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Quantum Corporation (QTM)

F3Q10 (Qtr End 12/31/09) Earnings Call Transcript

January 28, 2010 5:00 pm ET

Executives

Shawn Hall – SVP, General Counsel and Secretary

Jon Gacek – EVP, CFO and COO

Rick Belluzzo – Chairman and CEO

Bill Britts – EVP, Sales & Marketing

Analysts

Brian Freed – Morgan Keegan

Joe Feshbach – Joe Feshbach Partners

Brian Alger – Strata Capital Management

Paul Sonz – Sonz Partners

Presentation

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Quantum Corporation third quarter 2010 conference call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) This conference is being recorded today, Thursday, January 28th of 2010. And I’d like to turn the conference over to Shawn Hall, General Counsel. Please go ahead.

Shawn Hall

Thank you. And good afternoon and welcome. Here with me today are Rick Belluzzo, our CEO; Jon Gacek, our COO and CFO; and Bill Britts, our EVP for Sales and Marketing. 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 in the Investors section of our website at www.quantum.com and will be archived for one 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, opportunities and priorities, anticipated product launches and plans, future financial performance, including expected revenue, gross margin and expense performance, and debt covenant compliance, and trends in our business and in the markets in which we compete.

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 announcing our fiscal Q3 2010 results, as well as to our reports filed with the Securities and Exchange Commission from time to time, including our most recent 10-Q filed on November 6, 2009.

Such reports contain and identify important factors that could cause actual results to differ materially from those contained in our forward-looking statements. All such risk factors identified in our press release and in our filings with the SEC are incorporated by reference into today’s discussion. We undertake no obligation to update these forward-looking statements in the future.

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

Jon Gacek

Thanks, Shawn. Good afternoon and thank you for joining us, as we report our third quarter results. We are very pleased with our Q3 results and the continued progress that we have made in our overall operating model, closing on our third sequential quarter of delivering GAAP net income. We are reporting our second consecutive quarter with increased total revenue and branded revenue.

In the December quarter, we continued our trend of transitioning our business to higher margin branded business. Our gross margins continued to be some of the highest we have recorded in ten years. Operating expenses were managed tightly, and we reported non-GAAP operating profit of $22.7 million or 12% of revenue.

Additionally, this quarter’s results include minimal OEM DXi software revenue compared to a year ago and to last quarter. And as you can see from the results, we have been able to transition away from OEM DXi software revenue to branded DXi growth and still deliver solid double-digit operating profit.

Here are few additional highlights. First, disk systems and software revenue, including the related software maintenance and service revenue, was $24.8 million compared to $31.3 million a year ago. The amount we recognized this quarter was 95% branded and excluded the impact of OEM DXi software revenues in this category. For this period and last, our disk systems and software revenue grew 29% over the same quarter a year ago. So our branded DXi grew 29% year-over-year.

Second, our non-GAAP gross margin was 44% compared to 45% for the same quarter last year. We continued our trend of moving to more branded business, reporting 76% of branded non-royalty revenue for this quarter compared to 65% in the same quarter of last fiscal year. In absolute dollars, branded revenue increased both sequentially and over the same period in the last fiscal year.

Branded sales typically have higher margins. However, this quarter, the improved mix was impacted by other things, including a sharp reduction of OEM DXi software revenue, an increase in lower of cost or market charges associated with write-downs of service and manufacturing inventory related to end-of-service life dates on certain product families and planned product roadmap transitions overall, and a reduction in benefit from lower warranty obligations.

Third, our non-GAAP operating expenses were $57.9 million, down $2.2 million or 4% from Q3 of fiscal ’09. We remain focused on managing our cost structure, but we will invest an additional R&D and sales and marketing resources, as we see profitable growth opportunities.

Fourth, our non-GAAP operating profit was 12% compared to 15% in the same quarter last year. We have achieved non-GAAP operating profit in excess of 10% for two consecutive quarters. The last time we reported similar results was nine years ago.

Fifth, net income was $16 million or $0.07 per share compared to $25.6 million or $0.12 per share in the third quarter of last year. Those were both non-GAAP numbers.

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