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QTM > SEC Filings for QTM > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for QUANTUM CORP /DE/

Form 10-Q for QUANTUM CORP /DE/


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENT

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements in this report usually contain the words "will," "estimate," "anticipate," "expect," "believe," "project" or similar expressions and variations or negatives of these words. All such forward-looking statements including, but not limited to, (1) our goals for future operating performance, including increasing revenue in higher margin areas of our business; (2) our expectation that we will continue to derive a substantial portion of our revenue from products based on tape technology; (3) our belief that our existing cash and capital resources will be sufficient to meet all currently planned expenditures, debt service and sustain our operations for at least the next 12 months; (4) our expectations regarding our ongoing efforts to control our cost structure and our plans to reduce spending; (5) our belief that customers delayed tape library and tape drive purchases due to the anticipated release of LTO-6 tape drives and tape automation libraries and (6) our business goals, objectives, key focuses, opportunities and prospects which are inherently uncertain as they are based on management's expectations and assumptions concerning future events, and they are subject to numerous known and unknown risks and uncertainties. Readers are cautioned not to place undue reliance on these forward-looking statements, about which we speak only as of the date hereof. As a result, our actual results may differ materially from the forward-looking statements contained herein. Factors that could cause actual results to differ materially from those described herein include, but are not limited to: (1) the amount of orders received in future periods; (2) our ability to timely ship our products; (3) uncertainty regarding information technology spending and the corresponding uncertainty in the demand for our products and services; (4) our ability to maintain supplier relationships; (5) general economic, political and fiscal conditions in the U.S. and internationally, particularly in light of EU sovereign debt concerns and the uncertainty in the U.S. regarding fiscal and tax policies; (6) our ability to successfully introduce new products; (7) our ability to capitalize on market demand; (8) our ability to achieve anticipated gross margin levels; (9) customers not adopting LTO-6 tape drives and tape automation libraries in numbers consistent with past technology introductions and (10) those factors discussed under "Risk Factors" in Part II, Item 1A. Our forward-looking statements are not guarantees of future performance. We disclaim any obligation to update information in any forward-looking statement.

OVERVIEW

Quantum Corporation ("Quantum", the "Company", "us" or "we"), founded in 1980, is a global expert in data protection and big data management. We provide solutions for storing and protecting information in physical, virtual, cloud and big data environments that are designed to help customers be certain they are maximizing the value of their data over its entire lifecycle. With our solutions, customers can better adapt in a world of continuing change by keeping and protecting more data for a longer period of time while reducing costs and increasing return on investment. We work closely with a broad network of distributors, value-added resellers ("VARs"), direct marketing resellers ("DMRs"), original equipment manufacturers ("OEMs") and other suppliers to meet customers' evolving data protection and big data management needs. Our stock is traded on the New York Stock Exchange under the symbol QTM.

We offer a comprehensive range of solutions for data protection and big data management challenges that provide performance and value to end user customers of all sizes, from small businesses to multinational enterprises. We believe our combination of expertise, innovation and platform independence enables us to solve data protection and big data management issues more easily, cost-effectively and securely. We earn our revenue from the sale of products, systems and services through an array of channel partners and our sales force to reach end user customers of all sizes. Our products are sold under both the Quantum brand name and the names of various OEM customers. They include DXi® deduplication systems for high speed recovery and reliability, Scalar® tape automation products for disaster recovery and long-term data retention, StorNext® data management software and appliances for high-performance big data file sharing and archiving and vmPRO™ solutions for protecting virtual machine data. We also offer cloud solutions for cloud-based backup, fast restore, data recovery and business continuity. In addition, we have the global scale and scope to support our worldwide customer base.

For the second quarter of fiscal 2013, we believe our focus on closing transactions earlier in the quarter, qualifying orders earlier in the process and making contact with senior level decision makers at end users helped us improve our revenue results for disk systems and software solutions. We continued to acquire new customers which we believe was due in part to increased end user awareness as a result of our recent marketing and advertising campaigns. In addition, we introduced several new products during the second quarter of fiscal 2013, including our Q-Cloud backup and disaster recovery subscription service and StorNext 4.3. During the quarter, we also continued to expand our partnerships and routes to market.


During the second quarter of fiscal 2013, we believe there was weakness and reduced demand in the market for tape automation products. In addition, we believe there were some customers that delayed making tape library and tape drive purchases in the second quarter of fiscal 2013, and to a lesser extent in prior quarters, due to the anticipated release of LTO-6 tape drives and tape automation libraries in the upcoming quarter. Historically, we have seen declines in our tape automation systems revenue prior to the release of new technology due to customers delaying purchases until the new technology becomes available. Global economic conditions also continued to be volatile and uncertain, especially in Europe, and companies continued to be cautious with their purchasing decisions.

In an effort to return to generating positive cash flow from operations, we plan to implement various cost controls and spending reductions. We continue to be focused on building the long-term growth areas of the business and supporting our strategic initiatives. In addition, between October 31 and November 6, 2012, we issued $70 million of convertible senior subordinated notes due November 15, 2017 to improve our capital structure, strengthen our balance sheet and provide greater flexibility in our business operations. These initiatives are intended to improve profitability and increase shareholder value.

Results

We had total revenue of $147.3 million in the second quarter of fiscal 2013, an 11% decrease from the second quarter of fiscal 2012. Revenue was lower than expected for tape automation systems and tape devices, and royalty revenue decreased as expected. Our product revenue from OEM customers decreased 19% and revenue from branded products decreased 11% both primarily due to lower than expected tape automation systems revenue. As noted above, we believe tape automation systems revenue decreases reflected reduced market demand. Our continued efforts to increase revenue from disk systems and software solutions resulted in record quarterly revenue and a 14% increase in this revenue category. Service revenue was slightly lower than the second quarter of fiscal 2012. Our continued focus on growing our branded business is reflected in the greater proportion of non-royalty revenue from branded business, at 84% in the second quarter of fiscal 2013, compared to 82% in the second quarter of fiscal 2012.

Our gross margin percentage decreased 320 basis points from the second quarter of fiscal 2012 to 40.2% primarily due to the decrease in product revenue in addition to a decrease in high-margin royalty revenue. Operating expenses increased $3.0 million, or 5% from the second quarter of fiscal 2012, primarily from increased sales and marketing expenses, largely due to growing our sales force and marketing team. We also continued our expanded marketing programs in the second quarter of fiscal 2013 to generate greater awareness and future demand for Quantum products and services. We had a $10.0 million loss from operations in the second quarter of fiscal 2013 compared to operating income of $6.9 million in the second quarter of fiscal 2012.

Interest expense decreased 36% to $1.8 million primarily due to principal payments in the prior fiscal year. We had a net use of cash from operating activities of $13.4 million in the second quarter of fiscal 2013 compared to net cash provided by operating activities of $5.6 million in the second quarter of fiscal 2012.

RESULTS OF OPERATIONS

Revenue

                                           Three Months Ended
(In thousands)         September 30,        % of        September 30,        % of                             %
                           2012           revenue           2011           revenue          Change          Change
Product revenue       $       100,067       67.9 %     $       115,126       69.8 %     $    (15,059 )     (13.1 )%
Service revenue                35,711       24.2 %              35,898       21.7 %             (187 )      (0.5 )%
Royalty revenue                11,562        7.9 %              14,015        8.5 %           (2,453 )     (17.5 )%
    Total revenue     $       147,340      100.0 %     $       165,039      100.0 %     $    (17,699 )     (10.7 )%


                                            Six Months Ended
                       September 30,        % of        September 30,        % of                             %
                           2012           revenue           2011           revenue          Change          Change
Product revenue       $       193,878       67.3 %     $       217,394       68.2 %     $    (23,516 )     (10.8 )%
Service revenue                71,798       24.9 %              72,594       22.8 %             (796 )      (1.1 )%
Royalty revenue                22,543        7.8 %              28,586        9.0 %           (6,043 )     (21.1 )%
    Total revenue     $       288,219      100.0 %     $       318,574      100.0 %     $    (30,355 )      (9.5 )%

Total revenue decreased in the second quarter of fiscal 2013, largely due to lower than expected tape automation systems revenue and an expected decrease in royalty revenue. Total revenue in the first six months of fiscal 2013 decreased from the first six months of fiscal 2012, reflecting economic weakness in Europe, a decrease in large orders, or orders over $200,000, and potential delayed purchases from customers waiting for LTO-6 technology. Revenue from branded data protection products and services decreased $13.0 million, or 12% from the second quarter of fiscal 2012 and decreased 10% from the first six months of fiscal 2012. Data protection products include our tape automation systems, disk systems and devices and media offerings. Revenue from branded big data and archive products and services increased $3.2 million, or 27% from the second quarter of fiscal 2012 and increased 35% from the first six months of fiscal 2012. Big data and archive products include StorNext software and StorNext and Q-Series appliances. In addition, OEM product and service revenue decreased $5.4 million and $9.2 million from the second quarter and first six months of fiscal 2012, respectively. Royalty revenue decreased $2.5 million and $6.0 million from the second quarter and first six months of fiscal 2012, respectively.

Product Revenue

Our product revenue, which includes sales of our hardware and software products sold through both our Quantum branded and OEM channels, decreased $15.1 million and $23.5 million in the second quarter and first six months of fiscal 2013, respectively, compared to the prior year periods primarily due to decreased revenue from sales of tape automation systems across most all product lines. These decreases were partially offset by the addition of revenue from our new StorNext appliances that resulted in increased disk systems and software solutions revenue for both the second quarter and first six months of fiscal 2013. Revenue from sales of branded products decreased 11% and 9%, respectively, and sales of products to our OEM customers decreased 19% and 16%, respectively, in the second quarter and first six months of fiscal 2013 compared to the prior year periods.

                                                             Three Months Ended
(In thousands)                           September 30,        % of        September 30,        % of                             %
                                             2012           revenue           2011           revenue          Change          Change
Disk systems and software solutions     $        35,749       24.3 %     $        31,372       19.0 %     $      4,377        14.0 %
Tape automation systems                          48,812       33.1 %              62,410       37.9 %          (13,598 )     (21.8 )%
Devices and media                                15,506       10.5 %              21,344       12.9 %           (5,838 )     (27.4 )%
    Product revenue                     $       100,067       67.9 %     $       115,126       69.8 %     $    (15,059 )     (13.1 )%

                                                              Six Months Ended
                                         September 30,        % of        September 30,        % of                             %
                                             2012           revenue           2011           revenue          Change          Change
Disk systems and software solutions     $        60,410       21.0 %     $        54,831       17.2 %     $      5,579        10.2 %
Tape automation systems                          99,292       34.4 %             120,145       37.7 %          (20,853 )     (17.4 )%
Devices and media                                34,176       11.9 %              42,418       13.3 %           (8,242 )     (19.4 )%
    Product revenue                     $       193,878       67.3 %     $       217,394       68.2 %     $    (23,516 )     (10.8 )%

Our disk systems and software solutions revenue increased 14% and 10%, respectively, from the second quarter and first six months of fiscal 2012 primarily due to the addition of revenue from our StorNext appliances and Q-Series disk. The first StorNext appliance was introduced in the second quarter of fiscal 2012. As noted above, we had record quarterly revenue for disk systems and software solutions. In addition, enterprise disk systems revenue increased 30% from the second quarter of fiscal 2012 mainly due to increased large orders, or orders over $200,000. The 30% revenue growth in enterprise disk systems revenue from the second quarter of fiscal 2012 did not fully offset the 44% decrease from the first quarter of fiscal 2012, resulting in a 7% decrease in enterprise disk systems revenue for the first six months of fiscal 2013 compared to the prior year period.


The decrease in tape automation systems revenue in the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012 was primarily due to decreased branded tape automation system sales and, to a lesser extent, from decreased OEM tape automation system sales. Contributing to the decrease in branded tape automation systems revenue was a decline in sales to agencies and departments of the U.S. federal government compared to the second quarter of fiscal 2012. Tape automation systems revenue from midrange products decreased the most in the second quarter of fiscal 2013 followed by decreased revenue for enterprise and entry level products. For the first six months of fiscal 2013, enterprise and midrange tape automation systems had the largest decreases compared to the prior year period. As noted above, tape automation system revenue in the second quarter and first six months of fiscal 2013 may have been negatively impacted by reduced demand in the market, including customers delaying tape library and tape drive purchases due to the anticipated release of LTO-6 tape technology.

Product revenue from devices, which includes tape drives and removable hard drives, and non-royalty media sales decreased from the second quarter and first six months of fiscal 2012 largely due to decreased media sales in addition to lower revenue from devices. The second quarter and first six months of fiscal 2012 had higher than usual media sales due to customers increasing their media inventories in response to concerns of supply disruptions following the March 2011 earthquake and tsunami in Japan. Revenue from devices decreased primarily due to overall market declines and may have also been impacted by the pending availability of LTO-6 tape technology.

Service Revenue

Service revenue includes revenue from sales of hardware service contracts, product repair, installation and professional services. Sales of hardware service contracts are typically purchased by our customers to extend the warranty or to provide faster service response time, or both. Service revenue decreased 1% from both the second quarter and first six months of fiscal 2012 primarily due to a decreased volume of OEM product repair services, mostly offset by growth in revenue from branded service contracts associated with our StorNext appliances.

Royalty Revenue

Tape media royalties decreased 18% and 21% from the second quarter and first six
months of fiscal 2012 due to lower media unit sales sold by media licensees. The
decrease was primarily due to higher than typical media sales during the second
quarter and first six months of fiscal 2012 due to inventories being increased
in the second quarter and first half of fiscal 2012 in response to concerns of
supply disruptions following the March 2011 earthquake and tsunami in Japan.

Gross Margin

                                               Three Months Ended
(In thousands)            September 30,        Gross        September 30,        Gross                             %
                              2012           margin %           2011           margin %          Change          Change
Product gross margin     $        32,183        32.2 %     $      42,827          37.2 %     $    (10,644 )     (24.9 )%
Service gross margin              15,479        43.3 %            14,769          41.1 %              710         4.8 %
Royalty gross margin              11,562       100.0 %            14,015         100.0 %           (2,453 )     (17.5 )%
    Gross margin         $        59,224        40.2 %     $      71,611          43.4 %     $    (12,387 )     (17.3 )%

                                                Six Months Ended
                          September 30,        Gross        September 30,        Gross                             %
                              2012           margin %           2011           margin %          Change          Change
Product gross margin     $        61,244        31.6 %     $      76,588          35.2 %     $    (15,344 )     (20.0 )%
Service gross margin              31,232        43.5 %            29,399          40.5 %            1,833         6.2 %
Royalty gross margin              22,543       100.0 %            28,586         100.0 %           (6,043 )     (21.1 )%
    Gross margin         $       115,019        39.9 %     $     134,873 *        42.3 %     $    (19,854 )     (14.7 )%

*Gross margin for the six months ended September 30, 2011 includes $0.3 million of restructuring benefit related to cost of revenue.


The 320 basis point decrease in gross margin percentage compared to the second quarter of fiscal 2012 was primarily due to decreased product revenue. Some of our costs of goods sold are relatively fixed in the short term; therefore, revenue increases or decreases can have a material impact on the gross margin rate. In addition, approximately 100 basis points of the decrease was due to the $2.5 million decrease in royalty revenue. Approximately half of the 240 basis point decrease in gross margin percentage for the first six months of fiscal 2013 was due to a $6.0 million decrease in royalty revenue and the other half was largely due to decreased product revenue.

Product Margin

Product gross margin dollars decreased $10.6 million, or 25%, compared to the second quarter of fiscal 2012, and our product gross margin rate decreased 500 basis points primarily due to a 13% decrease in product revenue. For the first six months of fiscal 2013, product gross margin decreased $15.3 million, or 20%, and our product gross margin rate decreased 360 basis points primarily due to an 11% decrease in product revenue. Some of our product costs of goods sold are relatively fixed in the short term; therefore, product revenue increases or decreases impact the product gross margin rate. The change in the mix of products sold also contributed to decreased product margins in the second quarter and first six months of fiscal 2013. In addition, we had an increase in the inventory allowance in the second quarter and first six months of fiscal 2013 compared to the prior year periods largely due to more products nearing end of life than in the second quarter and first six months of fiscal 2012. Partially offsetting this decrease was lower intangible amortization in both the second quarter and first six months of fiscal 2013 due to certain intangible assets becoming fully amortized in fiscal 2012 and the second quarter of fiscal 2013.

Service Margin

Service gross margin dollars increased $0.7 million, or 5%, compared to the second quarter of fiscal 2012, and service gross margin percentage increased 220 basis points despite a decrease in service revenue of $0.2 million. For the first six months of fiscal 2013 service gross margin dollars increased $1.8 million, or 6%, and service gross margin percentage increased 300 basis points despite a decrease in service revenue of $0.8 million compared to the first half of fiscal 2012. These service margin increases were primarily due to reduced costs across our service delivery model in part due to bringing repair of certain product lines in-house and from a decreased volume of repairs. In addition, our service activities continue to reflect a larger proportion of branded products under contract, which have relatively higher margins than margins for OEM repair services.

The more significant cost decreases in the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012 were for external service providers and third party warehouse expenses. For the first six months of fiscal 2013, the more significant cost decreases compared to the prior year period were for third party warehouse, external service providers and service materials. Third party warehouse expenses decreased due to reduced usage as a result of bringing repair of certain product lines in-house. External service provider expense decreased due to a combination of bringing repair of certain product lines in-house and negotiating lower rates on the renewals of contracts with certain service providers. Service material decreases were primarily due to decreased volumes of repairs compared to the prior year.

Research and Development Expenses

                                                  Three Months Ended
(In thousands)                September 30,        % of        September 30,        % of                        %
                                  2012           revenue           2011           revenue       Change       Change
Research and development     $        19,475       13.2 %     $        19,003       11.5 %     $     472       2.5 %

                                                   Six Months Ended
                              September 30,        % of        September 30,        % of                        %
                                  2012           revenue           2011           revenue       Change       Change
Research and development     $        38,024       13.2 %     $        37,583       11.8 %     $     441       1.2 %

The increase in research and development expenses compared to the second quarter and first six months of fiscal 2012 was primarily due to an increase in use of external service providers largely for next generation LTO product development.


Sales and Marketing Expenses

                                             Three Months Ended
(In thousands)           September 30,        % of        September 30,        % of                          %
                             2012           revenue           2011           revenue        Change        Change
Sales and marketing     $        34,441       23.4 %     $        31,115       18.9 %     $     3,326      10.7 %

                                              Six Months Ended
                         September 30,        % of        September 30,        % of                          %
                             2012           revenue           2011           revenue        Change        Change
Sales and marketing     $        69,719       24.2 %     $        61,640       19.3 %     $     8,079      13.1 %

The increase in sales and marketing expense for the second quarter and first six months of fiscal 2013 was primarily due to a $1.7 million and $4.2 million increase, respectively, in compensation and benefits from growing our branded sales force and marketing team. We also had increases of $0.6 million and $2.4 million compared to the second quarter and first six months of fiscal 2012, respectively, in marketing and advertising expenses due to expanded marketing programs to generate greater awareness of Quantum and increase future demand for our products and services.

General and Administrative Expenses

                                                    Three Months Ended
(In thousands)                  September 30,        % of        September 30,        % of                        %
                                    2012           revenue           2011           revenue       Change       Change
General and administrative     $        15,279       10.4 %     $        15,230        9.2 %     $      49       0.3 %

                                                     Six Months Ended
                                September 30,        % of        September 30,        % of                        %
                                    2012           revenue           2011           revenue       Change       Change
General and administrative     $        32,059       11.1 %     $        31,232        9.8 %     $     827       2.6 %

The increase in general and administrative expenses for the first six months of fiscal 2013 compared to the first six months of fiscal 2012 was primarily due to a $0.6 million increase in facility expenses due to a higher proportion of facility costs attributable to general corporate operations as a result of reducing facilities utilized for manufacturing, service and research and development over the past year.

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