Q2 2023 Quantum Corp Earnings Call
[music].
Greetings welcome to the quantum Corporation second quarter fiscal 2023 financial results. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.
I'll now turn the conference over to your host Bryan commitment you may begin.
Good afternoon, and thank you for joining today's conference call to discuss Quantum's second quarter fiscal year 2023 financial results.
I'm, Brian Cooper quantum as Chief administrative officer, joining me today are Jamie Lerner, our chairman and CEO and Mike Dodson our CFO .
This afternoon, we issued a press release, which you can access under the Investor Relations section of our website at Www dot quantum dot com.
We are using a slide presentation in conjunction with today's call.
Also accessible under the same section of our website.
During today's call. Our comments may include forward looking statements all statements other than statements of historical fact should be viewed as forward looking these.
These statements include any projections of revenue margins expenses adjusted EBITDA adjusted net income cash flows or other financial items. These statements may also concern the expected development performance and market share or competitive performance of our products or services.
All forward looking statements are based on information available to quantum as of today's date, we advise caution and relying on these statements as they involve known and unknown risks and uncertainties, we referred to as the risk factors risk factors may cause our actual results to differ materially.
<unk> from those implied by the forward looking statements, including unexpected changes in our business.
We include detailed information about these and additional risk factors under the section labeled risk factors in our quarterly report on Form 10-Q, and annual report on Form 10-K, which we filed with the Securities and Exchange Commission, we do not intend to update or alter our forward looking.
Statements, whether as a result of new information future events or otherwise except of course as.
As we are required by applicable law.
Please note that our press release and the management statements. We make during today's call will include certain financial information in GAAP and non-GAAP measures. We include definitions and reconciliations of GAAP to non-GAAP items in our press release.
If you are unable to listen to the entire call. At this time, we will make a recording available for at least 90 days in the Investor Relations section of our website.
Now I would like to turn the call over to our chairman and CEO , Jamie Lerner Jamie.
Thank you Brian .
And thank you all for joining us today.
Earlier this afternoon, we announced the results for our second quarter of fiscal 2023 with revenue just above the high end of guidance.
Even by a record quarter in our Hyperscale business as well as sequential improvement in our EBITDA results.
The supply chain situation continues to improve both in terms of tape drives supply and the overall availability of materials at more standard pricing and lead times.
Our access to tape drives from our largest supplier has shown greater predictability and consistency.
And we are expecting that incremental improvement in supply to continue in the coming quarters.
We are also spending less money on broker fees and expediting fees as a result of our previously implemented initiatives.
During the quarter. We also executed additional cost containment measures that lowered our operating expenses to our target quarterly run rate of $35 million.
Which will support driving increased EBITDA as we continue to grow the top line.
In addition to our strong revenue bookings doubled sequentially and contributed to record backlog of $96 million at quarter end.
This record backlog was not driven by supply constraints, but rather large hyperscale orders for future quarters.
Our in quarter backlog has stabilized as our access to increase supply is allowing us to catch up on shippable backlog.
Which Mike will discuss in more detail.
Overall, our robust backlog gives us greater visibility and demonstrate the commitment from our large cloud partners to this business.
Also in fiscal Q2, we delivered our sixth consecutive quarter of subscription revenue growth, which subscription customers increasing to 554 from 455 last quarter.
Delivering our data management solutions as a software subscription is an increasingly important important part of how quantum does business going forward.
Our customers are asking for this type of purchasing model yet they still value running our software on quantum appliances in order to rely on a single vendor or support.
We will continue to drive growth in IRR.
Giving increases in primary storage and non Hyperscale secondary storage software and systems.
And introducing new products based on subscription software licensing such.
Such as store next running on the AWS cloud.
Which was launched in early September .
While our near term goal continues to be doubling of subscription software <unk> to the $14 million to $15 million level. We now have a clearer picture of the time required to identify and close on these engagements. Therefore, our achievement of this initial milestone.
It is increasingly likely to take place in early fiscal 2024.
Though we have made progress on several of our stated initiatives. There is still more work to be done.
During the first half of the year, we talked about expanding the earnings power of quantum through a combination of pricing and discounting discipline tighter management of the supply chain and operational expense reduction.
As evidenced by my initial comments, we are beginning to see the evidence of these actions in our results.
The other lever lever of utmost importance is expanding our gross margin, which is tied very closely to our revenue mix.
Applies not only to end market verticals.
Also from a geographic perspective.
As many of you know, we get our best margins in North America, as well as from our U S Federal business.
Both of these areas have been relatively weak over the past several quarters.
Within the federal business, we've seen some large deals being pushed out.
And our non Hyperscale business in the Americas has been impacted during the process of realignment of our sales team and appointment of new leadership.
At the same time, our Hyperscale business has been and will continue to be a strong growth driver for us though is that it is at a relatively lower margin than the rest of our primary and secondary storage revenue.
To further punctuate this point, our Hyperscale business grew 32% sequentially and 68% year over year without a corresponding increase in our U S federal or North America businesses.
In order to improve our mix more favorably going forward, we began investing in broadening our sales and leadership teams in these areas over the last few quarters.
I believe we are now back up to full strength and are well positioned to drive increased sales and more favorable revenue mix.
In conjunction with these efforts we are also focused on increasing our momentum in the enterprise market, particularly in the Americas.
Industry analysts are projecting massive increases in the amount of KOL data must be stored and protected in the enterprise as.
As the market share leader in cold storage software and solutions and having worked alongside the world's leading hyperscale customers for several years, we have a tremendous opportunity to develop unstructured data solutions for fortune 500 companies and help them address this massive data explosion taking place.
With this greater emphasis on U S. Federal in North America, we expect to see a more balanced revenue mix and then Annette and associated margin improvement going forward.
Can you give a broader sense of this opportunity.
<unk> estimates the worldwide scale out file and objects storage market to be over $30 billion by 2025 with emerging use cases like infrastructure for AI and business intelligence to be major growth drivers.
Quantum offers a unique end to end portfolio to store protect and enrich data across its entire lifecycle and address critical needs in the enterprise like modernizing infrastructure to enable digital transformation strengthening cyber security and using AI to unlock value in <unk>.
<unk> on structured data lakes.
We look forward to talking more about our go forward product and business expansion strategy at our upcoming analyst day on November 17.
Before turning the call over to Mike.
Like to take this time to welcome the new additions to our board of directors.
And hybrid cloud.
Now I'd like to turn the call over to Mike to provide more details on the results then we will take questions Mike.
Mike.
Thank you Jamie welcome and thank you for joining the call today.
Now turning to the results for the second quarter <unk>.
Revenue came in just about the high end of the guidance at $99.1 million.
Representing an increase of 6% year over year, and 2% compared to $97.1 million in the prior quarter.
As Jamie mentioned the supply chain continued to improve throughout the quarter, coupled with continued strong demand from our hyperscale customers.
We have very strong bookings during the quarter, which nearly doubled sequentially and contributed to a record backlog of $96.1 million as of September 30th.
The current quarter increased to a record backlog reflected the timing of several large purchase orders from hyperscale customers for future periods to ensure continuity of supply as opposed to being a result of supply chain constraints.
We ended the quarter with approximately 25 million of shippable backlog.
And ended the second quarter with approximately $20 million, which wasn't shift during the quarter, primarily due to lead times.
Similar to prior quarters, approximately 85% of the backlog was with Hyperscale customers.
Although we anticipate supply chain constraints will remain we do not expect us to significantly limit our ability to shift against customer demand.
In the second quarter secondary storage revenues were up 33% sequentially to 44% of revenue.
Primarily driven by ongoing strong demand from hyperscale customers and to a lesser extent an increase in enterprise backup and data protection products.
Primary storage systems declined 37% sequentially.
Which reflects a combination of decreased shipments of our video surveillance solutions following our fulfillment of a large order last quarter.
Combined with soft media and entertainment and U S Federal business.
In terms of the supplemental supplemental metrics, we used to track her ongoing transition to emphasize a recurring software subscription model.
Annual recurring revenue or.
Increased 14% sequentially to nine $4 million.
As a reminder, this figure includes recurring software subscription revenue across all of our transition product offerings.
Including Star next active scale DSI in captivity.
Additionally at quarter end, the cumulative number of customers under a subscription contract increase to just over 550 active customers, which represents 180% year over year growth and sequential growth of 22%.
In terms of total contract value Tacb increased 9% sequentially to $17.5 million at the end of the second quarter up $16 million in the prior quarter up from $16 million in the prior quarter.
Although we anticipated a slight sequential improvement and non-GAAP gross margin. We ended the quarter at 35% are flat with the prior quarter.
While we have seen benefits from our previously implemented initiatives related to price increases prudent management of discounting reductions in PPV and other related supply chain costs.
These were collectively offset during the quarter by approximately two percentage point gross margin decrease <unk>.
As a result of a less favorable product mix.
That was more heavily weighted towards our hyperscale customers.
As I just mentioned secondary storage was 44% of our revenue, which compares to 34% last quarter due to the significant increase in the Hyperscale business.
Next quarter, we expect a strong growth in hyperscale revenue to continue.
Offsetting the realized benefits from our cost initiatives and favorable pricing and therefore expect gross margins to remain flat with the second quarter.
Improving our revenue mix remains a critical focus area to help expand gross margin in order to drive improved operating performance and increased EBITDA.
As Jamie mentioned in order to improve the revenue mixed we are focused on building our enterprise business.
And have recruited top sales talent with years of experience selling into this market.
As well as recruiting new reseller partners focused in this space.
Another key growth driver is selling our end to end portfolio into our existing customer base effectively broadening our footprint within our existing customers and using this as a key leverage points.
Also impacting gap gross margins during the quarter was an extraordinary inventory reserved probation of $6 $9 million.
There were two primary factors that contributed to the need for this inventory provision.
First due to longer purchasing lead times up to 52 weeks during the pandemic and subsequent changes in customer requirements over to this extended timeframe.
Certain inventory had become obsolete due to next generation product screen released and the related legacy products being discontinued.
In addition, following our integration of several past acquisitions certain legacy products were discontinued and replaced with updated product offerings offerings rendering the related inventory obsolete.
We do not believe that the magnitude of this inventory charge is indicative of the company's performance and is not expected to be repeated in the near term.
To meet the ongoing supply chain challenges, we have focused on supply chain excellence over the past year, including the following.
First establishing supply chain analytics to enable improved reaction time to supply chain disruptions market demand changes in early technology transitions.
And second product management and supply chain are working closely together to reduce complexity, both in product SKU count and the supply base through supplier consolidation with.
With the objective of being able to use components across multiple product lines.
On the supply side, we will focus on supply partners for appliances that draw upon higher volume more industry common platforms and wished the supplier holds inventory until we need the appliance.
We are also extending lead times on products that have lumpier demand and are more customized to the customer solution to reduce risk of holding inventory through technology transitions.
GAAP operating expenses in the second quarter, where $39 million.
Compared to $41 $1 million in the prior quarter.
The non-GAAP expenses for the second quarter sequentially decreased $1.5 million to $34 $8 million or just below are targeted run rate of $35 million.
I wanted to further emphasise at $35 million was our target for the end of fiscal 2023. Therefore, we achieved this level effectively two quarters earlier than initially planned.
The decrease in operating expenses were primarily due to lower head count levels and higher cost geographies.
GAAP net loss in the second quarter was $11.9 million or a loss of 13 per share.
Compared to a net loss of $10.6 million or a loss of 13 per share in the prior quarter.
Excluding stock compensation restructuring charges and non-recurring charges non-GAAP adjusted net loss in the second quarter was point $5 million or one per share <unk>.
Compared to adjusted net loss of 3.6 million or four per share in the prior quarter.
<unk> EBITDA for the second quarter was for $1 million compared to $3 million in the prior quarter.
And included in the second quarter adjusted EBITDA was $2.4 million of other income related primarily to benefit from foreign currency exchange rates and the sale of certain intangible assets compared $2.8 million of other income in the prior quarter related primarily to a benefit from.
Patients in foreign currency exchange rates.
As we have discussed previously driving improvement in our adjusted EBITDA remains one of our highest priorities with our lowered operating expense run rate and continued top line growth as we outlined earlier and proving gross margin will be the key factor to fully realizing increase improve.
<unk> and our quarterly EBITDA results.
There's a full reconciliation of our non-GAAP results the most directly comparable gap measure and both the press release and the Form 10-Q released today.
Now turning to the balance sheet.
Cash and cash equivalents at the end of the second quarter, where $25.9 million compared to $26 $8 million in the prior quarter.
Outstanding turn that at the end of the second quarter decreased by $1.2 million to $77.2 million from $78.4 million at the end of the prior quarter.
At the end of the second quarter, the outstanding balance on the company's revolving line of credit was $21.5 million compared to $17 $3 million in the prior quarter.
Interest expense in the second quarter was $2.7 million compared to $2.1 million in the prior quarter and $3 $1 million during the same quarter a year ago.
Our cash and cash equivalents decrease my point $9 million during the quarter.
Ned cash provided by operating activities. During the current quarter was point $4 million and represents a significant improvement over the $18.3 million net cash used an operating activities in the prior quarter.
The fiscal year to date net cash used an operating activities was $17 $9 million.
And this use of cash approximated the $17.7 million decline and deferred revenue that was primarily driven by seasonality.
As we mentioned on the call last quarter historically, the heaviest bookings for service contract renewals have been the December and March quarters with decreases and bookings in these June and September quarters.
Net cash used an investment activities was $4.8 million, which represents.
Capex the net cash provided by financing activities during the quarter was $3.4 million and primarily represented increased borrowings on revolving line of credit of approximately $4 $2 million offset by $1.2 million used to pay down outstanding term debt.
Now turning to our financial outlook.
As previously outlined our fiscal 2023 objectives remain to continue growing revenue, while realizing identified cost reductions.
Although the pressure on gross margins associated with revenue mix remains a near term challenge. We believe we are positioned to realized improvements in the coming quarters as our sales teams ramp and secure additional wins for our higher margin products and solutions.
For our third fiscal quarter, we expect revenue to be $103 million <unk>.
Plus or minus $3 million.
non-GAAP adjusted net loss is expected to be $1.5 million, plus or minus $1 million.
Adjusted net loss per share.
One.
Plus or minus one per share.
Using an anticipated basic share count of 91.3 million shares.
We expect adjusted EBITDA in the third quarter to be approximately $3.5 million.
With that I'll turn the call back to Jamie for closing remarks, Jamie.
Thanks, Mike as.
As indicated by our comments today the team remains highly focused on executing and driving increased profitability in our business.
R N and data management solutions are resonating with customers and partners and we are actively expanding our software and systems business, along with driving future growth.
In the federal enterprise markets to increase our margins and improve our overall revenue mix.
We are well positioned with record backlog, which enables greater visibility into the longterm orders of our large hyperscale customers.
With our expectation for continued improvements in the supply chain, we're guiding revenue for the third quarter to be above $100 million at the bitcoin.
Which will be the first time since 2019.
With that let's open it up for questions operator.
Okay. Thank you at this time, we will be conducting a question and answer session. If.
If you would like to ask a question. Please.
Phone keypad and confirmation tall will indicate your line is into question Q you.
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One moment, please while we pull for questions.
Our first question comes from the line of Craig and this would be writing Securities. Please proceed with your question.
Yeah. Thanks for taking the question and guys congratulations on the significant searching the backlog.
I wanted to start there so.
The two components the shipper bulk component declined it looks like by about 20%.
And it's around 20 million, while the future period this up about three at so.
Mike what caused the mixer backlog to shift so much towards future and our customers just starting to do more order pipelining and if so why are they doing that now versus earlier when components might've been a bigger issue.
Yeah.
I guess first to talk about the shippable backlog, we've seen that steadily declined over the last few quarters has come from 32 to 25 1920, and when we look out to next quarter. We would expect that to go down about five more so we're getting pretty close to just a normalised level as far as shippable backlog and.
And then really the big introduces future orders.
And.
What.
Believe that is what's driving that is our large hyperscalers just wanted to.
Ensure continuity of supply so they're just placing these big orders on us it's in the future. It gives us great visibility and helps us plan.
But you know it's not it's not created because we've got a supply constraints like it had been in the past and Craig There you have one other interesting development or as we've been serving our largest hyperscaler coming on for years.
So we're starting to see them begin to not only make additional capacity buys but starting to replace an upgrade some of the equipment. That's four years old. So now we're getting both new orders as well as refresh and upgrade orders for the massive installed basis there. So.
Our quarterly.
Sounds of them is going up because it's including both new capacity and upgrades and refreshes to the.
Capacity, that's now coming up on four years old and some of it's out of step.
Yep, a nice dynamic to have.
So with that one clarification, so Mike for the backlog how long do those orders extend out that's out of 12 months backlog at 24 month backlog, what's the duration of the orders and that extend it back on.
It's about three quarters.
Three question, Okay. So so that.
Something I wanted to tie into the gross margin point that you made with gross margins in the third quarter being flatter. So if we got a backlog that's 97 million.
And with that being a three quarter backlog how is it that mix will shift to allow gross margins to go up over the next three quarters are we really looking at flattish gross margins over the next three quarters until we get through what is a very robust period of secondary demand where mixed is really working against.
Blended gross margin average.
Hey, Craig it's Jamie.
Okay.
The reason.
For the gross margin pressure.
Is that <unk>.
As we increase.
Our hyperscaler sales.
Every additional million dollars that we bring in Duluth gross margin because its margin dilutive business.
So to offset that.
We need to do.
Inc include a mix.
Of North American Enterprise sales.
And U S federal sales, which are among our highest margin business now our sales. There. If you look in primary have fallen off of that and some of that is.
A result of US moving our sales organization from single product sellers too.
<unk> portfolio sellers right. Our strategy is to sell our customers are full and the end portfolio of unstructured data products. So we've been shifting our sales force to a I would say.
Ah more capable enterprise seller, but when you transition a sales team.
The new team needs to get up to speed get going and we're transitioning that North America team in our U S. Federal team now we've made the hires we brought them through training and we expect them to come on and.
And as they begin to sell at a higher level than our previous teams did we're going to restore that Max So it's really about less of a market condition. It's more of a result of US you know.
Making pretty significant changes in the makeup of our North American and U S Federal sales ward.
Okay, Jamie so just to tie that in with some of the numbers from the Investor presentation, then after a quarter or two with primary kind of strange that these 10 billion dollar level. She had expected to get back to the mid teens and with that you'd get some upper mixed pressure on gross margins does that how we should look at it.
Yeah, I think you're going to see primary storage increase and I think you'll see secondary storage sales into the enterprise and into U S Federal increase.
And that's how we're going to restore margins right we do about.
Kind of in the mid forties of margin to the U S enterprise.
And we're in the sixties and in some cases seventies, when we're selling do certain government very specialized government programs.
So you.
You can imagine.
The impact of 70 points margin business when it is offsetting margins.
In the 18% to 20% of the Hyperscaler.
Yup makes sense.
To that business really.
Makes a big impact the margin. So it's really about mix until we we feel really good about the strength of our cloud business now, we're putting a lot of energy into our North America enterprise on our U S Federal business.
Get that next where we need to get the margins climbing back up into the forties, and ultimately where we hope to get to his end of the fifties.
Got it.
Okay, and then last one before I hop back in the queue.
The the subscription customers again, I think for about the third consecutive quarter up by about 100, so nice to see.
But might you indicated that your expectation for that that pay our target was pushed out from the end of this year early 24, and so it seems like $100 million or that hundred that quarter pacing or the value per deal or an aggregate just isn't pacing I should expect it can you talk.
About what it will take to accelerate the customer ads from 100, I know I've asked about that.
Before but it seems a very critical question for getting the business about 50 per cent gross margin target very long term.
Yeah, a craig.
You know what we feel good about is our new customers are moving to subscription.
We're happy to do it we're not getting a lot of pushback.
But as you pointed out we need more velocity, we needed to accelerate more so we're looking at a series of programs. One is we have certain customers who've been buying for us for 10 years 15 years, and they are pretty set and how they buy from us.
And when we move them to subscription it's just a very.
Different sets of pricing levels, and they're used to and so we're looking at different in certain customer incentives certain sales incentives channel incentives to accelerate people moving the subscription with us and we're going to be executing a series of programs to pick up the pace there because I think we feel.
Good about those products, we feel good about that business model.
What we need to address is the velocity of.
Customers moving to the new new business model.
Yep those incentives makes sense <unk>.
Thanks, Craig.
Our next question comes from the line of Ryan Mayors Lake Street Capital markets. Please proceed with your question.
Hey, guys. Thanks for taking my question is one for me I was just wondering if you could highlight your operating expense reduction efforts and if you feel like there's opportunity to reduce this even further it sounds like you've made some positive strides here during the quarter just kind of curious if you think there's opportunity to lower those even more.
Yeah, Thanks, Ryan Yes.
As we reported coming in at $35 million was the target that.
That we have for the end of the year. So we're we're two quarters I had there and we still will continue to optimize look at what we can do where we can do it if we can do things and lower costs Geography's will take advantage of that look to optimize our friends our facility footprint further so.
Would expect to keep at this level, if not do better as we go forward.
Definitely our targets.
Great. That's helpful. Thank you.
Thanks Ryan.
Our next question comes from the line of George <unk>.
<unk> Oppenheimer to proceed with your question.
Thank you for taking my questions, Jamie maybe just expanding on.
The economy, and what you're saying there I know you talked about the sales transitions with a new hires and all of that but are you seeing any areas where macro headwinds are impacting the business.
Right.
Our business certainly isn't as large as others, who are seeing headwinds, we're certainly not macro economists.
But at the same time I have to say I am not seeing <unk>.
<unk> being significantly pushed out because of economic concerns.
Not seeing delays I'm not seeing projects cancelled and it may be.
The areas that we play and data protection, which is I don't think that's an area where people will cut costs.
I don't see people cancelling.
Media and entertainment, they're not canceling shows or the news or movies or television series. So in the areas that we play critical video surveillance I don't see police departments cutting their budgets on video surveillance I don't see television stations cancelling shows.
I don't see people cutting corners on anti ran somewhere or data protection.
Until maybe it's the areas that we play may be that our products are value oriented.
But I am not and have recently spent a lotta time with our sales team I am not seeing.
Delays cancellations and that's why you see us for now multiple quarters in a row raising our revenue outlook.
Cause.
Or issues had been supply based in his <expletive> calming down, we're just seeing more and more sales flow through.
Alright, and just following on that supply challenges is good to see the improvement are there areas, where you're still seeing any decommit or.
Areas, where you're still a bit concerned or is the visibility definitely a lot clearer at this point.
That's a little hard to answer right because.
We've had the rug pulled out from us multiple times. So today, we have good visibility we are not seeing people asking the outrageous prices that we're being asked we're not seeing the need to do these.
Very expensive.
Expediting of shipment.
We're not seeing the brokers to out there charging massive fees. So that has calmed down now that can start again in a minute if somebody.
E Mail <unk>.
<unk>, but so far where a month ended this quarter, we're not seeing decommit, we're not seeing broker fees were not seeing expediting fees and were receiving materials as expected.
The only thing that I would say, we see a bit of as some products have slightly longer lead times <unk>.
Products, we used to see in two to four weeks are now four to eight weeks.
And that's why we're.
Moving to more of a more natural shippable backlog of 10 or $12 million when we used to be down to two or 3 million.
Guys products, where we get orders in the last two or three weeks of the quarter, we're not gonna pay expediting fees to get that we'd just rather roll that into the next quarter and get better linearity and better predictability in our business.
Alright, and just my last question and you know you have highlighted.
AWS marketplace availability of store Naps and.
Extended partnership how are how is the ecosystem evolving where are you focused on adding.
New partners and you know how long do you kind of expect.
That effort to last before you start seeing some new customer gains for that.
Yeah, the way I would characterize our partner ecosystem is quantum four years ago was a niche vendor.
We sold the media and entertainment and we sold in new certain backup use cases.
Today, we're in and the end provider.
We provide a full suite of offerings during every lifecycle stage for unstructured data so.
So now we are working with different partners were way more relevant to the enterprise and we used to be.
So our largest effort.
Globally, and all our theaters, which are North America Asia pack in EMEA, we're recruiting new channel partners that are more enterprise oriented that are more broaden their scope than the niche partners that we worked with historically and we think that is where we're at.
See the most margin expansion and I think that's where we're going to see the most revenue expansion is.
Being much more relevant with more products to the general enterprise.
Thank you.
And as a reminder, if anyone has any questions you may print star one on your telephone keypad to join the question of nursing queue.
Our next question comes from the line of David.
<unk> Securities. Please proceed with Ya.
Yeah, congratulations on the nice results sequentially.
Couple of questions for me.
As far as you're.
Your Hyperscale business.
Seeing a little bit of a slowdown in the growth rates of North American customers.
I think some slowdowns internationally as well how should be translate that into the growth rate of your business into.
Into this area and I guess.
Maybe if you could look into next calendar year or.
Just help us maybe to understand what the growth rate will actually be this calendar year.
Yeah, I mean, I can speak to why this occurred we're not seeing a slowdown in the economy anything like that we're transitioning of Salesforce has been here for many years as single product sellers into portfolio salaries and that slowdown in some of these areas is.
Natural thing that we just have to go through when you move a legacy sales team into a next generation sales team we've added cycle over some of our people and there's a learning curve.
So that I think that's just a natural piece that we're going through.
Mike you can speak to growth rates, but I don't believe we've provided any forward guidance on.
Growth rates beyond the quarter were guiding too but to that point, we are having a animalist day on November 17th So we'll be looking out you know.
Five years and will go year by year. So we definitely can give a lot more color as we go through that presentation.
Yeah now for calendar 2022, he just gave guidance for the December quarter, you know and I don't have the numbers in front of me what do you think the Hyperscale business did in calendar 2012 or will do with you at your guidance.
The for the current quarter for the current quarter. The Hyperscaler continues to grow.
Well no. If you just assumed that you hit your numbers in the current quarter for Hyperscalers, what will the growth rate fee for calendar 2020, we never we don't breakout individual.
Groups like that I mean, you can look at the secondary and understand that the Hyperscalers are the biggest group included in that <unk>.
Business unit and.
Compensated heightened how much did secondary growth has been growing significantly yeah.
33% for the Hyperscalers grew 33%.
Secondary.
Secondary.
Okay.
As far as the Hyperscale business. This is mainly a north American business or is there any risk from.
Natural restrictions in China or whatnot.
Jetson International business, we have Chinese Hyperscalers U S. Hyperscalers, we have telcos that are trying to be hyperscalers. So it's an international business.
Cape which is predominantly what we sell is a product that the Chinese government has said they will not be trying to make similar.
Similarly, India is saying that is a product they're not trying to make themselves. So they are they have made a decision to import that from the west.
Okay, and then finally from me touch.
Touched upon the little bit that we've talked about how you for federal businesses weak and your media and entertainment business was weaker than your enterprise U S. Non hyperscale enterprise businesses, what would be the timing or your best guess as to when those segments start to improve sequentially or year over year or however, you look at them.
Right now I mean.
That's why we're guiding to a one O three.
Is and will continue we think will continue to guide us as.
Think of it as we've hired over 15, new sales reps, so last quarter with the 99 they are.
15 sales reps, who contributed nothing.
They are brand new their new hires are coming up to speed when they come on.
Where we quoted people at over $3 million a year you can imagine as they come on how that's going to contribute so we were feeling pretty good about the highest we've made about the boot camps and the training we've done they're going into territories that are not cold they were cultivated prior to them as large as <unk>.
Saw basis in those territories so.
Part of the reason you're seeing us.
Not only have beaten.
Arrange an been above our range, but guiding.
As well.
Great. Thank you.
Yeah.
And our next question comes from the line of John Fitch doing with dynamic capital. Please proceed with your question.
Yeah, guys. Thanks, a lot and Ah nice work in the backlog in and hitting the numbers.
You know I guess everybody's trying to kind of get to the same answer here and so I'll ask.
Same question, a different way, which is you know.
You got into one of three that's great.
And you.
Dave just asked about kind of the mix here with hyperscalers or tape.
So you're you're forecasting growth, but you're forecasting flat gross margins, which would imply.
That all of the growth is coming from from Hyperscalers and yet you're also talking about these 15, new sales guys, which I'm excited about gaining traction and things like primary storage in federal and media and entertainment and.
And that somehow should imply higher gross margins, so I can't quite square that circle.
Yeah. So.
You're absolutely right.
And that we have been growing our hyperscaler business, while having some historic declines in our most profitable post profitable highest margin businesses. So to break the margins go up we need to sell more in North America and sell more in U S. Federal.
And also another driver has increased service sales which is.
A little more challenging in the short term.
So we've knew about this over a year ago. We've may have done the recruiting we've done the hiring we've done the training and the people are now I would just add a boot camp, where we trained a large group of these new folks and we expect them to start to contribute.
We don't know the speed at which they are going to come online, we don't know exactly how.
How to forecast that yet and so we've guiding too.
Strong <unk>.
<unk>.
The other thing, though if you look at that $96 million in backlog what does it tell you.
If it's mostly hyperscaler that means not only is hyperscalers sales gone up this quarter, they're probably going to go up in new quarters in front of us.
So that means that additional headwind that we have to sell into.
To offset the dilution of increasing hyperscaler sales.
And we haven't fully characterize that yet that's why EBITDA three five.
Is strong but it also has some conservativism and that we just don't know exactly how effective and the timing of these new wraps coming on board is.
I've met with them all personally I.
I can tell you. This is a much more experienced much more.
Mature enterprise selling org than we've had in the past.
Really optimistic about them, but I cannot draw a line through their performance yet because it's just too new.
So.
Like in the case of federal just to focus on specific vertical typically it's ah.
This was that quarter.
Is that something you still think you're new sales rep is going to be able to drive growth in federal maybe year over year, but it's maybe sequentially because it didn't seem like it was that great quarter for federal.
Yeah. It's interesting if you look at Dell Cisco US a lot of us got deals pushed by U S federal and they're continuing the budget. What's interesting is its use usually use it or lose it money.
In the government's sweeps quarter, which ends September 30th.
But with a continuing resolution, they're carrying money from last year forward.
So I'm feeling pretty good about our U S federal business I'm feeling really good about the programs that were part of and that there is going to be pretty big refresh budgets. There. So I'm.
I'm pretty optimistic about U S fat.
And I think we've had we have stronger leadership in that segment and I think we've ever had and some of the strongest new hires we've made her in that segment and.
I'm pretty optimistic about how that groups perform and I'm feeling pretty good about how the U S government.
With sweeps.
Did not do use it or lose it money any monies allocated last year. They kept almost all of those monies where they couldn't get deals done they kept the monies allocated into the new year.
Gotcha.
And so one other interesting area you have now had for a little over a year.
As in your in your SAS business, you know, you're almost 10 million and they are can.
Can you give me a little color on.
Hey, what what does that represent what would that have been.
Something far greater.
Revenue had it been kind of traditional revenue that you'd booked or not and what is the margin profile of of that business. As we look to see how you how you get to 50.
Yes.
I'll, let Mike provide some of the details, but most importantly.
In the old model, we would not have captured as much revenue our margin.
And the old model when people bought appliances.
Where the software was bundled it into it they undervalued or software.
They often wanted it almost for free and they didn't pay us for capacity. So in the new model, we get fully paid for our software we get paid for additional features in the software and we're paid for our capacity. So we had revenue leakage in the old model.
<unk> and we plug those links so definitely the new air our model is better for quantum.
Both from total revenues captured over lifetime as well as.
The margin.
So.
I'm very glad we made the transition.
I like seeing the I also think we posted pretty strong Tacb numbers. In addition are are so I like how that's building.
You know on the traditional model, we would've gotten more cash upfront and some people might say that you know.
They liked that model, but the majority of our customers are paying us three years upfront. So we're not even seeing that much delay in cash either and that we are providing incentives for our customers to buy on a monthly subscription, but pay 36 months in advance and the majority of our customers are.
Are opting for the 36 months in advance to get some of the incentives and discounts for paying upfront.
Gotcha.
Huh.
Two more I'll try and keep them quick.
The you said 85 per cent of the backlog was Hyperscaler does that mean, 15% is is not even tape oriented and it's in other products or is it just not in hyperscaler, but it's still a tape.
No I mean, a good example is.
Some of our customers.
In our video surveillance business need boxes with a lot of Gpus in them to do facial recognition. Our license plate recognition are advanced analytics. Those boxes are about an eight week lead time. Some of them are 12 week lead times. So basically what you sell on this quarter you ship next quarter. So we do have servers.
On.
Those kind of delays VF series as you know has very expensive nvme in it.
And some of that nvme as long lead time products as well. So there is F series products surveillance product.
And certain DSI product is in those longer lead time products that will push out in the quarter. So it is not all day.
Gotcha.
The last one.
So.
Roughly youre doing $100 million revenue, you've got 35% gross margin, which is 35 million you've got $35 million in and Opex. It seems like this is kind of breakeven.
You know art.
Do we feel confident because it's pretty lumpy right you've got.
Some quarters, you've got 44% tape and you're hoping these other ones grow but are you feeling pretty confident that this is kind of the base case for your business model and we're gonna see sequential growth from yours are still going to be a lot of seasonality.
Even though you got into three and a half a million and EBITDA you did generate a little cash this quarter, we love to see that I I'd love to hear your thoughts on cash flow. There was some working capital that reversed which was great but like from here is a top line growth is it top line growth and gross margin growth is it more gross margin gross and top line.
Gross what are you what are you what are you.
Where you're Goin' I mean, I'll tell you exactly kind of how we are running the business one is.
We feel pretty comfortable with the backlog with what we see we are running at 100 million plus.
Quarter now consistently.
We think that can be.
The new sales team coming online that can get to 110 115.
We're we're trying to get to an addition, we've got to get our margins back up to 40 points plus we're going to do that with the reps that are operating in the highest margin areas.
And or grinding costs more we've identified up to another $2 million per quarter of course, we can take out some on a run rate some on a one time.
But obviously my goal is to drive top line drive margin drive additional cost cutting so I get to at least 6 million and EBITDA, where I know conservatively, that's throwing off at least a million dollars of free cash flow.
And that's where I'm trying to get to US now we're in I mean, it was just a few quarters ago, where a $300000 in EBITDA now are at 4 million I got pushed out to around 6 million. So we moved from positive EBITDA two free cash flow and.
And that's where I think we all get a lot more comfortable as we start to build our balance build the balance sheet with.
With cash going into the bank.
And that's how I think about the business right now so my goal is.
B.
We've got a pretty good model now where we've been beating guidance and my goal is to be guidance this quarter and beat it enough to throw off cash.
Great. Thank you for that answer that's as clear a business model answers I've ever gotten on a conference call. So I really appreciate it.
Thank you.
And our final question comes from the line of Neil choke sheet with Northland Capital markets. Please proceed with your questions.
Yeah extend my congrats on the strong bottom line.
Lot of discussion here on the new quote or sales reps here just.
The level set hemi total quote <unk> now.
Where.
Well, we have the outside and inside quota carrying reps, but rough and tough I would say, it's about between 50 and 55 quota carrying people.
Okay.
Prior to the restructuring where where are you at.
We are about 50 to 55, what they were point product sellers. So people, who just sold DSI people, who just sold store and ask for media and entertainment. The new salespeople are people, who sell full portfolios they come from organizations like <unk>.
Go where there's 2500 products are down where there's 2000 plus products.
So it's <unk>.
These are salespeople that may be a little more tenured a little more experienced.
Cost a little more.
But they carry much higher quotas and they do more targeted accounts selling than what we did previously was just sell at anything you can anyone who is in front of you are new wraps are moving to more named accounts, where they just work 20 to 25 accounts, but do a lot more inside those accounts.
Okay, and just to be clear then.
Prior to the restructuring each quota carrying sales rep.
Was effectively a product salesperson and converted most of them to a multiplex salesperson those that weren't converted were let go and you hired a new 15th.
I mean the numbers.
About 15 in North America, but I would think of it as some of our salespeople.
Made the transition from being may be focused on a certain area to being more general lists.
I think everyone knows that there's been a lot of turnover and all U S businesses. So we've had a certain amount of turnover ourselves.
We've had certain people that just weren't successful here. So we've had a series of reasons of why we've cycled people over.
But in that process, we move too and the and sellers versus point product sellers.
A lot of them are new and right now, it's a race to get them up to speed get them up to quota and we're investing in training boot camps. All the things we could do to get them up Dakota as fast as we can and we think that will rebalance the Max and by rebalancing the mix.
The margins go should go up.
Yeah, but I think it was 35 you know we're expecting 35 to be the low point.
And we just got to bring it up from here.
Yep, absolutely, okay, and just to be clear you believe you're not seeing any negative macro signs at this point in time.
I'm not but we're a small business and we operate in a few niche is you know.
So I don't have the view that a.
Massive company like a dollar Cisco or H behalf, but in my little view and I have recently traveled to Asia Europe .
And across the U S to Atlanta to New York to L. A to Seattle.
And in all my travels and I visited over 30 customers face to face.
I have not had a discussion of hey, we got a slowdown or hit the brakes.
But my purview is probably smaller than.
C E O's bulge bracket companies.
Understood.
Finally can you just.
Might've missed this but the look to hear an update on the tip of three acquisition.
Four months of that asset yeah.
I mean, those guys are doing phenomenal. They just one another huge department of Homeland Security Award.
They are.
They're doing really well I think they got some long lead time products because what's happening with video surveillance is most vms is now need a lot of gpus to analyze the video and it's just making those products longer lead time and we're not.
You know kind of pre by systems.
It's just too much inventory risk.
But I would like for that business is going the other thing is a lot. We just did.
Across Asia Europe and.
Three different <unk>.
Meetings with partners in the U S. We do at annual elevate conference. So we brought in over 100 partners in Asia.
150 partners in Europe , and probably close to 200 partners in New York Al Law in D C.
The products that I found what everyone was most excited about adding to their portfolio was video surveillance.
Particular in Asia, we had to go back and do a whole another series of meetings about surveillance. So it's it's generating a lot of excitement in the partner base.
So.
So.
I think that's a good bye for us I think we've.
Got a lot of innovation there the USPS now shift the unified surveillance platform, which is the integration of pivot three with Ian cloud in assets, where the software runs on any server any hypervisor can run on the cloud.
Virtualized so it's Ah.
I think the technical architecture is is in a leadership position and it really is the platform of choice. If you cannot lose any frames of video. So if you are a police department of Homeland security.
Fence Department.
Run a casino a bank or you just cannot run any risk of losing that video.
David three platform is the leading platform for those use cases.
Alright, thank you for that update.
And we have reached the end of the question and answer session I'll now turn the call back over to Jamie closing remarks.
Alright, well, thanks, everyone. It feels great to be back, beating guidance and raising our revenue and I think that trend is one we plan to continue.
Yet being conservative and recognizing the fact that you know there.
There are still supply chain disruptions, there's still a lot of uncertainty.
But our products or value oriented we think they do well when customers have to spend wisely and we'd like how our products are positioned for this market and we.
We look forward to speaking to you all on November 17th will will be having our annual investor day, and we will be updating our five year model with what we've learned over the last year. So I look forward to seeing you. All then.
Tell them. Thanks, so much and we will talk to <unk>.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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