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QC

QUANTUM CORP /DE/ (QMCO)·Q2 2016 Earnings Summary

Executive Summary

  • Revenue of $117.0M came in below original Q2 guidance ($120–$130M) after a late-quarter order surge and disk-part shortages created $7.8M backlog; non‑GAAP gross margin fell to 39.9% and non‑GAAP EPS was −$0.03, marking a tougher enterprise storage environment .
  • Scale‑out storage product+services grew 17% YoY (33% including backlog) to $29.9M, the 17th straight quarter of YoY growth; data protection revenue improved sequentially (disk and tape) despite pricing pressure on low‑margin devices/media .
  • Q3 guidance: revenue $130–$140M, non‑GAAP gross margin 42–43%, non‑GAAP OpEx $48–$50M, non‑GAAP EPS $0.02–$0.03; management emphasized disciplined tape media pricing to protect profit and uncertainty in large/mega deal timing .
  • Liquidity catalyst: repaid ~$81M of converts on Oct 5 using $66M revolver draw and $16M cash; interest run‑rate guided to ~$1.5M/quarter with $139M total debt outstanding going forward .

What Went Well and What Went Wrong

  • What Went Well

    • Scale‑out momentum: “Total scale‑out storage and related service revenue grew 17% YoY and 33% including backlog,” with strong growth across surveillance (+200% YoY) and technical applications (+140% YoY; +200% incl. backlog) .
    • Sequential data protection uptick: “Data protection and related service revenue was up approximately 8% sequentially…including tape automation, disk‑based backup, and devices and media,” with DXi4700 revenue +39% YoY and +144% QoQ .
    • Cash generation and backlog quality: Cash from operations was $11.2M and backlog ($7.8M) reflected strong late‑quarter demand, especially in scale‑out (backlog $4.1M) expected to ship in Q3 .

  • What Went Wrong

    • Revenue miss vs original guidance driven by elongated sales cycles and parts shortages: total revenue $117.0M was below the $120–$130M July guide; backlog spiked to $7.8M due to last‑day orders and disk supplier shortages .
    • Mix and price pressure compressed margins: non‑GAAP gross margin fell to 39.9% (vs 46.3% YoY) as higher‑margin service/royalty declined and commodity pricing intensified; non‑GAAP operating margin −5.0% (vs +6.9% YoY) .
    • Large/megadeal drought: “We had no megadeals…versus several deals in Q2 of last year,” and scale‑out deals >$200K were ~10% lower YoY, highlighting market softness and lumpy deal timing .

Financial Results

MetricQ4 2015Q1 2016Q2 2016
Total Revenue ($USD Millions)$147.8 $110.9 $117.0
Non‑GAAP EPS ($)$0.06 −$0.03 −$0.03
Non‑GAAP Gross Margin (%)42.4% 42.8% 39.9%
Non‑GAAP Operating Margin (%)4.2% −4.0% −5.0%

Segment revenue breakout (product + related services unless noted):

SegmentQ4 2015Q1 2016Q2 2016
Scale‑out Storage (prod+svc) ($M)$31.7 $27.8 $29.9
Disk Backup Systems + Services ($M)$25.2 $17.3 $18.2
Tape Automation + Services Total ($M)$35.9 $44.6 $48.7 (Branded $38.0; OEM $10.7)
Devices & Media ($M)$18.5 $10.9 $11.5
Royalty Revenue ($M)$11.0 $10.2 $8.7
Service Revenue ($M)$38.8 $37.9 $37.3

Additional KPIs (Q2 2016):

  • Backlog: $7.8M total; scale‑out backlog $4.1M .
  • Cash from operations: $11.2M; cash & equivalents end‑of‑quarter $65.3M .
  • Scale‑out run‑rate growth: deals ≤$1M up 90% in 1H FY16 incl. backlog .

Year‑over‑year (Q2 2016 vs Q2 2015) reference points:

  • Total revenue: $117.0M vs $135.1M .
  • Non‑GAAP EPS: −$0.03 vs $0.03 .
  • Service revenue: $37.3M vs $39.2M .
  • Royalty revenue: $8.7M vs $10.7M .
  • Tape automation: $48.7M vs $64.7M .
  • Scale‑out prod+svc: $29.9M vs $25.5M (as reported prod+svc prior year) .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue ($M)Q2 2016$120–$130 (July guide) Pre‑announcement: $116–$118 Lowered
Revenue ($M)Q3 2016N/A$130–$140 New
Gross Margin (GAAP & non‑GAAP) (%)Q3 2016N/A~42–43 New
OpEx (GAAP) ($M)Q3 2016N/A~$51–$53 New
OpEx (non‑GAAP) ($M)Q3 2016N/A~$48–$50 New
Interest Expense ($M)Q3 2016N/A~$1.4 New
Taxes ($M)Q3 2016N/A~$0.4 New
EPS (GAAP) ($)Q3 2016N/A$0.01–$0.02 New
EPS (non‑GAAP) ($)Q3 2016N/A$0.02–$0.03 New

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2015 & Q1 2016)Current Period (Q2 2016)Trend
Scale‑out growth & portfolioFY15: +74% YoY scale‑out; Q4 +116%; targeting +50% in FY16 +17% YoY (33% incl. backlog); strong in surveillance and technical apps Moderating YoY growth; broadening verticals
Large/megadealsQ4: big‑deal momentum; Q1: market softness, elongated cycles No megadeals; >$200K scale‑out deals −~10% YoY Softer; longer cycles
Tape media pricing disciplineQ1: chose not to pursue low/no‑margin media revenue Continued discipline; price pressure sustained Ongoing profit focus
Surveillance verticalQ4: major push initiated Sales +200% YoY; VMS certifications; distribution agreement; funnel +166% YoY Accelerating
Cloud & hybrid (Q‑Cloud)Q4: Q‑Cloud Archive/Protect announced Q‑Cloud Vault introduced; Q‑Cloud Protect for AWS rollout Expanding
Macro/storage marketQ1: broad weakness; pricing pressure Challenging enterprise storage environment; elongated decisions Continues to weigh

Management Commentary

  • “Our total revenue of $117 million was slightly below our guidance due primarily to…an unusually high number of customers placing orders on the last day of the quarter…and a shortage of parts from our disk suppliers…We ended the quarter with sales backlog of approximately $8 million, basically all of which we have now shipped.” — Jon Gacek, CEO .
  • “Total scale‑out storage and related service revenue grew 17% year‑over‑year and 33%, if we include the backlog…we had no scale‑out storage megadeals in the quarter…sales cycles [have] elongated.” — Jon Gacek, CEO .
  • “Non‑GAAP gross margin was 39.9% in Q2 compared to 46.3% in the second quarter of fiscal ’15…reflecting a decrease in higher‑margin service and royalty revenue and increased pricing pressure.” — Linda Breard, CFO .
  • “We will manage our tape media revenue to maximize profit versus trying to maximize revenue.” — Jon Gacek, CEO .
  • “On October 5, we repaid $81 million of convertible debt…To fund this transaction, we used $16.3 million in cash and $66.1 million from our $75 million revolver.” — Linda Breard, CFO .

Q&A Highlights

  • OpEx discipline: Management is reducing spend where opportunities are lower while reallocating toward areas with stronger prospects; Q3 non‑GAAP OpEx guided to $48–$50M .
  • Surveillance sales cycles and product tuning: New XLS appliances and expanded VMS partnerships are tailored to the market; mix of short‑cycle and larger, longer‑cycle deals expected .
  • Royalties trajectory: Expect some uptick with LTO‑7 offset by ongoing declines in older generations; near‑term royalty around current levels .
  • Tape/disk outlook: Traditional storage environment remains “super choppy”; funnels growing but purchases can only be delayed so long—management taking it quarter by quarter .
  • Working capital: Accounts payable uptick tied to back‑end loaded quarter; ongoing tight balance sheet management .

Estimates Context

  • S&P Global/Capital IQ consensus estimates for Q2 FY2016 could not be retrieved due to a request limit error; therefore, comparisons to Wall Street consensus are unavailable for this period. Values would normally be sourced from S&P Global; in their absence, rely on company guidance and reported results [GetEstimates error].

Key Takeaways for Investors

  • Backlog‑driven revenue deferral rather than demand weakness: $7.8M orders pushed to Q3 due to late‑quarter timing and parts constraints, with scale‑out backlog $4.1M—supportive of near‑term revenue catch‑up .
  • Scale‑out remains the growth engine, diversifying beyond M&E: Surveillance (+200% YoY) and technical applications (+140% YoY) broaden TAM; watch for conversion of large/mega deals as sales cycles normalize .
  • Margin pressure reflects mix and pricing; Q3 guide implies stabilization: Non‑GAAP GM fell to 39.9%, but guided to ~42–43% in Q3 as backlog ships and media pricing remains disciplined .
  • Debt profile improved and interest expense lowered: Post‑repayment, ~$139M debt with ~3.75% average rate; interest run‑rate ~$1.5M/quarter—reduces financial drag .
  • Trading setup: Q3 revenue guide $130–$140M and EPS $0.02–$0.03 (non‑GAAP) sets expectations; upside hinges on large deal closures and surveillance momentum, downside tied to ongoing enterprise storage softness and media pricing .
  • Estimate revisions likely focus on mix and margins: With royalty and service soft YoY and disciplined media approach, consensus (once available) may recalibrate margin assumptions toward 42–43% near term .
  • Execution watch‑items: Large/megadeal closure rates, supply chain availability (disk parts), and continued growth in run‑rate scale‑out deals to reduce lumpiness .