Quantum Corporation

Good afternoon, and thank you for joining today's conference call to discuss Quantum's second quarter fiscal year 2023 financial results. I'm Brian Cabrera, Quantum's chief administrative officer. Joining me today are Jamie Lerner, our chairman and CEO, and Mike Dodson, our CFO. This afternoon, we issued a press release, which you can access under the investor relations section of our website at www.quantum.com. We are using a slide presentation in conjunction with today's call, also accessible under the same section of our website. During today's call, our comments may include forward-looking statements. All statements other than statements of historical fact should be viewed as forward-looking. These statements include any projections of revenue, margins, expenses, adjusted EBITDA, adjusted net income, cash flows, or other financial items. These statements may also concern the expected development, performance, and market share or competitive performance of our products or services. All forward-looking statements are based on information available to Quantum as of today's date. We advise caution in relying on these statements as they involve known and unknown risks and uncertainties we refer to as risk factors. Risk factors may cause our actual results to differ materially from those implied by the forward-looking statements, including unexpected changes in our business. We include detailed information about these and additional risk factors under the sections labeled Risk Factors in our quarterly report on Form 10-Q and annual report on Form 10-K, which we file with the Securities and Exchange Commission. We do not intend to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise, except, of course, as we are required by applicable law. Please note that our press release and the management statements we make during today's call will include certain financial information in GAAP and non-GAAP measures. We include definitions and reconciliations of GAAP to non-GAAP items in our press release. If you are unable to listen to the entire call at this time, we will make a recording available for at least 90 days in the investor relations section of our website. Now, I would like to turn the call over to our chairman and CEO, Jamie Lerner. Jamie?

Thank you, Brian, and thank you all for joining us today. Earlier this afternoon, we announced results for our second quarter of fiscal 2023 with revenue just above the high end of guidance, driven by a record quarter in our hyperscale business, as well as sequential improvement in our EBITDA results. The supply chain situation continues to improve, both in terms of tape drive supply and overall availability of materials at more standard pricing and lead times. Our access to tape drives from our largest supplier has shown greater predictability and consistency, and we are expecting this incremental improvement in supply to continue in the coming quarters. We are also spending less money on broker fees and expediting fees as a result of our previously implemented initiatives. During the quarter, we also executed additional cost containment measures that lowered our operating expenses to our target quarterly run rate of $35 million, which will support driving increased EBITDA as we continue to grow the top line. In addition to our strong revenue, bookings doubled sequentially and contributed to record backlog of $96 million at quarter end. This record backlog was not driven by supply constraints but rather large hyperscale orders for future quarters. Our in-quarter backlog has stabilized as our access to increased supply is allowing us to catch up on shippable backlog, which Mike will discuss in more detail. Overall, our robust backlog gives us greater visibility and demonstrates the commitment from our large cloud partners to this business. Also in fiscal Q2, We delivered our sixth consecutive quarter of subscription revenue growth with subscription customers increasing to 554 from 455 last quarter. Delivering our data management solutions as a software subscription is an increasingly important part of how Quantum does business going forward. Our customers are asking for this type of purchasing model yet they still value running our software on quantum appliances in order to rely on a single vendor for support. We will continue to drive growth in ARR by driving increases in primary storage and non-hyperscale secondary storage software and systems and introducing new products based on subscription software licensing, such as StoreNext running on the AWS cloud, which was launched in early September. While our near-term goal continues to be doubling of subscription software ARR to the $14 to $15 million level, we now have a clearer picture of the time required to identify and close on these engagements. Therefore, our achievement of this initial milestone is increasingly likely to take place in early fiscal 2024. Although we have made progress on several of our stated initiatives, there is still more work to be done. During the first half of the year, we talked about expanding the earnings power of Quantum to a combination of pricing and discounting discipline, tighter management of the supply chain, and operational expense reduction. As evidenced by my initial comments, we are beginning to see the evidence of these actions in our results. The other lever of utmost importance is expanding our gross margin, which is tied very closely to our revenue mix. This applies not only to end market verticals, but also from a geographic perspective. As many of you know, we get our best margins in North America, as well as from our U.S. federal business. Both of these areas have been relatively weak over the past several quarters. Within the federal business, we've seen some large deals being pushed out, and our non-hyperscaler business in the Americas has been impacted during the process of realignment of our sales team and appointment of new leadership. At the same time, our hyperscale business has been and will continue to be a strong growth driver for us, though it is at a relatively lower margin than the rest of our primary and secondary storage revenues. To further punctuate this point, our hyperscale business grew 32% sequentially and 68% year over year without a corresponding increase in our U.S. federal or North America businesses. In order to improve our mix more favorably going forward, we began investing in broadening our sales and leadership teams in these areas over the last few quarters. I believe we are now back up to full strength and are well positioned to drive increased sales and more favorable revenue mix. In conjunction with these efforts, we are also focused on increasing our momentum in the enterprise market, particularly in the Americas. Industry analysts are projecting massive increases in the amount of cold data that must be stored and protected in the enterprise. As the market share leader in cold storage software and solutions, And having worked alongside the world's leading hyperscale customers for several years, we have a tremendous opportunity to develop unstructured data solutions for Fortune 500 companies and help them address this massive data explosion taking place. With this greater emphasis on U.S. Federal and North America, we expect to see a more balanced revenue mix and associated margin improvement going forward. To give a broader sense of this opportunity, IDC estimates the worldwide scale-out file and object storage market to be over 30 billion by 2025, with emerging use cases like infrastructure for AI and business intelligence to be major growth drivers. Quantum offers a unique end-to-end portfolio to store, protect, and enrich data across its entire lifecycle. and address critical needs in the enterprise like modernizing infrastructure to enable digital transformation, strengthening cybersecurity, and using AI to unlock value in massive unstructured data lakes. We look forward to talking more about our go-forward product and business expansion strategy at our upcoming Analyst Day on November 17th. Before turning the call over to Mike, I'd like to take this time to welcome the new additions to our board of directors. In August, Christopher Neumeier joined our board after serving as an observer since 2016. Having spent a decade at PIMCO and a big supporter of Quantum's business, he provides a wealth of experience in corporate finance as we focus on delivering improved financial performance and shareholder value. And we recently announced that in November, Don Jaworski and Yu Mayrath will be joining our board of directors. Both Don and Yu have a deep understanding of the market trends in our space and have experience in the broad enterprise IT market, having previously held senior leadership roles at companies like NetApp, Dell, Juniper Networks, and Brocade. All of these new board members will help guide our future strategy particularly as we bring to market new products aimed at high-growth segments like software-defined storage, AI and machine learning, and hybrid cloud. Now I'd like to turn the call over to Mike to provide more details on the results. Then we will take questions. Mike?

Thank you, Jamie. Welcome, and thank you for joining the call today. Now, turning to the results for the second quarter, Revenue came in just above the high end of the guidance at 99.1 million, representing an increase of 6% year over year, and 2% compared to 97.1 million in the prior quarter. As Jamie mentioned, the supply chain continued to improve throughout the quarter, coupled with continued strong demand from our hyperscale customers. We had very strong bookings during the quarter, which nearly doubled sequentially and contributed to a record backlog of 96.1 million as of September 30th. The current quarter entries to a record backlog reflected the timing of several large purchase orders from hyperscale customers for future periods to ensure continuity of supply, as opposed to being a result of supply chain constraints. We entered the quarter with approximately 25 million of shippable backlog and ended the second quarter with approximately 20 million, which wasn't shipped during the quarter, primarily due to lead times. Similar to prior quarters, approximately 85% of the backlog was with hyperscale customers. Although we anticipate supply chain constraints will remain, we do not expect this to significantly limit our ability to ship against customer demand. In the second quarter, Secondary storage revenues were up 33% sequentially to 44% of revenue, primarily driven by ongoing strong demand from hyperscale customers and, to a lesser extent, an increase in enterprise backup and data protection products. Primary storage systems declined 37% sequentially, which reflects a combination of decreased shipments of our video surveillance solutions following our fulfillment of a large order last quarter, combined with soft median entertainment and U.S. federal business. In terms of the supplemental metrics we used to track our ongoing transition to emphasize our recurring software subscription model, annual recurring revenue, or ARR, increased 14% sequentially to $9.4 million. As a reminder, This figure includes recurring software subscription revenue across all of our transition product offerings, including StoreNext, ActiveScale, DXI, and Cat TV. Additionally, at quarter end, the cumulative number of customers under a subscription contract increased to just over 550 active customers, which represents 180% year-over-year growth and sequential growth of 22%. In terms of total contract value, TCB increased 9% sequentially to $17.5 million at the end of the second quarter, up $16 million in the prior quarter, up from $16 million in the prior quarter. Although we anticipated a slight sequential improvement and non-GAAP gross margin, we ended the quarter at 35% or flat with the prior quarter. While we have seen benefits from our previously implemented initiatives related to price increases, prudent management of discounting, reductions in PPV, and other related supply chain costs. These were collectively offset during the quarter by approximately two percentage point gross margin decrease as a result of a less favorable product mix that was more heavily weighted towards our hyperscale customers. As I just mentioned, secondary storage was 44% of our revenue, which compares to 34% last quarter due to the significant increase in the hyperscale business. Next quarter, we expect this strong growth in hyperscale revenue to continue, offsetting the realized benefits from our cost initiatives and favorable pricing, and therefore expect gross margins to remain flat with the second quarter. Improving our revenue mix remains a critical focus area to help expand gross margin in order to drive improved operating performance and increased EBITDA. As Jamie mentioned, in order to improve the revenue mix, we are focused on building our enterprise IT business and have recruited top sales talent with years of experience selling into this market, as well as recruiting new reseller partners focused in this space. Another key growth driver is selling our end-to-end portfolio into our existing customer base, effectively broadening our footprint within our existing customers and using this as a key leverage point. Also impacting GAAP gross margins during the quarter was an extraordinary inventory reserve provision of $6.9 million. There were two primary factors that contributed to the need for this inventory provision. First, due to longer purchasing lead times of up to 52 weeks during the pandemic and subsequent changes in customer requirements over this extended timeframe, certain inventory had become obsolete due to next generation products being released and the related legacy products being discontinued. In addition, following our integration of several past acquisitions, Certain legacy products were discontinued and replaced with updated product offerings, rendering the related inventory obsolete. We do not believe that the magnitude of this inventory charge is indicative of the company's performance and is not expected to be repeated in the near term. To meet the ongoing supply chain challenges, we have focused on supply chain excellence over the past year, including the following. First, establishing supply chain analytics to enable improved reaction time to supply chain disruptions, market demand changes, and early technology transitions. And second, product management and supply chain are working closely together to reduce complexity both in product SKU count and the supply base through supplier consolidation with the objective of being able to use components across multiple product lines. On the supply side, we will focus on supply partners for appliances that draw upon higher volume, more industry common platforms in which the supplier holds inventory until we need the appliance. We are also extending lead times on products that have lumpier demand and are more customized to the customer solution to reduce risk of holding inventory through technology transitions. Gap operating expenses in the second quarter were $39 million compared to $41.1 million in the prior quarter. The non-gap expenses for the second quarter sequentially decreased $1.5 million to $34.8 million, or just below our targeted run rate of $35 million. I want to further emphasize that $35 million was our target for the end of fiscal 2023. Therefore, we achieved this level effectively two quarters earlier than initially planned. The decrease in operating expenses were primarily due to lower headcount levels and higher cost geographies. Gap net loss in the second quarter was $11.9 million, or a loss of $0.13 per share, compared to a net loss of $10.6 million or a loss of $0.13 per share in the prior quarter. Excluding stock compensation, restructuring charges, and non-recurring charges, non-GAAP adjusted net loss in the second quarter was $0.5 million or $0.01 per share compared to adjusted net loss of $3.6 million or $0.04 per share in the prior quarter. Adjusted EBITDA for the second quarter was $4.1 million compared to $0.3 million in the prior quarter. Included in the second quarter adjusted EBITDA was $2.4 million of other income related primarily to a benefit from foreign currency exchange rates and the sale of certain intangible assets compared to $0.8 million of other income in the prior quarter related primarily to a benefit from fluctuations in foreign currency exchange rates. As we have discussed previously, driving improvement in our adjusted EBITDA remains one of our highest priorities. With our lowered operating expense run rate and continued top-line growth, as we outlined earlier, improving gross margin will be the key factor to fully realizing increased improvements in our quarterly EBITDA results. There's a full reconciliation of our non-GAAP results to the most directly comparable GAAP in both the press release and the Form 10-Q release today. Now turning to the balance sheet, cash and cash equivalents at the end of the second quarter were $25.9 million compared to $26.8 million in the prior quarter. Outstanding term debt at the end of the second quarter decreased by $1.2 million to $77.2 million from $78.4 million at the end of the prior quarter. At the end of the second quarter, the outstanding balance on the company's revolving line of credit was $21.5 million compared to $17.3 million in the prior quarter. Interest expense in the second quarter was $2.7 million compared to $2.1 million in the prior quarter and $3.1 million during the same quarter a year ago. Our cash and cash equivalents decreased by $0.9 million during the quarter. Net cash provided by operating activities during the current quarter was $0.4 million and represents a significant improvement over the $18.3 million net cash used in operating activities in the prior quarter. The fiscal year to date net cash used in operating activities was $17.9 million, and this use of cash approximated the $17.7 million decline in deferred revenue that was primarily driven by seasonality. As we mentioned on the call last quarter, historically, the heaviest bookings for service contract renewals have been the December and March quarters, with decreases in bookings in the June and September quarters. Net cash used in investing activities was 4.8 million, which represents CapEx. The net cash provided by financing activities during the quarter was 3.4 million and primarily represented increased borrowings on the revolving line of credit of approximately 4.2 million, offset by 1.2 million used to pay down outstanding term debt. Now, turning to our financial outlook. As previously outlined, our fiscal 2023 objectives remain to continue growing revenue while realizing identified cost reductions. Although the pressure on gross margins associated with revenue mix remains a near-term challenge, we believe we are positioned to realize improvements in the coming quarters as our sales teams ramp and secure additional wins for our higher margin products and solutions. For our third fiscal quarter, we expect revenue to be $103 million, plus or minus $3 million, Non-GAAP adjusted net loss is expected to be $1.5 million, plus or minus $1 million. Adjusted net loss per share of one cent, plus or minus one cent per share, using an anticipated basic share count of 91.3 million shares. We expect adjusted EBITDA in the third quarter to be approximately $3.5 million. With that, I'll turn the call back to Jamie for closing remarks. Jamie?