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 20.

Good afternoon, everyone and thank you for participating in today's conference call to discuss Quantum's financial results for the third quarter of fiscal 2022 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 zero on your telephone key.

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.

Pat.

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

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

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 2022 financial results.

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

I'm, Brian Cooper, Quantum's, Chief legal and compliance officer.

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

Joining me today are Jamie Lerner, Chairman and CEO and Mike <unk> 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.

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.

Deemed as forward looking quad.

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

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

Speaker 2: These statements include, without limitation, any projections of revenue, margins, expenses, adjusted EBITDA, 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 in 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.

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 statements.

All forward looking statements are based on information available to quantum on the date hereof.

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

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.

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.

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

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

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 headwinds.

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 headwinds.

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.

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

Up 30% sequentially and 98% year over year.

Speaker 3: With more products transitioning to a subscription contract, our year-over-year subscription revenues increased more thaninction dollars En feature ch of d

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

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 supply chain head.

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: 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 Mike will discuss, 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.

Discuss the supply chain situation and the actions we are taking in more detail shortly.

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.

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.

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

Our progress within store next 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. It 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.

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.

Also during the quarter, we had multiple shipping partners decided not to accept deliveries on new year's Eve a change from years past, which further limited our ability to ship and recognize revenue.

Speaker 3: which further limited our ability to shift 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 Cup.

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.

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.

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: While supply of tape drives has improved for 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.

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

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 cuts.

This was especially notable with one of our largest hyperscale customers, who converted a large order for <unk> eight drives.

Speaker 3: who converted a large order for LTO 8 drives to LTO 9 drives during the quarter and increased their order by $10 million.

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.

Due to the limited availability of LTE on nine drives this which impacted our ability to fulfill the order and our reported revenue.

Speaker 3: as our prior guidance included shipments for LCO8-based drives to this customer.

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

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 as our contract manufacturers, to mitigate

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.

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

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.

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

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

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

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

Which is currently in backlog.

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

This deal highlights our recent success at the 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 and acts as the subscription comp combined would take 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 a 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 multimillion 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 hardware.

Also during the quarter, we closed a multimillion dollar object storage deal with a genomics research institution and closed our first six figure software only object storage win.

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

Speaker 3: Both customers are managing large unstructured data.

Both customers are managing large unstructured data sets.

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

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.

And primary storage.

Mostly within the media and entertainment vertical.

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

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.

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.

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

Mike.

Thank you Jeremy.

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

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.

Jamie summarized earlier on this call.

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

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

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.

Adding to the ongoing supply chain constraints during the quarter.

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

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

As a result of the continued strong customer demand.

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.

The 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.

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.

Approximately $26 million of orders in the NDA.

Backlog could have been shipped to customers in the third fiscal quarter. If we would've 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 court.

Compares to just over $15 million.

Fulfilled orders in the prior quarter.

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

Just over $50 million of backlog.

Representing 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.

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 meaningful portion of the current box.

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

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

During the third fiscal quarter set.

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

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 L. Two trials that helps support sequential revenue growth.

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.

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.

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

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

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.

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

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

Now in over four percentage points from the prior quarter.

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

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 than expected on a gross margin in the quarter.

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

Speaker 4: Given the increasing cost of 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 product.

As we mentioned on the call last quarter, we implemented a 5% price increase for our products, but now 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.

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

Speaker 4: We expect the 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.

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

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

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 in cloud n increased sales

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

Increased sales and marketing spend.

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

The increase investment.

For the development of next generation L. T O technology.

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.

These increases were partially offset by a nonrecurring 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.

Bind 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 $0.16 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.

Which included a debt extinguishment charge of $15 million, partially offset by a gain of $10 million for the forgiveness of the PPP loan.

Excluding stock compensation restructuring charges and nonrecurring charges non-GAAP adjusted net loss in the third fiscal quarter was $4 6 million.

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.

<unk> per diluted share loss of seven cents.

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

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

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

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: 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.

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

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

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.

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

Netting $4 6 million in unamortized debt issuance costs compared to $104 5 million of outstanding debt as of September 32021, after netting $4 9 million in 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 mCloud end 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 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.

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

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.

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.

<unk> 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.

Finally, turning to our financial outlook.

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

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

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

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

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 cents.

What's your 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.

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

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

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 reflects 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 bits.

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...

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 remains 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.

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 queue. 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.

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.

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

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

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 up?

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 were 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 <unk> nine and we were constrained on L. T. O. Nine so that was one of the significant difference or issue that drove the decline and the other really is a more broad based shortage of.

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 and 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.

Speaker 5: particularly abruptly in the most recent quarter.

Particularly abruptly in the most recent quarter.

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

Yeah, Craig I'll speak to that.

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.

Parts that are 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.

Speaker 5: Thanks for that, Jamie. Then the second question, Mike, I want to couple two items on the income statement. So gross margins, you are clear that you have cost pressures arranged with 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...

Got it thanks for that Jamie and then the second question Oh, My God, one a couple too.

Say items on the income statement so.

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 would you expect that we could see adjusted EBITDA.

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

Move materially back into the black.

Speaker 4: 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.

Right. 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 further increases we saw this quarter. We are rolling out another set of additional increases which are going to be higher than that and I would 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.

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

Quote if they're not accepted we can re quote and quote 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 so we have that available to us.

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.

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 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 my second part of the 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.

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.

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. So we lost five point to based on the results of the quarter and we had 0.8 actually.

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 6 million if we, it would have been at that level. So really it is, you know, first get, you know,

We have recorded so we came in at 6 million if we.

It would have been at that level. So really it is you know first get through the.

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 in the place cost reduction measures that will be in q4 1 to 2 million dollars.

The supply chain constraint period.

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.

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

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

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 bookings 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 hyper-scaler business than we expected. We had set a goal of having a minimum of 8 million in ARR exiting this year in March 31st and we'll be out 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 about $160 million in recurring revenue and we are going to be above that goal.

Exiting this.

This year.

So we're feeling.

Continued bookings 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.

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 orders.

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 and.

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.

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 debt.

Covenant that.

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 I'm.

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 EBITDA?

So I believe there was a duck continent, usually there's some dead.

But what is that actual confident on the EBITDA.

The covenants.

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

We don't have a need.

EBITDA covenant strict Eva EBITDA Covenant, we've got leverage covenant.

Fixed charges ratio covenant.

We were okay at the end of the quarter.

Speaker 4: we'll 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 they will you know we'll be able to negotiate and work with some lenders.

We'll 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 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 liver leverage and fixed charge ratios that must be met.

Yeah, I mean, it's.

Oh absolutely.

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

Three three times.

Right in front of me right.

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

To 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 the 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, 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 O Q.

Your deferred revenue, though was up only two 4 million Q2 de 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 on 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.

Seasonality and the contracts and they are signing up the contracts. So in the December quarter, it's a little bit slower and Youll see that peak in the March quarter, because it's everyone kind of coming over the calendar year, and then and then signing up their new contracts. So it's just a bit of a C.

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.

Understood Alright, great. Thanks ill cede the floor.

Our next question is from George why not go on it.

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

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 subscription transition?

Thank you for taking my question Jamie.

You can take it 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.

Yeah.

Sure.

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 store next into other verticals.

Health care.

Surveillance.

Life Sciences.

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

And so yeah.

I also think we have a series of new products.

<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 at the H 2000, H 4000, and now we've launched the H 4000, Essentials, which is store next combined with Cat D. B 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 ship to the U.S. government, you need to ship a

So, yes, I am seeing the 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.

Need to ship a.

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.

<unk> and ship that cycle time has 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 is supply chain turnaround on that is much longer. So we are seeing supply chain headwinds there.

But a.

Very strong order strength in the business.

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 belt perspective?

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

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 3 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.

You know 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 had ordered 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 6: 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 quarter is that all going to be encompassed in this quarter or do you expect to.

To continue to make cuts for 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 where when we're under the.

The pressure of the supply constraints.

So yeah, we would expect that would continue.

Thank you.

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

Thanks, Alright. Our next question is from Eric Nice Newsy at Lake Street Capital markets. 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 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 yeah, 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.

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

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'll probably met out about 10 additional points.

Speaker 4: So that's to help on the gross margins with the higher costs we're seeing there. The cost reduction......

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

Speaker 4: Part of it is doing things like shutdown.

You know part of it is doing things like shut downs right.

Speaker 4: Right? And then it's looking at, you know, 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 contracts and where can you renegotiate or postpone or push out.

And then it's looking at.

Your typical items, if you look at the temporary employees.

Contractors, you look at all your discretionary spending.

You look at all of your contracts in and 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.

<unk> tried to leverage lower cost geographies right.

Speaker 4: Right? And we've been successful at, you know, moving some back office areas to, uh, 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.

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 four 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 I'm starting from a Q3 opex of $36 four and that includes in club and that includes a pivot three is that then just say that this $36 four maybe it gets reduced by 1 million and a half and so $35 million is the new.

Run rate and that we get that kind of $4 million to $8 million of annualized savings. That's 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, you're 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.

My experience the Decommit can be driven by a couple of things one can be or their 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 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 $150 now for that part.

Speaker 3: We have some orders that we made over a year ago. So plan-

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 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 there <unk> 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 a 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: Okay, 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've 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.

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.

Yeah I mean.

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.

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 key.

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.

Clinton and may be necessary to pick up your handset before pressing the star one.

My mom and place them on the call 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

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 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.

Speaker 5: 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

Speaker 5: And do you expect that we'll get back on that growth slide plan? Or where do we go from here in service?

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

Yeah, I mean, similar to signing up new contracts. It is there is a.

Of seasonality there.

They don't side, we can't recognize the revenue.

Historically, you've got a little bit of seasonality in there.

Speaker 4: And we always have underneath the golden glide that is always trying to pull that down. And then we're signing up new services and growing in other areas. So it's kind of an offset in that and just a touch

And we always have underneath you know.

The Golden glide 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.

Speaker 5: And is there any impact from supply chain? There is any parts or components, spares, et cetera, that minors that all true service.

And is there any impact from supply chain there are any.

Our components spares et cetera in that line or is that all true services.

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.

Top line.

Got it got it and so just on that on that margin point, I think 57% in the quarter a.

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?

A year ago, we were we were at 60.

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

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

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

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.

Really pricing driven.

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.

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.

So we.

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

Speaker 5: Yep. And how would you break out the...

And how would you how would you break out.

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

The drivers to the decrease from <unk> from.

From 60 to 57.

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.

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.

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 it out.

Yeah, Okay got it okay. Thanks, Mike.

Okay.

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 high-

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.

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

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

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

Speaker 3: 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 realistic.

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: sizable 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 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, but.

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.

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.

Okay.

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