Q4 2020 Quantum Corp Earnings Call
[music].
Ladies and gentlemen, please standby we are about to begin.
Hello, everyone and thank you for joining todays quantum fiscal fourth quarter and you're ending March 31st to 2020 earnings Conference call. As a reminder, all callers are in listen only mode, but you will have the opportunity to ask questions. Following todays prepared release for opening remarks, and introductions I'm pleased to yield the floor to Mr.
Rob Fink within K IR welcome Bob.
Thank you operator.
You're welcome everyone to the cost.
Hosting the call today remotely or quantities, chairman and CEO, Jamie learner and CFO, Mike Johnson.
Please be aware that some of the comments made during today's call may include forward looking statements.
All statements other than statements of historical facts are statements that could be deemed forward lucky.
Well I realize its costs you see reliance on forward looking statement.
We're looking statements include without limitation any projections of revenue margin expenses adjusted EBITDA adjusted net income cash flows or other financial items as well as anticipated impact and the Kobin 19 pandemic Quantums financial results any statements concerning the expected development performance market share.
There are compare competitive performance relating to products or services and the expected timing of Relisting over shares which has already happened. All forward looking statements are based on information available to quantum on the days here Rob.
Statements involve known and unknown risks uncertainties and other factors that may cause quantums actual results to differ materially from those implied by forward looking statements included unexpected changes in the company's business.
More detailed information about these risk factors and additional risk factors are set forth in quantums filings with the FCC, including but not limited to those risks and uncertainties listed in the section entitled Risk factors and Quantums quarterly report on 10-Q and annual report on form 10-K as filed with the FCC.
Quantum 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.
Please note that on this call the company will be discussing non-GAAP financial information.
CEO and CFO are providing this information as a supplement information prepared in accordance with accounting principles generally accepted in the United States or gap you can find reconciliation of these metrics to the reported GAAP results in the reconciliation table provided the company's earnings release I.
I would like to remind everyone that this call is available for replay on Quantums website for at least 90 days a link to the website. A replay of this call was provided in the earnings release, which is also on the company's website investors that quantum dot com and all that said I'd like to turn the call over to Jamie Jamie that follows yours.
Thanks, Rob and thank you all for joining us on today's call.
Well I first joined the company a little over 18 months ago, we were a company in crisis.
We are in the <unk>, they have a multi year financial restatement process.
We were subsequently elected from a major national exchange.
We haven't released a new product and over 10 years.
And the business had been in a long secular decline for many years without a clear business our architectural nation.
I think he need putting key new leadership in place, we built a transformation strategy.
Well 2020 was a year in which we delivered on the first phase of our turnaround with a focus on stabilizing the company and savvy yeah for growth.
To that and I'd like to highlight.
Sure accomplishments, we achieved over the last year.
We launched the store next F series and be in these storage line based on our own storage and software defined blocks strategy.
It's new product line was a major contributor to the growth in our primary storage business that we saw in that 20.
We established the top market position for tape and Hyperscaler cloud environments.
We continue to innovate in that area and view this segment as a growth driver business going forward.
We completed the acquisition of the active scale object storage.
Object storage business from Western digital in March 1st acquisition in many years.
And the reception from customers and partners has been extremely positive. This acquisition was almost immediately accretive to our operating results.
We continue to recruit and promote top executive talent to lead our transformation.
This included Reagan Macpherson as our new Chief legal officer.
James Mindell as the new global channel cheap.
And as a part of moving to a G.M. organizational structure and fiori as our new GM or our primary storage business and Bruno hauled then promoted to serve as G. M. A secondary storage.
From a financial standpoint, these and other factors led to significantly improved financial results.
Annual revenues were flat year over year in spite of a very challenging business.
That we faced in March.
Year over year, we delivered a 25 million dollar improvement in income from operations.
37 million dollar narrowing of our net loss.
Positive adjusted net income of 15.4 million.
And adjusted EBIT EBITDA of nearly 46 $9.
In summary over the last year quantum has been transformed.
We completed the multi year financial restatement and related losses, and FCC investigation are now behind us.
Let's turn our stock in the NASDAQ eliminated this significant amount of fixed cost.
Reinvigorated, our pipeline and rebuilt the earnings power of the company.
Our relationship with our lenders as evident by the recently announced amendments is stronger and we're making progress in our efforts to address our access to liquidity and ultimately reduce or elaborate.
Yes, we look ahead to the started fiscal year 2021 poised for growth, we're confronted with toga 19, new crisis with a new set of challenges.
Our team is faces challenges head on with the safety of our employees, our customers and our community. The top priorities, we transition tour to a remote working model almost overnight.
We've been able to continue to service and support our customers around the world.
Continue to develop and released new products.
Close our first acquisition in years.
And we've been able to maintain our global supply chain.
We worked with our bankers and lenders that secured an additional $20 million and incremental liquidity along with more flexible loan terms and conditions as was announced last week.
We're now starting to open up our offices gradually safely based on new processes and working models, we put in place around the globe.
Increasingly our technology is critical and core to our customers business processing.
This is no there's no doubt that many of our customers have faced unprecedented challenges.
And the sales cycle has become unpredictable.
We view these challenges as temporary.
Our fashion all sports will return and movie production will resume in quantum is well positioned my optimism has not Wayne.
I believe it was Winston Churchill that said never let a good crisis go away.
This global pandemic is affecting us all through the steps we've taken the more stable financial position, we're in and the perseverance resiliency and leadership, we've repeatedly demonstrated in times of the crisis, we will emerge as in a stronger position for long term growth.
This crisis has already presented a number of opportunities for tuck in acquisitions, we are analyzing considering.
He's can help both bolster our technology portfolio and injector innovative talent into the company to accelerate our growth trajectory as we look forward.
As an example in late March we acquired the source code for a Cavium software, which includes key technologies for data classification data management and Nexgen file storage.
As part of that acquisition do you worry joint quantum as VP and general manager of our primary storage business that brings substantial industry experience and leadership and this acquisition has helped to accelerate our store next roadmap sort of software defined hybrid multi cloud.
Gotcha.
And although we expect financial pressures to continue in the short term we remain focused on these five growth opportunities and drivers.
The first as growth in video and unstructured data. It is no coincidence that the world is using video for communications more now more than ever.
Yeah, Dan that will drive more organizations and all industries to credit darn video data for marketing or training for internal communications.
Many colleges have already announced full video base to online learning curriculum.
<unk> Health care will result in more video.
We expect this pandemic was for investment in all forms of virtual and augmented reality some of which are currently being developed on our store next nvme he starts today.
In addition use cases, such as scientific and medical research machine learning and AI and and I O. T devices are generating vast amounts of unstructured data that must be processed analyze protected and archives or many years.
The second is expansion into new markets.
The market for surveillance reporting and analytics is expected to grow even faster as result of cobot with recent investments in body temperature sensing cameras. Just one example.
In March we announced an expanded portfolio focused on video surveillance and analytics, including a new line of network video recording servers appliances for video analytics and new software for hosting multiple physical security workloads on a hyper converged cluster.
We view Atkins scale object storage as the key technology or surveillance archives.
We also see tremendous potential in the storage and now says protection and archiving of genomic sequencing EMR I images and other forms of medical images and video we recently upgraded some large environments for customers using genomics data to study cobot 19, and one of our customers.
In this segment is upgrading their store next medical image archive to include Nbn me.
For GPU based analytics and object storage or an online image archive.
The third.
Market and margin expansion by transitioning to software defined architectures and business models.
The next major release of our Stornext file system software is expected before the end of the calendar year.
Moving to a software defined architecture will enable the transition from enough and appliance sales model to subscription models.
And this is a key step toward supporting hybrid and multi cloud deployments. In addition, we'll be able to simplify and converge our product offerings expanding the use cases, we can address to include edge environments, and small and post animation houses.
The fourth is used to tape an object storage for enormous archives in Hyperscale enterprises government service providers.
Our experience in the last few years in building the largest archive and the world has an informed our product roadmap and new architectures.
We have new technology that is based on those learnings and this increases our odds of winning additional hyperscaler footprint, both technically and economically.
Further we're now seeing that the same architecture is interesting for very large archives and other service providers large enterprises and government agencies.
We believe it is the best architecture for anyone archiving large amounts of data.
If this is by inorganic growth.
Evidenced by our recent acquisitions of the ACO scale object storage business and the a tavy him source code we're going to.
The continued to be acquisitive.
We have the vision strategy and leadership team in place and we've proven that we can quickly integrate technologies into our business in a way that is accretive to our customers and shareholders.
Our goal is to leverage our leadership position in these dynamic markets to accelerate our strategy.
In closing, although we expect short term financial pressure from cobot. The work, we've done stabilized and transform the company our expanded technology portfolio and Marcy. Most importantly, the resiliency of our people and culture will ensure we emerge as a stronger company.
As you head into the next phase of our transformation.
We've accomplished a lot during fiscal 2020 and today quantum is a healthy cost efficient innovator focused on higher value and higher margin solutions.
The pandemic will subside or at least be contained.
Our customers and sports and entertainment will return.
Quantum is clearly positioned as a leader in the industry with Didnt shaded solutions that meet a large and growing need the management of video and video like data.
Oh leaner operating structure, we've rebuilt our earnings power of quantum this quarter was a challenge and our first fiscal quarter will reflect the full impact of the global situation.
But I am increasingly optimistic as the volatility of the macroeconomic environment eases quantum will be well positioned to continue its transformation and advance our efforts to achieve sustainable profitable growth.
With that I'd like to turn the call over to Mike Johnson, our CFO to discuss the financials.
[music].
Thank you Jamie.
Welcome to everyone has joined our call today.
First I'd like to Echo a fear of Jamie's comments regarding our progress this past year, which isn't able to climb to better weather. The challenges are there called at 19 pending.
In addition to be more strategically focused we're operating at a more appropriate cost level and capital structure that provides us the flexibility to see us through until our customer activity levels return to more normalized levels.
Let's first review the full year financial partners.
Revenue for fiscal 2020 was essentially flat at 402.9 billion. Despite a landmark slowdown driven by cobot not too.
The flat year over year performance was driven by 3% incruse and product rather than with growth in primary storage and begin devices, partially offset by a decline in secondary storage systems.
This modest increase in product revenue was offset by similar decline.
And services, primarily due to reduce support renewals or legacy backup customers combined with the columns and royalty driven by lower unit volumes as the primary due September transitions from backup and archive implementations.
Year over year gross margins expanded 120 basis points to 42.8%.
Our progress reflects reductions in cost of service across a wide range of products that sales mix weighted towards more profitable product lines.
We remain focused on selling value rather than selling on price, while avoiding low margin kamada size rather than.
I will address that sequential quarterly decline in our gross margins as well as our near term outlook later in the call when discussing the quarterly results.
We improved our profitability across all key metrics do the careful expense management.
We significantly reduced operating expenses.
As a part of our aggressive efforts to rebuild the earnings power plant.
We eliminated over 21 million year over year, 251.3 million or 38% or revenue.
Compared to 172.4 million or 43% or revenue in fiscal year.
2019.
The year over year reduction of 21 billion for image sensors was largely split between a reduction in restructuring and restatement costs of approximately 11 million.
And then that reduction in operating costs of approximately 10.
General and administrative expenses decreased by a total of 10.8 million to 54.5 million or nearly 17% reduction.
Wow 6.8 million of the decrease was due to lower costs related to the financial restatement and related activities.
There was 7.3 million cost reductions there will be part of our ongoing the lower operating run rate.
These reductions were primarily due to lower software expenses as we streamlined our classicism related applications.
And decrease facility expenses as we continue to consolidate our physical footprint.
These decreases in general and administrative expenses were partially offset by a 3.3 million incruse and stock based compensation expense.
Another area of expense reduction with sales and marketing where expenses declined nearly 10 million to 59.5 and.
A 14% Rewatching.
This decline is primarily driven by lower headcount due to improved sales and marketing efficiencies.
Importantly, these savings allow further investment in research and development in order to continue to innovate or product lines to meet our customers expand into now.
For fiscal year, 20, Twond and research and development expenses increased 4.2 million or 13% to 36.3 million compared to 32.1 billion last year.
The net result or improvements at the bottom line across both GAAP and non-GAAP metrics.
Net loss was 5.2 million or 14 for 14 cents per diluted share compared to a net loss of 42.8 million or $1.20 cents per diluted share last year.
Excluding nonrecurring charges.
Compensation.
The restructuring charges adjusted net income was 15.4 million or 34 cents per diluted share.
Compared to 4.8 million or 12 cents per ship diluted share last year.
And the adjusted EBITDA increased 13.3 million to 45.9 billion compared to 32.5 million last year.
Now, let US review the fourth quarter performance.
Revenue was 88.2 million in fourth quarter compared to 103.3 million last year and in line with the revised guidance we provided dinner.
The decline was driven by 20% decrease in product revenue.
Mary.
Due to reduced demand late in the quarter for secondary storage systems as a result at Cobiz 90.
And lower Hyperscale business.
Service revenue was down slightly and we experienced additional declines as royalty revenue due to overall declines and mark.
Yes.
More specifically product revenue decline, primarily as a result, they 15.7 million decurtis secondary storage system sales.
These declines were partially offset by three point Sixmillion Incruse and primary storage system drugs.
Our product revenue in the fourth quarter included incremental contribution from acquisition active scale object storage business.
Which closed on March 17, 22.
It's important to note prior to the acquisition quantum had been a reseller <unk>. So there's a certain level of contribution from ACA scale included in our historical financials.
[noise] royalty revenue, a 5 million third fourth quarter, continuing to be relatively light compared to historical periods.
The adoption that L. T O. It has lagged expectations, primarily due to attractive pricing for LTL, seven and customer anticipation of the next generation Oh here I'm not that is expected to be launched in the next six months.
Gross margin in the fourth quarter was 40.9%.
Paired to 41.3% last year.
Gross margins contracted modestly primarily due to lower royalty revenue.
And fixed overhead cost spread the cost lower revenue levels.
Partially offset by unfavorable mix.
I have a higher percentage are tired margins service revenue.
On a sequential basis, our gross margins decreased 470 basis points in 45.6% third quarter.
As we outlined I don't recall last quarter the increase in the third quarter gross profit was primarily driven by higher product gross margin barely 700 basis points from the prior quarter.
Which was due primarily to a sales mix weighted towards more profitable product lines as well as cost reductions across a wide range of product off.
The third quarter enjoy the benefit of some of his significant anchors and high margin federal business and lower levels of lower margin Hyperscale business.
Yeah, I'm quite gross margin for the fourth quarter based on the financial guidance provided last quarter, including gross margins in the range of 43% to 44%.
The revenue midpoint of 95.
As discussed in todays press release.
<unk> revenue.
At the midpoint of 73 million next quarter, we would expect continued pressure on gross margins as the fixed overhead costs are being spread over a lower revenue base.
Therefore, we would expect her gross margins in Q1 to stay in the range we recorded in Q4.
In total operating expenses, not corridor, and 22% to 33.5 million or 38% of rough.
Compared to 43.2 million or 42% of revenue last year.
This 9.7 million declining expenses was driven by 41% decline in general administrative expenses.
A 19% decline in sales and marketing expenses.
The 7.5 million decrease in general and administrative expenses was driven by five point Fourmillion and decrease costs related to financial restatement and restructuring.
As well as lower software expenses as we streamline our processes and related applications and decrease facility expenses will continue to consolidate our physical said.
The decrease in sales and marketing expenses.
Was driven by an overall decrease now reduced compensation glow on lower overall revenues and a decrease in marketing programs.
Research and development expenses were 9.2 million in the forces.
14% compared to 8.1 million in a year ago.
GAAP net income in the fourth quarter.
Excuse me GAAP net loss in the fourth quarter was 3.8 million or 10 cents per diluted share compared to a net loss of 9.4 million or 26 cents per diluted share in the year ago core.
Excluding nonrecurring charges stock compensation and restructuring charges adjusted net loss in the fourth quarter was 2.4 million or six cents per diluted share.
Fair to adjusted net income of 2.3 million or six cents per diluted income per share in a year ago core.
Adjusted EBITDA in the fourth quarter decreased 5.7 billion to 5.4 million compared to 11.1 million last year.
There's a full reconciliation of our non-GAAP results for the most directly comparable GAAP measure and both the press release and the form 10-K relates to that.
Now looking at the balance sheet cash flows.
Cash cash equivalents were 6.4 million at March 31st 2020.
Compared to 10.8 million as of March 31st 2019.
The current balance excludes 5 million unrestricted cash required and the times credit agreements and 800000 short term circuits cash.
Outstanding that as of March 31st 20, Twond <unk> was 167.8 million.
Before and adding 13.7 million and unamortized debt issuance costs, and adding 7.3 million current portion of long term debt.
This compares to 164.6 million outstanding debt as of March 31st 2019, before netting 17.3 million and amortize debt issuance costs, and adding 1.7 million current portion of long term debt.
The increase in data from March 31st 2019 was primarily due to borrowing.
Borrowings of 2.6 million at March 31st 20, Twond from the revolving credit facility to mid short term working capital requirements and paid in entrance.
1.9, though.
Included in the debt at March 31st was 2.6 million gone down $45 million revolver revolving credit facility compared to 7 million draw down at the end of the prior quarter.
Net cash used in operating activities was 1.2 million for fiscal year 20 Twond.
An improvement of nearly 15.7 million from the prior year, mainly reflecting the strength in the cash generated by operations.
Excluding working capital changes of 19.8 million in fiscal year 2020.
Or 23.9 million better than the 4.1 million cash used by operations, excluding working capital changes in the prior.
In summary, the total net cash used in fiscal year 20, Twond, a 4.6 million represents the sum of capital expenditures of 2.6 million.
Plus the 2 million acquisition price for the active scale transaction.
Now I'd like to talk about the actions, we've completed to strengthen our balance sheet and improve liquidity as we manage our capital structure to see us through the impact of the pending.
First on April 13, 2020, we received a $10 million long in the Paycheck protection program guaranteed by the S.
The P.T. low bears interest at a fixed rate of 1% per year with interest deferred up to a maximum of 10 months as an initial turned up two years and is unsecured.
Under the turn to the P.T.T. loan we may apply for forgiveness of their mouth do Oh.
We have utilize the proceeds from the PPP loan for qualifying expenses and intend to apply for forgiveness of the PPP loan in accordance with the terms as a loan agreement.
At this time, we cannot be assured that the P.P. low well, we forget the partially or.
Second last week, we announced that we agreed to amend our revolving and term loan credit facilities, securing an additional 20 million in incremental liquidity.
And negotiated more flexible low terms and conditions.
These credit facilities expire on December 27, 2020, Threerd and can be used to finance working capital and other general corporate purposes.
Among other terms the amended credit facilities provide a holiday period for certain financial covenants through March 31st 2021.
And the term loan credit facility contains a more favorable favorable equity clawback feature.
The terms of the 2020 term loan credit agreement as amended our substantially similar to the turns as existing term loan.
Including in relation to maturity security and pricing.
As of May 31st 20, Twond borrowings outstanding under the amended term loans were 165.2 million.
And 9.5 million under the amended revolving credit facility.
In addition to the customary closing and amenities, we issue 3.4 million warrants with the strike price of $3 to our term loan learners.
These agreements underscore our confidence or others that provide us with increased access to capital and incremental flexibility to manage our balance sheet in a manner that is strategically aligned with the ongoing rationalization of our business and changing macro environment conditions.
With the support of her lenders, we now have the necessary flexibility with our financial covenants as they continue to rationalize our cost structure and shift our focus to higher value higher margin sales opportunities aligned with our customers needs.
Finally, I'd like to comment on our financial out.
The continuing uncertainty and the overall economy as a result of the co bid and I like limits our visibility.
Every therefore have decided not to provide full year guidance at this time.
However, as discussed on this call, we expect the customer delays and disruptions experienced in the last two weeks of the fourth quarter to have more pronounced in Pasadena first fiscal quarter up 22 anymore.
Our outlook for the first quarter includes revenues of 73 million plus or minus 1 million.
Adjusted net loss to be 8 million plus or minus 500000.
Adjusted net loss per share to be 17 cents per share.
Plus or minus one cent per share.
Adjusted EBITDA to be zero, plus or minus one though.
With that when they turn the call back over the journey for closing comments.
Thanks, Mike.
We've come a long way in a very short period of time.
Earnings power of quantum is evident.
So the short term reaction to co bid will impact our results for the first half of our fiscal year.
We are increasingly optimistic about the longer term opportunities before us and believe the second half of this fiscal year will reflect the improvements we've made.
Well now be happy to answer any questions you may have.
Operating.
Gentlemen, thank you for your remarks onto our phone audience. Joining today, if you would like to ask a live question over your telephone line simply press Star and one on your telephone keypad pressing star and one will place you into acute and we will take your questions. One at a time also a friendly reminder, that if you're joining us today honest speakerphone. Please return to your handset prior to pressing star.
In one to be certain that your signal does reach our equipment. Once again that is started one for questions well take our first question from Craig Ellis at B. Riley FBR. Please go ahead Greg.
Yeah, Thanks for taking the crushing and guys. Thanks for all the detail on both the quarter in Europe, Mike I, just wanted to start with a few financial clarification since it relates to some of the comments around guidance first with regard to that Kobe 19.
Issue is there any impact to supply or is are the things that you're seeing a with respect to the crisis, all but man sort of laid that getting a 73 million dollar Prevnar guide.
Yeah, I would say that the supply chain has been challenged.
We've been able to address you know many of the challenges.
But it hasn't I mean, they definitely the impact is more on the topline in our customers demand than challenges from a supply chain.
Got it and then nice to see active scale opt to a very stressed skirt [noise].
Can you quantify the amount of revenues that was but was recorded in the fiscal fourth quarter and while we're in an unmatched train Berman here, how should we think about what a normalized revenue level would be for active scout [laughter] [noise].
No. We don't break out separately, you know product revenue or revenues related to acquisitions I mean, as we had.
Outlined on the call we did recognize revenue right out of the shoots so there was a little bit of pent up demand there.
It's a it's a business that we know very well we have OEM that equipment for years, they know that technology very well. So it's something that inherently was in our run rates. Historically. So the incremental addition is muted to a certain extent I believe we were the lock.
Just OEM for western digital for that product.
But I think.
You know, it's it's fair to say, it's not a it's not going to move our numbers as it relates to that product per se I think some of the synergy there we're going to see out to out of that acquisition will be on the technology side and what we do with other products are conjunction.
Got it and then moving maybe to somebody got more strategic I didn't think customer items, Jamie if I could flip here can you just help us understand that tone of business and some of your different customer groups as we've moved through a bit calendar first quarter, where were we when we started the quarter where are we now in areas like media.
No payment and area slides government health care et cetera.
Yeah, I would say.
The broader enterprise.
And probably.
To a greater extent in media and entertainment there is a market change in behavior and the behavior started.
With a just a drastic.
You know slamming on the brakes of all spending.
And then the first thing that opened up was what I would say is monies for continuing operations.
So, but new projects, so I would say in.
March.
We saw just people hitting the brakes April may as things cobot began to normalize.
We thought spending and if you see much of this spending.
That we're anticipating this quarter is related to maintaining operations and that's not just paying maintenance. That's also keeping systems running so that would be buying more capacity.
Replacing older equipment to keep it keep this system running so people are spending with us, particularly the installed base to keep all there.
System that they bought from us running keep them healthy keep them have capacity.
Mainly the behavior that we've seen that is the short fall is stopping of new projects new projects.
A new movie or new projects for the start of a sports and for enterprises looking to begin new.
Projects in and around analyzing unstructured data that new projects that really.
I would say in.
April and May we just didn't see activity on.
I would say in the last three weeks.
We're beginning to see a return new activity of the large projects.
I haven't seen not lose them that haven't gone to the cloud are gone somewhere else I've seen them put on hold I've seen people have checked in with us and say they we expect to resume as soon as their operations resume.
Well, we did start seeing signs of life in the last couple of weeks, we're seeing a various television movie companies are calling us again to say, hey, where we want to start talking about projects.
Sports franchises had been reaching in saying Hey work.
Looking at starting our season, then limited ways and we want to pick up projects as well as enterprises.
There have been three groups that have been moving.
Somewhat on the affected during this time.
And that's been government not just the U.S. government, but governments around the world and continued spending on.
Both civilian and military projects.
And the U.S. government has continued I'm a little slower in their procurement, but for the most part or they are taking on big new projects and big capital expenditures and and moving forward.
But also sell health care.
Ah, including not just hospital, but bio informatics genomics.
Drug development and life Sciences that whole segment has continued I'm mostly on affected during this.
And finally, I would say the law cloud operators and cloud providers have continued there.
Programs with us in evaluations are on schedule and delayed.
But I would say of the two forces the tavi it from our projection that the the people slowing down have outweighed. The people are the smaller amount people who carried on unaffected.
That's extremely helpful color and if I can follow up just sounds like the point I think.
Investors and the company had been looking for some some hyperscale some cloud customer expansion either late this year next year, how does the company feel about the potential to to broaden its customer base and getting back a narrow but quite large vertical.
Well I would say.
Number of things have developed.
The first is our large hyperscaler had really told us they would where needing to slow down there. We are having trouble digest equipment finding places for at.
That has on picking up and we now have.
Better line of sight into that and that is rebounding.
We have also had several new hyperscalers reach out to us and we'd like to begin advanced dialogue one of them actually is taking equipment in an accelerated way to accelerate their trials.
The trials that we have ongoing have moved to advance stages, where they are actually had equipment new equipment.
And they're testing it a pretty big correctly. So we're moving to you know moving off of the paper.
Trials actually physical equipment on premise being tested a and integration work happening.
And finally.
We're starting to see.
More customers.
Reaching out to us and saying.
I'd like you to build for US what you build <unk> cloud guys.
We think you have the NR amassing a enough data where.
We need our own internal clock.
The very large automakers large branches of the national laboratories, and and government agencies.
A large genomic.
And healthcare and life Sciences archive.
We're just seeing a number of people, saying, we think that data. We have is big enough, where we can cost you get by our own. So our hyperscaler business is actually starting to expand into very large telco very large enterprise.
They need a slightly different products, but not a radically different so that business I would say is becoming.
More robust.
It also has a long sales cycle.
When I think that long sales cycle is justified.
Doesn't want to cut for makes the commitment like that it's probably a seven to 10 year commitment.
No.
So a lot longer the bigger the plane no longer the runway.
Yeah.
That's interesting it sounds encouraging for the business, Mike If I can just ask your final question before getting back into queue. Following the announcement on.
On the updated covenants that the company was able to achieve that gets flankers and to claw back.
Elements and an improvement in terms of the amount that can be quite back and they produce penalty.
A question is are there any restrictions on <unk> you could do there because it.
Is it possible that execute on that way and equity offering and we'll take that element or they have to be just equity any color on how you might be able to utilize fat claw back it out would be helpful. Thank you.
I mean this.
For the equity Clawback structure. So the thought is to issue equity or we can do up to 50%. It was 25%. So we're able to double or how much weekend the pay off with equity from that standpoint, plus we reduced the penalty the penalty was 12% to use that.
Great Clawback now, it's 5% so we were able to double the amount that we could we could clawback and at a much lower penalty right.
So we felt really good about.
How about that.
But those changes in their members.
Mr. Ellis. Thank you for your questions. Today next we'll hear from Eric Newsy Lake Street.
I want to pick up on there the credit facilities Amendment the term loan amendments there as well.
Usually you know with the prelim results in early April you were talking about mid May was if these changes to the the the debt facility that cause things to kind of run out a little bit longer or is it more hey, let's get a better feel for.
Businesses, where are the flight 21.
Went up by 21 is going to look like that that drove the delay anymore.
Well I think.
It was a combination of both Eric we initially when we realize that code at 19 was going to have a direct impact on our revenues late March we wanted to get ahead of the game, where you got waivers on the covenants. So that we could you know put a stake.
On the ground at that point and then we wanted to get more visibility I bought we believe next year would look like we wanted to only do you know one set of amendments with both the term loan lender and the revolver lender. So you know its orchestrating those two parties getting better a little better visibility yet.
Leased so that we could set the covenants because we set them all away through.
And the other good news out of doing that once were able to negotiate a basically a holiday and all the covenants with the exception from an availability covenant.
So you know, we've got quite a bit of flexibility for a year as it relates to the covenant coverage, but it really was you know it's just a lot to go through and it always takes more time than you think it'll take but we're very pleased.
On the final outcome.
Okay.
Let me dive into the Q1 guidance.
Figure out what I can learn.
Q4 royalty revenue I assume that was kind of <unk> 5 million even.
And.
To my mind, I think that generate that throughout the quarter in there.
A big slug fourth quarter, and correct me, if I'm wrong, there, but what should we be thinking you know.
Slide 21, not just Q1, but realty in general because we do still have the need to as you say in the press release.
The short term in fact, the pandemic not growth of video.
Right.
And I would I would expect there's going to be continued pressure on that line item.
So.
You know thatll be that warnecke skate the impact the coveted 19, and you know it'll be impacted just as everything else is initially or where you expect it to come back.
Motors bigger factors that are a play it's as the.
As the use of tape moves from backup to archives or in that transition right. Now I think that's you know some of the pressure, we see there and as well as moving between generations as always I'm, a little you know difficult period to predict.
But always puts pressure on it as well so really we've got two factors.
From a business standpoint that are impacting royalties on top of the carpet 19 backdrop.
Okay, and then Jamie a big picture here you know, we've we have the kinda seismic shift with the arrival of a pandemic.
Are there any you know it seems pretty easy to focus on the negative we got a real pretty substantial down negative on the.
But have any doors been opened or any new markets. If any of the verticals <unk> have you been surprised just in your pipeline analysis over the last.
Call It 60 days.
Since it's a film results.
Yeah.
Right I mean, there's there's a lot.
Then I'm pretty encouraged by.
One is our U.S. federal team is killing it.
You know, we're just becoming more relevant.
In unstructured data in the government and that everything from the National labs to anything else space programs with NASA.
We want to go to Mars with NASA, you know, there's going to be a lot imagery there.
There's a huge amount of work whether its disease modeling a war fighter modeling, there's just a huge amount of work happening in the National laboratories, and you know every single thing that we do in our military is video attached.
So.
I just think that is a big growth area for us.
I think the cloud is realizing that they are growing their growing in the pandemic, they're generating more unstructured data predominantly video and photographs and I'm seeing those guys not only stay on budding cases accelerating.
Be evaluation and the Onboarding of our test.
I've also seen.
Are.
You know what makes our storage fast is not the storage in all cases, it's the network.
We allow data to go get to our storage faster than our competitors. It's not just that we can store it faster, but we can move it from where move the data to our storage faster.
So I've seen a lot of.
Acceleration, where people are working remotely or working from home and they're using our technology to accelerate data transfer from at home or remote facilities.
And so that use case is becoming more prevalent and we're becoming more relevant.
The other thing I've seen it is.
We had talked about wanting to get to.
You do more than media and entertainment.
Right. Okay. We're really good in movies were really good in television sports.
What we've got to be relevant another use cases and.
I've seen a large up tick.
And the conversation the people coming to our briefing center and having virtual briefings with.
About life Sciences data medical imagery.
Cat scan data analytics of medical imaging.
Archival on analytics of genomic data.
Bioinformatic data.
I've just seen that I.
I think we're just becoming much more relevant than we thought or planned in the whole life Sciences segment.
And you know our video surveillance work, which has been predominantly engineering right building the products that we need.
We're now turning that corner and we've built the sales relationships the district distribution relationships and I'm seeing our surveillance business picked up quite quickly.
As well so I.
I think all of our strategy is playing out.
On the way we look at things is.
You know as the disease is contained or subsides or we learn to.
You know have a viable containment that we can live with.
I think we're well positioned to come out of this with a lot of speed and I mean, and we tighten our belts, we thought we tighten our belts as much as we could tighten it now we tightened up more.
It's a pretty lean.
Innovative organization and we're seeing all the proof points of our strategy laying out.
And now we just need a healthier economy.
To fertilize the business and I I think that's.
I'm feeling pretty encouraged that we're going to come speeding up out of this and and we're starting to see.
A lot more inbound activity or certainly got a lot of publicity recently, and maybe that oh pits, well, but that I've, just seen more inbound activity than I've ever seen.
Well I appreciate those green shoot a highlights there in the pipeline.
The floor.
Eric Thank you for your questions today, gentlemen, well hear next from Chad Bennett with Craig Hallum.
Great. Thanks for taking my questions. Mike can you just speaks to how you're thinking about cash flow.
Relative to the 8 million dollar loss for the quarter.
Yeah, I mean, you know as I highlighted in our in their comments.
From operations, we basically Matt it out and when we looked at the total use of cash over the whole year, you really you could boil it down to our Capex and our acquisition of active scale. When we look forward in our cash flow breakeven is plus or minus 85 million.
So we're still in a position where we'd expect the to burn a little bit a cash next quarter.
But that's why we you know.
Three we've been able to get amendments to our credit agreements have access to additional liquidity as well as we've always had or $45 million line that helps cover the ebbs and flows in particular working capital. So it's something that we feel very good where we are today.
We think we're positioned well we can address any any [noise].
Cash requirements that we see and we can also fund as we climb out of this that working capital requirements to support groups. So we think what city [noise].
So the excess 20 million a liquidity was that.
On the revolver side, I assume or was that term.
Oh that's term.
Okay.
So where where's can you give us a snapshot of where the the the debt is today.
Well it is it's $20 million higher [noise].
Right that was before them [noise].
Right.
And we've got our balance sheet so [noise].
Okay.
Alright, and then just in terms you know obviously, we're in a pretty.
Unique environment to say, the least but you know considering your ear can you guys. This commentary on [noise].
You know starting to see a pickup in the last couple of weeks on the enterprise side and obviously fed.
Seems to be doing very well and just you know in I think you spoke about a year hyperscaler or your existing customer started to get back on track just idea again I know, it's a tough environment to just speak to this but if we look at the Sip.
Timber corridor.
Considering you know Weird June is gonna be would you expect better seasonality than the normal for that quarter or is it too early to tell.
<unk>.
[noise] hires I can.
<unk>.
Jamie well have to take a crack and they're not allowed to follow up but I mean, the visibility is very difficult. So it's hard for us to look forward. We do believe as Jamie has been articulating that when you know we do figure this out we believe there.
Sure.
Yes.
Okay. Thanks much.
[noise] gentlemen, next we'll hear from David Duley with Steelhead Securities. Please go ahead David.
Yeah, Thanks for taking my questions.
Sounds like we know when you talk about the trends in your business that things are getting better across some of your major categories and so is it safe to assume that June will be the bottom or the low point in revenue.
In this little cycle.
I mean, none of that have a crystal ball, but with the data and trying to meet today I would say that bottom is behind us.
And I would expect [laughter] current course speed.
September quarter will be better than this year.
Okay and as far as [laughter] lead times go what are your lead times for your secondary storage systems currently.
Well the pen.
There's a bunch of different products in that yeah.
De-excite paid and actually have scale.
So it depends what products our enterprise products.
From when we get a purchase order to when we shipped is two to four weeks [noise].
The longer lead times and products our last July.
A very large scale create some predominately for hyperscalers those have more of a.
Eight to 12 week manufacturing lead time.
Yeah, yeah, Okay. So hyperscalers all the long lead times, and so you probably have some sort of indication from them.
And then give us within man, but things are getting better in that particular business you have to have some sort of.
[laughter] indication from them since the lead times are so long that I'm right.
Okay. So.
You know your gut feeling it's based on what your customers are actually doing.
Yes, we get written.
Demand schedules and manufacturing schedules going months into the future [noise].
Is it just me, but we know some of these guys is these big Hyperscale customers that revenue was up like 40 or 50% year over year on six in 10 billion dollar numbers.
You know I noticed there and digestion mode, but wouldn't you think that that's sort of increasing business would drive your key customer that to be back at the table in a significant way here soon.
Yes.
That's all the questions I have now thank you.
Mr. Datsun Mr. learner. Thank you for your information that you shared with US today, we have no further.
Yes, I'd like to turn it back to our leadership team for any additional or closing remarks that you have.
Well I just want to thank everyone for today's call and I Hope you and your families are they.
During the unprecedented time [noise] and look forward just speaking you guys <unk> quarter, and then well be back on the phone in 90 days. So thanks, everyone.
Ladies and gentlemen, this does conclude today's teleconference than we do thank you all for your participation. You may now disconnect your lines and we hope that you enjoy the rest of your evening.
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