Q3 2021 Quantum Corp Earnings Call

[music].

Good afternoon, everyone and thank you for participating in today's conference call to discuss quantum financial results for the third quarter of its fiscal year 2021.

At this time all participants are in a listen only mode. The question and answer session will follow the formal presentation.

I know once you require operator assistance during the conference. Please press Star zero on your telephone keypad. As a reminder of this conference call is being recorded I would now like to turn the conference over to Leann Sievers with Shelton group.

Good afternoon, and thank you for joining today's conference call to discuss quantum third quarter of fiscal 'twenty 'twenty, one financial results I'm Leanne Sievers President of Shelton Group Quantum's Investor Relations firm, joining me today of Jamie Lerner, Chairman and CEO and Mike Dodson. Our CFO. This afternoon, we issued a press release, which you can access the copy on quantum's website at <unk>.

Ww the quantum dot com under the Investor Relations section. There's also a slide presentation that we will be using in conjunction with today's call that may be accessed through the website link on the IR website and is also posted as a PDF in the Investor Relations section as a reminder comments made during today's conference call May include forward looking.

All statements other than statements of historical fact can be deemed as forward looking quantum advises caution and reliance on forward looking statements. These statements include without limitation any projections of revenue margins expenses adjusted EBITDA adjusted net income cash flows or other financial items as well as the anticipate.

The impact of the COVID-19 pandemic on Quantum's financial results any statements concerning the expected development performance and market share or competitive performance relating to products or services. All forward looking statements are based on information available to quantum on the day hereof.

These statements involve known and unknown risks uncertainties and other factors that may cause quantum's actual results to differ materially from those implied by the forward looking statements, including unexpected changes in the Companys business more detailed information about these risk factors and additional risk factors are set forth in quantum's periodic filings with the Securities and Exchange Commission.

<unk>, but not limited to the those risks and uncertainties listed in the section entitled Risk factors in Quantum's quarterly report on form 10-Q, and annual report on form 10-K as filed with the SEC 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 applicable law. Additionally, the company's press release the management statements. During this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms included in the company's press release for definitions and reconciliations of GAAP to non-GAAP items, which provide additional details of those of you unable to listen to the entire call.

At this time, a recording will be available for at least 90 days in the Investor Relations section of Quantum's website now I'd like to turn the call over to chairman and CEO, Jamie Lerner Jamie. Please go ahead.

Thank you Leigh Anne and thank you all for joining us on today's call.

Earlier today, we announced.

Solid results for our fiscal third quarter with revenue exceeding our guidance and demonstrating our second consecutive quarter of sequential growth coming off the COVID-19 related lows in the first fiscal quarter.

Also as outlined in the press release, we expect next quarter revenues to be well over the current street consensus and sequentially flat and what is typically the seasonally weak quarter.

I'm encouraged by the progress we are making in our transformational growth initiatives as well as the gradual recovery we are seeing in some of our core vertical markets.

Our results from the third quarter reflected the combination of factors, including initial recovery in our core media and entertainment and data protection businesses as well as the sequential and year on year growth in new use cases and markets driven by new product introductions and our recent acquisitions.

I'll talk about some of these highlights in a moment.

We also made significant progress during the quarter in terms of the advancing our strategy and vision to be the leader in video and non structured data solutions during the quarter, we expanded our portfolio of solutions to store manage and protect unstructured data across its lifecycle.

While advancing our transition from a hardware centric business that is representative of the one time purchase two of software solutions oriented company with the recurring revenue model.

In November.

We introduced our next seven our all terrain file system Etfs.

And then the expanded active scale object storage portfolio.

All of which are targeted to be available on a subscription basis.

Store next seven the latest version of our award winning file system.

We've added new features so that our customers can leverage the performance of nvme storage to speed up production reduce data center costs and simplify their network infrastructure.

We've also made store next seven easier to manage with the streamlined and simplified user interface.

Our Etfs network attached storage platform offers new levels of visibility into the data by integrated data classification.

It is easy to deploy ease of use and prospects can download and install a TFS to trial it and see how it can help them better manage their valuable file data.

We also expanded our active scale product line with new models and new features to help customers secure their data against ransomware and other forms of cyber attacks.

Although in the very early stages of ramp up with customers. We are encouraged by the early traction we are seeing in fiscal Q3 from these new products.

Also earlier this week, we announced the launch of the H 2000 series of hybrid storage arrays based on the same software defined architecture as our award winning F series.

This new line is more tightly integrated with store next and as the platform is the basis for future product offerings.

As an all in one media clients that will run store and Cat D. D. In a single H series hyper converged storage server.

We also added Cat D V to our portfolio of December through our acquisition of square box systems.

The B is an AI analytics software platform that helps customers unlock the business value in their data and also add the growing and profitable software business unit to our portfolio.

We are already working on integrating <unk> with our store next product to expand our market reach and growing video production segments, such as corporate video sports government and education markets.

The potential to eventually expand the software to other markets such as genomic research autonomous vehicle design for <unk>.

Oh spatial exploration.

And the use case dealing with large unstructured data.

We are excited about the potential to grow and scale of this business as an AI analytics platform for video.

It'll images and other forms of valuable filed data.

With the addition of Cat D B, along with other new products. We've introduced in the last year. We have now built a comprehensive portfolio for analyzing and enriching video storing and protecting data and managing it across its lifecycle.

Our expanded portfolio of further solidifies our leadership position in video and unstructured data solutions.

And we are seeing the results materialize with our average deal size is steadily increasing as we sell more solutions with more services wrapped around them.

Some of the additional highlights from fiscal Q3 include.

24% sequential profit growth driven by a combination of market recovery and contributions from our new products <unk> and.

And the initiatives.

Our revenue contribution from new products was up significantly year over year and quarter over quarter.

And although starting from a small base. We are encouraged with how our expanded portfolio is resonating with customers and partners.

We closed our first software subscription deals for the new products, we introduced in November.

And we had solid active scale quarter after rebuilding the pipeline in the first part of this year.

We are also pleased with the progress we've made transitioning from product to solutions sales.

Our average deal sizes have been increasing steadily over the past two years and increased 24% year over year.

We closed a record number of six and seven figure deals in the quarter, we are deploying larger and more complex solutions and as a result are increasing our footprint and relevance at key customers and partners.

We're also doing a better job of attaching services, which further contributed to the robust size of these wins.

Although our Hyperscale business is lower in the first nine months of our fiscal year than the same period last year.

For the current quarter Hyperscale revenues grew sequentially and year over year, we expect for the full year. The hyperscale business will be nearly at the same level at last fiscal year.

As I've been discussing with you in the past working with these important of Hyperscale customers has enabled us to truly showcase of the competitive advantages quantum offers and the unrivaled expertise and unique customization that our engineering team is able to provide.

These relationships not only help establish strong market credibility for quantum of it.

It also enables us the opportunity to sell <unk>.

High value solutions to meet their archiving storage needs.

Providing the archive solutions and infrastructure to the world's largest hyper scaler will continue to be of growth driver for us.

And we are now extending our leadership position in that market and bringing it to web scale companies as well as large enterprises.

Many of these organizations are also generating massive amounts of valuable unstructured data that must be kept indefinitely.

And much of this will not reside in the public cloud this will be a key initiative for us as we move forward and represents a larger opportunity to deploy quantum of software and services along with tape hardware.

Lastly, as further validation of our vision and transformation strategy over the past few months, we have continued to attract the very high level of top of storage software and services talent to quantum most.

The most recently, Brian Koloski joined Us.

As our Chief development officer, bringing years' of experience developing leading innovative storage solutions.

As chief architect of pure storage, Brian the improved overall user experience for all flash storage platforms previously at net App. He was the 18th of employee playing a key role in the company's expansion.

Over nearly two decades and early in his career. He served as co architect of the network file system protocol at Sun Microsystems.

We also appointed Rick Valentine as our SVP and customer service officer with deep expertise in building and leading services.

And as the service businesses, including Silver peak systems, whereas work in improving the overall customer experience contributed to its acquisition by Hewlett Packard Enterprise.

<unk> also worked as chief customer officer at Symantec.

Baryton software, leading customer success for the technical support software portfolio.

We have also added key executive talent in the international and channel sales.

Specific focus on expanding our depth of expertise and advanced software solutions Dave.

Dave Clark the former CEO of square box system has been appointed general manager for our newly formed cloud software and analytics business unit.

Prior to square box systems, Dave work as head of technology delivery and Deputy Chief Technology Officer at L. Max of diversified financial Technology Company.

In addition, enable as director of Engineering project and program management at Mcafee.

The success in attracting key experienced industry talent is a testament of our business transformation strategy and one of them.

The accelerate our transition to a software and services led business with the.

That I will turn the call over to Mike Dodson, our CFO to discuss the financials Mike.

Thank you Jamie welcome to everyone, who has joined our call today.

As Jamie mentioned in his opening comments, our third fiscal quarter 2021 demonstrated the continued sequential revenue growth for the second consecutive quarter from the Covid related low reported in the March 2020 of quarter.

Revenue increased 14% sequentially to 98 million exceeding our guidance of $91 million to $95 million.

Compared to $85 8 million in the previous fiscal quarter.

Revenue growth in the quarter was driven by sequential increases across the revenue categories.

Primary and secondary storage systems for <unk>.

L T devices and media.

This reflects the broad based.

Coverage across our traditional market verticals combined with increasing contribution from our new products as our software strategy is resonating with customers.

We're also encouraged by the early signs of a recovery in our media and entertainment business keeping.

Keeping in mind the year to date revenue is running just over half of last year's level for the same period.

This reflects the significant impact Covid has had on this end market segment.

Gross margin in the third fiscal quarter was 43, 1% compared to 45, 1% from the prior quarter.

The 45, 6% last year.

The sequential and year over year decline is for <unk>.

I really do the product mix with product revenues up 24% sequentially and two of them.

Lesser extent.

The lower contribution from service of royalty revenues of a year over year basis.

GAAP operating expenses in the third quarter increased 1 million for $36 2 million or 36, 9% revenue compared to $35 2 million or 41, one percentage of revenue in the prior quarter.

And $35 4 million or 34, 3% of revenue from the year ago period.

Non-GAAP operating expenses during the third fiscal quarter for $33 7 million, an increase of $2 6 million sequentially and point of $7 million from a year over year basis.

The sequential increase in operating expenses was primarily due to an increase in sales commissions due to the higher product revenues as well as in the increases in marketing the efforts to support our new product releases.

<unk> of our leadership team.

GAAP net loss in the third fiscal quarter was $2 7 million for a loss of seven cents per share.

Territory of net loss of $4 6 million.

Or a loss.

Of the 11 per share from the prior fiscal quarter net.

Net income of $4 7 million for 10 cents per diluted share in the year ago quarter.

Excluding stock compensation restructuring charges and nonrecurring charges. The non-GAAP adjusted net income in the third fiscal quarter was 10000 or breakeven on a per share basis.

Compared to adjusted net loss of 212000 or a loss of <unk> <unk> per share in the prior quarter.

Adjusted net income of $7 3 million or <unk> 16 per diluted share in the prior year period.

The share count used to calculate GAAP loss per share was $40 3 million shares.

Whereas for non-GAAP fully diluted share count was $49 2 million shares due to the profit in the quarter.

Adjusted EBITDA during the third fiscal quarter was $9 4 billion and the increase from $8 9 million of the prior quarter.

But down from the pre Covid peak of $14 7 million in the third fiscal quarter of 2020.

There is a full reconciliation of our non-GAAP results for the most directly comparable GAAP measure in both the press release and the form 10-Q released today.

Now turning to the balance sheet liquidity from cash flows.

Cash and cash equivalents were $17 4 million at December 31, 2020 kind.

For the $12 3 million at March 31, 2020.

Both balances include $5 million in restricted cash required under the credit agreement for 8 million of short term restricted cash.

Adjusted working capital increased by $6 8 million during the third fiscal quarter to $66 7 million from $59 9 million at the end of the prior fiscal quarter.

This increase was primarily the result of the buildup of accounts receivable reflective of the higher revenue levels for the quarter.

Outstanding debt at December 31, 2020 on the gross basis was $201 2 million.

On a net basis was $180 2 million after netting $21 million and under amortized debt issuance costs.

This compares to $195 2 million of outstanding debt at September 30 of 2020 on the gross basis.

And on a net basis it was $172 4 million after netting $22 8 million in unamortized debt issuance costs.

Related to the term debt credit facilities. There is a holiday period for certain financial covenants through June 30 of 'twenty 'twenty one.

During the third fiscal quarter, there was a small draw on the company's credit line and the amount of approximately $6 million, which was due primarily to the timing of cash receipts at the end of the quarter.

He used to pay for the balance this amount has been paid down during the fiscal fourth quarter.

Since our analyst day back in August.

We've outlined the strategy to address the overhang on the revaluation created by the legacy high cost of term debt.

As you May recall, we had negotiated a more favorable equity clawback provision that allows us to pay down up to 50% of the outstanding term debt.

The reduced call premium of 5%.

This is available to us until the expensive make whole call provision expires on June 27th of this year.

As such on November 20th shifts, we filed an S. Three registration statement for $200 million.

$50 million of which has been allocated to of half the market or ATM equity facility.

We have not yet sold any shares under this facility since we've been in our quiet period related to our quarterly release of financial results.

We plan to utilize this ATM facility Opportunistically.

It's not something we need to do but rather it is a tool to take advantage of the equity clawback provision to help us reduce the debt over the next several months.

Excluding up to $3 million representing of the initial cash payment for for the square box acquisition. All proceeds from this offering will be used to pay down the term debt.

Following the exploration of the make whole provision in June the optionality to address our capital structure increases significantly.

And we have stated previously we will be considering a number of refinancing alternatives.

Okay.

Related to kind of all of us generating from operations for the first nine months of fiscal 2021.

Before the effect of changes in the assets and liabilities net.

The cash generated by operations was $4 4 million.

The use of cash resulting from changes in working capital accounts represented $24 5 million, consisting primarily of increases in inventories.

And decreases in accounts payable and deferred revenue.

The other uses of cash during the period included capital expenditures of $4 9 million.

$2 6 million net part of the initial cash payment for square box systems.

The other sources of cash during the first nine months period of fiscal 2021 included net borrowings of term debt of $19 4 million.

And borrowings of $10 million under the payment protection program, which we expect to be forgiven in accordance with the terms of the loan agreement.

As our business approaches the pre COVID-19 levels.

We address the significant interest payments on the current term debt.

We expect free cash flows out of the paces to surpassed the 20 million modeled from fiscal year 2020.

This represented a limited impact from Covid.

Finally, turning to our financial outlook as Jamie mentioned, we expect continued recovery across our market verticals and increasing contribution from our new software solutions, resulting in our expectation of revenue for the fourth fiscal quarter to the $98 million plus or minus three.

Well over the current street consensus and represents sequentially flat revenue in what is typically a seasonally weak quarter for the company.

Non-GAAP adjusted net income slash loss is.

As expected to be breakeven.

Plus or minus $1 million adjusted earnings per share slash net loss per share of breakeven plus or minus <unk> <unk> per share.

And adjusted EBITDA of $9 million, plus or minus $1 million.

With that I'll turn the call back to Jamie for closing comments.

Thanks, Mike.

In summary, this was the very solid quarter for quantum of the second consecutive quarter of growth.

And the second quarter of exceeding guidance.

We demonstrated significant progress toward our transformational initiatives grew our business sequentially, both in our core markets and outside of our core markets.

And added key new products to our portfolio to drive software and recurring revenue growth.

With that we will now take any questions you may have operator.

Ladies and gentlemen, the floor is now open for your questions. If you have any questions and are dialed in via the phone. Please press star One star one on your telephone keypad webcast participants can ask questions through the webcast player. Please hold them on the wall and poll for questions.

Your first question from the phone line is coming from Craig Ellis.

Your line is live.

Thanks for taking the questions and congratulations on the strong results and outlook guys.

Housekeeping item to start Mike.

Mike versus the fiscal third quarters 93 million dollar guidance mid point, where was the primary source of upside in the different businesses and then I think Jim you mentioned and you mentioned that the fiscal fourth quarter is typically seasonally weaker so part of given that you are outperforming that what are some of the the.

It gets and takes across either.

Customer groups or different product groups.

Yeah.

Relative to our guidance as we outlined line in the script, we really saw an increase across all of the products.

All of the verticals.

Everything.

It was up with the exception of service was plus or minus flat. So.

So we really saw a broad based recovery in.

In our business really.

Explains for large parts of the $98 million for the quarter.

Okay, and then Gibson takes in the fourth quarter Mike.

Yes, we have given guidance of $98 million staying flat.

That is reflective of again of a stronger business environment the.

The than the typical seasonal decline.

Again, we see strength in the Hyperscale scale of business.

We expect meeting the entertainment to continue to recover we're cautious there but.

That should be.

The stronger going forward.

Those of the key drivers.

Got it.

Maybe turning to some of the comments about the new products. So.

One segue into the question, noting the for the second consecutive quarter product gross margins was 31%. So nice gross margin I think consistent with what you.

<unk> suggested in the past Jamie that you wanted to drive the portfolio towards higher value. So so the gross margin question because this one.

Is that 31% level and products really of bubble that is now of sustainable or would we expect there to be gives and takes with that.

With regard to square box an.

Act of scale and some of the products that were refreshed in the world.

For launched in the calendar fourth quarter, what should our expectation be for their materiality as we go through calendar 2021, how how.

How substantially could could those businesses grow and become.

Okay.

Yeah.

Strategically.

Our goal is.

To sell larger deals.

The larger deals are a result of combining multiple products together into a solution versus the point product sale and more and more of the glue the ties multiple products together.

Is <unk>.

Software, whether it be deployed on premise or in the cloud.

And so.

Our goal is to be driving higher margins through a greater mix of software greater mix of services and of greater value by taking on more complex solutions than just an individual product sale.

Now.

Exactly how the model that and how that's going to take place.

From my point of view, we're in the very early days of that and simply don't have enough.

Customer and sales data to be able to.

Characterize the speed in which that transition is going to take place I mean, Mike you may be able to give better detail than that but.

We really just started putting these software products out in November and I.

I just don't think we have enough data as to the speed in which we're going to make this transformation yet to be able to.

Characterize.

Our multi quarter.

Trend yeah.

Yeah, Craig what what I would add to that is it is very difficult for us to the forecast the rate of the transition I mean every quarter as it builds more scale, we intend to provide more metrics from the information related to the software business the subscription business.

But at this point, it's just hard to tell we've just started and we just announced these products from the Oklahoma.

We're just starting down the path.

Fair enough, Mike and the and thanks for the color Jamie the paucity of guys.

Nice progress with the Hyperscale revenues within.

Within the secondary I'm wondering if you can just give us an update on just engagement with that customer set more broadly.

As we go through calendar 'twenty, one should we expect the number of of customer engagements. The number of customers for which you can derive revenue to expand beyond the current three and if so any color on geographic mix or other dynamics would be helpful.

Yeah, I mean, I can speak to our strategy I mean clearly.

We've got a tiered strategy.

We put a lot of energy in our sales efforts with the top eight to 10 cloud and Hyperscale customers just because of just how massive their buying power is.

But we also put energy to the.

Next 200, or so accounts beneath that in the web scale companies.

Maybe not at Hyperscale, but they certainly are certainly of the scale and then the global 2000, all of which have data they need the archive for.

Decades, if not longer.

And our strategy there is to increasingly.

Solve archived problems with more software cataloging software data movement software all of the software that's needed to organize.

An archived that could have.

$100 million of several billions of files in it.

And that's our strategy obviously, we started at the top of the pyramid, but we're pressing down.

And the goal is we need much more diversity in our install base.

Having one or two very large customers is great but the.

That comes with all of the issues of having just a handful of customers. So we are we're broadening out that base much more widely and broadening the customers that place more value on our software and more value on our services. So that we can drive the margin.

More aggressively than you can with the.

The top three or four players at the top of that pyramid.

That's helpful. Thanks, Jim Thanks, Mike.

Thanks, Greg.

Your next question is coming from Eric Martin Newsy.

Your line of five.

Hey, I had a follow up question regarding the media and entertainment vertical I'm curious to know if the.

You quantified the recovery by saying kind of initial recovery, obviously with the business with that vertical being off of about 50% versus a year ago.

Is your qualifier to say than that.

We think the things get better in December than we think they get better in March or is it just to say hey, they got better, but it's all relative versus the year ago.

Yeah, I would say they got better this quarter.

Significantly better.

And it's touching GAAP.

Right, we know that you cannot easily get.

You know.

Filming permits and New York and Los Angeles as you once were able to do we know that sports are still playing short or limited seasons.

Certainly in sports that rely on ticket sales are you now.

Still under pressure so it's an industry that's still significantly under pressure now it's.

There was a point in time when it was an industry that has stopped right I mean movie television in sports.

In the in our first first of all fiscal quarter.

They just stopped.

I mean, now it's moving again, but at a slower pace.

And <unk>.

It's my belief that it will continue to recover.

Almost in alignment to the.

Rollout of the vaccine.

And we're cautious, though because we've seen variance we've seen slowdowns in the vaccine rollout.

So I'm.

I'm optimistic about its recovery, but I'm also conscious that we.

We don't exactly know what what speed of what rate, what new twists and turns lay in front of us. So we're seeing improvement, but we're also.

We're not euphoric or cautious.

So if you were to look at pipeline in media and entertainment now versus 90 days ago.

How has that changed.

I'd say at the building and strength.

But I think people are still spending where they have to and they're not leaning into projects I think they're behaving with caution as well theyre not buying for one year two years out they're buying for very short range projects. So I think there's the.

Theres a lot of pent up demand, but theres a lot of caution there too and you know I think it's going to recover and correlation.

So how quickly they can rollout of vaccine and how effective that vaccine is I mean, it's a it's a business that's entirely characterized by humans Assembly.

Alright sports, it's about human Assembly, making a movie, especially out of feature film of two to 300 people assembled in close contact.

It's entirely about our ability to come in close contact and assemble people and to the extent that we can assemble people quickly with the vaccine. It will recover in the extent that it's drawn out it will take longer so it's directly correlated to the vaccine and in human Assembly.

Okay, and then the progress with the Hyperscale is I think last quarter. You said you were going to add two new in.

In the December quarter, and then a force in the fourth quarter or is that still on track.

Yeah, the businesses is on that trajectory.

Again, they don't always share their plans with us, but yeah, where we're loading more hyper scaler, we're starting a load of some web scales from telco. Some other other businesses as well further down that pyramid, but I think you characterized the rollout accurately.

Okay.

And then.

On the of the margin side, given the revenue roughly equivalent at least the at the midpoint for Q4 versus Q3, and the I guess the two.

Two part question the.

Should we anticipate similar opex in Q4.

And similar gross margin.

To get us to this EBITDA, that's roughly equivalent to the the.

Q.

At the midpoint versus Q3.

Yes.

The gross margin should be relative flat product mix relatively flat between Q3 and Q4.

We had a little bit of an unfavorable product mix in Q3 relative to Q2, and we saw that decrease in margin for <unk>.

<unk>.

And then.

When we your second part of the question was yes. The operating expense was partly out of the Opex go.

Go ahead.

Yeah, plus or minus.

As we enter Q4, you know some of the operating expenses become under pressure as it relates to.

For the annual audit of those types of things, but plus or minus there going to be in the same range.

Okay.

And then lastly.

Certainly <unk> been able to attract some quality talent Jamie.

Yep.

You've kind of got two lines from that kind of you do out of sort of two lines of business inside of the quantum there is your primary storage systems, you've got your secondary storage systems, you have been adding new products in both of those areas as youre, attracting this new talent from a product perspective, what do you think is the the appeal for whats attracting people to quantum.

Yeah.

You know I would characterize we have.

For core lines of business, certainly primary and secondary storage, but you know our cloud and analytics software is really where we are really expanding the business and differentiating and then our fourth line of business in our biggest business is our services business and more and more of our products.

We're gonna be delivered as a service.

So as we press that out there's really I think two things maybe three.

Or bringing the top industry insiders here.

Vs strategy I think the strategy is resonating with a lot of people who've been at very large bulge bracket infrastructure and storage companies.

I think they debut of the strategy as thought leadership.

And they actually.

Combine that with our culture.

They feel and I certainly feel that allows us to not only have that strategy, but to execute on it make the acquisition build the products make the moves we have to move to get it done.

So I think it's the it's both the validation of the strategy and the validation of this as a culture, where we can just get that work done.

I think those things are question marks two years ago, and now with the amount of customers is resonating with the top executives I think people just view it as.

It's a good strategy and the culture, where people can come and execute and be successful.

Thanks for taking my questions.

Good luck on the Q4.

Thanks, Eric.

Your next question is coming from Chad Bennett.

Your line is live.

Great. Thanks for taking my questions. So a few questions of just around the hyperscale or progress that you have made and I think it was Jamie in last call. I think you indicated a force hyper scaler, making production buys by the end of the fourth quarter of are we still on track for that.

Yes.

Now I think.

We're on track with them.

Finishing their qualifications.

Production buys.

Many of you track. This closely there have been delays in the L. T O nine rollout.

So a lot of the rollout that's happening you know what.

These three new commerce coming on around now it is not coincidental that the correlate to the rollout of LTE of nine.

And <unk> nine has now been delayed.

At least till June so.

There may be some impact of.

These newer customer siggi the fourth player.

Maybe holding out until L. T O nine and we'll have to see but they're certainly coming to the end of their.

Analysis of their trials their testing and they're coming down to their production rollout.

I think we'll just have to see how hard they hit the throttle on L. T O eight or if they wait a little longer for Algeo nine God and yeah. We're just gonna have to see how it plays out but I think the end result is the same I just.

I, just don't know how much they buy stuff when theres a whole new generation. That's the only 90 days or 90 days to 180 days away.

No I appreciate the color on that and then.

Probably different.

One of them, but you also mentioned.

Which I thought was pretty interesting you know new primary storage product into I think it was one of your hyper scalar that you thought you'd be able to sell into in early fourth quarter and then also on the software side Some management software around primary storage or maybe both primary and secondary.

That you thought you'd make headway in our this quarter can you address those I assume those arent really L. T O tied right. So.

Not necessarily I mean, I think you're pointing it to.

Trends one is.

For the.

You know a.

Cloud company has many different types of storage fast or slow storage cheap storage they have here.

Tiers of storage capability.

And.

What we're seeing now as we add more customers.

It is more of them are saying.

We don't just want your hardware, we actually want you or the software that allows us to write data the tape retrieve data organize data. So we're seeing a higher attach rate of software where you know some hyperscale is there like we just want your hardware and nothing else.

We'll take care of everything by ourselves I'm seeing more so the trend being.

We want tape and the software that manages tape and the storage software.

And management software and then allow us to build the enormous archives on the tape.

We're also seeing some of them, saying hey, there's some high speed you know we're not just interest in you for slow speed.

Archive software and archive storage. We're also interested in some of your high speed products for other use cases and youre seeing increasingly we are rolling out our high speed storage on the.

The top three cloud players and we will be making more announcements about that we're deploying on their edge storage.

And there's other engagements, where we're working with a variety of different hyper scaler on different tiers of storage. So yeah, I think where we went from just selling tape hardware to now selling Cape hardware tape management software.

Storage software.

And now some of our primary our software and hardware.

Got it and then and maybe you address a little bit just just kind of you know now that we're now that the new software products are out there and I understand it's still early but you are seeing some early success and in software and solutions selling and you're breaking into new use cases and the.

The fact that your product revenue has held up especially in the December quarter as much as it has in light of kind of a huge headwind on the M&A can you just give us a sense Jamie.

And I know it's early.

Kind of the use cases, and the solutions you're selling now.

And in.

Kind of incrementally where you're playing in whether it's in primary storage or in software or an in any type of management level layer of of the overall storage ecosystem.

Relative to where you were a year ago and in kind of what the.

What are you, replacing or what potentially would be competitive to you today that wasn't a year ago, if that makes sense.

Yeah, I mean I think.

There's the.

I think there is a technical question there and I think there's also a kind of vertical markets question.

You know I would say two years ago.

We sold predominantly the media and entertainment and enterprises wanting to do backup.

Yeah.

If you fast forward to today.

Yeah.

We now.

Can offer to the traditional customers both.

Enterprise backup and media and entertainment, we just have more to sell them.

So there were tiers of storage, we didn't use to have right. We didn't used to have flash storage. We gave up those sales to other people now we have that.

We didn't have mid range storage, we would give that up to someone like ice along.

At EMC now, we with the a G fast so we actually have that mid range.

Until we're filling out the tiers, so the existing customers, where we had gaps we now can sell them the full range of storage they need instead of saying you know you could buy some from quantum but you have to fill the gaps with other competitive vendors. We can now do and the N sales.

For the customers, who we've had for many years, we're going to sell the more.

Now, we're also gaining traction in new areas.

I know mix mean genomics is becoming really important.

Alright, everyone against COVID-19 has their genome sequenced to understand the impact of the.

<unk> the nations on upon their genome the impact of the illness on their genome and so just as the <unk>.

Society, we're collecting more genes were analyzing more genes and of gene is.

Kind of like a.

Television commercial.

You know in the sense that it eats up about that much data.

And so you have millions of millions of humans with lots of different genes in the end.

And sequences of their genes and.

Those repositories ended up looking like.

Gigantic.

From a positive words like you'd see at a news station.

And more and more companies are coming to US, saying help me organize those genes I want to keep metadata software. So theyre looking at things like a TFS and Cat D. D that allow you do you know if you have 40 million genes.

You can't just give them of filing.

I have to say this file is from of mail and this person is of this the age and this is their patient number and you need to really build a lot of metadata.

Around that file and we've now built software that we just never had before to do that so I think in verticals you.

You know when you're selling more into the existing verticals, we're expanding into genomics, we're expanding in the medical imagery.

X Ray Cat scan increasingly seeing just more deals in that area.

Economists everything.

Again, where they're collecting a lot of video video surveillance or getting making more and more inroads in our surveillance business.

So we're selling more to the customers we've had historically and we're branching into these new verticals.

And when we branch of the new vertical we just have instead of having a single product to sell them. We are now selling them multiple products.

Software products, and then solutions engineering.

It all together and help them solve the business problem.

And I think that's why in.

You know we are seeing recovery, but I think our good fortune in this quarter in our strong guidance is a function of.

The compounding impact of recovery and successful traction on new products, we're seeing the combined impact of both of those trends got it great insight on on the future and a nice job on the quarter guys.

Thanks, Jim.

Your next question is coming from Eric <unk>.

Your line is live.

Yeah. Thanks for taking the question and congrats on the solid quarter.

Can you talk about your supply chain and if there was any of them component constraints or anything like that obviously, you were able to deliver but.

Can you just talk about kind of the state of of supply chain and where you get your components from.

Yeah.

And we really didn't see any constraints in the supply chain during the quarter.

We subcontract out the majority of our of our manufacturing of a hardware side for us.

One of the largest firms.

With the Mexico footprint.

So we really haven't seen any impact on that front.

Okay.

Okay can you talk about any customer concentration issues of many are any of any customers that were of size.

Yeah of historically.

We haven't had any 10% customers with the exception of every now and then we'll have a distributor.

The really doesn't represent concentration per se.

And the classic customer concentration, meaning so you know we have very limited impact from that standpoint, historically, our largest customer would've been all of our hyperscale the customer that customer.

Historically, it Hasnt reached the 10 per cent point.

So really.

Not much of an issue from our standpoint our.

Our business model to kind of point.

Okay, and then you talked a little bit about the India knee in India and the environments.

Can you discuss.

So oh.

Broadly nvme had been adopted by the customers as at the end to end or how are the use of it.

Yeah.

I think.

The way, they're using it is in a tiered model.

In that.

They put the data that <unk>.

It needs to be processed.

Access.

Modified in very high speed, they put that data on flash.

Nvme.

And then when they're done with it they get it off of there.

So you know if you're a wealthy organization.

You could do and the end nvme, but I just rarely see that what I typically see is.

A thin here of N V of me there.

In a broader tier of desk and then the biggest tier of object storage for tape.

Tape archive storage.

And they use our software.

Which is there is that new.

Deeply developed.

Technology that we launched in store next seven net.

Dynamically organized is that for you.

Decides for you when did your when does your storage needs to be on high speed N V of me when should it be on desk and when should it be archived and they could do it based on policies of rules.

And the idea would be you know of your sequencing of gene are doing visual effects on the movie you're going to be up in nvme.

And then as soon as you're done doing that work it can slide down to desk, where it's still fast enough to watch that movie review of the movie have the editorial review, we could even play it out the movie theaters.

And then when the.

That movie is kind of come and gone. It can then slide down to an object store for a of deeper cold archive and we of the software that organizes that and that's the way we see of deployed so.

And I'm seeing more and more customers buying all of those tiers from us and even when they cheered of cloud they use our software to tier things to cloud and move it back from the cloud and use our policy engine to orchestrate.

All of the movements of those files.

As they go through their workflows.

Okay, and then the last one.

The S. Three I think you introduce Dennis three solutions work with AWS any comment in terms of adoption there.

I think I think what we talked about regarding S. Three was that our object store active scale has the most complete.

Most thorough as the.

Three implementation in the object storage space.

And we have to add just very strong pickup of that product in part because of the thoroughness of the S. Three implementation, but also.

Just how incredibly elegantly that product scales.

How robust it is an easy to run and we've recently added a lot of ransomware.

Action functions in it.

To make it not only.

Very scalable very easy to use but really locked down your data so that it's near impossible to.

For someone from the outside to you know.

Lock up of your files or modify your files and lock you out of them and hold it for ransom.

Very good thank you.

Thanks, Eric.

Your next question is coming from David Dooley.

Your line of five.

Yeah. Thanks for taking my question most of them have already been asked but I'll just have a couple of follow ups.

You mentioned two of the.

The current quarter seasonality of the March quarter seasonality typically.

What is the seasonality for the March quarter on a historical basis.

I'd say it range for the mid to high single digits, a decrease quarter over quarter.

Okay.

And.

When do you think about transitioning all of your hardware products to software or a lot of them.

What percentage do you actually think will ultimately, let's say over a three to five year period, tramps and transition to a software model and.

Why I ask it that way.

I'm sure. There are some pieces that will let you know that won't transfer. So I'm just trying to get an idea of over a three to five year period, what you would expect to transfer to the software oriented model.

Yeah.

At our analyst day, when we when we did our three to five year model.

As we transition.

What we characterized as recurring revenue.

B 70 per cent of our total revenue today, it's plus or minus <unk> 40 per cent that is non product. So we're really looking at the 60% that is product today.

Half of that well will move to two software and half of it will remain.

Round numbers.

Okay.

And then.

In your slide presentation, how the.

Pyramid slide there, where you have the Hyperscale is on top and then a couple of other incremental opportunities.

I'm just wondering how much bigger do you view of.

The web scale, guys and the fortune 2000, how much bigger out of those the market's done that top tier of the top 10 hyperscale or.

Just trying to understand what sort of hit the market opportunity you have here with these two big new pieces.

I mean, I think I.

I would characterize.

The difference between those tiers.

Less of in size.

And.

More in.

Value.

What I mean by that is.

A hyper scaler by design.

Wants to deliver all of the technical value themselves.

And wanted the little dependence on third parties as possible.

And they.

And that's their business model.

When you go to a web scale company or doing enterprise, they don't feel that way theyre happy to work with other technology companies.

And they're happy to use your software they're happy to use your services, they're happy for you to help them.

And they don't view that as a problem in their business model and so while the deals may be much much smaller.

There.

The percentage of software and the percentage of services is much higher and so the margins the profitability of those two lower pieces.

Is drastically larger.

So it may be may not be any bigger dollar.

Dollar wise to the company, but it could be over double the margins that we get from hyper scaler in those two lower tiers.

Alright, thank you.

Yeah.

Okay. Thanks for the other questions at this time I would now like to turn it back to Jamie for closing remarks.

Alright, well thanks, everyone was of great quarter, we're looking forward to more quarters, and we'll keep everyone updated on our transformation as we move as quickly as we can to transform ourselves into a.

More profitable more earnings Rich company as we transition to software services and subscriptions. So thanks, everyone and we'll be talking soon.

Thank you for your participation ladies and gentlemen, you may now disconnect.

Yeah.