Quantum Corporation

Welcome to Quantum's Fiscal First Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to Brian Cabrera, Quantum's Chief Administrative Officer. Thank you. You may begin.

Good morning, and thank you for joining today's conference call to discuss Quantum's first quarter fiscal 2024 financial results. I'm Brian Cabrera, Quantum's Chief Administrative Officer. Speaking first today is Jamie Lerner, our Chairman and CEO, followed by Ken Gianella, our CFO. We'll then open the call to questions from analysts. Some of our comments during the call today may include forward-looking statements. All statements, other than statements of historical fact, should be viewed as forward looking, including any projections of revenue, margins, expenses, adjusted EBITDA, adjusted net income, cash flows, or other financial, operational, or performance topics. These statements involve known and unknown risks and uncertainties we refer to as risk factors. Risk factors may cause our actual results to differ materially from our forecast. For more information, please refer to the detailed descriptions we provide about these and additional risk factors under the risk factors section in our 10Qs and 10K filed with the Securities and Exchange Commission. We do not intend to update or alter our forward-looking statements once they are issued, 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. 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. Earlier today, we announced our results for our first quarter fiscal 2024. Turning to slide three, here's a brief overview of the results from the quarter. We finished Q1 24 with $91.8 million in revenue, non-GAAP gross margin of 38.3%, and adjusted EBITDA of $0.8 million. While the revenue came in well below expectations, which I will address in a moment, our global efficiency plan and cost reduction initiatives helped to deliver a 280 basis point sequential improvement in non-GAAP gross margins to above 38%, as well as adjusted EBITDA improvements of over two times year over year as we continue to focus on driving improved profitability. Ken and I will walk through the quarter and the actions we are taking to deliver an improved year-over-year adjusted EBITDA as we described in our annual guidance. Now turning to slide four, I would like to share some operational insights. Several factors impacted revenue falling short of our expectations. First, media sales. that traditionally do not finalize until the last week of the quarter from our partners and has been traditionally steady for over the last 12 quarters came in lower than anticipated by 2.3 million in Q1 24. Investigation into this shortfall revealed there was unseen excess capacity in the market compounded by higher than anticipated weakness in a hyperscale vertical marketplace. Next, we saw some end of quarter hyperscale deliveries that were impacted by unexpected delays. And finally, some primary and secondary orders materialized later than anticipated, impacting this quarter's revenue. Turning to non-GAAP gross margins, We improved to 38.3% based on improved operational efficiencies in manufacturing and services combined with the reduced mix of lower margin device and media sales and hyperscale business. We anticipate the operational improvements in both manufacturing and services to continue through the near term. As you will hear from Ken, We anticipate another 400 basis point improvement to 42% gross margin in Q2 24. Margins are also improving with continued growth in our annual recurring revenue and . Fiscal Q1 subscription ARR grew by 78% year over year to 14.6 million. We continue to anticipate that general availability of Myriad by the end of this calendar year will continue our accelerated rotation from one-time hardware sales to a more stable subscription ARR model. Next, as a result of our proactive actions, we have made significant progress from our self-help initiatives. This includes improving manufacturing and logistics productivity, reducing discretionary spend, and leveraging our global footprint. These self-help initiatives are a key part of our transformation, along with improvements in our ability to sell the full portfolio of products. We expect to see continued positive benefits from these actions in fiscal Q2 given the timing of some actions was implemented late in the first quarter. As a result, we anticipate non-GAAP operating expenses to begin to trend below $34 million a quarter for the rest of the year, as we continue to find opportunities to leverage our global footprint, drive deeper cost actions, and improve operational efficiencies to increase our profitability. Finally, I want to address the current market environment and actions we are taking. While there continues to be exponential growth in public cloud, heading into this fiscal year, we are seeing indications that the hyperscale environment will not be as robust as in prior years. The drivers of this outlook are many. including indications of cloud storage slowdown due to the economic environment, tighter IT budgets, and the emerging trend of repatriation of certain data workloads to on-premise systems. All of these factors have led our hyperscale partners to a cautious capacity outlook for the next two quarters. Thus, subsequent to the Q1 24 quarter end, our largest hyperscale customer informed us that they were pausing all additional orders in our fiscal Q2 24 with the potential to also extend in the fiscal Q3 24. While they are still deploying our solution from their on-hand inventory, we anticipate this pause in new orders to impact our revenue outlook. as this customer was our only concentration of revenue greater than 10% in fiscal 2023 and represented over 22 million in our most recent Q1 24. While this hyperscale slowdown was anticipated in our initial fiscal year 24 outlook, these recent developments will have a deeper impact than we anticipated. And we estimate that this and the potential for additional hyperscale slowdowns will impact our initial fiscal year 24 full-year outlook by $35 to $40 million. In addition, we anticipate this slowdown will also impact device and media sales to similar levels as Q1 24 for the near term. While the media slowdown will have a very low margin impact, we anticipate a revenue impact of approximately $15 million from our original fiscal year 24 outlook. And we'll give you more color on the full impact of guidance and our outlook in its financial update. While the large hyperscale drop is disappointing, We are encouraged by the improvement in our end-to-end opportunities in both primary and non-hyperscale secondary solutions. In Q2, we see the potential for this market to increase 30 to 40% year over year. Additional opportunities are opening and being explored at these customers as Quantum now offers a complete end-to-end portfolio. We anticipate this trend to continue into the back half of 2024. Now I'd like to turn it over to Ken to walk through our financial results and Q2 24 outlook in more detail. Ken?