Quantum Corporation (QTM)

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Quantum Corporation (QTM)

F2Q2011 Earnings Conference Call

October 27, 2010 5 PM ET

Executives

Shawn Hall – SVP, General Counsel, Secretary

Jon Gacek – CFO, COO and EVP

Richard Belluzzo – Chairman and CEO

Bill Britts – EVP, Sales, Marketing & Service

Analysts

Brian Marshall – Gleacher and Company

Chad Bennett – Northland Capital Markets

Alex Kurtz – Merriman & Company

Eric Martinuzzi – Craig-Hallum

Glenn Hanus – Needham and Company

Joe Feshbach – Joe Feshbach Partners

Brian Freed – Wunderlich Securities

Shebly Seyrafi – Capstone Investments

Presentation

Operator

Welcome to Quantum’s second quarter 2011 teleconference. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Wednesday, October 27, 2010. I would now like to turn the conference over to General Counsel, Mr. Shawn Hall.

Shawn Hall

Thanks and good afternoon. I’m joined today by Richard Belluzzo, our CFO and Jon Gacek, our COO and CFO and Bill Britts, VP 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 at the investor relations 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 that 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 Q2, 2011 results 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 11, 2010. 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 s release and in our filings with the SEC are incorporated by reference in 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. Thank you for joining us as we report our second quarter of fiscal 2011. I’m going to walk through our results for the quarterly period ended September 30, 2010 and comment on significant accomplishments for the quarter as we continue to focus on becoming a growing and more profitable storage systems company.

For fiscal Q2, we delivered solid results including revenue of $167.7 million. Disk and software group revenue, including related service revenue of $30.6 million, non-GAAP gross margin of 45.2%, non-GAAP operating profit of $19.1 million or 11.4% and non-GAAP EPS of $0.06 per share.

We are very pleased with the gross margin, operating profit and EPS, especially given the fact that we were toward the lower end of our revenue expectations for the quarter.

Before walking through the detailed results, I want to emphasize a few key points from the past quarter. First, as we indicated in our June quarter earnings call, that was going to be the last quarter for which we expected to receive more than a minimal amount of revenue from our OEM deduplication software agreement with EMC, and as we said, we would replace that revenue and the related profit with growth in our branded business. We have done that.

So to provide some context on our overall Q2 performance, I want to walk through the following; if you exclude the EMC deduplication revenue from both Q2 and Q1 of fiscal 2011, we posted a sequential $13.2 million increase in revenue, and a $11.1 million increase in gross margin dollars, which equates to a 330 basis point increase in gross margin.

And these results demonstrate the earnings power we have a Quantum, and as we have progress in our branded business, you will see further expansion in all those measures.

The second key point is that our StorNext business had its best quarter in the history of the company with strong adoption in our core rich media market and expansion into adjacent markets, and we are starting to see broader opportunities for us to grow our StorNext revenue.

Third, we generated $26 million in cash from operations and $24.9 million in EBITDA for the quarter, and we paid off $22 million of our remaining convertible debt during the quarter.

And finally, on the product side we launched our DXI 6700, a mid-range fiber channel VTL product, which was followed by the announcement of our DXI 8500 enterprise product just after quarter end. That product will begin shipping in the next several weeks.

Both products reflect the work that we’ve done over the last year to deliver significantly greater performance in our DXI line, with the DXI 8500 providing the industry’s highest single unit BTL performance. We have already received several sizeable orders for this product and we will have a strong sales momentum at the time of our first customer shipment.

Now I will walk through the detailed results for Q2. I would like to refer everyone to the financial statements and supporting schedules included in the press release and on our website. It will be helpful to refer to those documents as I comment.

Revenue for the second quarter ended September 30, was $167.7 million compared to $174.9 million a year ago, a year-over-year decline of $7.2 million. The primary driver of the decline was lower OEM revenue which decreased 29% due to the anticipated declines in devices and deduplication software revenue and finally in service revenue.

In contrast, we saw an overall increase of 4% in our branded revenue with strong growth in our disk systems and software and a slight decline in tape automation.

Royalty revenue was $17.7 million for Q2 compared to $16.8 million in the same quarter a year ago. We saw growth in LTO royalties this quarter while DLT royalties declined slightly. For the quarter, non-royalty revenue totaled $150.1 million of which 80% was branded and 20% was OEM. That compares to non royalty revenue of $158.1 million a year ago, of which 73% was branded and 27% was OEM.

The decrease in non-royalty revenue was related to decreases in the OEM revenue as described earlier, partially offset by growth in branded disk and software revenue. For the remainder of fiscal 2011, we expect our branded business to grow for tape, disk systems and software products.

Looking further at various revenue classifications, devices and media totaled $22.5 million compared to $27.7 million in Q2 a year ago. The decline was primarily attributable to anticipated declines in OEM devices and media.

I mentioned this last quarter. I’m going to mention it again. As a point of reference, OEM devices revenue, less than $1 million of it this quarter is OEM compared to over $5 million in the same quarter last year.

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