Q2 2022 Quantum Corp Earnings Call
You know everyone and thank you for participating in today's conference call to discuss Quantum's financial results for the second quarter of fiscal 2022 at this time, all participants or any listen only mode. A 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 is being recorded I would.
Now I'd like to turn the conference over to Brian Cabrera from quantum. Please go ahead.
Good afternoon, Thank you for joining today.
Condoms second quarter school, 20th 22 financial results.
Right.
Street legal and compliance officer.
Joining me today R J dealer, chairman and C E O and my thoughts CFO.
This afternoon, we issued a press release, which you can [laughter].
Unconscious website at Www Dot <unk>.
Not all under the Investor Relations section.
There is also a slide presentation that we won't be using any congestion with today's call may be accessed through the web Kathleen on our website and it's also post it as a P D F.
The relation of sex.
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.
Who wants a advise caution to the lights up forward looking statements.
These statements include without limitation any projections of revenue marches expenses adjusted EBITDA adjusted at eight.
Cash flows or other financial animals.
Also any statements concerning be expected development performance at market share or competitive performance related to products or services.
All forward looking statements are based on the information available to quantum on the date hereof. These statements about.
An unknown risks uncertainties and other factors that make us <unk> actual results to differ materially from those implied by the forward looking statements.
Including unexpected changes in the company's business.
More detailed information about these risk factors and additional risk factors are set forth in Boston periodic filings with the Securities and Exchange Commission.
These risk factors include but are not limited to risks and uncertainties listed in this section.
Risk factors in quite the quarterly report on Form 10-Q as annual report on Form 10-K as filed with the SEC.
Lots of expressly disclaims any obligation to update or alter it forward looking statements, whether as a result of new information future events or otherwise, except as required by the law.
Additionally, the company's press release that management statements. During this conference call will include discussions of certain measures and financial information in gap and non-GAAP.
Included in the company's press release, our definitions and reconciliation of gas 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 learner Jamie.
Thank you Brian.
And thank you all for joining us on today's call.
Earlier today, we announce strong results for our second fiscal quarter with revenues that exceeded the high end of our guidance.
Customer demand remained robust during the quarter demonstrated by the material increase in our backlog, which grew sequentially to $50 million from $30 million last quarter.
Increased traction with our Hyperscale customers continued as we delivered a third consecutive quarter of sequential order grew up.
We also demonstrated progress in our software businesses.
In South continued momentum in our subscription and services backlog.
The ongoing industry supply constraints improved during the quarter, but still restricted our ability to meet all end customer demand.
We anticipate supply chain will see further improvement in our third fiscal quarter, which should allow the company to see a sequential reduction and current backlog levels.
In the second quarter, we saw another quarter of revenue acceleration within our software and subscription customers, which grew 30% I'll be it from a small base, but equally impressive was our bookings which grew more than 70% sequentially.
Our cat T V product line delivered the second consecutive quarter of increased bookings with traction across sports Entertainment and enterprise markets.
Demonstrating our ability to cross sell quantum solutions to customers with multiple needs and applications.
On the product and technology front, we completed the acquisition of Tibet Three's video surveillance business and recently announced the acquisition of the M cloud and Ah Hyperconverged startup, which will help further established quantum as a leading player in the surveillance market.
Also during the quarter, we announced major innovations for longterm data archiving and cyber protection.
New as a service offerings in a partnership with IBM on the next generation of L. T O technology.
All of these actual actions are strategic components to building a complete portfolio of solutions to meet customers unstructured storage and archiving requirements across multiple and markets.
We are pleased that during the quarter, we were recognized by Gardner as a visionary and the 2021 magic quadrant for distributed file an object storage.
And recognized as the number one brand for secondary storage based on and use their survey results published by Cole Dog do research.
We view the recognitions from third party research firms as validation of our long term strategy.
With a focus on transitioning towards a higher makes a software and subscription services.
What are the key aspects of our long term transformation is transitioning from selling mostly hardware appliances as our product mix suggest today.
Towards selling primarily software and services and a recurring revenue model.
Our portfolio of software based offerings has come a long way in the last two to three years and we have built a broad portfolio of solutions was target storing managing protecting and enriching data.
And both internal <unk> development and strategic acquisitions, our portfolio now includes software, which covers numerous aspects of the capture and storage of data such as indexing cataloging and tagging data.
High speed file and block software for ingesting and processing video and images files.
Object storage software.
Hyperconverged software for mission critical surveillance workloads.
Duplication software or data protection.
And cloud based software.
Software to monitor all of these operations around the world.
Over the last year, we transition three of our product lines, the software or subscription license plate.
In the past quantum typically sold customers hardware appliances combined with software.
Today, we're now transitioning away from providing appliances towards the subscription based model in which quantum software is the key aspect of the overall solution sale.
We have roughly 200 customers utilizing software and subscription services and.
And we anticipate future levels of adoption will continue to accelerate.
And they come in quarters will be transitioning more products to subscription licensing, including Cat D V D.
Deexcite duplication software and and cloud in Hyperconverged software.
Our long term strategic transition towards higher margin software and services is seeing strong initial uptake and we look forward to sharing additional metrics on this business.
Sharing our upcoming virtual analyst day on November 9th.
We continue to gain both market share and customer attraction within Hyperscale archived infrastructure.
We are now in production with multiple Hyperscale and Webscale companies and have to gear secured additional design wins and use cases at two major hyperscalers within the last quarter.
Including a 5 million dollar Webscale company when you.
Demonstrating the value quantum offers and supporting the massive archive needs of these global data B M S.
As noted our backlog has reached a new record level at the end of the second fiscal quarter.
And while not all backlog represents potential revenues in the upcoming quarter.
And demand remains robust across hyperscaler customers.
One positive that has emerged during the recent industry supply constraints.
Is that we are seeing significantly higher levels of visibility into future revenue contribution from this vertical compared to just a year ago.
We have made a few significant announcements in October that speak to our leadership in the Hyperscale space and.
And our strategy to offer large data archive solutions to Webscale companies and enterprises.
We recently announced active scale cold storage, which is a new type of storage for active scale based systems, which combines quantum tape hardware with patent pending erasure coding software.
In keeping with our longterm transition strategy, we can offer customers the solution as a service.
That's enterprises will be able to build a large private cloud quickly and effectively in any data center. They may choose with a fully managed quantum all inclusive subscription pricing model.
The new active scale cold storage solution delivers up to 80% savings relative to archiving data on disk.
And provide much better durability than any other team based archiving solution, while practically eliminating the risk of data loss.
Also in October we announced a partnership with I B M. On the next generation of L. T O technology.
Under the terms of the agreement quantum will collaborate with I B M and development of L. T O 10 tape drives and media.
To help accelerate the time to market capacity and performance of the next generation L. T O drops.
Earlier this week, we announced our ransomware solution, which provides customers and industry first implementation, which creates a physical block between tape drives and the robotic arm of the typical <unk> based system.
All simplistic in its design, it's additional staff, which requires an individual to remove a mechanism prior to drive removal.
Insurers data storage on tape can provide enhanced protection relative to networking cyber security offerings as.
It drives remain completely offline secure and provide the ultimate level of data security for cyber resilient archives.
Our customers you're using quantum based tape drives for archival storage cyber criminals would have to physically enter the data center to gain access to any data.
In total we believe quantum is established both the market and architectural leadership position when it comes to long term data archiving and hyperscale customers and now broadening into the enterprise.
A key element of our strategy is to expand our addressable market into the largest data storage market video surveillance.
Today surveillance cameras R V number one generator update or up data on the planet.
And the total number of cameras as well as the resolution required of the cameras is continually increasing.
Overall required retention times of video surveillance data is increasing as well.
As organizations are using surveillance data for more than just lost prevention.
Combined all these trends lead to a need for more storage capacity more infrastructure more software and more video analytics.
Over the past few months, we made two acquisitions to jump start our presence in this market.
We acquired the video surveillance business from pivot three which brought over 500 customers, including major airports large hotels major safe city deployments and major customers in the energy and utilities sector and critical infrastructure.
This acquisition also brought and establish sales channel along with an expertise in the video surveillance market.
N T engineering and support personnel for supporting these customers.
We also acquired a small hyperconverged software startup based in Bangalore called and cloud in.
The company is the start up which is develop hyperconverged software that is both hardware and hypervisor agnostic.
It is much easier to deploy as Standalone software running on any white box hardware and is available today on a subscription model.
In summary, we delivered solid financial results, making tremendous progress toward our transformation agenda can remain poised for a strong second half based on customer order strength.
Current backlog in anticipation that the industry supply constraints, we'll see further improvement during the third quarter.
We have clear momentum entering the second half of our fiscal year and I'm looking forward to our virtual analyst day next week on Tuesday November 9th.
Where our executive team can share more about the progress and outlook for a long term strategy.
To talk more about the results I'd like to turn the call over to Mike Dodson, our CFO to discuss the financial.
Mike.
Thank you Jeremy welcomed everyone that has joined or a call today.
Our second fiscal quarter of 2022 represent and another order of strong customers demand.
Revenue for the quarter was $93 2 million, which includes the expected 2 million three and is up 9% from the same period last year and 5% sequentially.
Exceeding the high end of our guidance range.
The second fiscal quarter revenue doesn't include just over $15 million a orders that were requested by customers in the quarter, but cannot be fulfilled as a supply constraints.
Hanging our total backlog to 50 million as compared to 30 million last.
Secondary storage revenues.
In the corner, where sequentially slightly down as ongoing industry supply constraints continue to restrict our ability to meet all near term customer from there.
Primary storage system shy meaningful sequential increase in revenue.
Due to continued recovery and R. M N a federal verticals during the second fiscal quarter.
Both vertical to see multiple headwinds over the last year, driven by Covid and other than tax and we are pleased with the improved.
The slide six months will decrease in devices and media similar to our first first book order were impacted by the supply constraints.
As Jamie discussed earlier on the call, we continue to transition or hardware product offerings to recurrent software licensing as well as the recently announced new archive storage as a service off.
In future periods, we believe we will see an acceleration of the conversion of our existing customers as well as signing up new costumes.
In addition, as Jamie also highlighted in the coming quarters, we will be transitioning more products to recurring revenue licensing, including Cat C V Deexcited, the duplication software and and cloud in Hyperconverged software.
Are unprecedented backlog as a result of the strong demand we have see across our business.
But related shipments were limited by the auto industry supply constraints.
While room, we remind investors, but not all backlog represents potential rubber they were gonna be immediate border.
It is indicative that the underlying business trends remain song.
The backlog also provides greatly improved visibility from our growing hyperscale business.
As we noted during our last quarter earnings call. Our business has historically had a relatively low level of backlog typically comprising of less than 5% of our report it poorly.
To provide more color related to the 50 million ended backlog Jill.
Just over 85% of the backlog was it related to tape products.
With just over 70% of the backlog specifically related to Hyperscaler crust.
Approximately two thirds of the backlog is expected to this shift in the second half of fiscal 2022.
And the remaining one third of the backlog at ship days early interest for your 2020.
As we mentioned in our press release today, we anticipate supply chain constraints, we'll see further improvement in our third fiscal quarter, which should allow the company to see a sequential reduction.
Levels.
Yup gross margin and the second fiscal quarter was 41%.
Dot approximately half a point from the private.
And non-GAAP gross margin equals 42% in the quarter flat sequentially with the first.
First the back half of the quarter, we experienced higher costs incurred in the supply chain that accounted for just over 1% of gross margin pressure during the quarter.
And we expect the same pressure the same level of cost pressure for the entire third fiscal quarter, which is expected to impact our gross margin by as much as two percentage points.
Yep operating expenses in the second quarter for 39 3 million.
Compared to $37.3 million and the prior.
Uhm GAAP operating expenses and the second fiscal quarter for 35.4 million.
An increase of 2 million sequentially.
The sequential increase in non-GAAP operating expenses.
Primarily due to the inclusion of operating expenses related to visit three.
And increased sales friend to support new product introductions and long term growth initiatives.
Overall, G&A spending was down 400000 sequentially, primarily due to lower professional fees related to the timing of audit services.
Yep net loss in the second order was 9.3 million for a loss of 16 cents per share.
Which included debt extinguishment charge of 15 million, partially offset by the $10 billion game from the forgiveness of our prior P. P. P law.
This compares to a net loss of 4.2 million or a loss of seven per share in the prior fiscal.
Excluding stock compensation restructuring charges and non recurring charges non-GAAP adjusted net income and a second fiscal quarter was 113000 or breakeven exceeding the high end of our guidance range compared to adjusted net income of 125.
Thousand four breakeven in the prior quarter.
Adjusted EBITDA during the second fiscal quarter was five 3 million, which exceeded the high end of our guidance range and was roughly flat sequentially.
There is a full reconciliation of our non-GAAP results to the most directly comparable gas measure and both the press release and the form tend to release today.
Now turning to the balance sheet liquidity and cash flows.
Cash and cash equivalents and restricted cash where $23 2 million as of September 30th 2021.
Compared to $24 6 million on June 30th 2021.
Address you're working capital excluding deferred revenue balances decreased by 2 million during the second fiscal quarter to 56 million.
From $58 million at the end of the prior fiscal quarter.
This decrease was primarily the result of an increase in current liabilities archly offset by higher levels of working capital assets.
Outstanding long term debt as of September 30th 2021, which.
Which included $10 million drawn down on the revolver.
Was 101.4 million after netting four $9 million, an unadvertised debt issuance costs, plus $3 1 million current portion of long term there.
This compares to 81.3 million.
How about sending that as of June 30th 2021.
After netted $8.8 million in on the amortize that additional costs.
11, 9 million current portion of long term debt that included the 10 million PPP loan that was forgiven and the second official color.
As a reminder, we successfully refinanced our long term debt early in the second fiscal quarter. Following a pay down half of the term that balance in the quarter ended March 31 2021.
Collectively these transactions have reduced our annual interest expense by 22 million.
Pretax EPS benefit of approximately 37 cents for sure.
And a reduction of annual cash payments for interest <unk>.
Excluding the increase in the revolver balance at the end of the second quarter.
The sequential increase and then that that balance is related to a recurring prepayment penalties lender fees and legal fees to complete the refinancing.
The company also paid for cash reserves, three 7 million to.
To cover a portion of these charges to complete the refinancing.
So taking into account the revolver balance of $10 million at the end of the second fiscal quarter net cash decreased by $11 4 million.
This decrease was primarily due.
<unk> 5 million cash payment for <unk>.
Three 7 million for refinancing costs.
Capex of $1.2 million.
Finally, turning to our financial outlook give.
Given the continued strength customer customer demand and continue improving conditions and supply chain constraints for the third fiscal quarter of 2022, we're guiding revenues of 104 million plus or minus $5 million.
Non-GAAP adjusted net income of breakeven.
Plus or minus 1 million.
Non-GAAP adjusted net income per share.
Zero, plus or minus two steps.
And if the EBIT 5 million plus or minus one.
Currently we are maintaining our full year revenue guidance.
Range of between 380 420 million with the range, reflecting the potential timing and magnitude of the supply chain improvements.
With that I'll turn the call back to Jamie for closing comments Jamie.
Thanks, Mike.
Our fiscal second quarter delivered strong financial results with both sequential and year on year revenue growth.
Seeding or guidance on all key metrics.
Our quarterly bookings have continued to see momentum, which resulted in another quarter of record backlog entering the third fiscal quarter.
Our long term transition towards a higher mix of software and service subscription revenue continues to progress.
Validated by another quarter of increased bookings for our cat DB solution.
We expanded our addressable market video surveillance and large data archives, while demonstrating continued growth as we make progress in building a base of recurring revenue from software and subscription services.
Combined with our view as an improvement in supply chain picture, we believe quantum Romanians poised for a strong second half of fiscal 2022.
Please join US next week in our virtual analysts day of that you can register and investors dot quantum dot com.
We appreciate your continued interest in quantum would that will now take any quick questions you may have.
Operator.
Thank you and nobody can go to your question and answer session, if you'd like to replace them to question Q. Please press star one on your telephone keypad.
A confirmation tone will indicate your lines and the question Q. He May press star two if you'd like to move to a question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing star. One we ask you. Please ask one question and one follow up then returned to the queue. Our first question.
Today is coming from Craig Hillis from be Riley. Your line is not alive.
Yeah. Thanks for taking the question and congratulations on the financial performance and a quarter Ah Jamie I wanted to start with just a high level question given what you saw intraquarter with some of the supply chain issues is it reasonable to think that the worst of the supply chain pressures is behind.
Quantum obviously, they're still out there and it's still out there for everybody, but do you feel like the ops team and and your suppliers are are in a better position than where we were three months ago now.
Yeah I mean.
With the information we have in front of US I would say, it's a dramatically different situation.
What I know now is for the last several weeks we've received among the highest weekly shipments of the constrained tape component that we needed the most.
So we have several weeks of evidence.
I always said that.
And.
October and November we'd see it strengthening and we've seen that so.
So we are receiving.
Much larger shipments of the tape component that we lacked.
Now we are getting other surprises across our products.
Sometimes it's hard drives sometimes it's nvme, sometimes it just a random chip component.
Connector, we are seeing other surprises, but their magnitude is much less.
So overall the situation has improved dramatically you see that in our guidance and we expect to start burning down through that somewhat enormous backlog over the next two to three quarters.
That's very helpful. And then the second question is really a multipart question on the primary storage business. So great to see it up 45% with a recovery and media and entertainment Federal government. The question is is that recovery and those to say segment.
Will and Mike given the strength in primary in the quarter why wouldn't we have seen more improvement in primary or excuse me not primary but product gross margins in the quarter, given what should've been favorable intersegment mixed dynamics.
Greg I'll speak really quickly to the market conditions.
Media and entertainment is stronger in television in sports.
But I still think feature films and.
Film in general.
Feature feature films motion picture things with theatrical debut.
Is still I would say touching go.
It's certainly not the production.
There just aren't as many movies being filmed today is there were and there's not as much spend on the the equipment.
But we are seeing strengthened primary and that we're selling our products to more vertical we had a goal to move beyond media and entertainment into genomics life Sciences.
Medical imagery scientific computing.
And I think we've.
We're starting to see.
That diversification of and market starting to play out.
Now I will tell you the one of the things you may recall, though in primary storage. It was one of the first products, where we separated the hardware from the software and we're selling the software on subscription. So are most our highest margin most valuable sale of software is not <unk>.
Ignited upfront anymore, it's recognized usually on a three year term. So we're starting to see the impact of moving our business model to a subscription model where that software that we used to get paid upfront is now over typically a three year contract so that.
Deferred revenue.
Is impacting that and and that's why there's so much pressure on us to show you. The other side of the equation, which is the air or the <unk> in the RPI, that's coming from that and we're going to start providing some insight into where we are with that at our Investor Conference and we're still committed that in queue for we're going to.
Start showing the a R R and all the deferred revenue from our software subscription business.
Craig what I would add to that as as I've mentioned in my comments, we were we had higher supply chain costs.
Sugar is impact with us about one percentage point across the board.
So that was another factor that was was weighing down on our gross margins.
And that's in there some incremental 200 basis points, you think in the physical third quarters, how could you mentioned in your remarks like.
Well.
Yeah, we expect that to be even bigger and Q3 right up to two points, we are working up to add.
A surplus charge to our customers a 175%.
So, we're hoping to minimize that or offset that but we do see those cost being higher going forward as well.
Thanks for the help guys. So I'll hop back in the queue.
Okay. Thanks, Craig.
Thank you for next question today is between from me, how chunky from Northland capital markets one ally.
Thank you and congrats so strong results.
Given the supply concerning issues affecting everyone, presumably guidance is more bookshelves to plot expectations rather than demanding patients. So can you share what your expectations are for bookings E changing our T O plus scrubbing you.
That's the question though.
Well, we don't give guidance on bookings, but we still see continued demand. We do expect at the level of revenue that we have forecasted but are ending backlog next quarter will be lower than 15 million. So we will be utilizing a burning.
Up some of that backlog.
But.
But still a very strong demand.
Environment.
Okay and is it the right way to calculate bookings so looked at the change in our P O plus revenue and that would be your bookings number or is there something else going on there.
While the R. P O number that's in the tend to that is the basically the deferred revenue plus our backlog.
So and you know as we burned out our backlog that number will come down and then we'll move just as deferred revenue, which deferred revenue can be a bit lumpy, especially as we go into the December quarter, because a lot of.
Of our customers sign up new contracts. So you would expect them to go up.
Okay, Great and then given a one third of backlog just for early fiscal you're twenty-three deliberate does that mean that most of the incremental backlog.
But you close it up in the current closed due to increased visibility that was discussed with respect to hyperscalers.
Bookings for fiscal year, 2002 relative to a quarter ago, it's about the same.
Yeah, I mean, it's fair to say that the bookings that are out and next year FY twenty-three, there's kind of a normal run right. We just have visibility. We just have the assurance that we've got the orders in hand.
I see okay, great. Thank you.
Thanks, though.
Thank you as a reminder that star one can you. Please into question Q. Our next call is coming from George even each from Oppenheimer. Your line of my life.
Thank you and I'll also add my congratulations on the solid results.
Jamie I you know I know you mentioned that you're already starting to see some cross selling synergies with the fifth at three acquisition could you give us an update on overall sales conductivities <unk> sales additions. In addition to that people that you added <unk>.
Yeah.
So we will be adding.
The sales a pivot three to our primary storage business and not be breaking out its results separately.
That being said whenever we make an acquisition we put a three year performa together with quarterly sales targets and both last quarter and our projections. This quarter is will be beating that plan.
And what's happening is just as you indicated we have the former pipeline that pivot three had but now what you have is.
Are very large installed base of stadiums.
Banks.
Local governments federal governments.
Defense organizations.
Our entire sales team is now compensated to cross sells surveillance into our.
Are large and loyal installed base and we're starting to see quite a bit of traction from that in.
In the pipeline.
As well as.
In quarter. So we are.
Right now.
Or last quarter and for the quarter in front of us were beating our internal objectives with our surveillance business.
[noise] and just following up on that a couple of questions. One and you were saying based on you know the segment split very strong traction in N E. N. APAC can you give us a sense of some color behind that and then just kind of a bookkeeping I believe that.
380 decor, 20th items previously excluded typically is that still the case uhm or am I correct on that you know how shall we looked at that the the full year guidance okay.
Yeah.
We put in new sales leaders in both the media and Asia and they both been on board just about a year and so what you're saying is the impact of.
The new idea of the new energy the new strategies they put in place.
Also in EMEA.
I think you're seeing a lot of strength in our data protection business because of <unk>.
Date of sovereignty issues data export issues laws in different countries, there's there's more.
I see more often people use on premise.
Backup strategies as well as in Europe, and in Asia, We've really put a strong focus on our enterprise business in the U S. I think we put a lot of energy into media and entertainment.
And that is weighing a little more on the historic or up results in North America, whereas.
In Europe, and in Asia, they're more balanced across enterprise and media and entertainment.
But also in Asia.
You know when we.
We're financially.
Press pressured.
We really put very little energy into Asia, and over the last year and a half because of the enormous populations in India. The enormous populations in China, we know that they're gonna be media and entertainment hotspots. We've also modified our portfolio.
To be more relevant in those markets be priced more appropriately for those markets. We have ways to build in those markets and we're seeing a lot of traction from that and we think we're going to do a lot more across the middle East a lot more across Europe.
Beyond just the three large economies and we're just pressing into.
More places like China, India, Brazil, and we're starting to see the results of those efforts.
And just on the hit it to the inclusion in the created a 420th right in there or not.
I'll, let Mike address.
When we gave the guidance last quarter, we said it was not including pipit three.
What what you said about pivot three was it was about $2 million.
And that's what we talked about in the script at this quarter included $2 million when we look forward.
It's.
It's a business units and we.
We really don't break out the revenue.
At that level, but we also believe it's not.
Something that's so material is to to change our guidance.
So.
Kind of how we are treating.
Okay very good thank you very much.
Okay. Thanks.
Baker next question today is coming from Eric Martin routines from make sure. Your line is alive.
Yes, I want to address the guidance just it seems like a pretty wide band if I if I look at the back half of the year. We're we're talking about in the on the order.
200, 240 million anywhere from 100 $120 million a quarter.
Why are we tightening that land a little bit and given the backlog that we're doing.
Yeah, I mean, that's a good question our backlog does give us more visibility and help us drive our contract manufacturers were better visibility as far as the.
Orders, but we also still have the uncertainties of the supply chain. So just given those uncertainties. We wanted to keep it a little broader than we typically do I mean, we usually go save 4 million. So it's not.
Significantly broader but it is a little broader than than we typically do.
Okay, and then just following up kind of related to gross margins, but also kind of related to the revenue.
What about a price increase your obviously seen price pressures, whether it's the actual.
Cost of goods or expedite and create fees.
What about raising the price list so that we've got some relief.
The revenue side.
So the cost of goods.
Yeah, we're we're actually have instituted a series of those programs.
We first instituted a 1.75% across the board.
Surcharge to deal with a predominantly the increase in.
Transportation fees and shipping fees.
Certain of our products when we moved the store next product.
Two subscription.
And as we're moving Deexcited subscription in that were instituting price increases in the 8% to 15% range based on various products.
Jim thing would active scaled cold storage with the introduction of that product weaving in added.
Price increases.
We introduced the H 4000, and we'll be introducing the age 4000 essentials and those are both at premium pricing as well.
So we're doing a combination of surcharges across the board and then products specific price increases as well and for our large customers who are ordering are putting purchase orders down that are very large and require us to buy a very large amount of material.
<unk>, we're moving to a model, where we're going to be asking for deposits to help offset the cost of the amount of materials. Some of them. We have to buy six nine and even 12 months ahead of orders. These very lead long lead time materials will be asking for deposits for as well.
So we're we're instituting a variety of programs to offset the inflationary environment that we're in.
And one thing.
Go ahead my error.
Just to add onto that understanding that anywhere where we've got orders already.
Got on pricing so it takes a little bit of time for that to work him.
Right right the use of the word surcharge is that too soon.
Ed.
Same thing as saying you expect it to be temporary and that the surcharge goes away.
Yeah, I mean, I I think.
Or I would expect that the amount of expediting that we're doing the amount of.
We're paying extra to get to get drivers quite frankly to get trucks to show up on time, we're paying a premium for that and I would expect as things settled down that isn't a normal divorce of business.
Hi, Thanks for taking my question.
Yeah sure.
Sure.
Next question today is coming from David duly from still had security your line is not alive.
Yeah. Thanks for taking my question as far as the products that you plan to move to the software service model.
Far along are we that alcohol argue with that program as far as total revenue goes and what <unk>. What you expect to move to that model how far along are you on that.
I think we're.
At the final stages, so we moved in.
And last November so a year ago.
Store next active scale.
And the.
The all terrain file system to subscription.
We are now this month, moving Dx Si to subscription removing cat DB to subscription relaunched active scaled cold storage as a service so it's honest subscription.
We have star next in the Amazon marketplace, which is on subscription.
The only thing at this stage.
That is not on subscription is our surveillance business and our tape hardware business now the tape hardware will more increasingly salads part of active scale cold storage and we'll be moving.
The.
Surveillance business to both software and the software subscription, but our traditional businesses of DSI active scales store next they're all being moved over now.
And I think Q4 will be our first quarter, where basically everything except surveillance.
And tape hardware will beyond subscription.
In the queue three will be.
We will be making the final moves over.
And Q4 will be a complete quarter, where again everything except surveillance and tape hardware, it's going to be on subscription and that quarter will will announce.
The more.
Modern metrics, if you will for a subscription business of <unk>.
<unk> and <unk>, we'll add the Investor day.
Give you what you should expect that will exit the year at in a R. R and what you can expect total recurring revenue looks like at.
At the end of our fiscal 2002.
Okay, and a follow up.
Uhm.
Gross margins.
I think I understood your explanation, but maybe you could just to get a little more detail when you move to a software and subscription models typically gross margins go up Yep, we're seeing them go down a little bit.
Could you just.
Sure.
On the front and the back and like you were talking about so we get a clear picture as to when they're gonna get better again.
I mean I'll walk through an example, and I think Mike will give you more colour we.
We closed a large sports company.
Where they bought $2 million of the store next software.
Now in our old model I would have recognized that 2 million of software, which is at 80 or 90 point to margin, we would've recognized it now but.
But instead.
We recognized probably one or two months of that and the other 34 months of that will be recognised over the next 34 months. So what we're doing as we rather than wreck like cat Dv, if I sell a million dollars of cat Dv in the old days, we'd recognize $1 million in quarter.
<unk> now I recognize 136 per month over the next 36 months, so that and but I recognized the hardware upfront. So we're recognizing the lowest margin parts of it now while taking the highest margin pieces and spreading it over three years.
And.
And that's why.
If you just look at revenue and margin you're not seeing the whole story, you've got to see that our our story.
And we're just in that transition.
And again this will be the last quarter.
Q3 quarter as the last quarter, where we're not going to be.
Bringing those metrics forward in queue for everything is going to be based in and around subscription and the metrics of a subscription business.
Yeah.
Dave what I would add to that is we're in the early stages arrived I mean, all these products will be available, but they are building overtime and.
Will give a sense of how this will look over the next five years on our analysts day as well.
So I think that'll be.
Also help you understand how we transition to this recurring revenue model at the when.
When we get out five years, we still expect 30% of our revenue will be product based revenue right. So we're not moving the entire business.
Don't expect to move the entire business to the recurring and our goals of 70 30 model, 70% recurring 30% upfront one time.
Thank you.
Okay.
Thank you we reached end of our question and answer session I'd like to turn the floor back over to management for any further closing comments.
Thanks, everyone. Thanks for attending today and I invite everyone to join US on November 9th Farrar Investor confidence.
Can sign up for that conference on.
Investor website at quantum dot com, thanks to everyone.
Thank you I'll just conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.