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| QTM > SEC Filings for QTM > Form 10-Q on 8-Feb-2013 | All Recent SEC Filings |
8-Feb-2013
Quarterly Report
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; and (5) 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; (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; and (9) 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.
We started fiscal 2013 with the objectives of increasing total revenue, having operating profit and generating cash from operations. These objectives assumed the market for tape automation systems and tape drives would be approximately the same as fiscal 2012 and the market for disk systems and software solutions would grow compared to fiscal 2012. Market analysts have estimated the overall demand in tape market decreased approximately 20% in the first half of fiscal 2013, and during that period we had a 17% decline in our tape automation systems revenue which caused a significant negative impact to both total revenue and operating profit. In addition, our disk systems and software revenue decreased in the first quarter of fiscal 2013 as a result of economic weakness in Europe, and large orders decreased due to customer caution from economic uncertainty. During the third quarter of fiscal 2013, we believe there was continued weakness in the data protection and big data markets as a result of economic uncertainty regarding the fiscal cliff in the U.S., and companies continued to be cautious with their purchasing decisions.
In the second quarter of fiscal 2013, we met our objective of increasing revenue for disk systems and software revenue for the quarter, achieving record revenue in this category. This revenue growth continued in the third quarter of fiscal 2013, increasing disk systems and software solutions revenue from both the third quarter and first nine months of fiscal 2012. We believe this revenue increase reflects the market opportunity, the strength of our DXi and StorNext product portfolios and continued innovation in these product families in addition to achieving better sales traction in the channel and improved sales productivity.
We expected and experienced sequential improvement in tape automation systems revenue from year-end IT budget spending and the release of LTO-6 technology in the third quarter of fiscal 2013. We introduced LTO-6 tape drives and tape automation systems in certain of our products in December 2012, which contributed to increased tape automation revenue from the second quarter of fiscal 2013. Overall, we believe our branded tape business has been outperforming the market due to smaller percentage decreases in branded tape automation systems revenue, devices and media revenue and royalty revenue than the estimated decrease in overall market demand.
We continued our focus on training our sales team and engaging with channel partners to take advantage of sales opportunities across our portfolio. We had strong new customer acquisition in the third quarter of fiscal 2013 which we believe was due in part to increased end user and channel partner awareness as a result of our marketing focus and awareness campaign in the first half of fiscal 2013. In addition, we introduced several new products during the third quarter of fiscal 2013, including Lattus™ X, the first product in our wide area storage family for big data environments, and version 3.0 of our vmPRO virtual machine backup software.
Given the tape revenue decrease in the first half of fiscal 2013 compared to the first half of fiscal 2012, its impact on operating profit and the use of cash in operations, we recognized the need for and implemented cost controls and spending reductions in the third quarter of fiscal 2013. As a result, our financial performance in the third quarter of fiscal 2013 improved from the second quarter of fiscal 2013, contributing to decreased operating loss and generating cash from operations. The improvement in our financial results from the second quarter of fiscal 2013 also reflects the leverage in our business model where revenue growth quickly leads to improved operating results.
We continue to be focused on building the long-term growth areas of the business and supporting our strategic initiatives. We believe our product portfolio and installed base of customers are a competitive strength and provide us with the opportunity to gain market share in a declining tape market. We continue to be opportunistic in improving our capital structure and issued $70 million of convertible subordinated notes due November 15, 2017 in the third quarter of fiscal 2013 to strengthen our balance sheet and provide greater flexibility in our business operations. With the completion of this convertible debt offering, we requested an amendment to our Well Fargo credit agreement to decrease the line of credit and modify certain covenants. An amendment was completed on January 31, 2013. We also continue to introduce new products and features to help customers meet their evolving data protection and big data management requirements. These initiatives are intended to improve profitability and generate cash from operations.
Results
We had total revenue of $159.4 million in the third quarter of fiscal 2013, an 8% decrease from the third quarter of fiscal 2012. Product revenue from OEM customers decreased 16% and revenue from branded products decreased 7% both primarily due to expected declines in tape automation systems revenue for the third quarter of fiscal 2013. Our continued efforts to increase revenue from disk systems and software solutions resulted in record quarterly revenue for disk systems and a 6% increase in this revenue category from the third quarter of fiscal 2012. Service revenue was the same as the third quarter of fiscal 2012, while royalty revenue decreased 18% from the third quarter of fiscal 2012 as expected. Our continued focus on growing our branded business is reflected in the greater proportion of non-royalty revenue from branded business, at 83% in the third quarter of fiscal 2013, compared to 81% in the third quarter of fiscal 2012.
Our gross margin percentage increased 20 basis points from the third quarter of fiscal 2012 to 42.7% despite a $14.1 million decrease in revenue primarily due to increased service gross margins as a result of reduced costs across our service delivery model and a mix shift toward branded service contract activity and reduced OEM repair activity. Operating expenses increased $6.9 million, or 10% from the third quarter of fiscal 2012, primarily from restructuring charges for severance and benefits to right-size our workforce in order to align spending with revenue expectations. We had a $5.6 million loss from operations in the third quarter of fiscal 2013 compared to operating income of $7.0 million in the third quarter of fiscal 2012.
Interest expense decreased 9% to $2.2 million primarily due to decreased debt amortization expense as a result of debt refinancings in calendar 2012. We generated $6.4 million in cash from operating activities in the third quarter of fiscal 2013 compared to $16.1 million in the third quarter of fiscal 2012.
RESULTS OF OPERATIONS
Revenue
Three Months Ended
December 31, % of December 31, % of %
(In thousands) 2012 revenue 2011 revenue Change Change
Product revenue $ 112,517 70.6 % $ 124,081 71.5 % $ (11,564 ) (9.3 )%
Service revenue 35,340 22.2 % 35,362 20.4 % (22 ) (0.1 )%
Royalty revenue 11,538 7.2 % 14,049 8.1 % (2,511 ) (17.9 )%
Total revenue $ 159,395 100.0 % $ 173,492 100.0 % $ (14,097 ) (8.1 )%
Nine Months Ended
December 31, % of December 31, % of %
2012 revenue 2011 revenue Change Change
Product revenue $ 306,395 68.5 % $ 341,475 69.4 % $ (35,080 ) (10.3 )%
Service revenue 107,138 23.9 % 107,956 21.9 % (818 ) (0.8 )%
Royalty revenue 34,081 7.6 % 42,635 8.7 % (8,554 ) (20.1 )%
Total revenue $ 447,614 100.0 % $ 492,066 100.0 % $ (44,452 ) (9.0 )%
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Total revenue decreased in the third quarter of fiscal 2013, largely due to a decline in the tape automation market and economic weakness due to uncertainty regarding the fiscal cliff in the U.S. Companies of all sizes were cautious with their purchasing decisions in the third quarter of fiscal 2013. Total revenue in the first nine months of fiscal 2013 decreased from the first nine months of fiscal 2012, reflecting a decline in the tape automation market, economic uncertainty and, a decrease in large orders, or orders over $200,000. Revenue from branded data protection products and services decreased $6.5 million, or 6% from the third quarter of fiscal 2012 and decreased 9% from the first nine 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 was the same as the third quarter of fiscal 2012 and increased 21% from the first nine months of fiscal 2012. Big data and archive products include StorNext software, StorNext and Q-Series appliances and Lattus wide area storage solutions. In addition, OEM product and service revenue decreased $5.1 million and $14.3 million, respectively, from the third quarter and first nine months of fiscal 2012. Royalty revenue decreased $2.5 million and $8.6 million, respectively, from the third quarter and first nine months of fiscal 2012.
Product Revenue
Our product revenue, which includes sales of our hardware and software products sold through both our Quantum branded and OEM channels, decreased $11.6 million and $35.1 million in the third quarter and first nine months of fiscal 2013, respectively, compared to the prior year periods primarily due to decreased revenue from sales of tape automation systems from entry level to enterprise systems. These decreases were partially offset by increased disk systems revenue and the addition of revenue from our new StorNext appliances that resulted in increased disk systems and software solutions revenue for both the third quarter and first nine months of fiscal 2013. Revenue from sales of branded products decreased 7% and 9%, respectively, in the third quarter and first nine months of fiscal 2013 and sales of products to our OEM customers decreased 16% in both the third quarter and first nine months of fiscal 2013 compared to the prior year periods.
Three Months Ended
December 31, % of December 31, % of %
(In thousands) 2012 revenue 2011 revenue Change Change
Disk systems and software solutions $ 33,768 21.2 % $ 31,712 18.3 % $ 2,056 6.5 %
Tape automation systems 60,967 38.2 % 70,489 40.6 % (9,522 ) (13.5 )%
Devices and media 17,782 11.2 % 21,880 12.6 % (4,098 ) (18.7 )%
Product revenue $ 112,517 70.6 % $ 124,081 71.5 % $ (11,564 ) (9.3 )%
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Nine Months Ended
December 31, % of December 31, % of %
2012 revenue 2011 revenue Change Change
Disk systems and software solutions $ 94,178 21.1 % $ 86,543 17.6 % $ 7,635 8.8 %
Tape automation systems 160,259 35.8 % 190,634 38.7 % (30,375 ) (15.9 )%
Devices and media 51,958 11.6 % 64,298 13.1 % (12,340 ) (19.2 )%
Product revenue $ 306,395 68.5 % $ 341,475 69.4 % $ (35,080 ) (10.3 )%
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Our disk systems and software solutions revenue increased 6% from the third quarter of fiscal 2012 primarily due to increased revenue from our enterprise and midrange disk systems resulting in record quarterly revenue for disk systems. Enterprise disk systems revenue increased 60% from the third quarter of fiscal 2012 mainly due to increased large orders, or orders over $200,000, and midrange disk systems revenue increased 13% from the third quarter of fiscal 2012. For the first nine months of fiscal 2013, disk systems and software solutions revenue increased 9% 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.
The decrease in tape automation systems revenue in the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012 was primarily due to decreased OEM tape automation system sales and, to a lesser extent, from decreased branded tape automation system sales. OEM tape automation system revenue decreases were primarily due to decreased midrange system sales followed by decreased entry level product sales. Branded tape automation system decreases were primarily due to decreased enterprise systems followed by entry level products. Sales of branded enterprise tape automation units increased from the third quarter of fiscal 2012; however, revenue from these systems declined due to lower system upgrade revenue. LTO-6 tape technology became available in our Scalar products and contributed to revenue in the third quarter of fiscal 2013. The decrease in tape automation systems revenue from the first nine months 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. For the first nine months of fiscal 2013, enterprise and midrange tape automation systems had the largest decreases compared to the prior year period.
Product revenue from devices and media, which includes tape drives, removable hard drives and non-royalty media, decreased from the third quarter and first nine months of fiscal 2012 largely due to decreased media sales in addition to lower revenue from devices. The third quarter and first nine 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.
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 was unchanged from the third quarter of fiscal 2012. For the first nine months of fiscal 2013, service revenue decreased 1% compared to the first nine 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 and midrange disk systems.
Royalty Revenue
Tape media royalties decreased 18% and 20% from the third quarter and first nine 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 third quarter and first nine months of fiscal 2012 due to inventories being increased in the third quarter and first nine months of fiscal 2012 in response to concerns of supply disruptions following the March 2011 earthquake and tsunami in Japan.
Gross Margin
Three Months Ended
December 31, Gross December 31, Gross %
(In thousands) 2012 margin % 2011 margin % Change Change
Product gross margin $ 40,510 36.0 % $ 46,843 37.8 % $ (6,333 ) (13.5 )%
Service gross margin 15,980 45.2 % 12,825 36.3 % 3,155 24.6 %
Royalty gross margin 11,538 100.0 % 14,049 100.0 % (2,511 ) (17.9 )%
Gross margin $ 68,028 42.7 % $ 73,717 42.5 % $ (5,689 ) (7.7 )%
Nine Months Ended
December 31, Gross December 31, Gross %
2012 margin % 2011 margin % Change Change
Product gross margin $ 101,754 33.2 % $ 123,431 36.1 % $ (21,677 ) (17.6 )%
Service gross margin 47,212 44.1 % 42,224 39.1 % 4,988 11.8 %
Royalty gross margin 34,081 100.0 % 42,635 100.0 % (8,554 ) (20.1 )%
Gross margin $ 183,047 40.9 % $ 208,590 * 42.4 % $ (25,543 ) (12.2 )%
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*Gross margin for the nine months ended December 31, 2011 includes $0.3 million of restructuring benefit related to cost of revenue.
The 20 basis point increase in gross margin percentage compared to the third quarter of fiscal 2012 was primarily due to offsetting factors, with increased service gross margins offsetting lower product gross margin and a $2.5 million decrease in royalty revenue. For the first nine months of fiscal 2013, our gross margin percentage decreased 150 basis points from the first nine months of fiscal 2012 primarily due to decreased product revenue and a corresponding lower product gross margin as well as an $8.6 million decrease in royalty revenue, partially offset by increased service gross margin. 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.
Product Margin
Product gross margin dollars decreased $6.3 million, or 14%, compared to the third quarter of fiscal 2012, and our product gross margin rate decreased 180 basis points primarily due to a 9% decrease in product revenue. For the first nine months of fiscal 2013, product gross margin decreased $21.7 million, or 18%, and our product gross margin rate decreased 290 basis points primarily due to a 10% decrease in product revenue. As noted above, 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 third quarter and first nine months of fiscal 2013. We had an increase in salaries and benefits in the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012 largely due to merit increases and investments in our software support team. In addition, we had an increase in the manufacturing inventory allowance in the first nine months of fiscal 2013 compared to the prior year period largely due to more products nearing end of life than in the first nine months of fiscal 2012. Partially offsetting these factors was lower intangible amortization in both the third quarter and first nine 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 $3.2 million, or 25%, compared to the third quarter of fiscal 2012, and service gross margin percentage increased 890 basis points while service revenue was unchanged. For the first nine months of fiscal 2013 service gross margin dollars increased $5.0 million, or 12%, and service gross margin percentage increased 500 basis points despite a decrease in service revenue of $0.8 million compared to the first nine months 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 third quarter of fiscal 2013 compared to the third quarter of fiscal 2012 were service parts inventory allowance, compensation and benefits, external service providers and third party warehouse expense. For the first nine months of fiscal 2013, the more significant cost decreases compared to the prior year period were for third party warehouse, external service providers, compensation and benefits and service materials. Service parts inventory allowance expense decreased primarily due to increased service parts usage and lower overall service parts inventory. Compensation and benefits decreased due to reduced staffing levels. 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 lower repair volumes compared to the prior year.
Research and Development Expenses
Three Months Ended
December 31, % of December 31, % of %
(In thousands) 2012 revenue 2011 revenue Change Change
Research and development $ 18,615 11.7 % $ 17,629 10.2 % $ 986 5.6 %
Nine Months Ended
December 31, % of December 31, % of %
2012 revenue 2011 revenue Change Change
Research and development $ 56,639 12.7 % $ 55,212 11.2 % $ 1,427 2.6 %
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The increase in research and development expenses compared to the third quarter and first nine months of fiscal 2012 was largely due to a $0.4 million and $0.9 million increase, respectively, in use of external service providers, primarily for next generation LTO product development. In addition, we had a $0.4 million increase in compensation and benefits expense in the third quarter of fiscal . . .
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