Q3 2022 Quantum Corp Earnings Call

Speaker 1: Good afternoon everyone and thank you for participating in today's conference call to discuss quantum financial results for the third quarter fiscal 2018.

Good afternoon, everyone and thank you for participating in today's conference call to discuss Quantum's financial results for the third quarter fiscal 2022 at this time all participants are in a listen only mode.

Speaker 1: At this time, all participants are in a 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 0 on your telephone keypad.

<unk> 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.

Speaker 1: As a reminder, this conference call is being recorded. I would now like to turn the conference over to Brian Cabrera from...

Speaker 2: Good afternoon and thank you for joining today's conference call to discuss Quantum's third quarter fiscal 2022 financial results.

Good afternoon, and thank you for joining today's conference call to discuss Quantum's third quarter fiscal 'twenty to 'twenty two financial results.

I'm, Brian Cooper, Quantum's, Chief legal and compliance officer, joining me today are Jamie Lerner, Chairman and CEO and Mike <unk> CFO .

Speaker 2: I'm Brian Cabrera, Quantum's Chief Legal and Compliance Officer.

Speaker 2: Joining me today are Jamie Lerner, Chairman and CEO , and Mike Godson, CFO .

Speaker 2: This afternoon we issued a press release which you can access a copy of on Quantum's website at www.quantum.com under the investor relations section.

This afternoon, we issued a press release, which you can access a copy out on quantum's website at www dot quantum dot com under the Investor Relations section.

Speaker 2: There is also a slide presentation that we will be using in conjunction with today's call that may be accessed through the webcast link.

There is also a slide presentation that we will be using in conjunction with today's call that may be accessed through the webcast link.

Speaker 2: on the IR website and is also posted as a PDF in the investor relations section.

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 should be deemed as forward looking quantum.

Speaker 2: 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.

Speaker 2: Quantum advises caution and reliance on forward-looking states.

Quantum advises caution and reliance on forward looking statements. These statements include without limitation any projections of revenue margins expenses adjusted EBIT adjusted.

Speaker 2: These statements include, without limitation, any projections of revenue, margins, expenses, adjusted e-bistah, adjusted net income, cash flows, or other financial items.

Adjusted net income cash flows or other financial items also any statements concerning the expected development performance and market share or competitive performance relating to products or services.

Speaker 2: Also, 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.

Speaker 2: All forward-looking statements are based on information available to Quantum on the day hereof. These statements involve known and unknown risks, uncertainties, and other factors that may cause Quantum's actual results to differ materially from those implied by the forward-looking statement.

These statements involve known and unknown risks uncertainties and other factors that may cause quantum's actual results to differ materially from those implied by the forward looking statements.

Speaker 2: including unexpected changes in the company's business.

Including unexpected changes in the company's business.

Speaker 2: 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. These risk factors include

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.

These risk factors include but are not limited to <unk>.

Speaker 2: risks and uncertainties listed in the section entitled risk factors in Quantom's quarterly report on Form 10-Q and annual report on Form 10-K as filed with the FCC.

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.

Speaker 2: 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.

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.

Speaker 2: Additionally, the company's press release and management statements during the conference call will include discussions of certain measures and financial information in GAAP and non-GAAP .

Additionally, the company's press release and management's statements. During the conference call will include discussions of certain measures and financial information in GAAP and non-GAAP .

Speaker 2: Included in the company's press release are definitions and reconciliations of gap to non-gap items, which provide additional details.

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.

Speaker 2: 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.

Speaker 2: Now I would like to turn the call over to the Chairman and CEO , Jamie Lerner. Jamie?

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 today.

Speaker 3: Thank you, Brian , and thank you all for joining us today.

Earlier this afternoon, we announced results for our third fiscal quarter.

Speaker 3: Earlier this afternoon, we announced results for our third fiscal quarter. Revenue was 95.3 million with backlog increasing sequentially to 62 million, another quarterly record for the company with strong demand offset by ongoing supply chain headings.

Revenue was $95 3 million with backlog increasing sequentially to Q2.

2 million another quarterly record for the company with strong demand offset by ongoing supply chain headwinds.

Our recurring revenue transition continued to accelerate with more than 255 customers utilizing quantum subscription solutions.

Speaker 3: Our recurring revenue transition continued to accelerate with more than 255 customers utilizing quantum subscription solutions of 30% sequentially and 98% year-over-year.

Up 30% sequentially and 98% year over year.

With more products transitioning to a subscription contract our year over year subscription revenues increased more than 190%.

Speaker 3: With more products transitioning to a subscription contract, our year-over-year subscription revenues increased more than 190,000.

Our flat third quarter revenue results are not indicative of the true underlying demand trends in our business, which had been at historically high levels, but impacted by the impressive unprecedented supply chain headwinds.

Speaker 3: Our flat third quarter revenue results are not indicative of the true underlying demand trends in our business, which have been at historically high levels, but impacted by the unprecedented unprecedented supply chain head-

Speaker 3: The third fiscal quarter represents our fifth sequential quarter of bookings exceeding revenue.

The third fiscal quarter represents our fifth sequential quarter of bookings exceeding revenue.

Speaker 3: As Michael discussed, we estimate that roughly $26 million of customer orders in the quarter could not be fulfilled, which had a major impact on revenue, gross margins, earnings, and adjusted EBITDA.

As Michael discussed, we estimate that roughly $26 million of customer orders in the quarter could not be fulfilled.

Which had a major impact on revenue gross margins earnings and adjusted EBITDA.

Speaker 3: I'll discuss the supply chain situation and the actions we are taking in more detail shortly.

I'll discuss the supply chain situation and the actions we are taking in more detail shortly.

Our hyperscale business grew meaningfully both sequentially and year over year, despite the supply challenges and has become less lumpy over the last four quarters.

Speaker 3: Our hyperscale business grew meaningfully both sequentially and year over year despite the supply challenges and has become less lumpy over the last four quarters.

Speaker 3: Our media and entertainment vertical has begun to stabilize while not above pre-COVID levels.

Our media and entertainment vertical has begun to stabilize while not above pre COVID-19 levels.

Our progress within store next the first point product, we transitioned to a subscription model has begun to take hold.

Speaker 3: Our progress within Storenext, the first point product we transitioned to a subscription model, has begun to take hold.

Speaker 3: Revenues for Stornex in the third fiscal quarter were flat year over year, but the prior year was primarily a product sale, while this quarter we are deferring a portion of the initial upfront revenue due to our shift toward subscription.

Revenues for <unk> in the third fiscal quarter were flat year over year, but the prior year was primarily a product sale. While this quarter. We are deferring a portion of the initial upfront revenue due to our shift towards subscriptions.

Speaker 3: The chart on the left provides a picture of how significant the increase in backlog has been over the last five quarters, while revenue has remained essentially flat.

The chart on the left.

Provides a picture of how significant the increase in backlog has been over the last five quarters. While revenue has remained essentially flat.

Speaker 3: The disconnect between our reported quarterly revenue and acceleration and levels of backlog is due to the unprecedented headwinds we have faced within our supply.

The disconnect between our reported quarterly revenue and acceleration in levels of backlog is due to the unprecedented unprecedented headwinds we have faced within our supply chain.

Also during the quarter, we had multiple shipping partners.

Speaker 3: Also during the quarter, we had multiple shipping partners decide not to accept deliveries on New Year's Eve, a change from years past, which further limited our ability to shift and recognize revenue.

<unk> not to accept deliveries on new year's Eve.

Changed from years past.

Which further limited our ability to ship and recognize revenue.

Speaker 3: We also saw significant cost increases for raw materials needed to fulfill customer orders.

We also saw significant cost increases for raw materials needed to fulfill customer orders coupled.

Speaker 3: coupled with much higher levels of freight and shipping costs that were materially higher than we previously anticipated.

Coupled with much higher levels of freight and shipping costs.

That were materially higher than we previously anticipated.

Now, let me turn to a more detailed discussion of the supply situation, which remains very dynamic with new challenges being introduced that werent present, even a few months ago.

Speaker 3: Now let me turn to a more detailed discussion of the supply situation, which remains very dynamic with new challenges being introduced that weren't present even a few months ago.

Speaker 3: While supply of tape drives has improved per LTO 7 and LTO 8, the biggest impact to our business remains the quantity of supply, which has not yet returned to normal.

While supply of tape drives has improved <unk> seven and <unk> eight the biggest impact to our business remains the quantity of supply.

Which has not yet returned to normalized levels.

Speaker 3: During the third quarter, LTO9 tape drives started shipping, but overall supply of LTO9 has been constrained due to initial manufacturing challenges.

During the third quarter L. T O nine tape drives started shifting but overall supply is L. T O nine drive has been constrained due to initial manufacturing challenges, which is typical during that transition to a new version of <unk> technology.

Speaker 3: which is typical during a transition to a new version of LTO technology.

Speaker 3: This was especially notable with one of our largest hyperscale customers who converted a large order for LTO eight drives to LTO nine drives during the quarter and increase their order by 10 million dollars.

This was especially notable with one of our largest hyperscale customers, who converted a large order for <unk> eight drives two L. T O nine drives during the quarter.

And increase their order by $10 million.

Speaker 3: Due to the limited availability of LTO9 drives, this switch impacted our ability to fulfill the order. kept in the money.

Due to the limited availability of LTR nine drives this which impacted our ability to fulfill the order.

And our reported revenue.

As our prior guidance included shipments for <unk> eight based drives to this customer.

Speaker 3: as our prior guidance included shipments for LTO8-based drives to discuss.

Speaker 3: In addition to the headlands we are facing in supply of tape drives, we are experiencing broad-based shortages of components for servers, network cards, and circuit boards very consistent with what peers in the storage industry are citing.

In addition to the headwinds we are facing in supply of tape drives we are experiencing broad based shortages of components for servers network cards and circuit boards very consistent with what peers in the storage industry are citing.

Speaker 3: We continue to work closely with our suppliers as well with our contract manufacturers to mitigate current

We continue to work closely with our suppliers as well as our contract manufacturers to mitigate.

Current supply shortages, which as of today, we lack the visibility to state when a more normalized supply chain will return.

Speaker 3: which as of today, we lack the visibility to state when a more normalized supply chain will return.

Under these circumstances, we are immediately implementing a series of cost reduction measures.

Speaker 3: Under these circumstances, we are immediately implementing a series of cost reduction measures.

Speaker 3: We are instituting pricing increases across our product categories.

We are instituting pricing increases across our product categories.

Speaker 3: and we are focusing on supply chain and operational.

And we are focusing on supply chain and operational excellence.

Some other highlights from the quarter include continued share gains in the Hyperscale type market.

Speaker 3: Some other highlights from the quarter include continued share gains in the hyperscale tape market.

Speaker 3: As of today, four of our hyperscale customers now utilize more than an exabyte of storage capacity, and we continue to view this business as a growth driver in future years.

As of today four of our Hyperscale customers now utilized more than an exit by storage capacity and we continue to view this business as a growth driver in future years.

During the third fiscal quarter, we closed a multimillion dollar video surveillance deal at a government agency.

Speaker 3: During the third fiscal quarter, we closed a multimillion dollar video surveillance deal at a government agency, which is a

Which is currently in backlog.

Speaker 3: This deal highlights our recent success at the cross-selling and upselling occurring between Pivot3 and quantum-based solutions.

This deal highlights our recent success at cross selling and up selling occurring between pivot three and quantum based solutions.

Speaker 3: Another example of our product cross-selling success we've had to date. We sold StorNext as a subscription combined with TAPES to create an effective, customer-friendly solution for long-term retention of surveillance data.

Another example of our product cross selling success, we've had to date, we sold store next as the subscription comp combined with tape to create an effective customer friendly solution for long term retention of surveillance data.

Speaker 3: This was a conversion win utilized by a large distributor in Southern California previously using a competitive solution.

This was the conversion when utilized by a large distributor in southern California, previously using a competitive solution.

Speaker 3: The newly deployed solution now captures surveillance data on quantum software and uses quantum tape for long-term retention and archiving.

The new the newly deployed solution now captures surveillance data on quantum software and use this quantum tape for long term retention and archiving.

Speaker 3: We believe this type of win is very repeatable and only Quantum offers this end-to-end portfolio.

We believe this type of win is very repeatable and only quantum offers this end to end portfolio.

Speaker 3: Also during the quarter, we closed a multi-million dollar object storage deal with a genomics research institution and closed our first six-figure, software-only object storage win at a large semiconductor manufacturer with a third party providing the hard work.

Also during the quarter, we closed a multimillion dollar object storage deal with a genomics research institution.

Closed our first six figure software only.

Storage win.

At a large semiconductor manufacturer with a third party, providing the hardware component.

Both customers are managing large unstructured data sets and quantum solution offers unique value in terms of scale durability and ease of use.

Speaker 3: Both customers are managing large unstructured data...

Speaker 3: And Quantum Solution offers unique value in terms of scale, durability, and ease of use.

Speaker 3: It was also a solid quarter for the H-Series and F-Series within primary storage, mostly within the media and entertainment vertical.

It was also a solid quarter for the H series and F series within primary storage, mostly within the media and entertainment vertical.

We continue to get recognized for our innovation during the quarter as our ransom block solution garnered two industry awards.

Speaker 3: We continue to get recognized for our innovation during the quarter as our ransom block solution garnered two industry awards.

Speaker 3: And our solutions for ransomware protection and cyber resilience continue to resonate and gain traction in the market.

And our solutions for Ransomware protection and cyber resilience continued to resonate and gained traction in the market.

Now I'd like to turn the call over to Mike to provide more detail on the results then we can take questions.

Speaker 3: Now, I'd like to turn the call over to Mike to provide more detail on the results. Then we can take questions.

Mike.

Speaker 4: Thank you, Jamie. Welcome everyone to our call to the.

Thank you Jamie.

Welcome everyone to our call today.

Speaker 4: Our third fiscal quarter of 2022 represented another quarter of strong customer demand, albeit with continued significant supply chain headwinds, as Jamie summarized earlier on this call.

Our third fiscal quarter of 2022 represented another quarter of strong customer demand.

Be it with continued significant supply chain headwinds as Jamie has summarized earlier on this call.

Speaker 4: Revenue for the quarter was 95.3 million, up 2% sequentially.

Revenue for the quarter was $95 3 million up 2% sequentially.

Adding to the ongoing supply chain constraints during the quarter.

Speaker 4: Adding to the ongoing supply chain constraints during the quarter was rising cost pressures that impacted our gross margins to a greater extent than expected.

It was rising cost pressures that impacted our gross margins to a greater extent than expected.

As a result of the continued strong customer demand coupled with the supply chain constraints the.

Speaker 4: As a result of the continued strong customer demand, coupled with the supply chain constraints,

Speaker 4: The customer order backlog grew over 10 million during the quarter to 62 million from 50 million last quarter and 30 million as of June 30, 2021.

Customer order backlog grew over 10 million during the quarter.

The $62 million.

From 50 million last quarter and $30 million as of June 32021.

Approximately $26 million of orders in the backlog could have been shipped to customers in the third fiscal quarter. If we would've had the support from the supply chain.

Speaker 4: Approximately $26 million of orders in the ending backlog could have been shipped to customers in the third fiscal quarter if we would have had the support from the supply chain.

This $26 million and unfulfilled orders.

Speaker 4: compares to just over 15 million in unfulfilled orders in the prior quarter.

Compares to just over $15 million and unfulfilled orders in the prior quarter.

Just over $50 million of backlog.

Speaker 4: Just over $50 million of the ending backlog represent

It presented tape products fruition.

Speaker 4: for which the majority was for orders from a hyperscale customer.

For which the majority was for orders from our Hyperscale customers.

As of today, we anticipate that the supply chain constraints will remain challenging.

Speaker 4: As of today, we anticipate that the supply chain constraints will remain challenging, eliminating the company's ability to ship against all customer demand, and recognizing a meaningful portion of the current box.

The name of the company's ability to ship against all customer demand and recognize a meaningful portion of the current backlog.

Speaker 4: During the third fiscal quarter, secondary storage revenues were up 17% sequentially, primarily driven by the increase in high-

During the third fiscal quarter set.

Secondary storage revenues were up 17% sequentially.

Primarily driven by the increase in Hyperscale or revenues.

Speaker 4: as well as the improving supply of LTO7 and LTO8 drives that help support sequential revenue growth.

As well as the improving supply a L. T O seven and they'll do it drives that helps support sequential revenue growth.

Primary storage systems saw a sequential decline in revenue down 17%, partially due to a delay in the recovery within our federal vertical.

Speaker 4: Primary storage systems saw a sequential decline in revenue, down 17%, partially due to a delay in the recovery within our federal vertical.

Speaker 4: combined with deferring a portion of revenue as we grow our subscription business with revenue.

Bind with deferring a portion of revenue as we grow our subscription business.

With revenues from store next.

The increase in devices and media during the third quarter up 20% sequentially.

Speaker 4: The increase in devices and media during the third quarter of 20% sequential.

Speaker 4: benefited from improved supply of certain tape drives following multiple quarters of head

Benefited from improved supply of certain tape drives following multiple quarters of headwinds.

GAAP and non-GAAP gross margin in the third fiscal quarter was 37%.

Speaker 4: GAAP and non-GAAP gross margin in the third fiscal quarter was 37 percent down over four percentage points.

Now in over four percentage points from the prior quarter.

Speaker 4: During our call last quarter, we noted our expectations were for cost pressure, which at the time, we anticipated could impact the gross margin by as much as 2%.

During our call last quarter, we noted our expectations were for cost pressure, which at the time, we anticipated could impact gross margin by as much as two percentage points. However.

Speaker 4: However, during the third fiscal quarter, we experienced much higher manufacturing costs, combined with higher freight, warehouse, and other logistics costs, that in total had a more severe impact than expected on a gross margin in the quarter.

However, during the third fiscal quarter.

We experienced much higher manufacturing costs combined with higher freight warehouse and other logistics costs that in total had a more severe impact unexpected on our gross margin in the quarter.

Speaker 4: Given the increasing cost of virtually all aspects of our supply chain, we are implementing another price increase this quarter.

Given the increasing cost in virtually all aspects of our supply chain. We are implementing another price increase this quarter.

Speaker 4: As we mentioned on the call last quarter, we implemented a 5% price increase for our products.

As we mentioned on the call last quarter, we implemented a 5% price increase for our products, but I'll feel a more substantial additional increases required to offset the rising cost environment.

Speaker 4: but now feel a more substantial additional increase is required to offset the rising cost environment.

Speaker 4: We expect the benefit from these price increases to take one to two quarters to gain full traction.

We expect to benefit from these price increases to take one to two quarters to gain full traction.

GAAP operating expenses in the third.

Speaker 4: quarter were 42.4 million compared to 39.3 million in the prior quarter.

Quarter were $42 4 million compared to $39 3 million in the prior quarter.

Speaker 4: non-GAAP operating expenses in the third fiscal quarter were $36.4 million, an increase of approximately $1 million sequentially.

non-GAAP operating expenses in the third fiscal quarter was $36 4 million.

An increase of approximately $1 million sequentially.

Speaker 4: The increase was primarily due to inclusion of expenses related to a full quarter of pivot three and ncloud n, increased sales

The increase was primarily due to inclusion of expenses related to a full quarter of for the three and M cloud and.

Increased sales and marketing spend.

Speaker 4: and increase investment for the development of next generation LTO technology.

We have increased investment for the development of next generation L. T O technology.

These increases were partially offset by a nonrecurring benefit from reduced ERP support costs related to legacy installation that is being replaced.

Speaker 4: These increases were partially offset by a non-recurring benefit from reduced ERP support costs related to legacy installation that is being replaced.

Speaker 4: Given the continued pressure on revenues due to the supply chain constraints.

Given the continued pressure on revenues due to the supply chain constraints.

Speaker 4: combined with the increasing supply chain cost environment.

With the increasing supply chain cost environment.

Speaker 4: In addition to increasing our prices, we're also implementing certain operating expense reduction programs in the fourth fiscal quarter.

In addition to increasing our prices were also implementing certain operating expense reduction programs in the fourth fiscal quarter.

Speaker 4: We expect to reduce our offering expense run rate between one and two million during the fourth fiscal quarter.

We expect to reduce our operating expense run rate between one and $2 million during the fourth fiscal quarter.

Speaker 4: Gap net loss in the third fiscal quarter was $11.1 million, or a loss of $0.19 per share.

GAAP net loss in the third fiscal quarter was $11 1 million or a loss of <unk> 19 per share.

Speaker 4: This compares to a net loss of $9.3 million, or a loss of 16 cents per share in the prior fiscal quarter.

This compares to a net loss of $9 3 million or a loss of <unk> 16 per share in the prior fiscal quarter.

Speaker 4: which included a debt extinguishment charge of 15 million partially offset by a gain of 10 million for the forgiveness of the PPP law.

This included a debt.

Spanglish went charge of $15 million, partially offset by a gain of $10 million for the forgiveness of the PPP loan.

Speaker 4: excluding stock compensation, restructuring charges, and non-recurring charges, non-GAAP adjusted net loss in the third fiscal quarter was $4.6 million or per diluted share loss of seven cents compared to adjusted income of $114,000 or break even in the prior quarter.

Excluding stock compensation restructuring charges and nonrecurring charges non-GAAP adjusted net loss in the third fiscal quarter was $4 6 million or a per diluted share loss of seven cents.

Compared to adjusted net income of 114000 or breakeven in the prior quarter.

Speaker 4: adjusted EBITDA in the third fiscal quarter was $0.8 million.

Adjusted EBITDA in the third fiscal quarter was <unk> 8 million.

Speaker 4: reflecting lower than expected revenues and gross margins due to the unprecedented headwinds we have faced related to the supply chain constraints and related increased costs.

Reflecting lower than expected revenues and gross margins due to the unprecedented headwinds we faced related to the supply chain constraints and.

And related increased costs.

Speaker 4: There's a full reconciliation of our non-GAAP results to the most directly comparable GAAP measure in both the press release and the Form 10Q released today.

There's 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.

Speaker 4: Now turning to the balance sheet, liquidity, and cash flow.

Now turning to the balance sheet liquidity and cash flows.

Speaker 4: cash and cash equivalents and restricted cash were $4.3 million as of December 31st, 2021.

Cash and cash equivalents and restricted cash were $4 3 million as of December 31, 2021.

Speaker 4: compared to $23.2 million on September 30th, 2021.

Compared to $23 2 million at September 30th 2021 .

Speaker 4: Adjusted working capital, excluding cash and deferred revenue balances, increased by $6.5 million during the third fiscal quarter to $62.3 million from $55.8 million at the end of the prior fiscal quarter.

Adjusted working capital, excluding cash and deferred revenue balances increased by $6 5 million during the third fiscal quarter to $62 3 million from $55 8 million at the end of the prior fiscal quarter.

Speaker 4: This increase was primarily the result of an increase in accounts receivable.

This increase was primarily the result of an increase in accounts receivable.

Speaker 4: inventories, and other current assets partially offset by an increase in accounts payable.

Inventories and other current assets, partially offset by an increase in accounts payable.

Outstanding debt as of December 31, 2021 was $101 7 million.

Speaker 4: Outstanding debt as of December 31, 2021 was $101.7 million after netting $4.6 million in unamortized debt issuance costs compared to $104.5 million of outstanding debt as of September 30, 2021 after netting $4.9 million in unamortized debt issuance costs.

After netting $4 6 million in unamortized debt issuance costs compared to a $104 5 million of outstanding debt as of September 32021, after netting $4 9 million and unamortized debt issuance costs.

Speaker 4: To summarize the 18.9 million decrease of cash, of net cash used during the quarter, over half of the net use

To summarize the $18 9 million decrease of cash of net cash used during the quarter.

Over half a dozen that use of cash, whereas the net increase in working capital and debt pay down of debt.

Speaker 4: was the net increase in working capital and that pay down of debt.

Speaker 4: with the remaining use primarily related to the mCloudN acquisition of $2.8 million, net cash used by operating activities of $2 million, excluding changes in assets and liabilities, and $1.6 million of capex for the quarter.

With the remaining use primarily related to the cloud and the acquisition of $2 8 million.

Net cash used by operating activities of $2 million, excluding changes in assets and liabilities.

And $1.6 million of Capex for the quarter.

As of the end of the third fiscal quarter, we remained in compliance with all debt covenants, but given our current expectations that the supply chain disruptions. We have experienced in the last four quarters. We will continue in the foreseeable future we have.

Speaker 4: As of the end of the third fiscal quarter, we remained in compliance with all debt coverage.

Speaker 4: But given our current expectations that the supply chain disruptions we have experienced in the last four quarters will continue in the foreseeable future, we have begun to work with our lenders to address any potential future covenant compliance issues, as well as any potential need for additional liquidity.

Begun to work with our lenders to address any potential future covenant compliance issues.

As well as any potential need for additional liquidity.

Speaker 4: We believe this is simply the prudent course to take at this time to get in front of any potential issues as we attempt to work through and address headwinds from the supply chain.

We believe this is simply the prudent course to take at this time to get in front of any potential issues as we attempt to work through and address headwinds from the supply chain.

Okay.

Finally, turning to our financial outlook.

We do expect continued pressure on revenues due to the supply chain constraints combined with the increasing supply chain costs environment.

Speaker 4: We do expect continued pressure on revenues through the supply chain constraints, combined with the increasing supply chain costs and biases.

Speaker 4: To a lesser extent, we also have lower seasonal demand in the fourth fiscal core.

To a lesser extent, we also have lower seasonal demand in the fourth fiscal quarter.

Speaker 4: Taking these factors into consideration for the fourth fiscal quarter of 2022, we are guiding

Taking these factors into consideration for the fourth fiscal quarter of 2022, we are guiding.

Speaker 4: revenues of 92 million plus or minus 5 million.

Revenues of $92 million, plus or minus $5 million.

Speaker 4: non-GAAP adjusted net loss of 4 million plus or minus 1 million.

non-GAAP adjusted net loss of $4 million, plus or minus $1 million.

Speaker 4: non-GAAP adjusted net loss per share of seven cents plus.

non-GAAP adjusted net loss per share of seven <unk>.

Plus or minus two cents.

Speaker 4: and adjusted EBITDA of breakeven plus or minus 1 mil.

And adjusted EBITDA of breakeven plus or minus $1 million.

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

Speaker 4: With that, I'll turn the call back to Jamie for closing comments. Jamie? Thanks, Mike.

Thanks, Mike.

We believe the underlying demand trends in our business strong order flow and record levels of backlog reflects the positive momentum of our business transformation.

Speaker 3: strong order flow, and record levels of backlog reflect the positive momentum of our business transformation.

Speaker 3: Bookings outgrew revenue for the fifth consecutive quarter, and we continue to drive growth across our hyperscale business.

Bookings outgrew revenue for the fifth consecutive quarter.

And we continue to drive growth across our Hyperscale business, demonstrating the value we're delivering for these leading edge customers.

Speaker 3: demonstrating the value we're delivering for these leading edge cuts.

Speaker 3: We are also closing a higher number of deals, both in number and dollar value, across a larger customer.

We are also closing a higher number of deals both in number and dollar value across a larger customer base.

Speaker 3: And we are continuing to convert more customers to a software subscription based model.

And we are continuing to convert more customers to a software subscription based model.

Speaker 3: our business is being limited by this unprecedented supply chain environment.

Our business is being limited by this unprecedented supply chain environment.

Speaker 3: and we are working diligently with our suppliers to manage the situation as effectively as possible.

And we are working diligently with our suppliers to manage the situation as effectively as possible.

Speaker 3: The quantum team remains committed to delivering continued order momentum, and we are well prepared to exit these constraints at a much higher velocity than just a few quarters ago.

The quantum team.

<unk> committed to delivering continued order momentum and we are well prepared to exit these constraints and a much higher velocity in just a few quarters ago.

Speaker 3: With that, we will now take any questions you may have.

With that we will.

Now take any questions you may have.

Operator.

Speaker 1: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star 2 button.

Thank you at this time well be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May Press Star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before.

And the stocking.

Speaker 1: we ask that you limit your questions to one question and one follow-up per person. One Computing

I ask that you limit your questions to one question and one follow up per person one moment. Please poll for questions.

Speaker 1: Our first question is from Craig Ellis of B. Riley.

Our first question is from Craig Ellis of B Riley.

Please proceed with your question.

Yes. Thanks for taking my question guys I wanted to make sure I understood.

Speaker 5: Yeah, thanks for taking that question. Guys, I wanted to make sure I understood the the variance on revenues to start.

The variance on revenues to start.

Speaker 5: So I think I heard that there was a 10 million LTO 8 to 9 customer order change issue that impacted sales. Are you saying that that was the reason that revenues were so materially below the guidance midpoint, or is that plus other issues? Can you, Mike, just give us a buildup of what the specifics were between where the guidance midpoint was and where revenue shook out?

So I think I heard that there was a 10 million L. T O eight to nine customer quarter change issue that impacted sales are you, saying that but that was the reason the revenues for so materially below the guidance midpoint or or it's that plus other issues can you just give us a buildup of what the specifics were between.

Whereas the guidance mid point question, where revenue shook out.

Speaker 4: Sure. When you look at the guidance of 104 going to 95, really it was supply chain issues, which we knew going in. But really what was different within the corridor was the transition from LTO8 to LTO9 was one big issue, where we had forecasts.

Sure when you look at the the guidance of 104 going to 95 really was a supply chain issues, which we knew going in but really what was different within the quarter was the transition from <unk> to LTE on nine was one big issue.

Where we had forecast forecasted more <unk> revenue, but we had customers that were changing their orders from LTE to LTE or nine and we were constrained on L. T. O. Nine so that was one significant difference or a issue that drove the decline and the other really is a more broad based shortage.

Speaker 4: forecasted more LTO 8 revenue. But we had customers that were changing their orders from LTO 8 to LTO 9. And we were constrained in LTO 9.

Speaker 4: So that was one significant difference or issue that drove the decline. And the other really is a more broad-based shortage of components, servers, network.

Components servers network cards.

Speaker 4: circuit boards, you know, to a greater extent than we had experienced in the prior quarter, and really was, you know, the other significant contributor to the revenue shortfall.

Good boards.

To a greater extent than we had experienced in the prior quarter and really what's you know the other significant contributor to the revenue shortfall.

From from the midpoint.

Speaker 5: As a follow-up to that and before my second question then, can you just comment on how confident you are in

As a follow up to that and before my second question. Then can you just comment on how confident you are in in the businesses ability to forecast demand levels and forecast component needs.

Speaker 5: in the business's ability to forecast demand levels and forecast component needs and really align forecast to customer desires. There are absolutely component constraints out there and everybody's facing them, but it seems to be impacting quantum.

And really align forecast to customer desires, there absolutely component constraints out there and everybody is facing them, but but it seems to be impacting quantum particularly abruptly in the most recent quarter.

Speaker 5: particularly abruptly in the most recent quarter.

Yes, Craig I'll speak to that.

Speaker 3: Yeah, Craig, I'll speak to that. We've had to take a significant departure from the way we were forecasting.

We've had to take a significant departure from.

From the way we were forecasting previously.

Speaker 3: And the departures are on several levels. The first is...

And the departures are on several levels of the first is.

Speaker 3: Very often we would forecast demand and we would forecast parts that we hoped or expected to arrive.

Very often we would forecast.

And and we would forecast parts that we hoped or expected to arrive.

Speaker 3: Today, we're forecasting off of deals that we've already...

Today, we're forecasting off of deals that we've already closed.

Speaker 3: forecasting off of inventory we already have parts that are either here or on their way here. We just had so many...

Forecasting off of inventory, we already have.

Art center, either here or on their way here.

Just had so many deep commitments.

Speaker 3: or delivery schedules that our suppliers did not meet, or pricing levels that they did not meet.

Or delivery schedules that our suppliers did not meet our pricing levels that they did not meet so we're now forecasting the 92 off of either.

Speaker 3: So we're now forecasting the 92 off of either orders we already have and parts that are already in inventory. So a much higher percentage of that forecast is based on things that we already know versus things we don't know.

Orders, we already have and parts that are already in inventory. So a much higher percentage of that forecast is based on things that we already know versus things we expect.

Speaker 3: The second thing we're doing, which is a large departure.

The second thing, we're doing which is large departure.

Speaker 3: is we're redesigning our products and the componentry within them.

Is we're redesigning our products and the componentry within them.

Speaker 3: Now, many vendors are having supply chain issues, whether it's Cisco or Ford Motor Company or companies of that size. Now, we do not have the purchasing power that those companies have. So, what we're doing is we're designing our products to use more popular components that have more

Now many vendors are having supply chain issues, whether it's Cisco, our Ford motor company or <unk>.

Companies of that size now we do not have the purchasing power that those companies have so what we're doing is we're designing our products to use more popular components that have more supply available and are available at lower prices, so rather than try and get supply.

Speaker 3: supply available and are available at lower prices. So rather than try and get supply chain attention versus Ford and Cisco and others, we're modifying our products so that they use components that are easier to get.

Chain attention versus Ford and Cisco and others, we're modifying our product suite that they use components that are easier to get.

Speaker 3: That's the second thing that we're doing. And I think between the more conservative forecasting method and the way that we're making our products easier to get components for, we hope to get a better result. But overall, we're choosing a more conservative model, even a more conservative departure from what we were doing previously.

That's the second thing that we're doing and I think between the the more conservative forecasting method and the way that we're making our products.

Z or to get components for we hope to get a better result, but overall, we're choosing a more conservative model and even a more conservative departure from what we were doing previously.

Got it thanks for that Jamie and then the second question Mike.

Speaker 5: Thanks for that, Jamie. The second question, Mike, I want to couple two items on the income statement. Gross margins, you are clear that you've got cost pressures, a range of them that have caused gross margin to be down 400 basis points in the quarter. The question is this, when do you expect a material improvement in gross margins and how do you expect that to be increased?

Come on a couple too.

Say items on the income statement. So gross margins you were clear that you've got cost pressures a branch of them, but to cause gross margin to be down 400 basis points in the quarter. The question is this when do you expect a material improvement in gross margins in and when which.

Speaker 5: And when would you expect that we could see adjusted EBITDA move materially back into the black?

You expect that we could see adjusted EBIDTA move materially back into the black.

Speaker 4: Right. First, on the gross margin, as we had talked about last quarter, we have increased our prices across all of our products 5%. With the further increases we saw this quarter, we are rolling out another set of additional increases, which are going to be higher than that. I would say plus or minus, probably at least 10 points additional.

Alright.

So first on the gross margin.

As we had talked about last quarter, we have increased our prices across all of our products 5%.

And with the Inc. Further increases we saw this quarter, we are rolling out another set of additional increases which are going to be higher than that.

I'd say plus or minus is probably at least 10 10 points additional.

Speaker 4: And the issue is the timing because we've got outstanding quotes, you've got outstanding POs, and when do you get traction on that? You know, the quotes, if they're not accepted, we can re-quote and re-quote with the higher prices we do have in some of our larger contracts.

And the.

The issue is the timing because we've got outstanding quotes you got outstanding P O's and when do you get traction on that.

The quote if they're not accepted we can re quote.

And recall with the higher prices, we do have in some of our larger contracts the ability to go back and renegotiate the price when we have significant price increases cost increases.

Speaker 4: the ability to go back and renegotiate the price when we have significant price increases, cost increases.

Speaker 4: So we have that available to us right away and we'll take advantage of that. So there's a little bit of traction right away, but I would tell you it's like in my prepared remarks, it's one to two quarters before we really see full traction of that, just because of all the outstanding quotes.

So we have that available to us right away and we will take advantage of that.

So there's a little bit of traction right away, but I would tell you. It's like in my prepared remarks, it's one to two quarters before it really see full traction of that just because of all the outstanding quotes.

Speaker 4: that are out there already in the business that's in motion before we can actually get the prices out there and get the benefit. And- So are you saying that, go ahead. And then...

Better out there already in the business that's in motion.

Before we can actually get the prices out there and get the benefit.

So are you, saying that we're really go ahead.

And then a second part question was EBITDA.

Yep.

Speaker 4: Really, when we look at the even though roll forward, we were expecting 5 million this quarter, right?

Really when we when we look at you know the.

EBIT a roll forward, we were expecting $5 million this quarter right.

Speaker 4: And, you know, being lower revenue, we lost 3.3 million of EBITDA. And then being a lower rate from 39, which was two points off already, to 37 was another 1.9.

You know being lower revenue, we lost $3 3 million of EBITDA, and then being a lower rate from 39, which was two points off already to 37 was another 1.9.

Speaker 4: So we lost 5.2 based on the results of the quarter, and we had 0.8 actually recorded. So we came in at six million if we, it would have been at that level. So really, it is, first get theazer off of the grid,

So we lost five point to based on the results of the quarter and we had 0.8 actually recorded so we came in at 6 million if we.

It would have been at that level, so really it is.

First get through the.

The supply chain constraint period.

Speaker 4: the supply chain constraint period. And you know, when that is, it's difficult to forecast, right? But in the meantime, we are changing our prices. So we address the gross margin at that level, regardless of the revenue level. And we are putting into place cost reduction measures that will be in Q4, one to $2 million.

When that is it's difficult to forecast right, but in the meantime, we are changing our prices. So we address the gross margin at that level, regardless of the revenue level and we are putting into place cost reduction.

Measures that will be in Q4 $1 million to $2 million.

Speaker 4: So those are the activities that we believe will help address the EBITDA shortfall.

So those those are the activities that we believe will help address the AR the EBITDA shortfall.

Got it thanks, guys I'll hop back in the queue with others.

Our next question is from the Hall Chockfull of Northland Capital markets. Please proceed with your question.

Speaker 1: Our next question is from Nihal Choksi of Northland Capital Markets. Please proceed with your...

Speaker 6: Yep, thank you. Given the supply chain limitations, it feels almost useless to talk about revenue. The much more important thing here is bookings and thank you for being transparent about the bookings for the December quarter, but what do you expect for the March quarter as far as bookings go?

Yep. Thank.

Thank you.

Given the supply chain limitation.

Uh huh.

You're supposed to talk about revenue.

The much more important thing here is bookings and thank you for being transparent about the bookings for the December quarter, but what do you expect for the March quarter as far as bookings go.

Speaker 3: Hey, and hogs, Jamie, we expect another quarter where bookings will be ahead of revenue.

Hey, Jamie.

We expect another quarter, where bookings will be ahead of revenue.

Speaker 3: We do not expect a

We do not expect a.

Speaker 3: major reduction in the backlog, which also speaks to booking strength. You know, we had set a goal for growing our hyperscaler business 15 to 20% per year, and we thought that was a pretty aggressive goal. You know, we're above doubling.

Major reduction in the backlog, which also speaks to booking strength.

You had set a goal for growing our hyper scaler business, 15% to 20% per year, and we thought that was a pretty aggressive goal.

Where we're above doubling that.

Speaker 3: at this point. So we are doing better in our hyperscaler business than we expected. We had set a goal of having a minimum of $8 million in ARR exiting this year, on March 31st, and we'll be at or above that goal.

At this point so we are.

Doing better in our hyper scaler business than we expected we had set a goal of having a minimum of $8 million and a R. R.

Existing this year.

At March 31st and we'll be at or above that goal.

Speaker 3: We set a goal of $160 million in recurring revenue, and we are going to be above that goal exiting this year. So we're feeling continued revenue.

We set a goal of $160 million in recurring revenue.

And we are going to be above that coal.

Exiting.

This year.

So we're feeling.

Hum.

Continued booking strength and it's a.

Speaker 3: It's a strange way to feel right now in that we're having some of the best sales results that this company has seen in many, many years, both the size of the results across video surveillance, object storage, hyperscaler enterprise. We're just having very good traction with our order.

It's a strange way to feel right now and that we're having some of the best sales results that this company has seen in many many years both the size of the results across video surveillance object storage hyper scaler enterprise, we're just having very good traction with our order.

<unk>.

Speaker 3: but we are having a hell of a time fulfilling those orders.

But we are having a hell of a time fulfilling those orders.

Speaker 3: And right now we're going to continue driving bookings. We're going to continue driving backlog. We're going to continue driving our subscription customers, which is going really well. So the transition is happening well. Sales results, our new products are resonating. The Ransom block is one of the coolest storage products of the year.

And.

Right now we're going to continue driving bookings, we're going to continue driving backlog, we're going to continue driving our subscription customers, which is going really well.

So the transition is happening well sales results, our new products are resonating the ransom block just one coolest storage product of the year, we feel really good about that side of the business, but clearly we've got to cut costs. We've got to get control of pricing, we've got to get control of.

Speaker 3: You know, we feel really good about that side of the business, but clearly.

Speaker 3: We've got to cut costs. We've got to get control of pricing. We've got to get control of the supply of material.

The supply of materials.

Speaker 3: and make sure we can just get to the other side. Now, when we get to the other side of this period, there's no doubt that we are dealing with a larger, a larger revenue generating company when we went into this period, just the booking strength is...

And make sure we can just get to the other side now when we get to the other side of this period is there's no doubt that we are dealing with a larger a larger revenue generating company than when we went into this period just the bookings strength is.

Speaker 3: You can just see it no matter if you take the 95 we did and you add to it, the 26 million we couldn't ship.

You can just see it no matter if you take the 95, we did and you add to it the $26 million, we couldnt ship.

Speaker 3: or if you look at it and take the 95 million and add what we grew in backlog, no matter how you construct the quarter.

Or if you look at it and take the $95 million and add what we grew in backlog no matter, how you construct the quarter U.

Speaker 3: you can determine that we are selling well above historic levels. And that's part I feel good about. The part I'm deeply worried about is we've got to get greater control of our materials. We've got to get greater control of their pricing. And until we do that, we've got to control costs internally to steer to that better supply environment.

You can determine that we are selling well above historic levels and that part I feel good about the part I'm deeply worried about is we've got to get greater control of our materials, we've got to get greater control of their pricing and until we do that we got to control costs internally.

Year to that.

Better supply environment.

Speaker 6: Right, understood. By the way, what is the confident that you guys are going to proactively work towards making sure there's no issue with?

Right understood.

By the way what is the.

I'm confident that the you guys are going to proactively work with work.

Towards making sure there's no issue with.

Yes.

Speaker 4: I'm sorry? I'm not sure we got your question.

I'm sorry.

Im not sure where you got your question.

Speaker 6: So I believe there's a debt confident, usually there's some debt confidence on EBITDA. What is that actual debt confident on the EBITDA?

So I believe there was a duck continent, usually there's some debt covenants on it.

What is that actual that confidence on the EBITDA.

The covenants.

Speaker 4: We don't have an EBITDA covenant, strict EBITDA covenant. We've got leverage covenant, fixed charges ratio covenant. We were okay at the end of the quarter.

We don't have an EBITDA covenant strict Eva EBITDA covenant, you've got leverage covenant.

Fixed charges ratio covenant.

We were okay at the end of the quarter.

Speaker 4: will work with our lenders and to the extent that we need any kind of a waiver or need to work with them, we're highly confident that we'll be able to negotiate and work with our lenders.

We'll work with our lenders and to the extent that we.

We need any kind of a waiver or need to work with them, we're highly confident that they will.

We'll be able to negotiate and work with several lenders on that.

Speaker 6: Do you happen to know what are those leverage and fixed charge ratios that must be met?

Understood do you happen to know what are those liberty leverage and fixed charge ratios that must be met.

Yeah, I mean, it's.

Roughly.

Speaker 4: three times, I don't have it right in front of me, right? But we met him at the end of the quarter, and we'll work closely with the bank to see how our forecasts look and stay ahead of it.

Three three times I don't have it right in front of me right.

But you know we met them at the end of the quarter and you know what work closely with the bank to to see how our forecast look.

And stay ahead of it.

Speaker 6: Okay, and then yeah, it's great to see continued traction with the subscription customers.

Okay, and then yeah, it's great to see our continued traction with subscription customers.

Speaker 6: I think you said on the press release it was subscription customers were up 30% QoQ. Your deferred revenue though was up only 0.4 million QoQ and the minimum amount in terms of percentage. How does that reconcile between the big increase in subscription customers on QoQ basis but we're not seeing that in terms of deferred revenue.

I think you said on the press release.

Some customers were up 30% Q over Q.

Your deferred revenue, though was up only two 4 million Q over Q.

Minimus amount in terms of percentage, how does that reconcile between the big increase in subscription customers in Q2 basis, but we're not seeing that in the book in terms of deferred revenue.

Speaker 4: There's a certain seasonality in the contracts and signing up the contracts. So in the December quarter, it's a little bit slower, and you'll see that peak in the March quarter, because it's everyone kind of coming over the calendar year and then signing up their new contracts. So it's just a bit of a seasonality.

There is a certain things.

Seasonality and the contracts and the.

Signing up the contracts.

So in the December quarter, it's a little bit slower and you'll see that peak in the March quarter, because if everyone kind of coming over the calendar year and then.

Signing up their new contracts. So, it's just a bit of a seasonality.

Speaker 4: Because it's based on cash, right? Cash receipts. Yep, understood. Alright, great.

Because it's based on cash right cash receipts.

Yep understood alright, great. Thanks ill cede the floor.

Yeah.

Speaker 1: Our next question is from George Iwanek of Oppenheimer. Please proceed with your question.

Our next question is from George you want at Oppenheimer. Please proceed with your question.

Speaker 3: Thank you for taking my question. Jamie, maybe you can dig into the primary storage trends a little bit deeper. Can you give us a sense of how much the pressure you're seeing there is from supply chain, how much was the federal vertical dynamics, as well as what you're seeing with that, the subscription transition?

Thank you for taking my question, Jamie maybe you can dig into the primary storage trends a little bit deeper.

Can you give us a sense of how much the pressure you're seeing there is from supply chain, how much was the federal vertical.

Dynamics as well as what youre seeing with that the subscription transition.

Yeah.

Speaker 3: You know, as I mentioned in my comments, the media and entertainment business, I think, is strengthened. It's not at pre-COVID level.

As I mentioned in my comments, the media and entertainment business I think is strengthened its not at.

Pre COVID-19 levels, but it is.

Speaker 3: I would say within 10 or 15% of pre-COVID levels. So I think that has recovered relatively well. I think we've gotten stronger at selling Stornext into other verticals, healthcare, surveillance.

I would say.

Within 10, or 15% of pre Covid levels. So I think that has recovered relatively well I think we've gotten stronger at selling <unk> into other verticals.

Health care surveillance.

Life Sciences.

Speaker 3: And so I also think we have a series of new products. We launched DOR-NEX 7 running on Amazon Cloud and AWS.

And so I.

I also think we have a series of new products we.

<unk> launched store next seven running on Amazon cloud and AWS.

We also.

Speaker 3: did major upgrades to the H2000, H4000, and now we've launched the H4000 essentials, which is Stornex combined with CatDB in a single appliance.

Did major upgrades to the H 2000, <unk> 4000, and now we've launched the H 4000, Essentials, which is store and X combined with cat DB in a single appliance.

Speaker 3: So, you know, I'm seeing the sales momentum pick up in those products. We do have supply constraint. We didn't used to, but now, you know, we're just getting much longer lead times, sometimes as much as five months for just a server, waiting on network cards, power supplies, things of that kind. One of the issues is when you shift to the US government, you need to shift a...

So, yes, I'm seeing that sales momentum pick up in those products. We do have supply constraint, we didn't used to but now.

We're just getting much longer lead times.

Sometimes as much as five months for just a server.

Waiting on network cards power supplies things of that kind one of the issues is when you ship to the U S government you need to ship a <unk>.

Speaker 3: server that has its whole chain of custody understood. And to get those systems quoted, ordered, and shipped, that cycle time has now gone in the five and six month level. So what's happening in the government is even though we're getting strong orders, we're

Server that has this whole chain of custody understood and to get those systems quoted ordered and shipped.

Cycle time is now gone in the five and six months level. So what's happening in the government is even though we're getting strong orders.

Speaker 3: chain of custody based systems, you know, where they're entirely ensured that, you know, they were either entirely made in the United States or no one ever touched them while they were outside the United States, the supply chain turnaround on that is much longer. So we are seeing supply chain headwinds there, but very strong order strength in the business.

Kane of custody based systems, where they are entirely insured debt.

Either entirely made in the United States or no one ever touch them, while they are outside the United States supply chain turnaround on that is much longer. So we are seeing supply chain headwinds there.

But very.

Very strong order strength in the business.

Alright, thank you for that and with the pivot three assets and what Youre doing in the video surveillance side can you give us an update there.

Speaker 3: Thank you for that and with you know the pivot three assets and what you're doing on the video surveillance side Can you give us an update there? You know, how is the customer engagement going? What are you seeing from a cross-sell perspective?

How is the customer engagement going what are.

Are you seeing from a cross sell perspective.

Speaker 3: Yeah, I'm really encouraged. I mean, I said in my comments, we closed a $4 million surveillance deal with a government entity.

Yeah, I'm really encouraged I mean, I I said in my comments, we closed a $4 million surveillance deal with a government entity.

Speaker 3: We just didn't have the technology to do things like that prior to pivot three.

We just didn't have the technology to do things like that prior to pivot three.

Speaker 3: The pivot three business is running ahead of the plan. We put together a three-year performa prior to acquiring a business, and we are exceeding that from a bookings perspective.

The pivot three business is running ahead of the plan, we put together a three year pro forma prior to acquiring a business.

And we are exceeding that from a bookings perspective.

Speaker 3: obviously struggling to fulfill all those orders. Servers used to

Obviously struggling to fulfill all those orders.

<unk> used to.

Speaker 3: We would order them and we get them two to three weeks later. We're just not in that kind of period any longer. But the pivot three business from a bookings perspective is ahead of plan. And so I feel really good about that business. And like our other businesses, we just chasing materials and have to ship products.

We would order them and we get them two to three weeks later, we're just not in that kind of period any longer but the pivot very business from a bookings perspective is ahead of plan.

And so I feel really good about that business.

And like our other businesses, we just chasing materials and have to ship product.

Speaker 3: All right, and Mike, just one question for you. With the one to 2 million savings that you're expecting this quarter, is that all going to be encompassed in this quarter? Or do you expect to continue to make cuts for maybe a quarter or two?

Alright, and Mike just one question for you with the one to 2 million savings that you're expecting this quarters is that all going to be encompassed in this quarter or do you expect.

To continue to make cuts for a maybe a quarter or two.

Speaker 4: Yeah, I mean, we will continue to.

Yes, I mean, we will continue to.

Speaker 4: to always optimize and reduce our expenses, especially when we're under the pressure of the supply constraints. So, yeah, we would expect that would continue.

To always optimize and reduce our expenses, especially when we are under the.

The pressure of the supply constraints.

So yeah, we would expect that would continue.

Thank you.

Thanks, Alright. Our next question is from Eric Nice Newsy at Lake Street Capital markets. Please proceed with your question.

Speaker 1: Our next question is from Eric Martinuzzi of Lake Street Capital Market. Please proceed with your question.

Speaker 5: Yeah, I wanted to go a layer deeper on the cuts you talk in the press release about, you know, cost reduction measures across product categories. Is this potentially is this eliminating certain products that maybe haven't been this productive or the demand hasn't been there? Or is this really, you know, kind of

Yes, I wanted to go a layer deeper on the could you talk in the press release about cost reduction measures across product categories.

This potentially eliminating certain products that maybe haven't been as productive or the demand hasnt been there or.

Or is this really kind of.

Speaker 4: pretty much people and we're doing kind of across the board capex, opex reductions, what's the focus of the reductions? Yeah, well, first there is the across all product lines, that's the price.

It's pretty much people and we're doing kind of across the board Capex Opex reductions, what's the focus of the reductions.

Well first there is the across all product lines, that's a price increase right. So we're looking at price increases across all products we.

Speaker 4: Right. So we're looking at price increases across all products. We had announced 5%

We had announced 5%.

Speaker 4: last quarter and we're putting into place a

The last quarter, and we're putting into place.

Speaker 4: a richer program that I think on average will probably net out about 10 additional points.

Hey, Richard program that I think on average you probably met out about 10 additional points.

Speaker 4: That is to help on the gross margins with the higher costs we are seeing there. The cost reduction... All you have to do is go beyond the actual scores you saw here.

So that's two to help on the gross margins with the higher costs, we're seeing there the cost reduction programs.

Speaker 4: Um, it's, you know, part of it is doing things like, um, shutdown.

Part of it is doing things like shut downs right.

Speaker 4: Right. And then it's looking at, you know, your, your typical items that you look at the temporary employees, the contractors, you look at all your discretionary spending. You look at all of your, your contracts and, and where can you renegotiate or postpone or push out?

And then it's looking at.

Your typical items that you look at the temporary employees.

Contractors, you look at all your discretionary spending.

Hey look at all of your contracts, and then where can you renegotiate or postpone or push out.

Speaker 4: So it's all those types of areas. I mean, we continuously look at how to optimize our expense base. For example –

So it's all of those types of areas I mean, we continuously look at how to optimize our expense base.

For example, we just.

Speaker 4: at the end of January completed our move out of the Bellevue facility, for example, which was our largest facility, most expensive lease, right? So we'll get benefits for that going forward as well as we we haven't signed up for a new lease there, but it'll be much much smaller lease in that facility. So it's all of these areas that we continuously look at to to optimize our spend to reduce our costs.

At the end of January completed our move out of the Bellevue facility for example, which was our largest facility most expensive lease right. So we'll get benefits for that going forward as well as we we haven't signed up for a new lease there, but it'll be much much smaller lease in that facility.

So it's all of these areas that we continuously look at two to optimize our spend to reduce our costs.

Speaker 4: The other thing that we do across the board is try to leverage lower cost geographies.

The thing that we do across the board as you know.

Try to leverage lower cost geographies right.

Speaker 4: right? And we've been successful at, you know, moving some back office areas to, to offshore locations, which is also, you know, that's always an ongoing activity that we have in that area.

We've been successful at.

You know moving some back office areas to to offshore locations, which is also you know that's always an ongoing activity that we have in that area.

Speaker 5: And this one is 2 million savings in Q4. If I'm starting from a Q3 OpEx of 36.4 and that includes in Cloud and that includes pivot 3, is that then to say that this 36.4 maybe gets reduced by a million and a half and so 35 million is the new run rate and that we get that kind of 4 to $8 million of annualized savings? Is that the right way to think of that?

Mhm and this $1 million to $2 million savings in Q4, if im starting from Q3 Opex of $36 four and that includes in clubs and that includes a pivot three is that fair to say that this $36 four maybe it gets reduced by 1 million and a half and so $35 million is the new.

<unk> run rate and that we get that kind of $4 million to $8 million of annualized savings is that the right way to think of that.

Speaker 4: Yeah, I mean, some of the cost savings we're doing, you know, unless you repeat them, you know, such as a shutdown, right? You need to do other measures. And we've got other measures in place as well. But yes, I mean, you're thinking of it.

Yeah, I mean, some of the cost savings, we're doing you know unless you repeat them.

Such as a shutdown right you need to do other measures and we've got other measures in place as well, but yes, I mean youre thinking of it correctly.

Speaker 5: Okay, and then my last question on the supply chain issues. I know we don't have a real large sample set here, but

Okay and then my last question on the supply chain issues I know, we don't have a real large sample set here but.

Speaker 5: From my experience, the decommits can be driven by a couple of things. One can be your supplier is shopping that supply to get a better price and you weren't able to meet the better price or it can be, hey, they just didn't have it even though they had quote, unquote committed to you. So I'm just wondering if behavior on decommits has changed in 2022 versus calendar 2021. Yeah, I.

My experience the Decommit can be driven by a couple of things one can be your your supplier is shopping that supply to get a better price and you weren't able to meet the better price or it can be hey, they just didn't have it even though they are quote unquote committed to you. So I'm just.

Wondering if behavior on Decommit has changed in 2022 versus calendar 2021.

Yes.

I think it has.

Speaker 3: We have some products that we have received consistently for 20 plus years.

We have some products that we have received consistently for 20 plus years.

Speaker 3: And our suppliers have just come forward and said, we're not going to make it any more.

And our suppliers they've just come forward and said, we're not going to make it any more.

Speaker 3: We have other products we're going to make that are more profitable. They just stopped making a part that we have orders going out some cases well over a year.

We have other products, we're going to make that are more profitable. They just stopped making apart now we have orders going out some cases well over a year.

Speaker 3: We have some sub two and $3 components. Think of them as like a socket connector.

We have some sub two and three dollar components think of them as like a socket connector.

Speaker 3: The supplier came back and said we'd like $150 now for that part.

I mean, the supplier came back and said, we'd like to $150 now for that part.

Speaker 3: We have some orders that we made over a year ago. So plenty of time.

We have some orders that we made over a year ago.

So.

Plenty of lead time.

Speaker 3: where our partner came back and said, yeah, we have none of that part for you and we cannot tell you when you will get.

Where our partner came back and said.

Yes, we have none of that part for you and we cannot tell you when you will get.

Speaker 3: We have another major partner who just said we're giving you six weeks notice that we're increasing prices 25%.

We have another major partner just said, we're giving you six weeks' notice that we're increasing prices 25%.

Speaker 3: We did not see that in previous quarters and previous times.

We did not see that in previous quarters and previous times that these.

Speaker 3: These are, there are more of these occurring, they're occurring more quickly, and that's why we're moving very swiftly on pricing increases. We're also taking those very troubling components and we're ripping them out of our products.

These are there more of these occurring they're carrying more quickly and that's why we're moving very swiftly on pricing increases were also taking those very troubling components and we're ripping them out of our products, we can't be in a position where were held for ransom quarter after quarter.

Speaker 3: can't be in a position where we're held for ransom quarter after quarter. So we're actually taking those very troubling components rather than negotiating for them because we're never going to have the negotiating power of a Cisco or Ford Motor Company. We're actually taking the component out of the product, redesigning it with another component that is much easier to...

So we're actually taking those very troubling components, rather than negotiating for them because we're never going to have the negotiating power of a cisco or a Ford motor company.

Actually taking that component out of the product redesigning it with another component.

It is much easier to procure.

Speaker 5: OK, and I said that was my last one, but I do have one more a risk of substitution for quantum product specifically in the hyperscalers. I'm thinking they kind of designed for quantum, so this is very low risk, but any behavior there that would indicate otherwise.

Okay, and I said that was my last one but I do have one more at risk of substitution for quantum products.

Specifically in the hyper scaler I'm thinking they'd kind of designed for quantum. So this is very low risk but.

The behavior, there that would indicate otherwise.

Yeah I mean.

Speaker 3: Yeah, I mean, it is a theoretical possibility. I want to recognize that. I have not seen any order switching, order cancellation, because most of the components that are in short supply are made by a single supplier, so no other supplier is advantaged.

It is a theoretical possibility.

I want to recognize that I have not seen.

Any order switching order cancellations because most of the components that are in short supply or made by a single supplier. So no other supplier has advantaged.

Speaker 3: So I have not seen people flip-flopping orders to other suppliers so far.

So I have not seen people flip flopping orders to other suppliers.

So far.

Okay. Thanks for taking my question.

Okay.

Thanks, Eric.

Speaker 1: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we...

As a reminder, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the stacking.

One moment, please while we poll for additional questions.

Speaker 1: Our next question is from Craig Ellis of B. Riley. Please proceed with your question.

Our next question is from Craig Ellis of B Riley. Please proceed with your question.

Speaker 5: Thanks for taking the follow-up Mike I wanted to just touch on

Thanks for taking the follow up Mike I wanted to just touch on.

Speaker 5: the trends in the service revenue line. So, we had a nice, gradual climb as we were going from late fiscal 21 through the fiscal second quarter of 22. And in December , we pulled back a little bit, can you just talk about some of the puts and takes that we saw in services in the quarter? And, and do you expect that we'll get back on that growth slide plan? Or where do we go from here in service?

The trends in the service revenue line. So we had a nice gradual climb as we were going from.

Late fiscal 'twenty, one through fiscal second quarter of.

'twenty two.

In December we pulled back a little bit can you just talk about some of the puts and takes that we saw in services in the quarter end.

And do you expect that we will get back on that growth quite plant or where do we go from here in services.

Speaker 4: Yeah, I mean, similar to signing up new contracts, it is there is a bit of seasonality there, that if they don't sign, we can't recognize the revenue. So historically, you've got a little bit of seasonality in there.

I mean, similar to signing up new contracts. It is there is a bit of seasonality there.

Maybe if they don't sign we can't recognize the revenue so historically, you've got a little bit of seasonality in there.

Speaker 4: And, you know, we always have underneath, you know, the golden clock.

And you know we always have underneath.

The Golden glide.

Speaker 4: that is always trying to pull that down, right? And then we're signing up new services and growing in other areas, right? So it's kind of it's an offset in that and just a touch

That is always trying to pull that down right and then we're signing up new services in and growing in other areas right.

So it's kind of a it's an offset in that.

And just a touch of seasonality.

And is there any impact from supply chain, there were any parts or components spares et cetera in that line or is that all true services.

Speaker 5: And is there any impact from supply chain there is any parts or components spares etc. in that miners that all true service roll.

Speaker 4: Yeah, it's not. It doesn't have a material impact. It did cost wise, where we saw some of our costs because the margins came down, but not really.

Yeah, it's not.

It doesn't have a material impact it did cost wise, where we saw some of our costs because the margins came down but not really a top line.

Speaker 5: Got it. Got it. And so just on that margin point, I think 57% in the quarter a year ago, we were at 60. What's your expectation for the margin trajectory in services?

Got it got it and so just on that on that margin point.

I think 57% in the quarter.

A year ago, we were we were at 60.

What's your expectation for the margin trajectory and services from here.

Speaker 4: Yeah, I mean, we're, we've got also some programs to reduce costs on the gross margin line, but those are tougher. And some of those are longer range to put into place. So it's going to be, you know, really pricing driven. And we are looking at increasing our prices on services as well. And really, that's more along the lines of discounting less is what we're

Yes, I mean, we're we've got also some programs to reduce costs.

On the gross margin line, but those are tougher and some of those are longer range to put into place.

So it's going to be you know really pricing driven.

And we are looking at increasing our prices on services as well and really that's more along the lines of discounting less.

Is what we're putting into place so well.

Speaker 4: So, you know, we'll do what we can to get what traction we can to get those margins back up to 60.

We will do what we can to get what traction we can get those margins back up to 60%.

Speaker 6: Yep. And how would you break out the...

And how would you how would you breakout.

Speaker 5: the drivers to the decrease from 60 to 57.

The drivers to the decrease from <unk> from.

From 60 to 57.

Speaker 4: It was, we have a, for example, a repair organization. So repair costs increased, warehousing costs increased, all the logistics of our spares organization increased. So, you know, those are some of the key areas that we saw the costs go up.

It was we have a for example, a repair organization. So repair costs increased warehousing costs increased all of the logistics of our spares organization increased.

So those are some of the key areas that we saw our costs go up.

Speaker 5: Got it. And it's just better execution on those variables to drive it back to the... Yeah. Yeah. OK. Got it. OK.

Got it and it's just better execution on those variables to drive it back.

Yeah, Okay got it okay. Thanks, Mike.

Yeah.

Speaker 1: We have reached the end of the question and answer session. I will now turn the call back over to Jamie Lerner for closing remarks. Thank you. You know, while our bookings were at the height of the pandemic,

We have reached the end of the question and answer session I will now turn the call back over to Jamie Lerner for closing remarks.

Thank you.

While our bookings were at.

The highest level they've been at in years.

We have to recognize that the global supply situation put us.

Speaker 3: put us in a position where the results have fallen beneath all of our activities.

In a position where the results have fallen beneath all of our expectations.

Speaker 3: But I'm confident in the underlying strength of this business. Our bookings levels, our hyperscaler wins, the strides we're making in video surveillance tell me that we have a growing business. Now, I'm also rela-

But I'm confident in the underlying strength of this business our bookings levels are hyper scaler wins.

The strides we're making in video surveillance tell me that we have a growing business now I'm also realistic you've got to make some very very quick cost cutting and.

Speaker 3: got to make some very very quick cost cutting and

Speaker 3: We've got to get our pricing in line with what our suppliers are doing with many of our components going up as much as 25%. And we've got to work very hard with our suppliers to make sure we get our fair share of components.

<unk> cost cutting we've got to get our pricing in line with what our suppliers are doing with many of our components going up as much as 25% and we've got to work very hard with our suppliers to make sure we get our fair share of componentry.

Speaker 3: But I think we can take those measures, we can do them quickly, and see this to the other side of the supply chain. And when we do, I think Quantum is going to be a larger company, a better company, and a bigger company. But we've got a few tough quarters to get through, and we're taking the measures to see that the company can do that in a healthy way. With that, thanks everyone for attending today.

But I think we can take those measures we can do them quickly and see this to the other side of the supply chain and when we do I think quantum is going to be a larger company, a better company and a bigger company, but we've got a few tough quarters to get through and we're taking the measures to see that the company can do that in a healthy way with that.

Thanks, everyone for attending today.

Speaker 1: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.

This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.

[music].

Speaker 7: I.

Speaker 7: I.