Q3 2020 Earnings Call
Thank you for holding ladies and gentlemen, your online for the quantum conference call. At this time here. So gathering industrial participants will get started momentarily. We thank you for your patience Sonesta you. Please remain on the line.
Good day, ladies and gentlemen, and welcome to the quantum fiscal third quarter 2020 earnings conference call. All lines have been play so listen only mode and the floral be open for your questions and comments following the presentation.
At this time and it's my pleasure to turn the floor Ritu your host for today, Rob think of S. NKR, Sir the floor is yours.
Thank you operator, I'd like to welcome everyone to the call.
Do you all today, your Quantums, chairman and CEO Jamie.
CFO Mike Dawson.
Please be aware that some of the comments made during our call may include forward looking statements.
All statements other than statements of historical soccer statements that could be deemed forward looking.
Quantum advisors cautioning reliance on forward looking statements.
Forward looking statements include without limitation and projections of revenue margins expenses adjusted EBITDA adjusted net income cash flows for other financial items any statements concerning the expected development performance Marketshare, we're competitive performance relating to products or services and the expected.
Moving over Relisting securities on the National Exchange.
All forward looking statements are based on information available to qualify them on the day if Europe .
These statements involve known and unknown risks uncertainties and other factors that may cause quantums actual reserve results to differ materially from those implied by forward looking statements, including unexpected changes in the company's business.
More detailed information about these risk factors and additional risk factors are set forth in quantums periodic filings with the fccs with the FCC, including but not limited to those risks and uncertainties listed in the section entitled Risk factors in Quantum's quarterly report on Form 10-Q .
Annual report on Form 10-K as filed with the Securities Exchange Commission.
Quantum expressly disclaims any obligation to update or older. 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 discussing non-GAAP financial information.
Jamie micro providing this information as a supplement information prepared in accordance with accounting principles generally accepted in the United States were gap you can find a reconciliation of these metrics to the reported GAAP results in the reconciliation table provided in the company's earnings release.
I'd like to remind everyone that this call will be available for replay on caught up Quantums website for at least 90 days a link to the website. A replay of this call was also provided in the earnings release, which was issued today and which is available, but company's website and investors dot quantum dot com.
With all that said I would now like to turn the call over to Jamie learner, Jamie the call is yours.
Thank you Rob.
Included with our earnings release today was the announcement that we've been approved to lists our shares on the NASDAQ starting on Monday February Threerd.
I could not be more proud of this company and our new leadership team.
Our relisting marks the end of phase one of our turnaround in transformation, where we settled our legacy issues or the FCC.
<unk> shareholder lawsuits.
Removes $70 million in cost on an annual basis. They came cash flow positive and profitable on a GAAP basis returned to innovation and launched six new products in the last year.
Added key new leadership and technology talent.
Re listed on a national exchange.
Without relisting, we now entering the second phase of transformation, where we will be moving from making the organization sustainable and stable on a long term basis 'cause growing on a long term basis. The second phase it transformation brings a new set of challenges, which I believe we are well positioned attack.
And expanding into new International media and entertainment geography is.
Executing key in organic growth initiatives.
We cannot be more relieved in elated as phase one of our transformation can concludes with our relisting on the NASDAQ.
When we completed our restatement and conducted our first earnings call I laid out a vision and road map for a leaner more product and technology focus quantum accompany poised not only for growth but profitable growth.
We will not repeat the mistakes of the past we're focused on high quality revenue distorts with creating tangible value for our customers, which then leads to high margins and a stronger customer partnership.
In fact in a relatively short period of time, the new quantum team has worked very hard to create differentiated solutions for all of our customers, enabling us to sell based unquantifiable value not just based solely on price.
We've place to be disciplined both in the management of our expenses and in the process in which we tranzact with our partners and customers.
The last quarter's results and the progress over the first nine months of this fiscal year demonstrates this discipline and I couldn't be prouder of our team.
We continue to advance to efforts to transform our business focusing on margin expansion and profitability as we reposition quantum as an innovator poised to solve the biggest challenge around the storage and management video and video like data.
As a reminder, video and video like data is projected to be 80% of all the world's data by 2025 and quantum is a clear leader in this space.
Quantum achieved this profitability guidance for the third quarter, despite generating revenues lower than expectations.
Merrily as a result result of the volatility inherent to our Hyperscaler business, where timing of large orders can fluctuate based on a variety of external factors.
However, due to the discipline and the tangible value I described earlier, our earnings were within our guidance range, even with lower revenue.
We recorded record gross margin demonstrating our focus on high quality revenue in value based selling.
And we returned to gap profitability for the first time in three years.
This is a significant achievement and that it occurred during a quarter when revenues were less than expected speaks to the operational and strategic progress we've made.
Ear to date, excluding nonrecurring charges stopped compensation and restructuring charges.
We have generated nearly 18 million and adjusted net income a positive swing of nearly 16 million.
On a gap basis, we narrowed are year to date net loss to just $1.4 million, a positive swing of $32 million compared to the prior year.
Are adjusted EBITDA.
Year to date of 40.5 million increase 19.8 million or 96% over the prior year.
Are strong performance in our phase one transformation has created great momentum and confidence for our team as we enter phase two and turn our focus to grow.
Are offerings in the video and video like data portion of our business remains strong and we continue to see growing demand for our differentiated solutions.
Our focus is to increase the contribution from these products, which maintain a better margin profile, which shouldn't mitigate the timing of hyperscaler revenue over time.
Our software defined F. series, and Vietnamese servers had their strongest quarter, yet we have a large pipeline and we just introduced a new lower price to envy Emmys stored server, the F. 1000, which will drive even more velocity.
We're extending this software to find architecture to the rest of our store next product line in the coming months and we're getting some strong early demands signals from our customers in this area.
We are building out our portfolio products for surveillance recording and analytics.
And we are still in the early stages of adoption there.
I'm encouraged with the momentum for these products and this reinforces my confidence in sustainable profitable growth through technology innovation.
It is clear that we have reestablish quantum as a leader in the industry with differentiated solutions that meet a large and growing need the management of video and video like data.
And it is clear that we have rebuilt the earnings power of quantum and that we are now poised for sustainable profitability.
As we move to the NASDAQ in the coming days. This profitability gives a tremendous momentum as we enter phase two of our transformation and shift our focus to growth.
I'd now like to turn the call over to my Godson are CFO to discuss the financials, Mike. Thank you Jamie welcome to everyone that has joined or call today.
Now turning to our financial results for the third quarter of fiscal 2020.
Revenue was 103.3 million and the third quarter compared to 102 million in a year ago corridor and represents an increase of 1.3 million or 1%.
Increase was driven by a 5% increase in product revenue.
Which was partially offset by 4% decrease in service revenue.
More specifically product revenue increase primarily as a result of 9.8 million increase in primary storage systems, driven by a higher level of government cells.
4.2 million increase in media cells.
These increases were partially offset by 10.6 million decrease in secondary storage systems.
Which was primarily driven by fluctuating purchasing cycles within our Hyperscale business.
Royalty revenue of 4 million for third quarter continue to be relatively light the L.T. or eight adoption was lagging from expectations, primarily due to attractive pricing for the L.T.O. seven and the next generation L.T.O. nine that is 12 to 18 months away from deliver.
Gross profit in the third quarter was 47.1 million or 45.6% gross margin compared to 43 million and gross profit.
42.2% gross margin in a year ago corridor.
Increase in gross margin was primarily driven by higher product gross margin of seven 100 basis points, which was due primarily to his sales mix weighted towards more profitable product lines at cost reductions across a wide range of product offerings.
Total operating expenses were 35.4 million or 34% of revenue for the third quarter.
Pair to 39.6 million or 39% of revenue in a year ago corridor.
The decrease <unk> was driven by decreases in general and administrative expenses of 2.8 million restructuring expense at 1.3 million.
Sales and marketing and at 1.6 million, which was partially offset by higher research and development expanse of 1.4 million.
The increase in research and development expense was primarily due to an increase in head count.
The decrease in general administrative expense was driven primarily by decrease costs related to the financial restatement.
Which was partially offset by an increase in stock compensation.
So decrease in sales and marketing expense was driven by an overall decrease in headcount marketing programs.
Are headcount at the end at the third quarter was 821.
Gap net income was 4.7 million or 10 cents per share for third quarter of fiscal 2020 compared to a net loss of 4.3 million or 12 cents per share a year ago quarter.
Prior year quarter included 5 million of after tax expense for the extinguishment of debt related to the August 2018 term loan amendment.
Which was partially offset by 3.8 million and other income resulting from.
2.8 million gain on the disposal of an investment.
And 1.1 million, resulting from the change in their mark to market valuation of warrants related to the term loan.
Adjusted net income was 7.3 million or 16 cents per share for the third quarter.
Fair to 3.4 million or eight cents per share in the year ago corridor.
Excluded from the adjusted net income and net loss calculations are non recurring and other items, including restructuring charges.
Extinguishment costs stock based compensation and financial restatement costs.
Adjusted EBITDA increase 3.6 million 214.7 million and the third quarter compared to 11.1 million and a year ago corridor.
There is a full reconciliation of or non gap results to the most directly comparable gap measure then both the press release in the Form 10-Q . released today.
Now turning to our a year to date results.
Revenue for the first nine months of fiscal 2020 was 314.7 million.
Fair to 299.4 million in a year ago period.
Increase of 15.3 million or 5%.
This increase was primarily due to an increase in primary storage systems, driven by a higher level of government sales and an increase in device and media sales.
Gross profit in the first nine months of the current fiscal year was 136.4 million or 43.3% gross margin.
124.9 million in gross profit and they 41.7% gross margin in a year ago period.
The increases from gross margin are primarily to do to cost reductions in our costs of service and across a wide range of product offerings and mix weighted towards more profitable products.
Total operating expenses for the nine months of the current fiscal year decreased by 11.4 million or 9% compared to a year ago period.
Total operating expenses were 117.8 million or 30% of 37% of revenue.
Compared to 129.2 million or 43% of revenue and a year ago period.
Research and development expenses increase 13% to 27.1 million for the first nine months of fiscal 2020 compared to 24 million in a year ago period.
Sales and marketing expenses declined 6.7 million or about 13% to 46.1 million for the first nine months of the current fiscal year.
Fair to 52.8 million in the fiscal 2019 period.
Decline was driven by a lower headcount to improve sales and marketing inefficiencies.
General and administrative expenses decreased by 3.3 million or 7% to 43.6 million for the first nine months of fiscal 2020 compared to 46.9 million for the same period and fiscal 2019.
This decrease was primarily driven by lower costs related to finance the by natural restatement.
Lower software expenses as we streamlined our processes and tools and decrease facility expenses as we consolidated our fist physical footprint.
These decreases where partially offset by increases and stockbased compensation.
The net loss for the nine months of fiscal 2020 was 1.4 million or four cents per share compared to a net loss of 33.4 million or 94 cents per share in the year ago period.
Adjusted net income was 17.8 million or 40 cents per share for the first nine months of the current fiscal year compared to 1.9 million or five cents per share in a year ago period.
Adjusted EBITDA increase 19.8 million to 40.5 million for the first nine months of the current fiscal year compared to 20.7 million a year ago period.
I wanted to provide some information regarding our income tax provision as well as our outstanding share account.
Over the years the company has accumulate accumulated federal noel's and expects the and the 2020 fiscal year with approximately 300 million.
Oh wells So the company does not expect to pay cash for federal taxes for the foreseeable future.
However, we do have typical statutory taxes and certain foreign jurisdictions, and we would expect them that tax provision on a quarterly runrate bases to be approximately 400000.
Related to the outstanding share count during the quarter, we had a former lender complete a cashless exercise for 3.8 million warrants that resulted in issuing 2.8 million shares. This exercise brings the outstanding share account and to approximately.
39 million shares.
With the returned a gap profitability during the quarter, we use the treasury stock method to calculate the fully deluded share account that takes into consideration dilutive equity instruments.
Represented 46.6 million shares for the corridor vs calculation.
Now looking at the balance sheet and cash flows.
Cash in cash equivalent increased 1.5 million to 7.5 million at the end of the third quarter compare to 6 million at the end of the prior quarter.
These a mouse exclude 5.9 million and restricted cash.
Outstanding long term that at the end of the third quarter was 1.2 million lower than the prior corridor.
And it was 152.4 million net 14.6 million and unamortized debt issuance costs at 1.7 million and in current portion of long term that.
This balance was 153.6 million at the end of the prior quarter net 15.5 million and on advertised that issuance costs at 1.7 million current portion of long term doubt.
Borrowing on 45 million dollar revolving credit line.
Decreased by 1.7 million at the end of the corridor to 5.3 million compare to 7 million at the end of the prior recorder.
Met cash use an operating activities was 5 million for the first nine months fiscal 2020, and the improvement of 2.4 million from the same period and fiscal 2019.
Primarily reflecting improved opera results net of changes and working capital accounts.
For the third quarter of fiscal year 2020 are operating activities, where a positive source of cash 4.7 million as we expected and indicated on our last quarterly earnings conference call.
Taking a look at significant balance sheet variances.
Wanted to address the 17.2 million decrease in the total deferred revenue balance to 110 million at the end of the quarter compared to 127.1 million at the end of the last fiscal year.
Approximately 9.8 million of the decrease represents the historical timing of the contract renewal process that peaks in the last quarter of the fiscal year. Following the end of the calendar year.
The contract renewals and related bookings are always the highest in the fourth fiscal quarter, which results in a seasonally high deferred revenue balance at the end of that corridor.
The remaining decrease of 7.4 million in that deferred revenue balance is primarily inventory. There was held at distributors that was sold through the channel over the last nine months.
As of the end of the quarter. This legacy inventory that has held at distributors as down to approximately 300000.
Related to other matters first as Jamie you mentioned earlier, we have received approval to listen to the company's common stock on the NASDAQ global market.
We expect trading to begin on Monday February 3rd under the ticker.
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<unk> during the quarter the company settled with the S.C.C. related to all matters arising out of the season investigation into the company's historical accounting practices that resulted in every statement or later revenue recognition for transactions between fiscal 2015 and fiscal 2000.
18, the settlement, which we disclosed in late December included a payment of 1 million as a civil penalty.
Now turning to our financial guidance.
The fourth fiscal quarter, excluding the impact of Hyperscaler business has historically been our softness revenue period for the year.
For the fourth core fourth fiscal quarter of 2020, the company expects revenues of 95 million plus or minus 5 million.
The company expects adjusted net income to be 2 million plus or minus 2 million.
Unrelated and related adjusted net income per share of four cents plus or minus four cents.
Adjusted EBITDA is expected to be 10 million plus or minus 2 million.
This fourthquarter outlook results in an update for our full your outlook.
Management now expects total revenues for fiscal 2020 to be 410 million plus or minus 5 million.
And adjusted even with a guidance of 50 million plus or minus 2 million.
With that let me turn the call back to Jamie for closing comments.
Thanks, Mike.
We're excited to read list on the NASDAQ and conclude Destabilisation phase of our transformation.
And begin phase two where we focus on long term sustainable growth I would now like to open a line for questions operator.
Thank you, ladies and gentlemen, tacit question on today's call. It a star one on your telephone keypad.
Star one for any question.
Oh I'll go first to Eric Mark Martin.
Straight capital markets.
Thanks, Jimmy and Mike I'm curious.
The revenue reset if I look take a look at the full year. Just so we don't get into that puts and takes an individual orders.
Revenue mid point previously it was 427 million and now the revenue mid point 410 million.
Curious to know what what are the variances of that 17 million variance how much of that is due to hyperscaler not being what you thought it would be this fiscal year, how much of that is due to maybe royalty being blow what you thought it would be this year.
Par set out I'd appreciate it.
Sure.
When we look at our full year.
We would attribute that decrease almost entirely to the hyperscaler at the volatility in the Hyperscaler revenue.
We saw a part of that decrease in the current quarter and when we look forward to the to the fourthquarter, obviously, it's a it's r. soft as quarter of the year.
But you know the difference in our annual guidance would be almost entirely attributed to the hyperscale or just the the timing of Hyperscaler revenue.
And see that the man going down we don't see any competitive issues, but it's just simply at the time.
When the revenue will come in.
And that's to say that it is until I know obviously near term.
Can also be volunteered to do good are you just proactively stripping it out and being overly conservative potentially here or is it truly.
<unk>.
21.
Well I would say that we're not we're not in a position to be overly conservative, but we are being conservative in our guidance.
But we do have.
Mmm relatively good guidance from our from our customers and that would be the basis of what we're providing.
Okay. Okay.
Okay, and then I want to shipped over obviously, you're having a good success with.
There you talked about it software defined architecture series and I want to make sure I understand because I get the idea of.
Slick technology in a box, but I want to make sure I understand.
Software to find on top.
Yeah the.
Part of the transfer him transformation, we're making.
Is to sell the software independent of the hardware.
Not have them bolted together or or.
Technically combined.
Allowing us to transform into more of a software company allow us to get the full value of our software allow that software to run on.
Commodity hardware or even let that software run directly on the cloud.
So the F. series is architected that way and we're removing restore next over the next couple months is store next will actually just be sold as software and you will have to buy a software license for it and then you have a variety of different choices of hardware to run it on but it will be actually completely.
And bond old and uncoupled.
Going forward.
Okay.
The gross margin on the product side terrific job there that I've got it at 34% on the product I I look back as far as my current models shows I don't see it ever better than that what should we be thinking about for product gross margin without a one time I normally here or is that kind of our current robin right from which we can.
Yeah, I would say, we we're very pleased with the gross margin this quarter, we had a good mix.
I wouldn't say that that is now the new norm per se when you look at our products.
At the low end of our gross margin with media were in the mid to high single digits.
Then you look at our royalty, which is 100%. So we have a wide range of.
Margin contribution when we look at.
Mix of what goes into our revenue.
So.
We do everything we can from a managing our business. We really are driven by gross margin dollars and providing earnings to the bottom line.
We are not going to you know do discounting at the end as a quarter to get revenue, we're not going to sell for the sake of empty calories. So everything we do is to maximize the gross margin and will continue to take those actions to ensure that we have very strong <unk>.
<unk> very strong earnings where that settles out.
You know it's difficult to predict within that gross margin per cent of just because of the variability we have in our different products.
I understand those those hyperscalers can really swing things too sure. Okay, well that covers it for me congrats on the NASDAQ up list and I'll see the floor.
Thanks.
Well go next to crank L.S.F.B.I. Riley.
Yeah. Thanks for taking the question and it's <unk>.
And Jamie My congratulations on all the things you accomplished in phase one and now embarking on page two I wanted to go back and clarify the first question. So I just with regard to Hyperscalers is it the company's sense that what what's at play is that.
Something that is really more seasonal and an artifact what often happens between.
The calendar for it than first quarter or is it something that may be similar to what a large.
Server AMPU maker said last week, when they said that they just saw that hyperscalers, we're starting to move from capacity absorption pays two more of a capacity digestion face.
I think.
It it.
Feels more like what you read the second item, which is.
You got to understand a single unit that we sell to a hyperscaler can be over 90 feet long.
And take a team of people to install and integrate and when they receive scores of these are over 100 of these.
It's safe to assume they need thousands of square feet or tens of thousands even hundreds of thousands of square feet of building to put them in.
With.
The power to support that with a cooling the support that with the system administrative and monitoring software to put that in place. So the digestion of these systems as you put it is non trivial.
And there's a lot of logistics and I think in in.
In this case I would think of it as they need these units they need him as much as they've ever needed them. They want to install them as quick as they can but just the.
You know we had to kind of.
Harmonize our manufacturing line to their ability to digest, the systems and installed them and call them and power them.
That's really helpful color Jamie Thanks for that and then the follow up question is related to that customer set the company's span pursuing diversity within hyperscale customers.
Can you provide some color on how you are progressing and when there might be an opportunity to diversify beyond the current customers.
Right.
We.
We have test equipment, so physical equipment.
In most cases bought by Hyperscalers delivered now to three additional Hyperscalers, who are testing the equipment.
Feedback from the task continue to be positive and we feel that we are.
Hum.
You know.
Viable and meet all requirements.
All stated requirements, both technical and economic and.
I believe those it would be safe to think about those trials to continue.
For another several months followed by no you know.
More detailed financial negotiation, where orders I would not expect a volume orders for another six months I think it will happen within.
The fiscal year.
So within the next to 12 month, but I think there's another solid six months or more of testing tuning and negotiation before there's you know second volume customer.
Thanks for that and then I'll ask one more before I jump back in the queue.
You mentioned in response to an earlier question.
The movement of store next out into something that sold individually I'm wondering if you are or maybe even Mike could provide some color on on how we should think about that just mechanically would we expect to see a fourth segment come into the model and have something that's important along with products and services and royalty and.
And more importantly, how should we think about the revenue potential over the first year to ask the company moved to that direction.
Yeah, I think we're going to stay with kind of our three large pillars, which are primary storage, which I would think of as our our high speed products secondary storage, which are backup archive and think of them as cheapened deep storage products.
And then our services business I think those are the right measurements.
As we started to build up our software business I think what you'll see is.
Margin shaping differently in those businesses and that's really what we're attempting to do as well as.
I think the software separation and some of the other work for doing with our products to make them easier to use easier easier to install applicable to more cases than just movie, making and television.
Trying to drive growth in those products as well by appealing to other segments.
So I think that's really you know Oh it would go in a phase to our focus is really value engineering I mean, a lot of the software separation allows us to combine more things on a single box, which is a form of value engineering. So.
Big part a phase two is building the same product that building it less expensively for margin expansion, making it less expensively. So we can enter different markets and different market segments, making it more flexible so it can be combined with other pieces of software like video surveillance software.
<unk> software.
All with an effort to enter additional markets appeal to different segments.
And expand margin those are all things, we're doing to to drive the growth side of the business and you can only imagine what a massive distraction all the stabilization work has been over the last 18 months.
I think we've done unbelievable body work to stabilize the company and now as it would that behind US and the company has now stable operating efficiently every man woman and child. In this company is now focused on our value engineering and growth initiatives.
I think Jamie and congratulations on the <unk>.
Thanks crack.
Oh him next to chat, but I crank Hallam capital.
Great. Thanks for taking my questions. So just following up on the Hyperscaler volatility comment.
Did you have any hyperscaler revenue last December quarter.
Yes.
It's are you able to quantify it.
I would we never break that out separately.
But it would it'd be fair that when we look year over year the level of revenue.
Will be pretty much the same ballpark.
Twain fiscal year, 19, and fiscal year 20, but the distribution between corridors can swing quite quite a bit.
Okay. I guess is it fair to say to decline the 10.6 million dollar decline.
Secondary storage.
Would be representative of yes, Okay got it okay perfect that's enough.
And so it's it's we look it's much as I can push into.
<unk> early next year for us half a next year.
The company returns back to.
Overall revenue growth and specifically product revenue growth in the first half of of 21.
Yeah.
Will come out with that those thoughts on the next quarter Chad.
Really we're just looking out this this one quarter working that get this year.
Will provide that view next quarter, Okay, and then Mike how should we think about.
Maybe you have a little more.
Just into the royalty revenue run rate.
For the March quarter, and if you can say at least into the the early part of next year.
Yep.
The visibility that we have at least one quarter out we would expect.
In the same range or maybe a little better.
But I would say that range would be you know four to five.
Give you a range.
Okay.
In in that's looking out a couple of quarters or or just for the next quarter. Okay got it.
Maybe last one for me for for Jamie.
Jamie's or is there any way too.
You know think about how.
Significant that the new products could be.
Maybe as we look into the second half of next year, whether it's F. series, yes, or I believe our series on autonomous side.
Are we at a point where.
You know those products in aggregate contribute you know 10 per cent of product revenue or any type of colored there and as we look out a few quarter on three or four quarters.
I mean are.
Our goal is a leadership team is to be able to grow organically, 10% next year.
So that will be a combination of new products that will be a combination of entering new markets.
Now greater sales of the products, we have today. So I would think of it in that way is you know we want to be able to.
Take what we accomplish this year and grow 10% organically and organically meaning.
You know growing the products. We currently have and you know our engineers building new products and selling new products.
I think 10% is about the right place for us to be.
For overall revenue.
Overall red product product revenue.
Product.
Product, Okay got it.
Alright, guys nice job on managing the business love seeing the gross margins and the but performance. Thanks.
Yeah.
Yeah.
Well in Madrid charge, I want I could oppenheimer.
Hi, George on Hi, and congrats on finishing a phase one of the transformation. So yeah, maybe <unk> just sticking it to the visibility a little bit more so if he it exclude cloud and you look at your your other markets you know that meeting.
Expectations for the fourth quarter and then maybe can you give US a reminder of what are normal t. The analogy is x. the cloud business.
Oh.
Yeah, the the normal seasonality.
I would put a range of 5% to 10%.
The product to revenue.
You know it's just.
Softness just that we have experienced and I would exclude the hyperscaler from that because I can just be lumpy and we've discussed.
Revenue trends.
As far as the demand that we've seen outside of the Hyperscalers.
It is as we have expected there was you know we haven't experienced any surprises.
Outside of you know the guidance that we would have given are understood.
History.
Okay, and Jamie could you maybe give us a little bit more color on how the value of a selling is going and where you're seeing the the sales per ticket predictivity gain.
Yeah I mean.
Our customers want more from us.
You know they don't want us just to sell them a product increasingly they want us to help them solve a problem and more importantly, solve a business problem.
Right.
You know we have.
Customers at one of.
US to help them map genome is in create new drugs, we have customers, who want us to help them produce more television shows more rapidly in efficiently and we've always historically said look our answer to everything has to sell you a box.
And if you call our support line with a problem if someone is broken we'll fix it.
But now are transforming to say, we're more focused on our customers success.
So they're buying multiple products multiple products that are integrated together to help them solve a problem and ultimately a customer's going to pay a lot more money a lot more attention and a lot more margin is someone who helps them solve a critical business problem. Then you just dropped a box off at the loading dock and that's.
Transformation, we're making with our sales team and that's why we're seeing less of.
The old behaviors here were hey, it's the end of the year.
You know hit the revenue target no matter, how much you have to discount or sell whatever you have to sell to go hit the revenue target and Mike and I, just don't look at things that way and so we come in and say look we're going to hold do our prices. If you want some incredible discount, it's not going to happen and it.
And if you're going to buy the product a couple months from now by it a couple of months from now we're not going to give you discounts to buy it abnormally early.
Because that's not where our focuses on telling you a box it's more about let's talk you about solving a critical business problem. How can we sell you a combination of products to do that how can we sell you more services to install them in such a way to solve the business problem and when you integrate the technology in.
To the customers network to solve a problem, it's a much stickier installation and a much stickier relationship than again, hey, I need I need this much capacity and we just drop the capacity off the loading dock.
And that's a transformation of our services organization that transformation of our technical salary selling organization and a transformation of how we build our products. So they can be integrated in a much more flexible way.
To solve problems and you know that is going to take us a few more years to become a really good at that but we're we're becoming better and better every quarter and it's really changing.
How we talk to our customers, how we engage with the customers and and how we sell to them right in in this model, you're not just giving them a quote you're actually giving them a proposal about hey, we're going to build something unique and special for you that's going to help you solve this problem and we're going to we're going to explain that in a multi page document.
Hey, Here's a quote.
And it's a it's a different way of engagement I think it is a lot of work to make that transformation, but I think it just dynamically changes the kind a company, we are and how our customers perceive us.
Alright, and one more question for me just with that evolution can you give us a sense of.
On the software side, how you see that progressing over the next.
You're so.
Yeah.
Yeah, I mean, we're.
We're building a series of layers think of it as a layer cake at the most basic layer.
There is stored hardware.
And our goal is to increasingly commoditize that use commodity equipment use basic equipment.
Use.
The lowest price equipment that we can find for our customers and that commodity equipment is given differentiation and flavor and given a personality by the software that we place on it. So we can take a generic server and turn it into.
File server turn it into a movie making piece of technology turn it into a genome sequencing piece of technology turn it into a video surveillance platform cheapened deep archive platform and so.
Well the first step is separate the software from the hardware and sell that software separately and increasingly sell that software on a subscription. So our sales are less episodic and there are more reliable now that's a big transformation for us.
Now those two layers software defined storage and hardware.
Allow us to store video and video like data.
But our customers want more from US say, okay. You stored my video data, but now helped me manage it.
Where is that data is.
Is it on the cloud is it on hardware what hardware is it on is it on the right priced hardware at any given time help us move data help us backup that data help protect that data.
And help us administrate access to that data. So we're moving to a layer you know if you think of the lowest layer is hardware software defined storage above that and then data management software above that.
And also the other software we're getting into his his manage these.
Enormous quantities of video photographs and build catalogs at at how do how do I catalog I mean, our average customer has 300 million files with us on average they need tools to catalogue those 300 million files understand where they are are they protect.
Acted who's the access them, how do you search them very often a video you want to search for a face you want to search for an image you may want to listen to what they're talking about and.
Search for a dialogue and that requires a different set of analytics cataloging in search technology. So I think.
You are going to see those layers come out from us this year and again an effort to move much more of our sales to software increasingly that software will be sold on a subscription and increasingly it will reside in the cloud and be delivered from the cloud we're moving our whole store next platform to to cloud.
It'll run on Google Amazon and.
Asher.
So you know we're seeing a lot of these kind of movements are dxi platform, which is a backup product now backs up not only to on premise hardware, but backs up to the cloud as well.
So these are all transformations, we're making this year.
As we again move to more of a software to find in general software based posture and a set of software all around.
The infrastructure for managing moving accessing and creating video.
Thank you.
Oh him next to David Julie at still had security.
Thanks for taking my question, just kind of a recap on the sequential gross margin improvement I think another gentleman mentioned it.
It all came from or a vast majority of it came from the product gross margin improvement.
Could help us understand which exact products.
This.
So improvement in gross margins in and.
How far you are a long I guess on the total products set on this series of layers that you just went through with the previous questioner you are we.
On this layer cake with all the products now or is it just one or two or just kind of <unk> from.
<unk> macro perspective, how far along are we.
Yeah, I mean pro macro perspective, the product gross margin improvement was in in the primary products.
As jamie's when describing you know the.
The positions were taking the the direction. We're moving there is to to offer solutions and to move north right.
And as well as the customer base that we're selling too.
As mentioned in the prepared remarks.
The increase there was predominantly government business, which is good margin business and what we're providing them the solutions were providing them.
So that is that's here today right.
Unlike what at what I'd add to that is you know we have a company that has gotten really good at doing many many.
Hundred and 20 200000 dollar transactions.
And what we were able to do with the.
The D.O.D. is we are able to do a north of a $5 million sales. So we're selling as I described a more complex solution. We are working on solving a large complicated problem with them.
And that drives higher value then again these kind of quick hits sales and I think we want to keep our baseline of quick hit 120, K. to 200000 dollar highly transactional sales than now where layering over these strategic 5 million.
Sales $7 million sales, where they have higher margin because a sale of that size.
Is not really a a box sale. It's a series of things that were selling someone to solve a more complex business problem or strategic problem.
Okay, and then as far as how how how far are you long so that would leave the hyper which products have you not I guess <unk>.
Transition to selling more <unk> software oriented.
Mix, we were just in the beginning of that right. We are doing the engineering work, but I mean store next today is not sold his software it's not there yet dxi is not there yet.
We are just making that transformations. So those products, even the F. series as it is has software and hardware separated but you still buy them together. So this we're at the very early days of this so I think we're in the early days of solution selling.
And architecturally it will take a few more product revisions to actually.
Sell all of our products at separated software, but all of that is on our the road map set for sharing with our customers today.
Okay.
I guess.
Scale business.
You guys have mentioned that it's lumpy how long would you expect us to left.
[noise] 'cause itself frankly from your explanation that it's a facility readiness yeah.
Yeah, I mean it.
Dialog, but I'm just wanted to know what you guys think.
Yeah, I mean, I think it usually takes them about six months to to deal with these digestion issues six to nine months.
Really.
Safe to think about some of these are about you know digesting, but some of these things are actually for all of us who sell large amounts of equipment. Some of it is tied to construction.
Right you have to construct the building you have to construct a cogen electric facility to provide the electrical power. So you know depending on if you're tied to basic logistics or in some cases.
The equipment is waiting on a building to be built or waiting on power to be you know additional power to be brought to the facility. So.
That gives you a sense of what the hyperscalers are dealing with it they build out their infrastructure. It it's not just installing the equipment, sometimes you actually need to build.
Additional buildings or additional square footage or additional cooling capability to receive them.
So if the customer habit facility ready then we wouldn't be having this issue.
Yeah.
Mean, I I wouldn't draw direct conclusions, but I mean, there's a whole set of these issues from it can be power. It can be cooling it can be getting access to person now it can be the ability to support the equipment. I mean, there's just a big complex infrastructure to receive and install the equipment.
And I would to it isn't just directly linear and it isn't something that we necessarily are always given a lot of insight into right. They operate.
Fairly privately and they're they're quite quiet about how they run their building and.
They give us like in this case, we got notification as late as December about what their demand would be and it was you know received late and quarter that they had to slow down significantly for their own reasons.
Okay. Thank you.
[noise] [noise] Thanks day.
Well, it's no other questions that will conclude today's conference. We thank you for your participation you may disconnect at this time and have a great day.
Yeah.