Quantum Corporation (QTM)

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Quantum (QTM)

Q3 2013 Earnings Call

January 30, 2013 5:00 pm ET

Executives

Shawn D. Hall - Senior Vice President, General Counsel and Secretary

Jonathan W. Gacek - Chief Executive Officer, President and Director

Linda M. Breard - Chief Financial Officer, Chief Accounting Officer and Senior Vice President of Finance, IT & Facilities

Analysts

Cindy Shaw - DISCERN Investment Analytics, Inc

Jack McCarthy

Brian S. Freed - Wunderlich Securities Inc., Research Division

Glenn Hanus - Needham & Company, LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Quantum Corporation Third Quarter 2013 Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, January 30, 2013. I would now like to turn the conference over to Mr. Shawn Hall, General Counsel. Please go ahead, sir.

Shawn D. Hall

Thank you, and good afternoon, and welcome. Here with me today are Jon Gacek, our CEO; and Linda Breard, our CFO. The webcast of this call, our earnings release and a quantitative reconciliation of any GAAP and non-GAAP financial measures discussed today can be accessed at the Investor Relations section of our website at www.quantum.com and will be archived for 1 year.

During the course of today's discussion, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements regarding our business strategy, opportunity and priorities, anticipated product launches and plans and future financial performance. We'd like to caution you that our statements are based on current expectations and involve risks and uncertainties that could cause actual results to differ materially.

We refer you to the risk factors and cautionary language contained in today's press release as well as to our reports filed with the Securities and Exchange Commission from time to time, including our most recent 10-K filed on June 14, 2012, and 10-Q filed on November 9, 2012. These risk factors are incorporated by reference into today's discussion and we undertake no obligation to update them in the future.

With that, I'll turn the call over to Jon Gacek.

Jonathan W. Gacek

Thanks, Shawn. Welcome to our fiscal 2013 Q3 earnings call. Today, we reported revenue of $159.4 million, non-GAAP gross margin of 43.6% and non-GAAP earnings per share of $0.02. In addition, we generated $6 million in cash from operations and ended the quarter with a cash balance of $55 million. Our disk and software revenue totaled $41 million, driven by another record quarter of DXi revenue, and our tape automation revenue rebounded strongly from Q2.

I'm going to address the key elements of this quarter's results. Linda will give more detail on the results, and I will come back to address Q4 and our fiscal 2014 plans.

The clear highlight in Q3 was our overall financial performance, including sequential revenue growth and the resulting profitability and cash flow. This reflected a series of actions we took in October to adjust our financial model to the current economic environment with a balanced approach to both drive for revenue growth and generate income and positive cash flow.

First, we reemphasized our growth objectives with the sales team and we reiterated the importance of not getting overly focused on a single product line at the risk of missing opportunities across the entire portfolio. This was particularly true in the case of tape automation, where we stressed the need to ensure we are taking full advantage of the market opportunities.

The tape automation market has been difficult this year, with the overall market down approximately 20%. However, we have the best tape product portfolio and market position and we should gain share even in a tough market. This year, we've added a lot of excellent salespeople with a wide range of backgrounds, but most have a historical experience was in selling disk and software products. We have taken steps to make sure we are getting the tape opportunities, train our new sales team members to be successful and making sure we have adequate support to close tape deals.

The second action we took in October, following the reduction in our Q1 and Q2 tape revenue, was to adjust our spending levels accordingly, with a focus on generating cash and income while still driving growth in this system's software and Big Data products. We implemented a plan that reduced headcount by roughly 10%, with basically all of the actions completed by December 31. Changes were implemented in all functions and in all geographies. We focused on performance, productivity, opportunity and strategic importance as we made these changes. The impact was approximately $1 million of benefit from those reductions in Q3 and we expect to recognize $6 million per quarter of benefit beginning this quarter.

The third action we took was to improve our overall balance sheet by refinancing our senior debt with a convertible security. The refinancing will allow us to accumulate cash and gives us more flexibility to run the business. Linda will provide details on the EPS and interest impact of the new debt later in the call.

The results of these actions was that we grew revenue by 8% over Q2; reported non-GAAP operating income of $7.5 million, which was a sequential improvement of $10 million; and generated cash from operations of $6.4 million, a $20 million swing from the $13.4 million of cash used in operations for Q2. As this demonstrates, our financial model is very leveraged, and as we add revenue, we generate incremental operating profit very quickly. In addition, when increased revenues coupled with full savings from the cost reductions we've made, the result will be even better operating results and cash flow generation.

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