Q1 2022 Quantum Corp Earnings Call

[music].

Good afternoon, everyone and thank you for participating on today's conference call to discuss quantum financials results for the first quarter of fiscal 2022.

At this time all participants are in a listen only mode.

Question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Brian Cabrera from quantum good afternoon, and thank you for joining today's conference call to discuss Quantum's first quarter fiscal 2022 financial results.

I'm, Brian Cabrera, quantum as chief legal and compliance officer.

Joining me today are Jamie Lerner, Chairman and CEO and Mike Dodson CFO.

This afternoon, we issued a press release, which you can access a copy of from the Quantum's website at Www dot quantum dot com under the Investor Relations section.

There is also a slide presentation that we will be using in conjunction with today's call that may be accessed through the website webcast 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 statements all statements other than statements of historical fact could be deemed as forward looking quantum.

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 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 date 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 statement include.

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, including but not limited to those risks and uncertainties listed in the section entitled Risk factors in Quantum's quarterly report on form 10-Q.

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 and management's statements. During this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP.

Included in the company's press release are definitions and reconciliations of GAAP to non-GAAP items, which provide additional details for 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 would like to turn the call over to the chairman and CEO Jamie Lerner.

Jamie.

Thank you, Brian and thank you all for joining us on today's call.

Earlier today, we announced results for our fiscal first quarter with revenues of $89.1 million.

Up 22% year over year.

And both adjusted net income and earnings per share at the high end of our guidance.

Our end demand remains robust with strength at hyperscale customers driving a meaningful increase in sequential bookings.

We remain restricted in our ability to fulfill all customer orders due to the ongoing supply constraints, which has caused our backlog to reach unprecedented levels.

Historically, our backlog has been 5% or less of our reported quarterly revenue.

The first fiscal quarter, our backlog has grown to $30 million compared to $14 million in the previous quarter and $2 million in the year ago period.

While not all backlog represents potential revenues in the following quarter or end demand remains robust across our business, particularly with the hyper scalar customers.

And we are seeing significantly higher levels of visibility.

We're starting to see signs from 1 of our key suppliers that there will be more strength closing out this quarter and continuing to strengthen in the following quarter.

Despite the near term industry supply constraints, our long term business transformation continues to move forward.

During the quarter, our software and subscription customers grew more than 20% sequentially with bookings up 2 times.

While it's still off a small base I'm pleased with the progress we continue to make toward our shift to a more recurring revenue model.

Also during the June quarter, we delivered an all time quarterly revenue record for our recently formed cloud software and analytics group.

This group, which represents the acquisitions of square box systems, and the Cat D V media asset management business benefited from the increased scale of the quantum global sales force and generated a strong increase in 6 figure contract wins during the quarter.

We have already seen leverage in selling combined product solutions, such as our store next file system. Kathy D V software and quantum services and created a significant increase in our ability to cross sell.

To our current customer base.

Recently, we successfully refinanced our remaining outstanding term debt, reducing the total annualized interest expense by $7 million and cash interest expense by $4 million.

This transaction represents the final step in our debt restructuring and significantly enhances both our covenant and financial flexibility.

We see this completed debt refinancing as the commitment to our shareholders to operate with strong financial discipline in order to drive improvements in our bottom line results while also remaining.

Also maintaining a solid balance sheet.

Mike will discuss more aspects of this transaction in greater detail during his prepared remarks.

In addition to our successful refinancing we received notice from the small business administration that our prior $10 million paycheck.

Protection program loan has been forgiven.

This $10 million is currently represented in our short term debt on our balance sheet as of June 30th.

So it will be removed in the subsequent quarter further strengthening our balance sheet.

Another significant development since our last earnings call in July we acquired the video surveillance portfolio and assets from pivot <unk>.

The acquisition adds an established customer base and product portfolio in the multibillion dollar surveillance market.

And provides a major advance in our share position in video surveillance.

The transaction adds over 500 surveillance customers globally, including large airports casinos transit systems and federal government programs.

These customers currently use pivot 3 software running on server hardware to record in store surveillance footage and mission critical workloads.

Having served as the Chief operating officer, a pivot 3 prior to joining quantum I am very familiar with these products and the customers and I believe there is tremendous opportunity per quantum to leverage their hyper converged software platform with RBS series product portfolio.

Our team has already had the opportunity to meet with a number of these customers and the response.

Both from customers and industry analysts has been very positive.

As we stated we expect this acquisition to be slightly accretive to EBITDA through the remainder of this fiscal year 2022, and we believe there is significant upside potential based on the market opportunity and the scale of Quantum's global sales team and customer base.

We see a meaningful opportunity to cross sell and up sell surveillance solutions to our customers and sports media and entertainment higher education retail and government and we are already seeing early traction.

As the demand for video for entertainment and streaming services continues to grow so does the use of video in the enterprise.

Videos used for communication and training and many enterprises and then particular particular the market for surveillance is expected to significantly expand thereby increasing the need for efficient storage solutions that retain the data for long periods of time and also provides.

Quick and easy access for managing analyzing and sorting historic context.

Surveillance video is being used for much more than just security.

And the emerging use of AI and analytics represents a big opportunity to help customers enrich this video content to drive new insights.

Our acquisition of pivot III surveillance portfolio is a key step towards establishing a more prominent position in this market.

As I mentioned in my comments.

We have continued to see strong demand and increasing orders from our hyperscale customers we.

We have established ourselves as the market share leader in this space and we continue to gain share in this market based on the strength of our offerings the.

The orders are almost entirely for our tape storage products, which is the area that is being most affected by our current supply shortages.

Our engineering teams remain engaged in the development of solutions and architectures.

And we now have sold quantum software into multiple Hyperscale customers. In addition to our tape storage systems.

Industry analysts are projecting massive increases in the amount of KOL data that must be stored and protected in the enterprise.

We see this projected growth as an opportunity to transfer our knowledge of cold storage software and solutions gained from working alongside the world's leading hyperscale customers to help fortune 500 companies address this massive data expansion.

We look forward to sharing more information regarding our progress on cold storage data solutions in the coming months.

In summary, the amount of unstructured data being generated globally continues to expand exponentially.

We're seeing strong demand.

Rod in our footprint across soft.

And solutions within multiple end markets. We're building on our market share leadership in Hyperscale archives and the acquisition of pivot 3 establishes a strong share position in video surveillance.

The ability to cross sell software from our recent square box systems and Cat D V acquisitions in December demonstrates our ability to integrate and accelerate adoption of new services across our customer base.

Our unprecedented level of backlog and demand momentum.

Administrate the significant progress that we've been seeing across our business and then the underlying business trends.

With that I'd.

The 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.

Our first fiscal quarter.

2022 represented another strong quarter of customer to customer demand demonstrating continued acceleration in our underlying business.

As Jamie mentioned first quarter revenue was $89.1 million up 22% from the same period last year.

Near term supply shortages continue to present headwinds for our secondary storage systems business during the first fiscal quarter.

Revenues from secondary storage were up more than 7% sequentially.

But remain restricted by your ability to pay and key components.

As Jamie mentioned in his opening remarks.

We do expect the supply chain to begin to firm up by the end of this quarter and continued to show improvements into next quarter.

Although it is still too early to understand the rate of improvement.

We do believe we will see a demonstrative improvement starting in our fiscal third quarter.

Primary storage systems declined sequentially, primarily as a result of the Lumpiness of the M&A business during the Covid recovery period.

And to a lesser extent the impact of deferring software revenue sold separately on a subscription basis.

The slight sequential decrease in devices and media were impacted by supply constraints related to certain products.

In line with Jamie's comments, our business has had very limited backlog historically.

Equaling less than 5 per cent of our reported quarterly revenue.

Our backlog grew to $30 million at the end of the June quarter, when a significant order contribution from our hyperscale customers.

Comparison.

We reported fourth quarter revenues of $92.4 million.

With a backlog of $14 million.

And in the year ago period reported revenue of $73.3 million.

With a backlog of $2 million.

While not all backlog represents perpetual revenue in the following quarter.

When looked at in total we believe the underlying business trends remain robust and our visibility has improved significantly versus the year ago period.

On a GAAP and non-GAAP basis gross margin in the first fiscal quarter was 442% flat with the prior quarter.

GAAP operating expenses in the first quarter.

Were $37.3 million compared to $36.6 million in the prior quarter.

Non-GAAP operating expenses from the first quarter.

Were $33.3 million, an increase of $1.3 million sequentially.

The sequential increase in non-GAAP operating expenses was primarily due to higher general and administrative expenses.

Partially offset by lower sales and marketing expenses and R&D expenses.

The higher G&A expenses were primarily driven by seasonal increases.

<unk> related services.

Well as increased legal and other expenses related to debt refinancing and business acquisition costs.

GAAP net loss in the first fiscal quarter was $4.2 million or a loss of 7 cents per share.

Compared to a net loss of $17.5 million or a loss of 35 per share in the prior fiscal quarter.

Which included a debt extinguishment charge of $14.8 million related to the retirement of about 50% of our senior secured term loan last quarter.

Excluding stock compensation restructuring charges and nonrecurring charges.

Non-GAAP adjusted net income in the first fiscal quarter was 125000 or breakeven compared to adjusted net income of $2.1 million or <unk> <unk> per share in the prior quarter.

Adjusted EBITDA during the first fiscal quarter was $5.4 million, which reflects an increase of 4 million on a year.

Year over year basis, and a $3 million decreased sequentially.

Primarily due to lower revenue and higher operating expenses.

There is a full reconciliation of our non-GAAP results to 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 and cash flows.

Cash and cash equivalents were $24.6 million as of June 32021, compared to $33.1 million on.

On March 31, 'twenty 'twenty 1.

Adjusted working capital excluding deferred revenue balances increased by $2.8 million during the first fiscal quarter to $58.1 million from $55.3 million at the end of the prior fiscal quarter.

This increase was primarily the result of a decrease from accounts payable and other accrued liabilities.

Outstanding long term debt as of June 32021 was $81.3 million after netting $8.8 million in unamortized debt issuance costs and.

And $11.9 million in current portion of long term debt.

Current long term debt includes the 10 million P. P P loan, which was forgiven in July.

This compares to $99 million of outstanding debt as of March 31, 2021.

After netting $9.7 million in unamortized debt issuance costs.

And $1.9 million in current portion of long term debt.

During the first fiscal quarter before the effect of changes in assets and liabilities.

Cash generated from operations was $3 million.

Offset by $10 million and net cash used by changes in working capital accounts.

Other notable uses of cash in the first quarter of fiscal 2022.

We're 1 million in capital expenditures in.

And the pay down of long term debt of 500000.

Last week, we announced the successful refinancing of the remaining portion of our outstanding senior secured term loan.

Following a competitive proposal process.

The company remained with existing lenders and replace the existing term loan facility with a new 100 million senior secured term loan that matures in 2026.

The new facility bears an interest rate of LIBOR, plus 600 basis points.

This refinancing significantly improves our covenant and operating flexibility.

While significantly reducing the related interest expense.

To put this into perspective, when we began calendar year 2021, we were incurring an annual run rate of interest expense of approximately $30 million of which $22 million representing a cash payment.

When we raised equity in February of this year, we paid down half of the term debt.

<unk> reduced our annual run rate of interest expense to 15 million of which 11 million represented cash payments.

Then following the completion of our recent refinancing our annualized interest expense was further reduced to just under 8 million.

Of which 7 million represents cash payments.

Collectively these transactions have reduced our annual interest expense by $22 million with an EPS benefit of 32 per share.

On a reduction of annual cash payments for interest on $15 million.

At the end of the first fiscal quarter, there were no funds drawn on the company's credit line.

Finally, turning to our financial outlook.

On the ongoing supply chain shortages for the second fiscal quarter of 2022, we are guiding revenues of $88 million plus or minus $4 million.

Which includes a 2 million contribution from the pit of the 3 acquisition.

Non-GAAP adjusted net loss of $2 million, plus or minus $1 million.

Non-GAAP adjusted net loss per share on <unk>.

Plus or -2 cents.

And adjusted EBITDA of $2 million, plus or minus $1 million.

At this time, we are maintaining our full year revenue guidance range of between $380 million to $420 million.

With the range, reflecting the potential timing and magnitude of the supply chain improvements.

Our fiscal year 2022 guidance excludes any projected revenue contribution from pivot 3.

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

Thanks, Mike.

Demand is strong evidenced by our growing backlog and continued customer order momentum during the quarter.

We're seeing increasing opportunities to penetrate further into a fortune 500 enterprise accounts with both our software and product solutions.

The acquisition of pivot <unk> video surveillance business offers immediate access to over 500, new customers with whom we expect to see cross selling opportunities across our portfolio of software and data storage solutions.

With this significant milestone of our debt restructuring behind us our new financial flexibility will allow us to responsibly grow our business.

I would like to welcome the new members of the quantum team from pivot 3 led by Ross Fujii General manager of the strategic markets business unit. The most recently served as vice President of engineering and alliances at solar winds and Curt Wordage, who will be heading up sales.

In conclusion, I'm pleased with the execution of our team has delivered in a difficult operating environment.

The opportunities for long term growth and transformation towards a more software centric model remain intact.

Quantum is focus remains on establishing and enhancing our position as a global leader in archive storage solutions with that we will now take any questions you may have operator.

Ladies and gentlemen, we will now have our question and answer session.

If you would like to ask a question. Please press star 1 on your telephone keypad.

Confirmation tone will indicate that your line is from the question queue.

You May also press star 2 if he would like to remove your question from the queue.

1 moment, please while we now pull for questions.

Our first question comes from Craig Ellis with B Riley Securities. Please proceed with your question.

Yeah. Thanks for taking the question and guys congratulations on the growth from the backlog.

I just wanted to start with a clarification on the dynamics within product revenue in the first quarter on what Youre seeing in the second quarter. So for the first quarter can you just provide a little bit more color on some of the things that were happening in primary storage since that was down more than what I had expected.

What did you see in government and some of the new customer segments, and then with the second quarter.

As we look ahead what are some of the gives and takes at the primary and secondary level on them below that.

Within guidance.

Hey, Craig.

Jamie.

Yeah, I think we're seeing 2 things.

Our cloud customers, particularly the 10 largest hyper scaler on.

Are doing really well and they're placing increasing orders on us we're now engaged with 6 hyper scaler.

Whether were in production or going through trials or late stage trials. So we picked up a lot of momentum there.

But we are predominantly selling them tape products, which are the most constrained.

Now our other historic legacy market, where we're the share leader in.

In high end Postproduction is media and entertainment now.

On a media and entertainment, while it's up from a year ago.

And you see our sales were up 22% from a year ago.

Still not at historic levels.

So we don't see people going this summer blockbusters in theaters and major movie production is still hampered by.

On Covid and the Delta variance so we.

We see a stronger media and entertainment business, but it is not at historic levels.

At this point.

And I think it's even more.

Trouble debt in Europe, and Asia than it is in the U S. So.

We have those 2 factors.

If you look at our backlog they balance each other out and were selling at historic levels.

Mix is weighted towards hyper scaler, which are most constrained but.

We did get news that.

The constraints, we have in our tape components will be improving this quarter, we still gave a conservative estimate not anticipating it to improve but as we get into October November and December we are seeing we're getting indications from our suppliers.

We're going to be in a much better position now we're going to convert that into supply.

Commitments.

We don't have those commitments, yet, but we're getting strong data from our suppliers that.

While they're not ready to say, we'll be at historic levels. They see very significant improvement as we get into the fall and winter.

And we should be shipping at much higher levels in that timeframe.

Got it that's really helpful. Jamie. Thank you and then the follow up is to Mike Mike I think I got most of the guidance elements cause if you could provide any color on your expectations from around gross margin and then with respect to the near term guidance and the full year guidance.

You included pivot 3 in the near term guidance, but didn't include it in the full year guidance why was that and is it reasonable to think that.

Just adjusting for the timing of the deal that the current quarter's revenue would be a reasonable proxy for what you could do going forward or can some of the synergies that Jamie talked about it in his prepared remarks start to hear this weekend into.

Fiscal third quarter of fiscal fourth quarter of the year.

Yes.

Related to how we've included to the theory.

As we move forward, we'll be integrating that business into quantum.

But in the near term we have.

Good enough visibility to call it out in the current quarter as far as how much we expect it to contribute to the.

The current quarter's revenues.

So we've called it out but when we looked at the full year.

We wanted to.

The statements. We wanted to make was we were still standing by the flow of your guidance.

The range, whether it's 380 day for 'twenty is really going to be dictated by how quickly does the supply constraints come back how quickly can we ship against the backlog that we have already.

So you know that was kind of you know how we treated the pivot theory as it related to our <unk>.

Current quarter guidance and the annual guidance.

Got it and then just a detailed related to the acquisition I know it was some cash some shares can you help us with the share element. So that we can get the share count private on the bottom of our modest share.

Well when you look at the total deal was $5 million in cash 3 million in shares.

We had a little bit of a certain licensing fees that we paid so that's how we got to the total of $8.9 million in purchase price.

On the shares were based on the average price.

5 days per quarter, we closed on.

When we look at just the total share count taking everything into account.

We know that.

On a on a weighted average we were $57.1 million.

For the quarter ended 630 on a diluted basis, it was $68.6 million.

Got it.

And I'll hop back in the queue. Thanks for the help guys. Okay. Thanks Craig.

Thank you.

Our next question comes from Naval shops ski with Northland Capital markets. Please proceed with your question.

Okay.

Mr. Shops can you May proceed with your question.

Yes, sorry, I was on mute there.

Uh huh.

Nice bookings strength and thank you for that.

Clarity and transparency on the backlog and therefore declare.

Booking strength here looking at the guide certainly implies that you remain supply constrained.

The key question is then given.

Given commentary around ongoing strong demand.

Can you comment on what you expect the bookings to acute profiles look like and thus backlog at the end of September quarter.

Given let's say the midpoint of our current guidance.

Yeah.

Yeah, we were we would expect at this guidance level of 88.

But we would continue to build the backlog, but at a much lesser rate than where we built this quarter.

Yeah.

Okay.

And so that then would imply that bookings would not be as strong in the September quarter. As it was in the June quarter or is that seasonality or is that something else going on.

Okay.

So I mean part of the strength that we saw this quarter.

It's really the Hyperscale orders.

<unk> Big orders that go beyond the quarter.

So part of that is just you know getting in the queue.

They're already in the Q, so it's not necessarily indicative of lower demand per se.

Understood Okay.

And then the software and subscription customers that grew more than 20 per cent sequentially.

And then the bookings were up 2 X.

So that basically implies that youre getting more.

Not only gross profit dollar sort of absolute revenue dollars per cost.

Customer that converts from.

No a capex to a subscription growth.

Does that yes.

On average bigger deals yes.

Okay, Alright, and presumably most of the software and subscription is that there'll be hitting primary storage or is it evenly distributed between primary and secondary storage.

Yeah definitely today, it's weighted very heavily towards primary because thats. The score next product that is selling this as subscription.

As we move forward and we moved forward with a cold storage software as a service.

You'll see more on the secondary side, but that is yet to be released.

Okay Alright.

On it.

I've seen other.

Software and subscription transition stories, where it does actually impact.

The product revenue.

Negatively.

And it certainly seems like that could be the case with respect to primary stores yet on the other hand here you are saying that look it's absolutely true growing not only in gross profit dollars, but revenue dollars.

Can you just.

Clearly say, what's the bridge between the primary as far as Q over Q decline versus you're seeing an increase in naturally revenue dollars as these customers transition to software and subscription.

Yeah.

Well I think what we're saying we're really in the early stages of the transition.

So you know we did.

In our prepared remarks, we noted that our revenue was impacted slightly by the subscription revenue because it gets deferred.

Its preferred out so we saw a little bit of a debt.

I would expect to your early part of the question that as it gets more scale, we'll we'll see more.

But it's too late.

[noise] I'm not too sure if it's my connection book.

It was cutting out.

And as someone seems to have.

Always.

So.

Yeah.

Can you hear me now.

Yeah, It's probably my connection so just finish my question to answer and then I'll pass on to Mike.

Okay.

So it's I mean, just to repeat my.

Their response.

Yes, you would expect your revenue to be under pressure as you transition to a subscription model.

Recurring revenue subscription model and we're seeing that but it's still because we're at the very early stages.

It's not it doesn't have on material impact on us at this point.

So you know where you would expect as we get further into the transition to see more of that impact but to date, it's still it's not at the level that it's significant.

Got it thank you very much.

Okay. Thanks al.

Thank you.

Our next question comes from George <unk> with Oppenheimer. Please proceed with your question.

Thank you for taking my question.

So maybe digging into the near term guidance just a bit more so if you normalize for the $2 million you expect 3 or you're still kind of pulling back how much of that is the software transition and then is it still primarily primary storage in Europe that are there.

The near term headwinds that you're a net.

Projecting corp.

Yes, Jamie Hey, George.

Almost all of the pullback is just not being able to get take material.

So we can.

We could sell at historic or beyond historic levels, while we are closing the contracts its just.

You know, we have a higher mix of tape than primary but it still meets all our sales objectives on me our sales team is meeting or beating their plans.

We're just.

Very restricted on how much cash.

Libraries, we can ship because we are.

We're missing a key component.

So we guided based on.

You know.

Little or no improvement in actually some pullback in ability to get supply this quarter.

And then again anticipating improvements NR.

Fiscal Q3, but anticipating no improvements in this quarter and if there are significant improvements will will.

I'll, probably get back on the phone and give some visibility there, but right now we're modeling no improvements and even some.

Some more deterioration.

Okay. So.

With the deposits that you're seeing on the sales team can you give us a sense of how you feel about the solution selling salad strategy at this point how much activity do you have with the larger 500, K plus deals how much multi product.

Alan are you seeing right now.

Yes, I mean, a couple updates and then we started with.

A single hyper scaler.

And we had ambitions of closing multiple.

At this point I would say of the world's 7 largest we have 6 of them that are either customers deep.

Deep actually they're all customers.

And there are different levels of production purchasing so I would say we are hands down the share leader in the top 10 hyper scaler when it comes to cold storage. We simply are ahead of everyone by a lot in that space.

Now.

Our second ambition after.

Winning the majority of Hyperscale or business was can we press down into the web scale.

The companies that are big web properties think of them.

The likes of an Instagram or a tick tock.

Hmm.

Those bulk of companies.

We found out probably about 2 to 3 weeks ago. We were awarded our first web scalar when to exit by slightly over $5 million.

So we now feel comfortable that our ambition to close web scale or as we have now close to 1 of the world's largest and we have others in the queue.

We have a product coming out.

Later this month.

That clearly targets the web scales in the fortune.

2000.

And that will make that selling motion much more packaged and repeatable.

In addition.

Of our.

6 large hyperscale or <unk>.

5 of them have bought our software.

Monitoring software storage software data management software.

Yeah, I think that's going really well for us.

We still remain the share leader in high end Postproduction is just.

Just last movie and television, making down there at 1 time was I think that'll come back, but right now it'll remain COVID-19 impacted.

Now the balance that we had an ambition in video surveillance and we found the fastest way to gain share there.

Cause to get a very economic purchase of a company that you don't like.

I can tell you is doing well more than $2 million a quarter, we acquired that company.

Halfway through our quarter, but you know that to the 3 cases, certainly more than a $2 million per quarter business. So.

So we are the share leader in high end Hyperscale.

Starting to get traction on web scale, we are still day share leader in high end media and entertainment Postproduction just debt businesses.

Is COVID-19 impacted and we've made a huge share advancement with the purchase of pay per 3 so our strategy is playing out and.

I've got a supplier who's really made our life difficult but.

That supplier is.

Coming out of there.

There.

You know restrictions on problems they've had I think they are coming out of it in the next 2 to 3 months on it and I think we'll get that behind us and.

That backlog is going to flow through and I think we're gonna be well inside our $3.80 to $4.20 range.

And we will have an investor conference.

We're thinking in late October in New York and at that point, we'll be able to give an update on our guidance on we'll narrow that range and we'll have the pivot 3 selling motion pretty well figure. It out so that we can fold that into that guidance and I think by October we'll know exactly where we sit.

It was supply constraints, and we will be able debt tightened that range in the 380 to 420.

At that time, and I think a lot of things will get clarified you know in the next 2 to 3 months as we got through that.

Just maybe 1 last question if I'm looking at new opportunities or software subscription transition you talked about potentially getting to a 1000 customers in FY 'twenty 3 do you feel you're on pace for that.

And like.

Like ransomware with another area that it felt like the opportunity I imagine that day.

<unk> strengths are probably still none of them on your ability to cool, let's go after that opportunity.

Yes.

Let's let's teams the 2 out.

I I still think there's a strong ransomware opportunity for us we actually have a very specific.

Physical product that we're building for that we have it in limited production with a few hyper scaler, who really need it.

But we're going to make that more widely available.

On towards the end of the year, but we're actually building some extremely unique intellectual property around ramp really physical ransomware protection.

So I feel really good about.

That piece and on and I think that's going to be really strong for us.

You had another part of your question.

Okay.

Yeah.

Do you feel you're on pace, adding.

1000 subscription customers.

Yeah, I think we are.

You know our baseline goal was 500 customers on my stretch goals 1000, I think we're on pace for the 500 I still think of thousands of stretch and what we're going to need to do is move more of our products to subscription our cat D V product is not on subscription yet.

<unk> not on subscription yet.

And so we we've got a true.

France form a few more products into the subscription model and I think if we do that realm.

Relatively quickly I think we'll we'll get closer to that thousand number.

And it's just a function of you know.

Getting a sense of how willing are customers to move to the new model. So far it's been pretty fluid.

With the store next transformation on the active scale transformation on.

We just got to bring more of our products over to that model on pushing our general managers to to move to the subscription model is more more quickly.

Thank you.

Yes.

Okay.

Thank you.

Our next question comes from Bruce Goldfarb with Lake Street Capital Markets. Please proceed with your question.

Hi, Thank you for taking my questions and congratulations on your results.

First 1 in regard to component.

You know a shortage issues do you anticipate any contract changes.

In terms of price or terms.

With your suppliers to try to.

Oh alleviate some of the shortages.

No. This supplier had some price changes earlier in the year and they.

Their products pretty.

Structured and how they go about it so I don't see price changes, we've offered things like Hey, you know Ken if we offered more money could we move further up in the queue could we purchased more supply I mean, obviously youre going to ask all those questions. You know is there would you get.

You know if you had most favored day you know if you provided the best pricing would you get the best supply continuity and.

Tried all those angles, but yeah.

They are on allocation in and it's not really a function of price, it's just a function of them.

Getting these chips made and the volumes that need to made at and.

You can spend more money, but it can't get people with COVID-19 into factories faster you know.

There's a COVID-19 outbreak in a factory you can write all the chaps you on and it doesn't get a different result.

Hum and then thank you and then do you anticipate any difficulty in integrating pivot 3.

Yeah.

Hum.

I don't you know on I think.

Net sales synergy has been pretty great.

What I mean by that is if you look at our current customers, they're large government customers large.

Sports franchises la.

Large entertainment companies.

On large banks and retail companies all of whom use surveillance right their surveillance and every stadium that we do media and entertainment work with all the auto racing and sports teams.

And so we are seeing really good synergy where we.

We go to a sports team and say look we've been helping you with your production video for 20 years.

Would you also trust us with your video surveillance.

And that synergy is playing out really well.

You know whether its theme parks.

Critical facilities also are our university work as well as our work with National Laboratories, I mean, Theyre. All places that are heavy users of surveillance. So I think the selling synergy is playing out in real time.

There is some integration work with I T systems.

We're in the middle of an ERP upgrade so you.

We wanted to get our new ERP in place before we integrate.

Some of these older ERP systems that we've required on I think it's.

We will take some work, but I don't.

I wouldn't characterize it as difficulty.

Thank you.

It's going to be pretty straightforward.

It also helps having been there.

You know I was the chief operating officer responsible for our supply chain support, Iran sales sales engineering, and so I just happen to have that unique insight debt.

Makes this 1 somewhat easier.

Curt weighted to run sales for that organization had been with pivot 3 for 9 years.

So we just had a lot of insight into how that company runs and.

It certainly made diligence quite a bit easier having work.

Yeah.

Great. Thank you that's all I had and.

Congrats on all the progress.

Thank you.

Thank you.

Our next question comes from David Duley with Steelhead Securities. Please proceed with your question.

Yeah. Thanks for taking my questions a couple of them could you just perhaps try to take a guess.

I guess at what you thought the impact was from the supply constraints either in your.

June quarter or your September quarter.

Okay.

Okay.

Yeah, I think that the easiest way to characterize that Dave is when you looked at our backlog the $30 million of backlog that we carried out of the quarter roughly a third of that had we had the parks.

We could have shipped within the quarter.

And then 2 thirds of it is is next quarter and bid on.

So that's probably the easiest way to characterize that.

So roughly 10 million Bucks.

Yeah Yeah.

Okay and.

Well I guess.

On the supply is available to shift your all of your systems.

Would you expect this backlog to decline or are you kind of an a.

Yeah.

Our new model, where you're going to have better visibility on this business.

Alright.

Go ahead Mike.

I'll go ahead, Trevor you can.

I looked at I think we expect.

The backlog in our traditional hardware based products to go back to the sub $5 million level, where it's insignificant we don't talk about it what we want to talk about.

Backlog in the form of RPE L. T C V in.

That's the backlog we want to talk about we don't want to talk about Hey, I, just can't ship tape libraries cause I'm missing a component.

So I think the way we talk about just.

Physical hardware backlog, which is essentially what we've got here.

That will go back down to 2 to 3 million dollar level.

And the backlog we want to grow is again, our software subscription, which isn't really backlog it's more on.

P O a RR and and you know ratable.

Ratable.

Revenue.

Deferred revenue.

That's really what we want to build not a hardware backlog.

Okay, and then could.

Could you, perhaps give us your kind of goals in the surveillance business now that you've got a platform and 500 customers and you're doing 2 million a quarter, let's say as your run rate.

But what kind of.

Expectations can we have for this business over the next 2 to 3 years it kind of double in size.

How should we think about the growth trajectory of the surveillance business for you guys.

We do view it as a growth business.

Surveillance is a business that's growing at.

You know north of.

Of 20% CAGR per year it just.

Putting more cameras more higher fidelity cameras more cameras with analytics more cameras with facial recognition more cameras with license plate recognition.

Using license plate recognition for billing purposes in drive throughs, and there's just many many more applications and they all just consume more storage consume more compute power and we have a converged platform that does compute analytics and storage and that's it's a hyper converge.

<unk> platform, which allows us to not just use storage, but actually do the analytics work. The G. P. You work on the computing work as well as the storage work.

And we view that as all growth and we're chasing growth debt.

We've got a strong brand we've got a product that's been in the market for 15 years very stable 500 customers that include the world's biggest casinos the world's biggest natural gas pipelines.

On the world's largest police departments prison systems.

Some of the biggest smart city projects.

Large military and government installations on it.

It really has.

Now on marquee customer base, and we absolutely plan to grow that.

And we plan to grow it globally.

We do have the ability to self pay per 3 a software only so we can be competitive in markets like India, and China, where you really do want to separate the hardware on the software for both geopolitical reasons, but also pricing reasons using localized hardware and I think we're really well positioned for that we have.

On an amazing partnership with Lenovo, who can help us do business in geographies like India and China. They can handle the hardware portions where we handle all the software portions.

I think we're really positioned to grow we brought a 10.

Very successful sales reps over with us in the acquisition. So now we've got.

Hum.

Almost just shy of 15 surveillance specialists.

That work around the world and and Theyre going to overlay. The 200, plus salespeople that we have today. So I think theres a lot of synergies both in our installed base and I think theres a.

On a huge amount of new customers that are coming in through partnerships like we have with Lenovo as well as all of our security integrator. So yeah, it's a growth business for us it's always been a growth business.

You know we were a little slow to build our organic technology and we had an opportunity to you know take years up our development by buying a stable mature platform that was ready to go. So it really worked out for us. So yes, I think it's a business debt.

And 2 to 3 years, we can more than double.

And then just a final on my question on gross margins in the back half of the year. It sounds like a conservative guidance in the September quarter.

But the December quarter, I would guess Youll see a lot of.

The backlog move through the sales funnel, what's the implications for gross margins I guess when that happens.

Yeah, I think we've got 2.

2 factors right.

As the secondary business grows and as.

Driven by the Hyperscale or business, that's gonna be a gross margin headwind.

And as we grow their primary business and grow the subscription revenue recurring revenue.

It will improve the margins.

So you know it you know maybe the offset.

And as we go forward in the near term. So I'd expect you know plus or -2 to be at the current level, maybe a little bit better, but but only marginally.

Thank you.

Yeah.

Well thanks, thanks debt.

Our next question will come from Steve Busch with Everglades Resources. Please proceed with your question.

Hello, Jamie and Mike and thank you for taking my call.

Just wanted to say hey, thanks for all your hard work. The last couple of years, it's been a good to see a quantum as improvements and so my first kind of question on the component supplier.

Are they going to be able to keep up with any future growth that we have in that business.

Just get back to the historical levels.

Yeah, they'll they'll need to get to historic levels and beyond historic levels.

Historically, they've always been able to do that you know that the way. We've worked with this supplier is they have a depot and we literally.

Have never hit the bottom of the depot, we literally draw as much as we want from the depot.

And we give them visibility, we give them forecasts and it's been.

Pretty rare almost you know and we've been drawing from this depot for over 20 years.

And we just have never drawn from it and hit the bottom.

And now that depot is routinely empty.

So that tells me if they're able to get back to normal day, usually carry enough headroom in excess inventory that it can handle.

When we get large orders or get growth and I think they should be able to return to that.

I don't know how quickly I think it might be another few quarters until the depot just as overstock.

But I think we'll see you know, we're getting very strong word from them that they're going to see quite a bit of a strengthening coming into the fall and again, we're waiting on the numerical.

Component commitments that they're gonna make but they're indicating to us that they'll be able to deliver much higher levels than we're getting today.

Okay. So we don't need a second source and there isn't 1 anyway.

Yeah.

No second source for this 1.

Right and so it was there from you kind of mentioned is it COVID-19 related.

Yeah, I mean, it's a single source supplier.

And.

When they are and a lot of these components are made in Asia. When they have a total of it outbreak they send everyone home.

And you know those.

Those are mandated by the government.

And so you know.

You don't have that choice like Amazon doubts here to say, hey, even if people get COVID-19, we're gonna keep shipping and keep people on the factories. Some governments day look we're just not going to give you that option. If there's a COVID-19 outbreak everyone has to go home for 2 weeks and you've got a factory that's the idled.

That's right that's really been the core issue and so its a single supplier on a single country and it's a pretty rigid model.

Right. Okay. Thank you for that so I'm looking at your slide today, I think it's like 5 of our presentation.

Which is very similar to the Mi.

On the Investor Slide page 14.

From where it list a bunch of the.

I'm, assuming those are all customers correct.

And in the main presentation.

It's it's titled Hyperscale Web scale unstructured data archives on let's say AWS, Microsoft Google Apple Facebook Sir.

I think that's describing the telco customers, but not meant to be an indication that those are quantum customers. That's the.

Type of thing better from that category.

Congrats on that.

Many of those are our customers as well.

Correct, Okay. So.

So.

Well.

Are we able to do any kind of ramp you were discussing on the ransomware.

Products with.

A little while ago.

Are we growing with them or we partner with any companies to bring out you know like say on AWS older customers for for Rambler.

The solution that we're gonna be bringing to market.

Think of it towards the end of the year was co designed with 1 of the hyper scales.

Okay.

That's good to know and and what would you say the overall market you know 2 or 3 years out for for that kind of purchase.

Got it.

Uh huh.

The short answer is.

We don't know.

Like I said, it's a product that we haven't brought to market yet it's a product that no..1 else has in the market I think we all know that the security enhanced anti ransomware market is large what.

Percentage of that market, our products going to address it just yet to be seen.

So we just need a little time and market to understand.

You know how it resonates, it's a different approach than anyone's taken before.

It is.

You know completely Unhasp book, because it's just literally the data's physically.

Turned off and not on a network, there's just no way to get to it.

No matter, how many hackers are present or infiltrated the system. It just literally unless you break into the building you cant get the data.

And that's just a different approach.

And it's going to be interesting to see how it resonates we've been talking to analysts and there.

Giving us a lot of really positive feedback about both the anti ransomware and the cold storage as a service and we are going to combine them. So that when you buy a cold storage solution you can get it with the anti ransomware package.

Which basically puts your data onto cold storage then fully.

It connects it from any network.

Where no robot or no technology could ever get to that data. So we feel that combined package is going to be really compelling, but again no..1 has anything like that on the market. We're excited about it but I think we need a few quarters of sales to get a sense of how it resonates.

Okay sounds good to me. Thank you very much bigger force.

Thank you.

There are no further questions at this time I'd like to turn the floor back over to management for any closing remarks.

Thanks to everyone for joining us on today's call I hope within the next several quarters, we won't need to discuss supply constraints anymore and I feel good that we're getting pretty positive data.

That should be behind us.

Pretty soon here and with that thanks, everyone and.

We'll be sending out details about the Investor conference in the October timeframe, and we'll provide a lot of updates at that time.

<unk>.

Ladies and gentlemen. This concludes today's webcast you may now disconnect your lines at this time.

Can you for your participation and have a great day.