bang for the buck and really good value. People are looking at our compression technology in DXi because again, it compresses 20-1, so it's really good value. StorNext, you know, gives you flash-like performance with a lower cost disk-based product. It's a value-oriented technology.

I've seen that in the hyperscalers as well, where they're becoming more oriented for value. In that sense, I'm seeing the value-oriented portions of the portfolio selling really well. Our Scalar i3 product is having record sales, where I think more and more smaller companies are leveraging tape both for its resilience to ransomware, combined with the fact that you can get a lot of storage at a really aggressive price.

George Iwanyc (Executive Director)

Okay. That, you know, maybe just building on that with the follow question. From a regional standpoint in Europe and Asia, are there any unusual dynamics going on there?

Jamie Lerner (Chairman and CEO)

No, Europe continues to be really strong for us. The only areas that I've got a question mark on; one is U.S. federal. Next quarter is, you know, the final end of year for U.S. federal. Last year it was pretty soft, so it's gonna be interesting to see if federal spending returns to historic levels. In addition, we did have to walk away from about $1 million in revenue in Russia because of the changes there, but I don't think that was a big hit to us. We did walk away from about $1 million in revenue to predominantly Russian television and media and entertainment outlets.

The area where we're just seeing tremendous growth is in China and I expect India as well, just given the populations are so large and growing so quickly. We're putting a lot more energy into those regions. I've not seen a macro slowdown in Europe.

George Iwanyc (Executive Director)

Thank you.

Operator (participant)

Our next question is from Craig Ellis with B. Riley. Please proceed with your question.

Craig Ellis (Director Of Research, Senior Semiconductor and Capital Equipment Analyst)

Yeah, thanks for taking the question. This one has two parts to it, one for Jamie, one for Mike. Jamie, you mentioned in your prepared remarks that this year you're targeting EBITDA expansion via sales growth, operating expense reduction, margin expansion initiatives, and supply chain strategy. Can you just speak qualitatively to how those would rank in magnitude relative to the EBITDA expansion you would hope to drive? And Mike, since margin expansion initiatives were part of that, it was helpful to get your quantification around OpEx help. But can you help us understand what kind of gross margin expansion you'd expect in the back half of the year, since it sounds like it'll be pretty flat in the first half from current levels?

Jamie Lerner (Chairman and CEO)

Hey, Craig. Good to talk to you. I wanna talk about how we're gonna achieve EBITDA expansion through four major programs. The first program is we are looking to reduce our spending. We're targeting roughly a reduction of $8 million annually. We've already actioned over $5 million of that, you know, roughly two-thirds of that work is already done, and the remainder is in sight to try and get our adjusted OpEx roughly at $35 million. That's an important action. It's something we control completely and can execute, and that's why we're mostly already executed on that program. The second program, as you know, we've implemented two price increases. I don't feel, and I'm not seeing enough return from them.

We are contemplating a third pricing action, which could take place as a price increase, a discount reduction. There's a variety of ways to achieve it. We are roughly around July 1st gonna implement another pricing action to drive more margin, increased margin, and offset, you know, continual price increases that we're seeing. On the sales expansion plan, our number one goal in that is to fill key territories where we are underrepresented. It's putting sales teams into the critical territories that we've historically driven the best sales and margin from, combined with changing a bit of our channel focus and a bit of our sales focus from niche sales in automotive, medical, media, and entertainment to more of a generalized enterprise focus as our portfolio becomes more generally targeted to the enterprise.

Our fourth initiative is all about supply chain, reducing the broker buys, changing out bespoke components to more commodities, engaging with our critical suppliers, and then vertically integrating more of the technology down in Mexico, so we don't need to ship it very far. We just build and vertically integrate as much as we can in Guadalajara, and limit the amount of logistics required to build our products. We think those together, our first focus is to get back to a $25 million EBITDA run rate, and then that's our first milestone, and we would view that as we're healthy. The second milestone is to get to back to a $50 million EBITDA where we view ourselves as prosperous.

Craig Ellis (Director Of Research, Senior Semiconductor and Capital Equipment Analyst)

Got it. Mike, any color on second half gross margins?

Mike Dodson (CFO)

Well, the second half, you know, as we had said in the prepared remarks, well, the first half, we expected to see a lot of the same pressure points, partly PPV, which we've, you know, amortized. We're gonna be amortizing over the first half. Even though the underlying market is getting better there, we just have carryover of that. We would expect, we're at 38% margin now, steady improvement in the back half, that would, you know, build EBITDA, build our gross margins, you know, and it'll be, is it 2 points better, you know, plus or minus, you know, to get into, you know, the low 40s, if we're successful. There is, you know, a lot of unknowns and dynamics. Obviously, the inflationary cost environment is gonna be a big driver for that.

If that continues, and we don't see much relief there, it'll just, you know, stretch it out a little longer.

Craig Ellis (Director Of Research, Senior Semiconductor and Capital Equipment Analyst)

Got it. The follow-up question on the number of subscription customers up 100 quarter-over-quarter. Jamie, that's 2x what the change was in the prior quarter.

Jamie Lerner (Chairman and CEO)

Yeah.

Craig Ellis (Director Of Research, Senior Semiconductor and Capital Equipment Analyst)

Real nice quarter-over-quarter gain, so good for the team. What drove that and what's the path to something?

Jamie Lerner (Chairman and CEO)

Sure.

Craig Ellis (Director Of Research, Senior Semiconductor and Capital Equipment Analyst)

That, you know, I've had 750 in the back of my mind is the number we need to get to.

Jamie Lerner (Chairman and CEO)

Right.

Craig Ellis (Director Of Research, Senior Semiconductor and Capital Equipment Analyst)

To convert the install base. How do we get there?

Jamie Lerner (Chairman and CEO)

Yeah. I guess there's a good and bad in your question. Meaning the reason why it accelerated is we got several of our products moved from a perpetual model to a subscription model. By getting more products on the model, we're getting more customers. The challenge is it was harder than we had expected to get those products converted, so they converted much later in the year. We had expected them to convert to subscription several quarters earlier and be at, you know, a larger number than $356 at the end of the year. We got the work done. We've gotten all the products converted, but a little later in the year than we anticipated. Now we're at the right run rate. I think we're accelerating the way we wanna be, just a little later at the end of fiscal 2022 than we had hoped.

Craig Ellis (Director Of Research, Senior Semiconductor and Capital Equipment Analyst)

That makes sense. Within some of the objectives that you talked about on the earlier question, where would you expect or want the number of subscription customers to be when we exit fiscal 2023?

Jamie Lerner (Chairman and CEO)

I think we're thinking about it more in terms of the ARR, and I think we're still trying to figure out how that translates to customers. Cause we've done some ARR deals that are $2 million a year, and we have some that are $2,000 a year, right? They're both one customer. I'm thinking about it more in terms of the ARR, and we know we minimally wanna double the ARR, and we think we could do quite a bit better than that. Our focus is to minimally double and try and go beyond that in our ARR.

Craig Ellis (Director Of Research, Senior Semiconductor and Capital Equipment Analyst)

Got it.

Jamie Lerner (Chairman and CEO)

What that is in terms of customers, I think that's less clear.

Craig Ellis (Director Of Research, Senior Semiconductor and Capital Equipment Analyst)

Okay. Got it. Thanks, guys.

Jamie Lerner (Chairman and CEO)

Yeah. Thanks, Craig.

Mike Dodson (CFO)

Thanks, Craig.

Operator (participant)

Our next question is from Max Michaelis with Lake Street. Please proceed with your question.

Max Michaelis (Senior Research Analyst)

Hey, guys. Just one for me. It's about price increases. I know you guys said you guys were gonna increase prices again here in July. Just wondering if you guys have gotten any, feedback, maybe some pushback from customers. Have you seen any customer attrition from your first price increase? I believe it was last quarter.

Jamie Lerner (Chairman and CEO)

Yeah. The short answer is no. You know, I think if I were to fault ourselves, I think we've been so sensitive about it that we've been too modest in the price increases. I'm seeing our competitors and the people we buy from increase their prices 10%-25%. We were much more modest than that. We increased list prices up to 15%, but then after we applied discounts and rebates and whatnot, it came to something much more modest in the low to mid-single digits. Quite frankly, we've been not as aggressive as we have needed to be in that. The price increases have worked. We haven't seen any churn. We haven't really seen any loss in business.

The opposite is we've been too modest, and we need to turn those prices up more given the amount of price increases we're seeing in shipping, warehousing, trucking fees, chips, connectors, you name it. We just got to lift our prices more to just offset the prices that are coming into us, and we're gonna do that quite rapidly here.

Max Michaelis (Senior Research Analyst)

All right. Thanks, guys.

Jamie Lerner (Chairman and CEO)

Yeah.

Mike Dodson (CFO)

Thanks, Max.

Operator (participant)

Our next question is from Nehal Chokshi with Northland Capital Markets. Please proceed with your question.

Nehal Chokshi (Managing Director)

Yes. Thank you. Looks like bookings using shippable backlog was about $101 million, which is well above what we were expecting. Still down a little bit, $3 million, I think, from the December quarter of $104 million. What were the quarter-over-quarter downticks from a portfolio perspective for that booking's trajectory, albeit still very good, I think?

Jamie Lerner (Chairman and CEO)

I'm not sure exactly where you're pulling the numbers from, but what I would say is we had some enormous backlog expansion from predominantly our large hyperscaler customers placing two and three quarter out orders on us. The idea being, if we place a very large order on you going out several quarters, that will improve our ability to get supply. In our conversations with them, our conversation with our suppliers, that isn't getting Quantum or getting the hyperscaler any more material just because they placed a giant purchase order on us. I think if you look at the graph that was provided in the PowerPoint, you'll see that the big out-quarter orders are coming down a bit because I think there's less motivation to place those enormous out-quarter orders.

The part you see growing in the bookings or the backlog is the things that are shippable immediately, we just don't have the parts to ship. It's a higher quality backlog because more of it is shippable immediately.

Nehal Chokshi (Managing Director)

Yep. The calc comes from calculating the change in shippable backlog from that particular slide that you're referencing, plus the revenue in the March quarter and the December quarter. The shippable backlog was up, I think, $9 million quarter-over-quarter in the December quarter and $6 million quarter-over-quarte in the March quarter. We werqen't expecting it to be up $6 million quarter-over-quarter in the March quarter. That's why I'm saying, hey, that's better than what we expected.

Jamie Lerner (Chairman and CEO)

Yeah.

Nehal Chokshi (Managing Director)

Yet it's still down quarter-over-quarter when you know, look at the bookings, shippable bookings, basically. That's the question. You know, the question is, which parts of the product saw that quarter-over-quarter downtick in terms of the bookings?

Mike Dodson (CFO)

Okay.

Jamie Lerner (Chairman and CEO)

Um-

Mike Dodson (CFO)

Sorry, was there a question?

Nehal Chokshi (Managing Director)

Yeah. The question is that, from a bookings perspective, which we can back out based on that slide that you provide, shippable bookings perspective, bookings was down $3 million quarter-over-quarter. Much better than what we were expecting, but still down $3 million quarter-over-quarter. From a product perspective, which products were down quarter-over-quarter?

Mike Dodson (CFO)

Yeah, I mean, I think we really don't go into that level of detail on our bookings. I mean, we know as we've shared, you know, where the revenue is and where the revenue strength is and where the revenue had declined.

Nehal Chokshi (Managing Director)

Right. Understood.

Mike Dodson (CFO)

Okay.

Nehal Chokshi (Managing Director)

Understood. It's great to see the revenue outlook as well as the statement of expected substantial improvement in EBITDA for a full year. What's your outlook for bookings, which is, you know, the true or rather shippable bookings, which is, you know, the indicator for demand as opposed to supply here.

Jamie Lerner (Chairman and CEO)

Well, I guess, I mean. We don't provide a guidance on bookings.

Nehal Chokshi (Managing Director)

Yeah. Okay. Understood. All right. The $25 million EBITDA milestone, what's you're thinking on timeframe for getting to that annualized level?

Jamie Lerner (Chairman and CEO)

Yeah, I mean, we haven't provided annual guidance on EBITDA margin or revenue at this point. There's just too much uncertainty. You know, our goal, obviously, is get there as fast as we can. I think it's gonna take quarters to get there. We have everything at our disposal to return to that level, but we are not providing EBITDA guidance at this point. There's just too much uncertainty.

Uncertainty, yeah.

Nehal Chokshi (Managing Director)

Yep, yep. Yeah, especially in the context of the four levers that you're talking about. Certainly.

Jamie Lerner (Chairman and CEO)

Yeah.

Nehal Chokshi (Managing Director)

Can understand that.

Jamie Lerner (Chairman and CEO)

Yeah.

Nehal Chokshi (Managing Director)

Can you give a specific update on the Pivot3 Video Surveillance asset purchase?

Jamie Lerner (Chairman and CEO)

Yeah. That business is performing quite well. We've closed now multiple million-dollar-plus deals with U.S. federal agencies, with large universities and school districts. One of the world's largest shipping and logistics companies did an enormous purchase with us. I think it's going well. I think for us to break out will be that selling video surveillance becomes part of everything Quantum does. Today, we have a specialist team that can sell it really well. What we need is the generalist team, you know, the 200+ salespeople we have to all sell it to their customers versus a specialist team.

That's gonna take a while for everyone to fully understand how to sell that technology, how to explain it, how to be comfortable engaging with their customers, and that's one of our big goals for the year, is move it from a specialist sale to a generalist sale. We think that's gonna allow us to expand. I think the margins of that business have been really good, better than we expected. The traction through the acquisition has maintained pretty steady. You know, sometimes an acquisition can destabilize the business for a period of time, and we've seen sales be pretty steady through the whole transition from Pivot3 being independent to being part of Quantum.

Nehal Chokshi (Managing Director)

Great. Thanks for that update.

Jamie Lerner (Chairman and CEO)

Yeah.

Nehal Chokshi (Managing Director)

Thanks, Nehal.

Operator (participant)

Our next question is from David Duley with Steelhead Securities. Please proceed with your question.

David Duley (Managing Principal)

Yeah, thanks for taking my question. I think in the past you mentioned that you had a critical IC component shortage in your tape storage business. I'm just wondering, when would you think that particular issue will be solved? Are you waiting for that particular customer to add capacity, which I'm guessing that would be calendar year-end before that problem is solved? Or have you been able to shift the design or shift the manufacturing of that product to a different source?

Jamie Lerner (Chairman and CEO)

Okay. I think what we're talking about is the tape drive.

David Duley (Managing Principal)

Yes.

Jamie Lerner (Chairman and CEO)

That is only made by one company in the world. There are no alternative suppliers. We engage very deeply with this supplier. I personally fly out to meet with them, with other executives, and I would say the relationship is really strong. I would say that the communication and transparency is better than it's ever been. At the same time, you know, they are making that product or a pretty large amount of it in China. There are all the issues that we know about in China. They are not able to build in volume. They are under very constrained volumes. I feel comfortable we're getting a high-quality allocation of the volumes that they're making. I think those allocations are gonna go up, and I think they are taking the steps that they need to take to bring their volumes up.

They're still telling us, while we're constrained now, they believe they can meet our demand for the year. Now, clearly, they're not meeting our demand now, but they think they can pick it up in the subsequent quarters this year to get us at or pretty close to our full demand. We'll see, but so far, I'm pretty encouraged with what I'm hearing. We're in a situation where we have to work very closely with the supplier cause there are no alternative suppliers for this component.

David Duley (Managing Principal)

That chip design cannot be ported to a different manufacturer.

Jamie Lerner (Chairman and CEO)

Yeah. The subcomponents can, yes. The components that are constrained inside the drive, they are looking at alternative suppliers. They are changing out chipsets. They are looking at alternative ways. They're now manufacturing in multiple countries. They're taking the steps, but like a lot of us are seeing, you move from one chip that's constrained to one that isn't, and just about as soon as you do that chip you move to becomes constrained. I mean, cause all of us are doing the same thing. We're all flip-flopping from one chip to another to find supply, and just about everyone's getting constrained.

David Duley (Managing Principal)

Okay. Now, as you mentioned, hopefully in the back half of this year, this particular supplier picks up its supply to you of this component for your tape drives. I assume what that would mean would be is you would then, sometime in the back half of this calendar year or the first part of next year, sometime in that timeframe, you would be able to ship to current demand from the hyperscale customers and shrink this little backlog that they've built.

Jamie Lerner (Chairman and CEO)

Correct. Correct. Yeah.

David Duley (Managing Principal)

Okay. That's all for me.

Jamie Lerner (Chairman and CEO)

Okay. Thanks, Dave.

Operator (participant)

We have reached the end of the question-and-answer session. I will now turn the call over to Jamie Lerner for closing remarks.

Jamie Lerner (Chairman and CEO)

Yeah. Thank you. Listen, I wanna thank everyone for the support of Quantum. Many of you on this call participated in our rights offer, and I wanna thank you for that, for your show of support for the company. I feel like we've got strength in our balance sheet. I gotta say, the timing of the rights offer was pretty excellent given that capital is getting more expensive and more constrained. I think we have the capital we need. I think we've got the portfolio we need, and we're taking the very aggressive steps to get back to the levels of EBITDA that our investors expect, and I have every confidence we're gonna get there. Thank you, everyone.

Given how late we are in this call, given our end of year, we'll be back on a conference call in six or seven weeks with Q1 results. We'll all speak then. Thank you.

Operator (participant)

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.