Quantum Corporation (QTM)

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Quantum Corp. (QTM)

F3Q11 (Qtr Ended 12/31/2010) Earnings Call

January 26, 2011 5:00 pm ET

Executives

Rick Belluzzo - CEO

Jon Gacek - President and COO

Linda Breard - CFO

Bill Britts - EVP for Sales, Marketing and Service

Shawn Hall - General Counsel

Analysts

Brian Marshall - Gleacher & Company

Shebly Seyrafi - Capstone Investments

Chad Bennett - Northland Securities

Eric Martinuzzi - Craig-Hallum Capital

Alex Kurtz - Merriman & Company

Brian Freed - Wunderlich Securities

Glenn Hanus - Needham & Co

Ryan Esposto - Sterne Agee

Brian Alger - Wedbush Equity Management

Presentation

Operator

Ladies and gentlemen thank you for standing by and welcome to the Quantum Corporation Third Quarter 2011 Conference Call. During today's presentation, all parties will be placed in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This is call is being recorded today Wednesday, January 26, 2011.

I would now like to turn the conference over to Mr. Shawn Hall, General Counsel. Please go ahead, sir.

Shawn Hall

Thank you and welcome to our conference call. Here with me today are Rick Belluzzo, our CEO; Jon Gacek, our President and COO; Linda Breard, our CFO; and Bill Britts, our EVP for Sales, Marketing and Service.

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 would 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 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 and our most recent 10-Q filed on November 5. 2010. these risk factors are incorporated by reference in today’s discussion and we undertake no obligation to update them in the future.

With that, I will turn the call over to Rick Belluzzo.

Rick Belluzzo

Thanks Shawn. Good afternoon and thank you for joining us. Today, we are going to change the structure of our call given the organizational change that we announced two weeks ago. I will start with an overview of our strategy and results, Linda Breard, our recently promoted CFO will follow with the financial discussion and then Jon Gacek, in his new role as President and COO will provide more details regarding our operating results and expectations for Q4.

As we stated at the start of this fiscal year FY2011 has been defined as marking the beginning of a new period for Quantum highlighted by a focus on growing our business and taking advantage of the work we have completed over the last few years. This work has resulted in increased profitability in both margin and absolute levels, a greatly improved capital structure and most importantly set a strategic opportunities built around significant market changes and improved technology in products.

In FY2011 our goal has been to deliver our first year of overall revenue growth in more than four years, and although we are likely to be relatively flat for the year we still expect to deliver growth in a number of key areas including our overall branded business and branded disk systems and software. Therefore, we believe we are well positioned as we enter FY2011.

Let me expand a little bit on the opportunities that we had focused on. Our aim has been to transition Quantum to become a storage systems specialist and as a result, we are focused on four key opportunities. First, the tape market remains a significant element of the storage market and we are now well positioned in the strongest segments of this $3 billion market with a very solid product offering. This is a highly profitable business and we have near term incremental opportunity as a result of the disruptions caused by Oracle’s acquisition of Sun and a more general move towards consolidation.

Our Q3 results demonstrate the relative strength of our tape business although our branded automation revenue was down slightly year-over-year the decline was less than that of the overall market suggesting that we gained market share. In addition, our revenue grew again sequentially.

We have more work to be done here given the incremental opportunity but we feel that we can grow share and offset some of the near term market decline as we target our incremental investments to make tape more valuable including areas such as encryption, long term retention in the archive and the cloud.

The next opportunity is with DXi and the growth with deduplication and replication. This is a fast growing market that is still in the relatively early phases of adoption. Since the change in the EMC relationship we have been focused on building our VAR[ph] channel and establishing a run rate business in the mid range while selecting pursuing large enterprise opportunities.

Our results in the past year have been inconsistent as a result of the slower than expected build of the channel business and the lumpiness of the enterprise business. These dynamics changed this quarter as we made excellent progress mid range run rate business adding the most customers ever in a single and growing the VAR channel significantly. Yet we had a weak quarter for the enterprise business which we attribute to the timing of deals and a new product transition. Despite the enterprise weakness total DXi revenue grew year-over-year and was flat sequentially, and we expect future quarters to have more traditional pattern of large enterprise deals.

In addition today, we announced DXi 2.0 our most significant software release to date which we feel will strengthen our position as one of the leaders in the disk backup and duplication market. Jon will provide more detail on our DXi progress and plans in just a few minutes.

The third area of opportunity is the StorNext business where we had a record quarter this quarter. The market for our high performance file sharing and advanced archiving remain strong and again we feel we are well positioned to grow this business over the next year through a continued focus on vertical markets and delivering greater success through our expanded features and functionality.

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