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QTM > SEC Filings for QTM > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for QUANTUM CORP /DE/

Form 10-Q for QUANTUM CORP /DE/


8-Aug-2014

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, having operating profit and generating cash from operations; (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; (5) our expectations regarding the outcome of any litigation in which we are involved and (6) our business goals, objectives, key focuses, opportunities and prospects 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

We believe our combination of expertise, innovation and platform independence enables us to solve data protection and scale-out storage challenges 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. Our products are sold under both the Quantum brand name and the names of various OEM customers. Our scale-out storage solutions include StorNext® file system and archive software, StorNext appliances and LattusTM object storage systems and are designed to help customers manage large unstructured data sets in an information workflow, encompassing high-performance ingest, real-time collaboration, scalable processing, intelligent protection and high-value monetization. Our data protection solutions include DXi® deduplication backup systems and Scalar® automated tape libraries that optimize backup and recovery, simplify management and lower cost. Our vmPROTM virtual server backup and disaster recovery offerings protect virtual environments while minimizing the impact on servers and storage. In addition, we also offer software for cloud backup and disaster recovery of physical and virtual servers. We have a full range of services and the global scale and scope to support our worldwide customer base.

Our goal for fiscal 2015 is to profitably grow total revenue in our core business to improve operating results and shareholder value. We have undertaken several initiatives to achieve this goal, which include leveraging our market position in tape automation; penetrating growing markets where we are well positioned from a technology and go-to-market perspective with our DXi, StorNext and Lattus product lines; leveraging our large customer install base across our product portfolio to achieve efficiency and scale; focusing on vertical markets where we are strong; expanding our product portfolio; and continuing to pursue go-to-market partnerships that would drive incremental revenue and profit. In addition, we believe our current cash, balance sheet resources and line of credit availability are sufficient to pay off the $133.7 million of 3.50% convertible subordinated notes due November 15, 2015 and fund additional growth opportunities.

During the first quarter of fiscal 2015, our focus on expanding our footprint among large broadcasters in the vertical market of media and entertainment helped us achieve record quarterly revenue for scale-out storage products and services. We have created specific product combinations in our StorNext Pro Solutions as well as dedicated sales and marketing resources to this vertical market. In addition, we leveraged our install base of data center customers to sell scale-out storage solutions to manage growing media files and large content workflows for these customers. We also introduced the DXi6900, which incorporates StorNext 5 technology and is optimized for modern data protection workflows. During the quarter we pursued strategic partnerships and announced a new joint solution with a partner targeted for sporting event media and entertainment customers. In addition, in July we announced a joint solution with a strategic partner that enables customers to more easily investigate and combat cyber attacks. We believe these strategic partnership joint solutions for specific use cases can contribute incremental revenue in fiscal 2015.


In April 2014, we completed an amendment to our Wells Fargo credit agreement which increased our line of credit by $20 million to $75 million and provided additional flexibility by allowing the line of credit to be utilized to pay outstanding amounts under the November 2010 convertible subordinated notes, which are due in November 2015.

Results

We had total revenue of $128.1 million in the first quarter of fiscal 2015, a $19.7 million decrease from the first quarter of fiscal 2014, primarily due to a non-recurring $15.0 million royalty received in connection with finalizing an intellectual property agreement in the first quarter of fiscal 2014. Our branded product and service revenue increased 1% from the first quarter of fiscal 2014 due to increased scale-out storage revenue mostly offset by decreased revenue from data protection products and services. Revenue from branded scale-out storage products and related services increased $5.1 million, or 40%, in the first quarter of fiscal 2015, while revenue from branded data protection products and related services decreased $4.5 million from the first quarter of fiscal 2014. Our continued focus on our branded business is reflected in the greater proportion of non-royalty revenue from branded business, at 86% in the first quarter of fiscal 2015, compared to 83% in the first quarter of fiscal 2014. Royalty revenue decreased $16.1 million from the first quarter of fiscal 2014 largely due to the $15.0 million royalty received in connection with an intellectual property agreement as noted above.

Our gross margin percentage decreased 390 basis points from the first quarter of fiscal 2014 to 43.3%, primarily due to decreased royalty revenue. Excluding the $15.0 million royalty received in connection with an intellectual property agreement in the first quarter of fiscal 2014, our gross margin percentage would have increased in the first quarter of fiscal 2015 compared to the prior year period. This is due to the improvements we made in our business model over the past year, including changing to an outsourced manufacturing model.

Operating expenses decreased $6.6 million, or 10%, primarily from cost controls and spending reductions implemented over the past year. The largest spending decrease compared to the first quarter of fiscal 2014 was for compensation and benefits as a result of reduced staffing to right-size our workforce. These cost reductions impacted sales and marketing expenses the most, followed by decreased research and development spending compared to the first quarter of fiscal 2014.

Although the $15.0 million in royalty revenue from the prior year intellectual property agreement was not repeated, our operating results declined only $7.2 million from the first quarter of fiscal 2014. We had a $1.5 million loss from operations compared to operating income of $5.7 million in the first quarter of fiscal 2014. Excluding the non-recurring $15.0 million royalty in the prior year, our operating results would have improved from the first quarter of fiscal 2014. We generated $6.3 million in cash from operations during the first quarter of fiscal 2015 compared to $9.2 million in the first quarter of fiscal 2014. We ended the quarter with $107.2 million in cash, cash equivalents and restricted cash, the highest quarter-end balance in over four years.

RESULTS OF OPERATIONS

Revenue

                                                  Three Months Ended
(Dollars in thousands)
                                                  % of                              % of
                            June 30, 2014       revenue       June 30, 2013       revenue          Change          % Change
Product revenue            $        80,194         62.6 %     $       85,849         58.1 %     $    (5,655 )         (6.6 )%
Service revenue                     38,500         30.0 %             36,492         24.7 %           2,008            5.5 %
Royalty revenue                      9,434          7.4 %             25,508         17.2 %         (16,074 )        (63.0 )%
    Total revenue          $       128,128        100.0 %     $      147,849        100.0 %     $   (19,721 )        (13.3 )%

Total revenue decreased from the first quarter of fiscal 2014 primarily due to royalty revenue in the prior year that was not repeated as noted above, as well as decreased product revenue, largely due to decreased sales of OEM products. We believe decreased product revenue was due to the changing storage environment, including reduced demand for tape products and increased market demand for scale-out storage solutions, in addition to our actions related to reducing our investments in sales during fiscal 2014 while improving our sales model. OEM product and service revenue decreased $4.2 million, or 21%, from the first quarter of fiscal 2014. As noted above, combined branded product and service revenue increased slightly from the first quarter of fiscal 2014 due to increased scale-out storage revenue mostly offset by decreased revenue from data protection products and services. However, our branded product revenue decreased 2% primarily due to decreased tape automation and disk backup systems revenue, partially offset by a 25% increase in revenue from scale-out storage products. Service revenue increased $2.0 million, or 6%, primarily due to increased sales of branded hardware service contracts for our StorNext appliances. Branded scale-out storage products include StorNext software, StorNext appliances and Lattus object storage solutions. Data protection products include our tape automation systems, disk backup systems and devices and media offerings.


Product Revenue

Total product revenue, which includes sales of our hardware and software products sold through both our Quantum branded and OEM channels, decreased $5.7 million in the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014, primarily due to decreases in revenue from sales of midrange tape automation systems. Over half of the tape automation revenue decrease was from lower midrange OEM sales and approximately one-third was attributable to decreased revenue from sales of branded midrange products. Revenue from sales of branded products decreased 2% and sales of products to our OEM customers decreased 22% in the first quarter of fiscal 2015 compared to the prior year period.

                                                                         Three Months Ended
(Dollars in thousands)
                                                June 30, 2014      % of revenue      June 30, 2013      % of revenue         Change         % Change
Disk backup systems and software solutions     $        24,563            19.2 %     $       23,205            15.7 %     $    1,358            5.9 %
Tape automation systems                                 37,906            29.6 %             44,665            30.2 %         (6,759 )        (15.1 )%
Devices and media                                       17,725            13.8 %             17,979            12.2 %           (254 )         (1.4 )%
    Total product revenue                      $        80,194            62.6 %     $       85,849            58.1 %     $   (5,655 )         (6.6 )%

Our disk backup systems and software solutions revenue increased 6% from the first quarter of fiscal 2014 primarily due to a 25% increase in revenue from branded scale-out storage products. This was offset partially by a $1.7 million decrease in sales of branded disk backup systems. The increase in scale-out storage revenue was primarily due to increased revenue from StorNext appliances followed by Lattus object storage products. The decreased revenue from disk backup systems was largely due to lower sales of our midrange products, partially offset by increased sales of entry-level DXi products, including the DXi 4700, and enterprise disk backup products. Increased enterprise disk backup systems revenue was primarily due to increased large orders, or orders over $200,000, in the first quarter of fiscal 2015 compared to the prior year period.

Our branded tape automation business performed better in the first quarter of fiscal 2015 than our OEM tape automation systems business, declining 9% or $2.4 million, compared to a 24%, or $4.3 million, decrease in OEM tape automation revenue. OEM tape automation systems decreases were primarily due to a 30% decline in revenue from midrange systems compared to the first quarter of fiscal 2014. Within our branded tape automation systems, the decline was primarily due to midrange tape automation systems sales, which decreased 26% from the first quarter of fiscal 2014.

Product revenue from devices, which includes tape drives and removable hard drives, and non-royalty media sales was relatively unchanged.

Service Revenue

Service revenue is primarily comprised of hardware service contracts which are typically purchased by our customers to extend the warranty or to provide faster service response time, or both. Service revenue increased 6% from the first quarter of fiscal 2014 primarily due to increased revenue from branded service contracts for our StorNext appliances.

Royalty Revenue

Royalty revenue decreased from the first quarter of fiscal 2014 primarily due to the $15.0 million royalty received in connection with an intellectual property agreement in the prior year. Additionally, LTO royalties decreased as expected from the first quarter of fiscal 2014.


Gross Margin

                                                                                                   Three Months Ended
(Dollars in thousands)                                                                                                                                                Basis
                                                                                                  Gross                              Gross                            point
                                                                             June 30, 2014       margin %       June 30, 2013       margin %         Change          change
Product gross margin                                                        $        25,286         31.5 %     $        27,066         31.5 %     $    (1,780 )           -
Service gross margin                                                                 20,806         54.0 %              17,261         47.3 %           3,545           670
Royalty gross margin                                                                  9,434        100.0 %              25,508        100.0 %         (16,074 )           -
    Gross margin                                                            $        55,526         43.3 %     $        69,835         47.2 %     $   (14,309 )        (390 )

The 390 basis point decrease in gross margin percentage for the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014 was primarily due to the $16.1 million decrease in royalty revenue. Partially offsetting this decrease was a 670 basis point increase in service margin as a result of cost reductions and a continued mix shift to more service for branded products and a reduced proportion of OEM repair service.

Product Margin

Product gross margin dollars decreased $1.8 million, or 7%, on a product revenue decrease of $5.7 million, or 7%, compared to the first quarter of fiscal 2014; however, we maintained our product gross margin rate at 31.5% primarily due to shifting to an outsourced manufacturing model. Outsourcing our manufacturing has created a more variable cost model, reducing costs in the first quarter of fiscal 2015 that were relatively fixed in the first quarter of fiscal 2014 when we manufactured the majority of our products in our facilities. Notable cost decreases from the first quarter of fiscal 2014 as a result of implementing outsourced manufacturing include compensation and benefits and facility expenses.

Service Margin

Service gross margin dollars increased $3.5 million, or 21%, compared to the first quarter of fiscal 2014, and service gross margin percentage increased 670 basis points on a $2.0 million increase in service revenue. The increase in service gross margin rate was primarily due to reduced costs as a result of continued improvements to our service delivery model, including outsourcing geographies with lower service and repair volumes and improving utilization of our service team. 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.

Royalty Margin

Royalties typically do not have related cost of sales and have a 100% gross margin percentage. Therefore, royalty gross margin dollars vary directly with royalty revenue. The decrease in royalty gross margin dollars in the first quarter of fiscal 2015 was primarily due to the non-recurring $15.0 million royalty received in the first quarter of fiscal 2014.

Research and Development Expenses

                                                   Three Months Ended
(Dollars in thousands)                             % of                              % of                              %
                              June 30, 2014       revenue       June 30, 2013       revenue         Change          Change
Research and development     $        14,554        11.4 %     $        16,694        11.3 %     $   (2,140 )        (12.8 )%

The decrease in research and development expense in the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014 was primarily due to cost reductions that resulted in a $2.0 million decrease in compensation and benefits from lower staffing levels.


Sales and Marketing Expenses

                                                 Three Months Ended
(Dollars in thousands)                           % of                              % of                             %
                            June 30, 2014       revenue       June 30, 2013       revenue         Change          Change
Sales and marketing        $        27,705        21.6 %     $        30,158        20.4 %     $   (2,453 )        (8.1 )%

The decrease in sales and marketing expense in the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014 was primarily due to a $1.4 million decrease in compensation and benefits from decreased staffing levels. We also had a decrease of $0.8 million in marketing and advertising expense due to fewer marketing activities as a result of spending reductions.

General and Administrative Expenses

                                                     Three Months Ended
(Dollars in thousands)                               % of                              % of                          %
                                June 30, 2014       revenue       June 30, 2013      revenue        Change         Change
General and administrative     $        14,371        11.2 %     $        14,689        9.9 %     $   (318 )        (2.2 )%

The decrease in general and administrative expenses for the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014 was primarily due to a $0.4 million decrease in facilities costs, largely from vacating portions of various facilities.

Restructuring Charges

                                               Three Months Ended
(Dollars in thousands)                          % of                            % of                             %
                           June 30, 2014      revenue      June 30, 2013      revenue         Change          Change
Restructuring charges      $          865        0.7 %     $        2,559        1.7 %     $   (1,694 )        (66.2 )%

Restructuring charges in the first quarter of fiscal 2015 were primarily due to facilities costs as a result of further consolidating production and service activities. Restructuring charges in the first quarter of fiscal 2014 were primarily due to severance and benefits costs as a result of deciding to outsource our manufacturing operations and consolidate production and service activities.

Gain on Sale of Assets

                                               Three Months Ended
(Dollars in thousands)                          % of                           % of                      %
                           June 30, 2014      revenue      June 30, 2013      revenue     Change      Change
Gain on sale of assets     $          462        0.4 %     $            -         - %     $   462         n/a

The gain on sale of assets was primarily due to the sale of IP addresses in the first quarter of fiscal 2015.

Other Income and Expense

                                                   Three Months Ended
(Dollars in thousands)                              % of                             % of                          %
                              June 30, 2014       revenue       June 30, 2013       revenue        Change       Change
Other income and expense     $        (125 )        (0.1 )%     $          375         0.3 %     $   (500 )         n/m

Other expense in the first quarter of fiscal 2015 was primarily due to net foreign exchange losses compared to other income in the first quarter of fiscal 2014 largely due to net foreign exchange gains. Foreign exchange losses in the first quarter of fiscal 2015 were primarily due to strengthening of the British pound against the U.S. dollar, and foreign exchange gains in the first quarter of fiscal 2014 were primarily due to the U.S. dollar strengthening against the Australian dollar.


Income Taxes

                                                 Three Months Ended
(Dollars in thousands)                           % of                             % of
                                               pre-tax                           pre-tax                          %
                           June 30, 2014         loss        June 30, 2013       income         Change         Change
Income tax provision       $          248        (6.1 )%     $          390        10.6 %     $   (142 )        (36.4 )%

The income tax provision for both the first quarter of fiscal 2015 and fiscal 2014 reflects expenses for foreign income taxes and state taxes. We have provided a full valuation allowance against our U.S. net deferred tax assets due to our history of net losses, difficulty in predicting future results and our conclusion that we cannot rely on projections of future taxable income to realize the deferred tax assets.

Significant management judgment is required in determining our deferred tax assets and liabilities and valuation allowances for purposes of assessing our ability to realize any future benefit from our net deferred tax assets. We intend to maintain this valuation allowance until sufficient positive evidence exists to support a reversal or decrease in this allowance. Future income tax expense will be reduced to the extent that we have sufficient positive evidence to support a reversal of, or decrease in, our valuation allowance.

Amortization of Intangible Assets

The following table details intangible asset amortization expense within our
Condensed Consolidated Statements of Operations (dollars in thousands):

                                   Three Months Ended
                            June 30, 2014      June 30, 2013       Change        % Change
    Cost of revenue         $          378     $          368     $      10          2.7 %
    Sales and marketing              1,856              1,856             -            - %
                            $        2,234     $        2,224     $      10          0.4 %

The change in amortization expense was nominal comparing the first quarter of fiscal 2015 to the first quarter of fiscal 2014. For further information regarding amortizable intangible assets, refer to Note 5 "Intangible Assets and Goodwill."

Share-based Compensation

The following table summarizes share-based compensation expense within our
Condensed Consolidated Statements of Operations (dollars in thousands):

                                          Three Months Ended
                                   June 30, 2014      June 30, 2013         Change          % Change
    Cost of revenue                $          414     $          528     $      (114 )        (21.6 )%
    Research and development                  780                868             (88 )        (10.1 )%
    Sales and marketing                       910              1,074            (164 )        (15.3 )%
    General and administrative                964                886              78            8.8 %
                                   $        3,068     $        3,356     $      (288 )         (8.6 )%

The decrease in share-based compensation expense was primarily due to a $0.2 million decrease in expense related to the employee stock purchase plan due to decreased employee contributions as a result of reduced staffing in fiscal 2014. Additionally, we had a decrease of $0.1 million in option expense due to existing options becoming fully vested in the first quarter of fiscal 2015.

. . .

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