Q2 2020 Earnings Call
Ladies and gentlemen, thank you for your patience, you're holding for today's quantum financial results Conference call. Please remain on the line your conference will be getting momentarily again, we do appreciate your patience. Please remain on the line and your conference will be getting momentarily.
Good day, everyone and thank you for participating in today's conference call to discuss Quantum's financial results for the second fiscal quarter ended September Thirtyth 2019.
This time all participants are in listen only mode. A question answer session will follow with the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the conference over to Rob think about 10-K IR. Please go ahead Sir.
Thank you operator hosting the call today are quantum's, chairman and CEO , Jamie learner and CFO , Mike Johnson.
Please be aware that some of the comments made during the call today, maybe forward looking all statements other than statements of historical gold.
Our statements I couldn't be deemed forward looking [laughter] quantum advisers caution that in reliance on forward looking statements forward looking statements include without limitation any projections of revenue margin expenses adjusted EBITDA adjusted net income cash flows or other financial items any statements concerning the expected develop.
Net performance marketshare, where competitive performance relating to products or services and the expected timing of Relisting on a national exchange.
All forward looking statements are based on information available to quantum on the date Europe's these statements involve known and unknown risks uncertainties and other factors that may cause.
Actual results to differ materially from that was implied by the forward looking statements include and expect unexpected changes in the company's business.
More detailed information about these risk factors and additional risks factors are set forth.
Hi.
Periodic filings with the Securities Exchange Commission.
Commission, including but not limited to those risks and uncertainty listed in the section entitled risk factors.
In Quantum's quarterly report on Form 10-Q , and annual report on Form 10-K as filed with the Securities Exchange Commission.
I want him expressly disclaims any obligation to update or alter its forward looking statements, whether as a result of new information future events or otherwise except as required by law.
Also note on this call the company will be done discussing non-GAAP financial information.
Our CEO and CFO are providing this information in the supplement to information prepared in accordance with accounting principles generally accepted in the United States, where yeah. You can find a reconciliation of these metrics to the reported GAAP results in a reconciliation table provided the company's earnings release.
I'd like to remind everyone that this call will be available for replay on quantum's web site for at least 90 days a linked to the week. The website. A replay of this call is provided in the earnings release, which is also about available in the company's website at investors dot quantum dot com with all that said I'd now like to turn call over Jamie Jamie the call is yours.
Thank you Rob.
This was another strong quarter for quantum providing further evidence that we have the right vision and strategy solidified operations and our position to deliver profitable growth.
The aggressive streamlining of our expenses over the past two years combined with the RIN renewed focus on growing markets, where quantum can differentiate itself from competitors is paying dividends.
On a GAAP basis, we grew revenue by nearly 18% to 106 million, representing the fourth consecutive period a quarter over quarter growth.
We also expanded our gross margins on a year over year basis and generated more than 4 million an income from operations.
When excluding stock compensation restatement costs and restructuring expenses, we generated more than $5 million, an adjusted net income for the second quarter in a row and our adjusted EBIT D.A. exceeded $12 million.
Year to date, we have generated more than $125 million, an adjusted EBIT da demonstrating their earnings power of the new quantum.
We're well on our weighted to delivering on our full year adjusted EBITDA outlook and have raised the bottom end of our previously issued range by $1 million to $51 million to $55 million.
Our transformation is based on a new strategy formed around two core tenets.
First the projection that 80% of the world stayed up by 2025 will be video or video like data and second quantum is positioned as a leader in a high speed processing of video and the long term low cost of storage of video video like an unstructured data both on premise.
And in hybrid multi cloud environments.
Today quantum provides the video infrastructure to some of the world's largest studios post houses corporate brands sports networks and franchises.
Airports research institution, and the world's largest hyperscalers.
The storage of video in video like data is a major challenge for many companies today and it represents a massive new market opportunity for quantum.
We're no longer just a tape backup company.
Today, we are deeply and increasingly relevant to our traditional enterprise and media and entertainment customers along with the world's largest hyperscalers as a trusted partner, providing critical technology for a pressing and accelerating need.
We're confident this strategy will also enable us to expand into a rapidly growing adjacent markets with similar technology requirements.
Such as video surveillance autonomous vehicles medical in surgical video manufacturing video for quality assurance satellite and geospatial imagery military and tactical applications video search analytics and more.
In the last conference call I discussed the progress, we've made and revamping our product line.
I know that while operating expenses declined an additional $4 million sequentially and more than $7 million year over year, we've increased our R&D investments to further extend our technological lead.
As part of this we've repositioned our tape offering as a key technology for long term archive with both Hyperscaler an enterprise customers.
These hyperscalers are using tape as a basis for our archive in the cloud because tape is anywhere from one third to one six the cost of alternative storage technologies.
This is a significant new market opportunity for tape and requires a very different architecture compared to traditional tape backup.
Quantum has been established as a leader in this new market for tape and expects this emerging opportunity to reverse the historic secular decline of the enterprise tape backup market.
In addition, we have completely refreshed our product line, including first the quantum F series, a new line of Nvme me flash storage arrays for editing rendering and processing video content and other large unstructured data sets based on our entirely new software defined.
And cloud storage platform.
S series is in production with customers and it's one of the fastest video storage and processing platforms available today.
Second we also announced the B S series, a hyper converged platform for video surveillance recording and management a building systems to capitalize on the ongoing growth of this survey on storage market.
This product is also in production with customers and is being resolved by the world's largest surveillance integrators.
Third we launched the quantum our series a line of Ruggedized removable storage systems for in vehicle data capture mobile surveillance and military applications. This ruggedized automotive grade edge storage platform can be installed and cars planes buses trains and.
Remote non datacenter environments.
Autonomy is test vehicles are our largest use case of the R series today.
For we're making significant investments in our data management and hybrid multi cloud technology in our store next file system flex tier and flexing software products.
Your neighboring our customers to seamlessly move video between multiple cloud providers and locations to take advantage of cost performance and data protection advantages of a hybrid multi cloud storage model.
Fifth we're enabling all of our products with quantum cloud based analytics, enabling monitoring and configuration through the cloud essentially connecting all of our product deployments to the quantum distributed cloud.
We feel this will offer not only significantly better customer experience.
But also enables quantum does shift to both a hybrid multi cloud model and then as a service recurring revenue model for many of our customers.
These product and technology enhancements are all part of our clear strategy in Michigan focused on becoming the leader of video and video like infrastructure.
The renewed focus on driving high margins based on designing and selling products with unique and defendable intellectual property.
With our clear vision and strategy, improving product and sales execution operational and spending discipline. The successful activist campaign led by Eric singer and bikes capital partners is now drawing to a close.
Eric singer has retired from the quantum board of directors to focus his attention on new investments highlighting his confidence in the company's management team board governance and turnaround efforts.
I would like to personally thank Eric for his tremendous vision energy and determination as a key partner in our turnaround.
We have an active search for a new independent board member and our interviewing candidates from a real robust pipeline of IP and storage industry veterans.
In addition, we revamped our senior leadership, all while streamlining our overall headcount and eliminating layers of middle management.
Today's team is both streamline and highly experienced.
In our last call I know noted that we have recruited over 10, new executives from the best organizations worldwide to comprise our new executive leadership team, including a new Chief Executive Officer, Chief Financial Officer, Chief Revenue Officer, Chief Accounting Officer, Chief Information Officer VP of supply.
Why chain corporate controller and director of internal audit during the second quarter. We added to this with a higher of Reagan Macpherson, our new chief legal and compliance officer.
Our focused video based division is resonating with our customers.
Our execution is continuously improving and our product and sales strategy is showing encouraging signs that they're working.
The key performance metrics are validating our work efforts.
We believe there's substantial opportunity to drive further revenue and margin growth by moving to a software defined hybrid cloud architecture across our product portfolio.
I'd now like to turn the call a Mike Dodson, our CFO to discuss the financials like.
Thank you Jamie.
Welcome to everyone that has joined our call today.
First just a quick clarification up from the financial comparisons to prior period results, but I will be discussing in my comments today relate to the financial statements. We published in our filings with the FCC on August six 2019.
Now turning to the financial result for the second quarter fiscal 2020.
Revenue was 105.8 million in the second quarter compared to 89.9 million in a year ago corridor and represents an increase of 15.9 million or 18%.
This increase was driven by higher primary storage systems.
Secondary storage systems and media sales.
They hire secondary storage system revenue was driven by an increase in a hyperscaler business.
The higher media revenue was driven by the beginning of a more typical business environment with the resolution no. They ended the quarter of an ongoing legal dispute between the two principal suppliers in that market.
[noise] gross profit in the second quarter was 43.5 million or 41.1% gross margin compared to 35.5 million and a 39.5% gross margin.
In a year ago corridor.
The increase in gross profit was primarily driven by an increase in revenue.
While the increase in gross margin was driven by higher product gross margin.
This increase was due primarily to cost reductions across a wide range of product offerings and the sales mix weighted towards more profitable product lines.
While we are encouraged with a year over year improvement in our gross margins. We note that the gross margin was 43.4% in the prior quarter.
Sequentially the largest contributor to the lower gross margin in the second quarter is an unfavorable revenue mix of lower.
Royalty revenue as well as product mix weighted towards lower margin product lines.
Total operating expenses were 39 point, threemillion or 37% of revenue for the second quarter.
Fair to 38.9 million or 43% of revenue in the year ago corridor.
The increase in dollars was driven by increases in research and development expense by 1.5 million and in restructuring expense of 8.5 million.
Which were largely offset by lower sales and marketing expense of 1.9 million.
The increase in research and development expense was primarily due to an increase in headcount.
The increase in restructuring expense, representing the final negotiation related to the closure of a facility.
The decrease in sales and marketing expense was driven by lower headcount and a decrease in marketing programs and professional service costs.
The significant sequential decrease of 3.8 million and total operating expenses from 43.1 million in the prior quarter.
Was primarily due to lower professional fees related to the audit and financial restatement, partially offset by higher stock based compensation and restructuring costs.
Our headcount at the end of the second quarter was 817.
The company incurred interest expense of 6.3 million in the second quarter compared to 4.6 million in the year ago corridor.
Primarily due to a higher principal balance.
The net loss was two point threemillion or six cents per share for the second quarter.
Compared to a net loss of 21 point sixmillion or 61 cents per share in the year ago corridor.
The prior quarter.
Included 12.4 million a pre tax expense for the extinguishment of debt related to the August 2018 term loan amendment.
The adjusted net income was 5.1 million or 11 cents per diluted share for the second quarter compared to adjusted net loss of five point sixmillion or 16 cents per share a year ago corridor.
Excluding from the adjusted net income and that loss calculations are nonrecurring and other items, including restructuring charges.
Debt extinguishment costs stock based compensation and financial restatement costs.
Adjusted EBITDA increased 10.3 million to 12.7 million in the second quarter compared to 2.4 million in a year ago quarter [noise].
[noise], there's a full reconciliation of our non-GAAP results to the most directly comparable GAAP measure and both the press release and Form 10-Q released today.
I would also like to provide some color related to our outstanding share count.
First when we recorded a loss we will only include weighted average shares outstanding excluding dilutive equity instruments like warrants and employee equity Awards. For example in the first two quarters of fiscal year 2020, the weighted average shares used were 36 million and 30.
6.3 million shares respect.
Respectively.
When we calculate the net income per share we use the treasury stock method to calculate the fully diluted share count that takes into consideration dilutive equity instruments. For example in the first two quarters of fiscal year 2020 fully diluted share counts were 41.1 mill.
Ryan and 44.9 million shares respectively.
Included in our diluted share calculation are approximately 11 million warrants held by our current and former lenders and 3.5 million shares outstanding and our equity incentive plans.
The sequential increase in our fully diluted share count is primarily driven by the increase me average stock price during the most recent quarter compared to the prior quarter.
Now turning to our year to date results.
Revenue for the first half of fiscal year.
It was 211 211.4 million compared to 197.4 million in a year ago corridor.
Ago period.
An increase of 14 million or 7%.
This increase was primarily due to an increase in secondary storage system revenue driven by growth in the Hyperscaler business and to a lesser degree growth in the primary storage system revenue.
These increases were partially offset by lower revenues and media service and royalty revenues.
Gross profit in the first half of the fiscal year was 89.3 million or 42.3% gross margin compared to 81.9 million and a 41.5% gross margin in the year ago period.
The increase in gross profit was primarily driven by an increase in revenue while increasing gross margin was primarily driven by cost reductions across a wide range of products and services.
Total operating expenses for the first half of the fiscal year decreased by 7.2 million or 8% compared to the year ago period.
The total operating expenses were 82.4 million or 39% of revenue compared to 89 point sixmillion or 45% of revenue in a year ago period.
Selling general and administrative expenses declined 5.7 million or 8% to 63.6 million for the first half of the fiscal year.
Fair to 69.3 million for the year ago period.
This decrease was primarily due to lower headcount.
Marketing programs professional service costs and information system operational costs, partially offset by increases in stock based compensation expense.
Professional and professional fees related to financial restatement and related activities.
Research and development expenses were 17.7 million for the first half of the fiscal year up one point, sixmillion or 10% compared to 16.1 million in the year ago period.
Centuries is primarily due to higher headcount.
[noise] restructuring expenses decreased 3.1 million or 74% to 1.1 million in the first half of the fiscal year compared to 4.2 million in a year ago period.
The net loss was 6.1 million or 17 cents per share for the first half of the fiscal year compared to a net loss of 29.1 million or 82 cents per share in the year ago period.
The adjusted net income.
Was 10.5 million or 25 cents per ship per diluted share for the first half of the fiscal year compared to an adjusted net loss of 3.3 million or nine cents per share in the year ago period.
Adjusted EBITDA increased 16.2 million to 25.8 million for the first half of the fiscal year compared to 9.6 million in a year ago period.
Now taking a look at the balance sheet and cash flows.
Cash was 6 million at the end of the second quarter compared to 10.8 million at the end of the prior quarter.
These amounts exclude $5 million in restricted cash required under the company's credit agreements.
Outstanding long term that at the end of the second quarter was 153 point Sixmillion.
Matt a 15.5 million and unamortized debt issuance costs, and 1.7 million and current.
In current portion of long term that.
This compares to 146.1 million of outstanding debt at the end of the prior period.
I've 16.4 million and unamortized debt costs, and 1.7 million and current portion of long term that.
The sequential increase in long term that from the prior quarter was primarily due to borrowings of 7 million at the end of the current quarter from the revolving credit facility to meet short term working capital requirements.
The second quarter experienced cash flow pressures of pain that last remaining significant restructuring costs and professional fees related to the business transformation plans and completing the financial restatement.
This quarter also endured the annual seasonal decline in deferred revenue.
And related cash receipts as a significant number of our enterprise customers renew their annual service contracts living up to and just after the end of the calendar year.
Despite a positive cash flow from operating results. These business pressures resulted in a sequential decrease in our cash a 4.8 million and increased borrowing on our revolving credit facility by 7 million.
Look into the next quarter, the cash flow applications of our guidance for the third quarter represent a forecasted range of adjusted EBITDA of 13 million to 15 million.
With the restructuring and restatement costs, largely behind us and after paying approximately 6 million of interest expense as well as the forecasted capital expenditures and foreign taxes.
We expect to generate free cash flow during the third quarter that will reverse the cash flow trends, we experienced in the second quarter.
Related to our current financial performance compared to our financing bank covenants, we had $9 million the cushion on the key trailing 12 month, EBITDA covenant and compare comparable cushions on the remaining covenant calculations.
Now before we discuss the financial guidance for the next quarter and the fiscal year I.
I would like to provide an update related to the FCC investigation.
And the process to realists quantum had a national exchange.
First related to the ongoing SCC investigation, we continue to cooperate with the staff and provide documentation has requested.
As a practice, we will provide no additional comments regarding the details or status of the investigation and related settlement discussions.
Second related to our efforts to read less than a national exchange the process is progressing but taking longer than we initially anticipated.
During the advanced discussions regarding qualifications for listing with representatives from both the NASDAQ and the New York Stock Exchange.
It has become clear that they are closely monitoring the progress of the FCC investigation.
Based on this we remain confident that we will once again be listed on a national exchange, but at this time it is difficult to provide definitive timing.
Now turning to our financial guidance.
The third fiscal quarter that ends in December is traditionally our strongest of the fiscal year and we expect revenues in the range of 106 million to 112 million.
Excluding approximately 2 million of stock based compensation charges.
We are forecasting adjusted net income to be in the range of 6 million to 8 million and related adjusted net income per share.
13 cents to 18 cents.
Adjusted EBITDA is expected to be in the range of 13 million to 15 million.
For the full fiscal year quantum expects total revenues in the range of 424 million to 430 million and adjusted EBITDA in the range of 51 million to 55 million.
In summary, the second quarter financial results continued improved financial performance reported last quarter.
With revenue guidance provided for the third quarter of 106 million to 112 million, we're expecting our fifth consecutive quarter of revenue growth.
Through the leadership at the revamped senior management team.
It was like that success the transformation of quantum is further evidenced by the financial guidance, representing the return to GAAP net income and earnings per share for the first time and three years.
With that let me turn the call back over to Jamie for closing comments Jamie.
Thanks, Mike.
We've made tremendous progress over the first half of this fiscal year and I'm encouraged by the results we are reporting today.
We're committed to driving high margins by designing and selling innovative products to solve the world's biggest technical challenges around video and video like data.
We have a solid and stable financial base and see additional opportunities to further improve our earnings power.
We're value engineering, our products to improve performance, while reducing costs and increasing the value of our software by making it more surgical more accessible and more intelligent.
We're excited for the future and look forward to sharing our progress as we move forward.
I would now like to open the line for questions operator.
Thank you the floor is open for questions. If you do have a question. Please press star one on your telephone keypad at this time using a speaker phone, we ask that well posing a question you pick up your handset to provide the best sound quality also please limit yourself to one question and one follow up to allow time for everyone to ask their questions.
Again, ladies and gentlemen, if you do you have a question or comment it as star one on your telephone keypad at this time.
We'll go first to Craig Ellis.
Riley FBR.
Yes, thanks for taking the question and congratulations on the financial performance gentlemen, nice to see.
Hi, Jamie I wanted to start off perhaps synthesized saying a product question with the customer question you mentioned the F series, our series and the B F series I think there the F series would probably be one of the products along with.
The tape products that when standout with hyperscalers, but.
Three months ago, you indicated that the company was engaged in discussion with a with numerous hyperscalers send I'm. Just wondering if you can give us an update on that it sounded like.
Each had different specific requirements, but how is that going and has the resolution of the LTL legal issues help move any of those discussions forward.
Yeah with regard to Hyperscalers I think they have two main care about.
The first is.
They want to.
Work with us on architectures that get them the lowest price per terabyte. So they're very concerned about density how do you put the most tape and a physical space and how do you work with that say for the highest amount of storage density and they're really looking for the best economics.
The second thing they're looking for is they're buying at such large volumes. There are deploying it exabyte scale that serviceability is their second largest care about how do you service just literally acres of equipment was in these colossal deployments and the feedback were getting is.
As we're both leading and price performance and we're leading and serviceability.
We are in the middle of several tests deployments right now.
Where we believe we are the leading solution in them and we expect to be selected for the at scale deployment, but we are in the test phase.
Many of the Hyperscalers build their own software.
A lot of their own storage software and so it can take anywhere from 10 months to 18 months to test our platforms and we are right now in that testing phase with three hyperscalers and hoping to.
Prevail on their final selection, but those final selections have not been made yet.
That's very helpful. My call last my follow up to you.
Thanks for all the clarity around the financials.
I have missed it in your prepared remarks, but like can you can you just recap the primary drivers to that 3 million a reduction in operating expense in the quarter.
And as we look ahead beyond the December quarter.
We would typically expect things like five kept potentially.
Fringe cost adjustments is there anything.
As we look beyond the December quarter that we need to be mindful up as we think about operating expense and the excellent job you're doing getting good controls.
Sure.
When we look out to the next quarter, we would expect as our revenues go up there is a variable nature to that as it relates to our sales expense. So we would expect that to increase.
And also we it's gonna be.
Probably more weighted towards products and that that amount will be.
Finally in impact on the on the fourth quarter of a third quarter fourth calendar quarter.
Besides that.
Where we very we monitor our expenses very closely.
So we really do we don't see any other expenses going up.
From that standpoint in the last in the next quarter.
Thanks, guys I'll hop back in.
Okay.
Well go next Eric Martinuzzi at Lake Street.
Hi, congratulations as well not only on the growth but.
Double digit growth, that's just terrific to see.
And obviously offers a tremendous leverage in the model.
Thank you highlighted the the secondary storage growth you also talked about to a lesser extent the primary storage I wanted to focus for a moment on the service revenue that's really the only part of the revenue stream that decline.
When can we expect that to reverse itself given the strength there we're seeing in the product side.
Well there is a.
Secular decline we call it the Golden glide as it relates to our service revenue.
We do see as I've mentioned, the deferred revenue. They go down this period just says the timing of the contract renewals will happen in the next two quarters.
And also as we look at tape in general as Jamie has outlined we look at that as a growth driver and the service related to that tape.
As we move forward.
In the area of Hyperscalers and tape is an archive versus tape as a backup.
We would expect you know that strengths of B to B showed in the service line as well.
Okay no sense.
Yes, we've got this contraction now that will reverse.
March June timeframe.
Just do the math for me on the deferred revenue.
Oh, okay, well the deferred revenue.
You know you collect your cash.
You record deferred revenue and then your amortize it down.
And when everyone's win and but we don't collect that cash evenly during the year people will sign contracts, we signed much more contracts near the ended the year or at the beginning of the following year. So because we're collecting the cash at that time.
The deferred revenue gets recorded right, but what if you're not collecting the cash then the revenue will just amortize down in the deferred balance comes down I don't know if I'm explaining that very clearly.
But.
Thanks.
Which focus to a geographic question you had good strength in Americas and me. It was also up well what's behind the it's relatively small decline, but there's a decline in Asia.
So.
Yeah I mean.
Our sales and APAC are pretty small so one large deal can sway you around so last quarter, we had a close to $3 million deal and in Asia, and so you know it just becomes lumpy because it's a much smaller business I think in Asia, we have a lot of work to do.
I think we have a pretty small team. There I also think that we probably need to move to an end country pricing model today, we have kind of worldwide pricing and I think in markets like India, China Pacific Graham you probably need.
Graphic specialized pricing just given how competitive those markets are.
So on you know Asia is our smallest.
Revenue market today, but I think it represents one of the largest potentials for growth and you know, we're just going to need to put more focus on that market quite frankly and during the last year. It just wasn't a focus because of how small its revenue as but as we move out of survival mode and into growth mode. I think you're going to see has put a lot.
More attention on that market.
Mhm.
And then lastly on the royalty revenue.
That was came in 5.3 million or so for the September quarter up year over year, but.
Were down sequentially.
What given the progress that you're seeing the.
But just to versus Sony litigation settlement and adoption of LTL weight.
Good way to think about that.
Yeah.
Next quarter.
Sure.
Yeah, I mean, not while things resolved legally I think there are still.
Three question marks.
Uh huh.
Regarding LTL eight which is the latest generation and the generation that just became available. The first is there isn't a lot of factory production capability.
So if you look at the quantities that are available even today Sony has almost no product on the market. Their factories are just not producing AD and Fuji is producing it at.
I would say somewhat limited quantities.
Secondly is the pricing of LTL seven is so aggressive that I think some people are staying with that because when you use it and then m- format.
It's only two terabyte less than LTL, eight, but it's almost half the price.
Uh huh.
And so and then thirdly.
LTL nine the next generation is only about 18 months away. So I think we're seeing at least right now muted uptake of LTL eight and I think we'll get a better picture of what's going to happen when the factories are at full capacity.
Okay, and if some of the major hyperscalers make switches from which I expect them to do but I just haven't seen it happened yet is switched from LTL seven to LTL eight and put in volume purchases down and we just we're waiting for that to happen.
It could happen I don't think it's going to happen this quarter and it may happen in the next two quarters. So yeah I'm glad the legal battles are over but you know, it's I would view it as a market that's still recovering.
Okay to put a finer point.
It's safer to kind of model for December what we saw in September or do we kind of split the difference between Q1 Q2.
For those of us.
Yeah, I think that.
We look at it as a range of five and a half to six and a half.
And yes, if you split the middle your your.
Hi range.
Okay.
Congrats again on a quarter and thanks for taking my questions.
Thanks, Thanks, Eric.
Well go next to Chad Bennett at Craig Hallum.
Great again kudos on the quarter, great job out of the gate here execution wise guys.
So.
Mike maybe maybe just a little more refined refinement on the December quarter Guide.
What should we expect from a gross margin progression standpoint in the December quarter.
Well, we typically don't give guidance, we talk about revenue guidance and we talk about the bottom line guidance any EBITDA.
But you would expect.
The.
Second quarter have was under pressure from the royalty. So that gross margin wise, you would think sequentially I would make a Q3 stronger from that standpoint and just.
Higher revenue levels, you, usually get a little bit more.
Scale benefit.
But.
It wasn't just general trends I think you should be able to model and.
Okay.
And then maybe maybe for Jamie you know if you. If you look at your your primary storage growth year over year, I mean, <unk> in the Americas I should say it nearly doubled year over year.
I guess.
What what's really driving that type of growth in and then maybe you know kind of a question.
Integrated in with this one is is can you talk about.
What you've seen in terms of the new products F series V. S. R series and in terms of initial traction here in the September quarter, and then maybe you know what your expectations are for for a ramp there as we go into next year and and you know maybe Mike can highlight a little bit on the gross margin profile.
Those products as they scale. Thanks.
Sure.
So in primary storage our flagship product is store next.
It's an extremely high speed file system that is.
Predominantly used for manipulating video.
Television, making moviemaking.
Sports.
Surgical and medical imagery jobs like that.
It's been known as one of the most stable on highest speed file system.
But.
It's also known as being somewhat hard to use somewhat complex.
And what we've done over the last years, we've made the product drastically easier to use.
We've made its simplified.
Weve stabilized it and made it scale, even more and so what's happening now as.
For a long time it was viewed as it's really only.
Worth using for the world's most complicated and.
Pressing jobs.
But by making it easier to use by making a simplified it's now being used for a much larger set of jobs you don't need as much expertise to use it you don't need as much services to install it it's.
It's now usable by a much wider audience of people and we're going to continue that we have a new major release coming up in the next several months called Stornext seven well, we're going to make it easier to use than probably any file system that of its kind.
We're going to make data movement easier data management easier the ability to deploy it seamless and easy and what we're doing as we're bringing the incredible performance of this system to just a wider audience of people by making the product to simpler.
I think that's helping a lot secondly is.
The F series is a very easy product to bolt into our installed base anyone who is using store next today can literally in a few hours bolt on an F series and just by doing that they get a huge boosting performance. We've seen customers you know fourx fivex in some cases 10 x.
The performance of their existing system, just by adding one F series box to it so that has been the naturally easiest new product to bolt into the installed base and go.
The V. S series is very compelling, but it's a new market for us it very often video surveillance is tied to the construction of a new airport a new casino.
A new boss terminal a new stadium, so I'm very encouraged by what we're seeing in that space, but because we're going to all new customers and an all new market. That's often part a construction that's just a slower business to get going because we're literally entering a whole new space.
So I like how the product is going I like the feedback were getting but we expect when you're entering a new market that take a little longer.
Our series continues to do well again, it's a lower priced product, but what is really doing as.
It gets us into when you do an autonomous vehicle project.
The small storage devices in the vehicles are not particularly expensive, but what do you have hundreds of vehicles on the road that data actually ends up getting all backhauled to store next and to our tape. So really the reason we want the edge is to get the core is usually what we're after on those projects and unlike counting.
Is there going with autonomy this vehicle projects because.
The amount of data is now and in most economists vehicle projects. After 100 pad to bite and very often over that 300, petabyte and that's where they need to start having discussions with us about tearing the data to save money and that's what store annex also does extremely well.
[noise], so Chad as far as your question to margins just qualitatively when you look at our product portfolio and first if you just look at service service will be our highest margin.
And then when you look at our products the lowest margin product would be the device and media.
And then when you look at secondary and primary.
The primary will be slightly better in margin than general than the secondary.
Just qualitatively gives you a sense of how it falls out.
And it should also be said, we're going to be entirely revamping, how we build stornext over the next six months, we're coming out with a new set of devices and a new technical architecture that is we expect to change the margin profile that product, it's essentially a year.
Our long value engineering project to allow us to use hardware much more efficiently deploy the product much more efficiently and effectively get the customer more performance by buying almost half as much hardware.
And.
That is something that we'll be going into trials.
Around the holidays, and we'll start getting into customers hands, you know any.
Around March.
So very encouraged about a lot of the new developments, we've been working on for the last year.
Great good to hear guys nice job again.
Yeah. Thank you thanks.
Well go next to David Juliet Steelhead Securities.
Hi, Congratulations I might result.
I had a couple of housekeeping questions, Mike I'm thinking in the press release. It mentions the difference between GAAP and non-GAAP earnings is $2 million in stock comp is there any other adjustments on top about 2 million to get from GAAP to non-GAAP .
No not not in our guidance.
Okay. So it's just a $2 billion.
Yes, okay.
Did you have any 10% customers during the quarter.
No.
And.
As far as the.
I think it's to do yes, no. The other D series the video surveillance product.
You mentioned you have a bunch of value added resellers that help you sell that product who are some of the big.
Bars that we should be looking <unk>.
To you to sign up going forward that will help you penetrate that market I'm, just not that familiar with that space and so I'm. Just wondering if you could help us understand who some targeted customers are in that space.
Okay.
Yeah, I mean the.
The customers tend to be.
Large critical facilities right, so they're going to be.
Public transportation airports rail boss.
Large prisons large police departments.
Stadiums.
Say cities projects.
Universities in K 12.
Now there is a wide spectrum of different resellers.
Do you have a you have a a lot of local resellers that do K through 12 that you stadiums.
There are certain specialized resellers that you building campuses you know there's a bunch of.
Large building operations companies you know the likes of Siemens in JC API and those large players and then you have a lot of small regional players that that work in surveillance is well.
Theres some value added resellers in that space as well. So we're we're reaching out to both you know.
Yeah, and the people in strong local presence when looking at some of the large international building operations companies. We're also partnering with the Vms makers you know the milestones in genotype some of the world that make the video management software.
So really when selling video surveillance, it's an ecosystem, where you work with it.
And the firms the architecture and engineering firms that are designing the blueprints of these buildings and doing the permitting process of the buildings you work with security integrators.
Sometimes a national integrator, sometimes local integrators.
And then you work with the software that's used for access control for video management and you've got to work that whole ecosystem over a period of time.
To win these large projects.
And so what we did when we designed the technology is we wanted to design and so if it could scale down and do very small high speed projects. So we have a bit of a run rate business and then it can also scale up where we can do large stadiums now those large stadiums large prisons large airports those are one too.
Sometimes four year long sales pursuits. So what we're seeing right now is a lot of the smaller sales that where you can do kind of more of a three month or six months sales cycle, whereas like a new stadium, that's being constructed could take several years, so where we're working across that it's still early days for us I think.
A handful of salespeople in that area are being somewhat conservative about our investments there but.
We're convinced over the next several years that if you've got a video strategy simply have to have a a video surveillance strategy as well.
Okay final question for me.
I think on the last couple of conference calls now you've kind of talked about value engineering your products.
I think for more software orientation or capturing more value from them to me that right more software in the total content or bundle and right.
How will that from macro perspective, how will that impact product gross margins whatever they are now so there's some sort of goal do you want to increase gross margins and products by three or 400 basis points or just help us frame, what we should expect.
You're successful with this initiative.
Yeah, I mean, I think I'm really represent to give you numbers and targets because you know what we'll see in tape, what we'll see in store and actually what we see in the V. S series that they're just going to be different and some of it is not entirely known.
What I can do is tell you what we're doing.
A series of efforts one for example, as we've moved our manufacturing to lower cost countries.
So that we pay a lower cost of engineering.
To build the product we are.
Vertically integrating the products. So that we can have lower cost of materials, we're negotiating the material pricing down.
We're redesigning some of the product so that they use less expensive motors.
Or less expensive.
Shifts like PCBA is where we're using less expensive materials there.
We're also tuning our software so what you need less hardware needs, a smaller CPQ and needs less memory less stores. So we can run it on less expensive equipment.
So there are many different efforts that are happening.
But the largest is a lot of what we're doing with our products is were hyper converging them. So instead of a box doing one task. The box may do three four or five tasks. So instead of it needing four boxes or five you know appliances or five servers to do a task we can do that in one server.
Other effectively the same size. So we are getting much more efficient in our hardware usage and how we build our products. So again, we're buying less hardware to support a given deployment and the other thing were doing today when you buy a product from us.
You got one line item you by the product. So you don't pay for the software you don't pay for the appliance. We're teasing knows apart now so that you can buy an appliance from us or from someone else and then you place our software onto it and actually took place in some cases multiple pieces of software on it so were break.
Taking notes apart.
And you know so we can capture the value of our software and actually you know charge for it as a line item.
And this these efforts will go on for you know we've been at it for you know at least nine months or more and starting with the easiest things.
Now, we're getting to the much harder things, where we're actually changing core architecture of product.
And it will go on and we'll share to you as we achieve it but we're not putting any projections out there about where we think we'll be in three months six months nine months. It's just too hard to project. We know there will be improvements and I think we'll give updates on the improvements I mean, it will be somewhat obvious as we as.
We go through the quarters, but.
Neither Mike nor I have a schedule or a set of projections that we're comfortable sharing.
Thank you.
You're welcome Thanks day.
Well go back to follow up from Craig Ellis, the B. Riley FBR.
Thanks for taking my follow up Jimmy I wanted to follow up on.
One of the point that I thought I, how does it take away from the last call in tied into some of the commentary around F series Synar series and vs.
A quarter ago I thought one of the points that the company was making was that this part of the product portfolio was fairly dynamic in the company was was really testing market interest and appetite for some of the unique solutions that you could provide and I wasn't sure if that meant that.
For the F series that overtime, there would be more than what I think is three offerings now that spend 46 to 184 terabyte or if there were other solutions that might come into the portfolio. So maybe you could talk about that a little bit and give us better sense for how you're looking at the breadth of product portfolio.
Yeah.
I mean, one of the things we as it relates specifically to the F series one of the things. We realize is the F series is a very highly available box. So it is has.
The highest level of data protection highest level of redundancy.
But we've seen customers say you know.
We'd be willing to forego that high level of redundancy for a much more aggressive price. So we're going to be introducing enough 1000 product, which is a much lower cost.
Maybe not as durable of a product, but a much lower cost product and you.
Where are you seeing a lot of demand for that and that'll probably be coming out you know early in the new year.
The V. S series Similarly, we're finding a demand for different.
Incarnations, particularly demand for a lot support for many different BMS is spending a lot of time qualifying different video management software.
On that platform I.
I think in the Ruggedized products were seeing demand for a all flash and Nvme me based products.
Where they can do just hires higher speed data collection in the vehicles and you can achieve with a disk drive.
So we're getting a lot of feedback and we run an all agile development methodology. So we can make changes to our products very quickly.
And you know for example, the F 1000 is probably will end up being less than a 14 week you know development phase. So what I really like is we're able to put product into the market, we're able to get customer feedback and then pivot and it or eight at speeds that I just don't see our law.
And your competitors I, just I think they'll spend more time in meetings that we spend developing our products and so I really am liking the speed of engineering that we're getting the and our customers. We have customers that have been with us for so long, we can get them technology Bacon. They can literally hammer it within a few.
Weeks give us very detailed feedback we reiterate on that feedback and you know our ability to produce a product tightness in the market tune it for that market and get the sales ramp going I really really like what I'm seeing across our K products across the store next products across.
Our new introductions I really like how the innovation is going and I think store next seven is gonna be lights out I really do I think store next seven with the new.
Hierarchical management policy management and Tiering of data I think it also set a lot of the standards for for data movement and data management in the industry. So I'm feeling pretty good about how engineering is doing and.
I think we've done.
You know, Mike and I have.
You know really done I thought a good job in managing expenses and Mike, though in our managing of expenses has realized you know why we were taking a expenses down we can't starve engineering right. We're here to innovate we're here to create we're here to build new technology and we've got to do.
At efficiently, we've got to do more and more of that and low cost geographies, but we can't starve it either.
And I think I think we're getting a good bounce there.
And you know the products are.
I don't think a quarter goes by where we don't launching new products. So.
It feels pretty good right now.
That's helpful. Thank you.
That's all the time, we ever questions today, I'll turn the conference back to Mr. learner for any additional or closing remark.
All right well I'd like to thank everyone for joining us today, Mike and I look forward to keeping everyone updated.
And we'll be updating everyone again in 90 days. So thanks, everyone for your time and thanks for your support.
Ladies and gentlemen, we thank you for your participation that will conclude today's conference. You may disconnect at this time and have a great day.
[noise].