Q1 2021 Quantum Corp Earnings Call
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Good day, ladies and gentlemen, and welcome to your quantum fiscal first quarter 2021 earnings call and webcast. All lines have been placed on to listen only mode and the floor will be open for your questions and comments following the presentation [noise].
You should require assistance throughout the conference. Please press star zero to reach a live operator at this time, but it's my pleasure to turn the floor over to your host Rob think Sir the floor is yours.
Thank you operator, I'd like to welcome everyone.
Okay.
Yes.
One of those chairman CEO, Jimmy learner CFO Mike.
Please be aware that some of his comments made during our call today includes forward looking statements.
All statements other than.
Historically.
It could be going forward book.
Quantum advises caution reliance on forward looking statements.
When looking statements include without limitation any projection of revenue margin expenses adjusted EBITDA adjusted net income cash flow to the other financial items as well as anticipated.
Colin not easy Quanta financial results.
During the second element performance could share or competitive who more minutes relating to product or service.
We expect to time and.
All forward looking statements are based on information available to quantum on the date Europe. These statements involve known and unknown risks uncertainties and other factors that may cause actual results to differ materially from those implied by such forward. Looking statements include an unexpected changes in the company's business.
More detailed information about these risks that these risk factors and additional risk factors are set forth in quantum's periodic filings with yet.
Including but not limited to those risks and uncertainties listed in the section entitled Risk factors in Quantums quarterly report on form 10-Q, and annual report on form 10-K as filed with the Securities Exchange Commission.
Quantum expressly disclaims any obligation to update.
Forward looking [laughter], whether as a result with new information.
Sure event or otherwise and stuff like required.
[noise] also note that on this fall and somebody will be discussing non-GAAP financial information.
You don't see about fighting information to supplement the information prepared in accordance with accounting principles generally accepted them and units.
States or got you can find a reconciliation of these metrics the reported GAAP result, and the rest and says silly Asian table provided in the company's earnings.
I would like to wireline everyone.
Call will be available for replay of quantum's website for at least 90 days.
A linked to a website replay of this call is also provided in the earnings.
Which was issued this afternoon.
And it's on the company's website investors that quantum dot com.
With all that I'd like to turn on the call over to the chairman and CEO Quantums anywhere that you need to call is yours.
Thank you Rob and thank you all for joining us on today's call.
While this was a challenging quarter, it's clear that the worst is behind us.
I couldn't be more proud of the way our team has continued to deliver on our transformation strategy as expected the disruption of covert 19 led to a decline in revenues and impacted our profitability.
And our fourth quarter conference call just a few weeks ago. We said, we believe that the first FIS fiscal quarter would represent a trough in our revenues.
Now is were nearly halfway through the second quarter and based on our current visibility. We are increasingly confident that this is the case as we're seeing our business improve.
We are seeing steady in gradual recovery across the enterprise cloud government media and entertainment and other sectors.
We're seeing purchasing and procurement activity ramp up as well as encouraging signs of our customers starting to spend again on new projects and new business initiatives.
We're expecting a very strong quarter for our federal government business, we're seeing activity pick back up and movie TV and sports production and we continue to see traction of our growth initiatives from F series, Our series distributed cloud services and archive.
In response to the pandemic and the short term stresses it created on our business, we've taken steps to reduce expenses and streamline operations.
Our total operating expenses were 20% lower than in the period one year ago.
These cuts meaningfully reduced our breakeven point.
Combined with expected higher revenue plus the typical seasonality, which historically has benefited our second fiscal quarter should help us significantly narrowed losses in cash burn in the second quarter.
We continue to demonstrate Chris execution on our strategic transformation and innovation initiatives with the most product releases and innovation in our history.
We have four Hyperscalers veteran lab trials of our next generation keep cloud archive technology and the feedback we're getting is that we're pulling away from the competition.
We continue to view this business as it as a growth driver for quantum and why we're getting positive signals. It is unclear when volume purchasing world again.
We are executing against our transition to a virtualized software defined and converged architecture, featuring next generation policy driven data placement.
We're also enabling our technology to run both on premise and on the cloud, allowing our customers to operate in a hybrid multi cloud architecture.
We are currently in limited customer release of store next seven as well as our H series Nexgen software defined storage platform.
We have also deployed our 100% cloud version of Stornext at one of our key customers.
They're using this as the basis for their cloud studio initiative.
We will be rolling this software out two additional customers this quarter on a limited basis.
[noise] later this quarter. We're also entering limited customer release for enhanced Dxi software that can archive data to the cloud followed by the ability to run Dxi software entirely virtualized the on premise and in the cloud.
We are driving our active scale technology road map with near term enhancements for compliance and ransomware protection and making active scale available as software only.
Our recent certification as being ready object solution and Quantums expanded partnership in the active archive Alliance showed a continued momentum from this recent acquisition.
We have introduced Nvme me based edge collection devices, which are key to our economists and assisted driving vertical.
We've also established some key early wins in the video surveillance market with our newly expanded product line.
We're also making progress within our services business.
The usage of our cloud based analytics monitoring and management application has increased by over 250% year over year and is now connected to over 1500 systems worldwide.
Nine months after introducing our distributed cloud services, we have over 60 customers, who depend on quantum to remotely manage and operate their quantum solutions. We're encouraged by this progress which represents a significant year on year increase recognizing it is a new business for us.
I'd like to congratulate our services and support organization led by Eve Roomy a.
Who have achieved a net promoter score of 71 in June the highest customer satisfaction score in our company's history and well above similar scores from our competitors.
Looking ahead, we remain focused on growth driven by the exponential growth of large unstructured data in all its forms video images and other large files being generated by machines and devices at unprecedented rates.
We are confident the worst is behind us, we're seeing steady and gradual recovery and we are continuing to demonstrate Chris specs acumen honor strategic transformation and innovation initiatives.
We're looking forward to our virtual Investor day on August 26, well, we can go into more depth on the progress we are making on our transformation, our long term business and technology strategy and the opportunity we see for the future.
With that I'd like to turn the call over to Mike Dodson, our CFO to discuss the financials Mike.
Thank you Jamie welcome for everyone that has joined our call today.
As Jamie mentioned in his opening comments the first fiscal quarter 2021 was certainly a challenging quarter driven by the disruption of coded 19, and the related significant impact for many of our customers and a few of our key verticals.
Revenue was 73.3 million in the first fiscal quarter compared to 105.6 million in the year ago quarter and in line with guidance, we provided on our previous call.
The decline was driven by a 40% decrease in product revenue, primarily due to reduced demand for secondary storage systems. As a result of covert 19 pandemic and fluctuating purchase cycles and our Hyperscale business.
Service revenue was down 9% in the first fiscal quarter compared to the same quarter last year, which reflected additional downward pressure due to covert 19, resulting in lower renewal rates and fewer system installations.
We also experienced a decline in royalty revenue, primarily due to an overall decline in market unit volumes.
Royalty revenue of 3.2 million for the first fiscal quarter continue to be relatively light compared to historical periods.
The adoption of LTL weight has lagged expectations, primarily due to attractive pricing for LTL, seven and customer anticipation of the next generation LTL nine as is expected to be launched later this calendar year.
Gross margin in the first fiscal quarter was 42.1%.
Compared to 43.4% last year.
Gross margins contracted modestly primarily due to spreading fixed overhead costs over lower revenue combined with lower high margin royalty revenues.
In total operating expenses in the first fiscal quarter decreased 20% to 34.3 million or 47% of revenue compared to 43.1 million or 41% of revenue in the same period last year.
The 8.7 million decrease in operating expenses was driven by 38% decrease in general and administrative expenses.
27% decrease in sales and marketing.
Which were partially offset by a 21% increase and research and development.
The 7 million.
Decrease in general and administrative expense in the first fiscal quarter compared to the same period, a year ago was primarily a function of higher costs in 2019.
Related to the financial restatement.
Hi, infrastructure expenses and bad debt expenses.
This was partially offset by an increase in headcount and stock compensation.
The decrease in sales and marketing expense in the first quarter compared to the same period a year ago was driven by an overall decrease in headcount.
Reduced compensation on lower overall revenue.
A decrease in marketing programs professional services costs and reduced travel and entertainment expenses due to the current cobot 19 related restrictions.
Research and development expenses were 10.2 million in the first fiscal quarter up 21% compared to 8.4 million in a year ago quarter.
This increase was primarily attributable.
Attributable to an increase and research development headcount focused on new product development.
Related to our share count used for the per share calculations I wanted to provide more color.
Given the differences in calculations between a loss period and an earnings period and the further impact for the warrants issued in conjunction with our recent credit agreement Amendment.
Our share count is not a straightforward calculation.
At the end of Q1, and a loss position our shares used to calculate the shift the loss per share was 39.9 million.
For the same period, assuming a profit and the warrants were outstanding the entire quarter the share count for per share calculations.
I would have been 47.1 million.
Ultimately the total number of shares outstanding when all employee awards are vested and warrants exercised is 53.9 million.
GAAP net loss in the first fiscal quarter was 10.7 million or 27 cents per diluted share compared to a net loss of 3.8 million or 11 cents per diluted share in the year ago quarter.
Excluding stock compensation restructuring charges and nonrecurring charges adjusted net loss in the first fiscal quarter was 6.8 million or 17 cents per diluted share compared to adjusted net income of 5.4 million or 13 cents per diluted share.
In the year ago quarter.
Adjusted EBITDA in the first quarter was 1.4 million compared to 13.1 million in the year ago quarter.
There is a full reconciliation of our non-GAAP results to the most recently comparable GAAP measure and both the press release and form 10-Q release today.
Now looking at the balance sheet liquidity and cash flow.
Cash and cash equivalents were 29.1 million as of June Thirtyth 2020, compared to 12.2 million as of March 31st 2020.
Both balances include 5 million unrestricted cash required under our credit agreements and point 8 million of short term restricted cash.
During the first fiscal quarter, we completed several transactions that strengthened our balance sheet and an improved liquidity.
First we amended our revolving credit line and term loan securing an additional $20 million, an incremental liquidity and negotiated more flexible loan terms and conditions.
These credit facilities expired on December 27.
2023.
In terms of the 2020 term loan credit agreement are greater than the terms of our 2020 term loan a credit agreement are substantially similar to the terms of the existing term loan.
Including in relation to maturity security and pricing.
In addition to the customary closing at amendment fees, we issued 3.4 million warrants with a strike price of $3 to our term loan lenders.
Second we secured an additional 10 million and liquidity from the paycheck protection program or pp.
This loan bears interest at a fixed rate of 1% per year.
With interest deferred up to a maximum 10 months.
Has an initial term of two years and is unsecured.
Under the terms of this loan we may apply for forgiveness of the amount due on the alone.
We have utilized the proceeds from the PPP loan for qualifying expenses and intend to apply for forgiveness of this loan in accordance with the terms of the loan agreement.
At this time, we cannot be assured that the PPP loan will be forgiven, partially or fully.
With these transactions, we have greater flexibility with our financial covenants as we continue to rationalize our cost structure and shift our focus to higher value higher margin sales opportunities aligned with our customers needs.
Outstanding debt as of June Thirtyth 2020 on a gross basis was 195.2 million.
And on a net basis was 170.6 million after netting 24.6 million and unamortized debt issuance costs.
This compares to 167.8 million of outstanding debt as of March 30, Onest 2020 kind of grow spaces and on a net basis was 154.1 million after netting $13.6 million and unamortized debt issuance costs.
Net cash used in operating activities was 9 million for the first fiscal quarter.
This compares to net cash provided by operate activities a point 9 million in the comparable period last year.
The approximate $10 million difference is primarily attributed to the higher net loss of $10.7 million in the first fiscal quarter as compared to a net loss of 3.8 million in the same period a year ago.
Plus almost 5 million more networking capital use in the first fiscal quarter compared to the same period.
In the prior year.
Finally, turning to our financial outlook.
The continuing uncertainty in the overall economy as a result of the cobot pandemic limits our visibility.
And we therefore will now provide full year guidance at this time.
However, as we discussed in the opening remarks on this call. We are increasingly confident that the first fiscal quarter represents a trough in our revenues and we have a clear line of sight to second quarter revenues that represents a double digit sequential increase.
Our outlook for the second quarter includes.
Revenues of 83 million plus or minus 2 million.
Adjusted net loss of 3 million plus or minus point 5 million.
Adjusted net loss per share to be eight cents.
Per share plus or minus one cent per share.
And adjusted EBITDA of 5 million, plus or minus 1 million.
With that I'll turn the call back to Jamie for closing comments, Jamie Thanks, Mike.
Proud of how the quantum team executed in the first fiscal quarter as missed a dynamic and challenging environment.
We are advancing our long term transformation strategy. According to plan and I'm confident that the rebuilt earnings power of quantum will become increasingly apparent as we navigate through this crisis and expand our leadership.
In managing and retaining video and unstructured data.
As I mentioned, we will be hosting a virtual analyst and Investor day on August 26. This event will provide us an opportunity to share a deeper and more comprehensive log into our long term vision to transform into a leader of video and unstructured data solutions over viewing our dry.
First of all markets technology strategy and financial goals.
This event will serve as a unique opportunity to hear from the key executives that are driving our business transformation as well as some industry experts and customers.
Additional information on this event will be made available on our IR website and I Hope you will consider joining us so what we hope will be a meaningful opportunity to learn more about quantum.
With that we will now take any questions you may have operator.
Thank you ladies and gentlemen, the floor is now open for questions.
If you do have a question. Please press star one on your telephone keypad at this time, if you're using a speaker phone we ask that while closing your question you pick up your handset to provide the best sound quality.
Again, ladies and gentlemen, if you do have a question on common press star one on your telephone keypad at this time, we'll take our first question from Craig Ellis with B. Riley FBR. Please go ahead Sir.
Yes, Thanks for taking my question and congratulations on continuing to execute this transformation through a difficult period guides.
Jamie in your prepared remarks, you mentioned that there're a number bearings.
On your end markets that are coming back and showing signs of strength came from was one of them.
I was hoping you could elaborate a little bit more and what you're seeing in that government vertical not just for the current quarter, but you should look out over the next few quarters, how do you see that trajectory going.
Yes, I mean.
Surely this quarter is strong because it's the government ended the year, it's governments swapes.
So we're seeing a lot of strength, but not just in this quarter, but I think for subsequent quarters.
We're seeing unstructured data.
Being pervasive across civilian and.
DLD.
Activities.
We're seeing more data being archived.
The data being a richer and larger.
And we're seeing increasingly the incredible speed up stornext being used for more analytics.
And more storage applications.
Not just involving video, but and photography, but expanding more into unstructured data machine generated data and we're just seeing wider applicability.
Of our solutions and I think.
It's also an area, where we're just putting more sales execution.
Investment we're building our team out we're building out our partner ecosystem and just putting more intense focus in and around not just our us government but.
Met our government business globally.
That's helpful and I think in the past you commented on.
Strength in the healthcare vertical as well so im just wondering if you could expand the scope.
The discussion a little bit too as we look at the activity outside the traditional media and entertainment vertical into some of these new verticals, where you've got some good growth.
Yes, what we're seeing in health care as just an explosion in the generation of unstructured data.
Clearly everyone knows that medical imagery X Ray MRI and patient records, but we're also seeing a lot of activity in bio informatics.
Hi genomics.
Right.
Forms of drug development.
Testing that are just creating a clinical trial data on machine generated data.
Very complex correlations between data and increasingly we're seeing people turn to our primary storage technology for its its speed and then all this data is just data that's never thrown away.
So the fact that are high speed data is very tightly coupled with our long term hundred year archives.
Has really increased our relevancy in that area.
I'd say, we're at the beginning phases of becoming experts sellers into healthcare. We've we've played in health care for many years, but we're really beginning to sharpen our capabilities to work in healthcare vertical to have all the various certifications and comply.
Thanks.
Pieces that we need and then also with a partner ecosystem and we're just starting new getting better at that I think thats, we still got a few years to go to become world class at that but I think we've come a long way and we're certain serving over 200 hospitals today.
Okay.
That's helpful. And then let me follow up on Hyperscale comments I think you said you had floor.
Hyperscalers in advance product evaluation, but I think.
If I rebound the clock, maybe three months five months I would've expected get comfortable so it seems like a couple more hyperscalers have come in.
When maybe more in a better case view could we expect to see material revenues from one or more and.
And.
Would be more about base case few potentially meaningful revenue.
Yes, I mean I think.
The advancements that have occurred are.
We have a new next generation deep cloud archive technology.
That is now physically available on shifting the customers.
There are four of the world's largest hyperscalers that are using that technology, either an hour laboratories are there laboratories.
On.
Several have paid for that.
Hardware and several are in [noise].
Volume trials, meaning you know 10 racks are more of equipment being tested so we're much further along.
I think we have also gotten very strong signals that we've been selected as the go forward technology and the phase we're now entering into is.
Demand planning.
When are they going to need the equipment at what volumes how is it kind of be supported so where we are moving from the trial phase into.
The manufacturing delivery phase.
Theres still much to be clarified there, but we are with one in particularly we're exiting the trial phase and really beginning.
Demand planning.
That's helpful and then one for Mike the price to before the others, Mike repeatedly in the prepared remarks, the current quarter was characterized as one on seasonal strength.
As we look beyond the current quarter not looking for guidance, but how should we think about the seasonality of the business beyond the current quarter for the answering your question. Thanks guys.
Yes sure.
As Weve discussed the next quarter is a seasonally strong quarter with the federal government. The yearend beyond that I think when we think of our strengths and what we would expect revenues to be we have the recovery from the co that pandemic as a strength behind that.
So I think Vettel overweight any type of seasonal activity. When you look at the last two quarters or to the back half of this year.
So we feel good about next quarter, and we'll give more guidance.
As we report next quarter, but I think it's going to be more recovery driven beyond this quarter.
Fair enough thanks, guys.
Okay.
We'll take our next question from Chad Bennett with Craig Hallum. Please go ahead Sir.
Great. Thanks for taking my questions I'll try to be brief so just it's great to see the the strong sequential.
Rebound this quarter and I think I remember, Jamie if correctly on your last call you talked about.
Your existing hyperscaler kind of coming back.
From a from a shipment standpoint.
Potentially this quarter. So I guess the question is.
Is that happening and then how much of the strong sequential is from that existing hyperscaler versus the seasonal strength from the fed in just getting back to business.
Yes the.
Our.
Our current install base customer is.
I would say back to steady shipments they're not at.
The highs that they've been with.
With us, but what I like about where we're at now as we're at a steady rate and we're a little less of a highs and lows state or a lumpy state they they've got a much more steady.
We've worked with them to.
To achieve a steady quarter over quarter delivery schedule instead of a.
Start and stop delivery schedule, which obviously allows us to run our factory in a much more efficient way.
And.
Regarding military I would say the up we're seeing right now is mostly attributed to strength and us federal and strength in our increasing rebound in general enterprise.
No that's great color and then maybe a follow up for Mike Mike just in terms of.
A little bit of how we view.
A segment of revenue that being royalty.
You know should we expect somewhat of a rebound there tend to not only in the current quarter, but.
Throughout the year based on what you see right now and then second question is on on gross margin obviously were.
We're getting pretty good sequential increase here in revs and more scale to lower labor layer over the fixed costs there.
How should we think about gross margin improvement from here. Thanks, Yeah. Yeah. So first the royalty revenue, there's really I think the key there is going to be that adoption of LTL nine so until we get to that point.
I think you're going to see the business pretty much at the levels that we saw in Q1.
And once that gets that level, it's always a little bit of a delay right. So there that are expecting to introduce this why they ended the year. So it may not be actually in our results by the earlier, but beyond that as its adopted we should see a healthy bounced back from that.
As far as our margins.
We would expect our margins to be a little better in Q2.
You know what they've the government business typically is a better margin for us so that will help us despite having a lower royalty expectation there.
And of course with a higher revenue forecast.
It allows us to spread those fixed costs over a larger revenue base. So I think we should see a little bit of improvement on the margin from.
Good to hear.
Good to hear things in a it's good to see the business rebounding.
Okay. Thanks, Joe.
We'll take our next question from Ryan Myers with Lake Street Capital market. Please go ahead Sir.
Hi, guys. Just one question for me can you give us some color on what you guys are seen in the supply chain right now and if there's any sort of constraints.
Hey, Ryan as Jamie.
Right now and supply chain is surprisingly healthy.
We're not seeing long delays.
There was a time, where we were seeing some delays in just shipping lanes.
Whether they were.
True shipping lanes or flight availability.
Just because the air traffic had been our flight had been so restricted but right now.
We're not taking any.
Precautions or kicking back what we think we could achieve because we're worried about supply chain I, it's just not showing up as an issue for us at this time.
Great. Thank you. This issue I mean, if if you want to pinpoint the biggest issue up we need that New York and allocate to start filming television and movies again.
I mean, it if you want to figure out how do we get from 83 backup to historic levels.
Single biggest thing would be for sports movies and television to begin again.
We're seeing them begin in Australia people are filming in Iceland people are filming in Euro side, I mean, New York and Alway our.
Our at a standstill.
In music recording and television in movies and sports is on shorten seasons, and a stop and go state.
That's really I think right now fewer to put eight.
What is coded restraining that vertical up while its opening up.
It's still far from historic levels for those reasons.
Great. That's helpful. Thank you.
That will conclude our question and answer session for today, we'll now turn the floor back over to Mr. learner. Please go ahead Sir.
All right well thanks, everyone for joining US today, we hope you made us on August 26 for our Investor Conference and we'll go off for a deep dive on our strategy and a four hour session at that time. So thanks, everyone.
Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation you may disconnect. Your lines at this time and have a great day.
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