Q2 2023 Quantum Corp Earnings Call
[music].
Greetings and welcome to the quantum Corporation second quarter fiscal 2023 financial results at this time all participants are in a listen only mode.
Question and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.
Now I'll turn the conference over to your host Bryan go wherever it.
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 am Brian Cabrera 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 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 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 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 driven 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 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.
And we are expecting that the 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 increased 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 our 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 for support.
We will continue to drive growth in IRR by driving increases in primary storage and non Hyperscale secondary storage software and systems.
And introducing new products based on subscription software licensing.
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 two 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 and our results.
The other lever lever of utmost importance is expanding our gross margin, which is tied very closely to our revenue mix. This applies not only to end market verticals, but 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.
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 that must be stored and protected in the enterprise.
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 IDC 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.
<unk> cyber security and using AI to unlock value in massive 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 I'd like to take this time to welcome.
Storage, AI and machine learning 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.
Thank you Jamie welcome and thank you for joining the call today.
Now turning to the results for the second quarter.
Revenue came in just above 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 had very strong bookings during the quarter, which nearly doubled sequentially and contributed to our record backlog of $96 1 million as of September 30.
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 entered the quarter with approximately $25 million of shippable backlog.
And ended the second quarter with approximately $20 million, which wasn't shipped 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 this to significantly limit our ability to ship 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 our 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 median entertainment and U S federal business.
In terms of the supplemental supplemental metrics, we use to track our ongoing transition to emphasize our recurring software subscription model.
Annual recurring revenue or <unk> increased 14% sequentially to $9 4 million.
As a reminder, this figure includes recurring software subscription revenue across all of our transition product offerings, including store next active scale DSI and cat television.
Additionally at quarter end, the cumulative number of customers under a subscription contract increased to just over 550 active customers, which represents a 180% year over year growth and sequential growth of 22%.
In terms of total contract value TCE 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.
Anticipating a slight sequential improvement in non-GAAP gross margin, we ended the quarter at 35% or 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.
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 this 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.
And 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 mix, we are focused on building our enterprise it business.
And have recruited a 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 point.
Also impacting GAAP gross margins during the quarter was an extraordinary inventory reserve provision 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 of up to 52 weeks during the pandemic and subsequent changes in customer requirements over this extended time frame.
Certain inventory had become obsolete due to next generation products 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 and 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 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 in which the supplier holds inventory until we need the appliance.
We are also extending lead times on products that have lumpier demand in our more customized to the customer solution to reduce risk of holding inventory through technology transitions.
GAAP operating expenses in the second quarter were $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 our targeted run rate of $35 million.
I want to further emphasize a $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 <unk> 13 per share compared to a net loss of $10 6 million or a loss of <unk> 13 per share in the prior quarter.
Excluding stock compensation restructuring charges and nonrecurring charges non-GAAP adjusted net loss in the second quarter was <unk> 5 million or <unk> <unk> per share.
Compared to adjusted net loss of $3 6 million or <unk> <unk> per share in the prior quarter.
Adjusted EBITDA for the second quarter was $4 1 million compared to $1 3 million in the prior quarter.
And included in our second quarter adjusted EBITDA was $2 4 million of other income related primarily to a benefit from foreign currency exchange rates and the sale of certain intangible assets compared to $8 million of other income in the prior quarter related primarily to a benefit from.
<unk> and 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 topline growth as we outlined earlier improving gross margin will be the key factor to fully realizing increased improve.
<unk> in our quarterly EBITDA results.
There is a full reconciliation of our non-GAAP results to the most directly comparable GAAP measure in both the press release and the Form 10-Q released today.
Now turning to the balance sheet cash and cash equivalents at the end of the second quarter were $25 9 million compared to $26 8 million in the prior quarter.
Outstanding term debt 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 decreased by $9 million during the quarter.
Net cash provided by operating activities. During the current quarter was <unk> 4 million and represents a significant improvement over the $18 3 million net cash used in operating activities in the prior quarter.
The fiscal year to date net cash used in operating activities was $17 9 million.
And this use of cash approximated the $17 7 million decline in 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 in bookings in the June and September quarters.
Net cash used in investing activities was $4 8 million, which represents cap.
Capex the net cash provided by financing activities during the quarter was $3 4 million and primarily represented increased borrowings on our revolving line of credit of approximately $4 2 million offset by a $1 2 million used to pay down outstanding term debt.
Yeah.
Now turning to our financial outlook as.
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 realize 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.
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.
<unk> plus.
Plus or minus <unk> <unk> 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 <unk>.
As indicated by our comments today the team remains highly focused on executing and driving increased profitability in our business.
Our end to end 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 and 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 long term orders of our large hyperscale customers.
With our expectation for continued improvements in the supply chain, we are guiding revenue for the third quarter to be above a $100 million at the midpoint.
Which will be the first time since 2019.
With that let's open it up for questions operator.
Thank you at this time, we will be conducting a question and answer session. If.
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One moment, please while we poll for questions.
Our first question comes from the line of Craig Ellis with B Riley Securities. Please proceed with your question.
Yeah. Thanks for taking the question and guys congratulations on the significant surge in the backlog.
I wanted to start there so.
Yes.
Of the two components the shippable component declined it looks like by about 20%.
And it's around $20 million, while the future periods is up about three so.
Mike what caused the mix of backlog to ship 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 decline over the last few quarters. It's gone from 32% to 25 now to 20 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 normalized level as far as shippable backlog.
And then really the big increase as future orders and what we believe that is what's driving that is our large hyperscale or just wanted to.
Ensure continuity of supply so theyre just placing these big orders on us in the future. It gives us great visibility and helps us plan.
But it's not it's not created because we've got a supply constrained like it had been in the past and Craig there. One other interesting development is we've been serving our largest hyperscale are coming on for years.
We're starting to see them begin to not only make additional capacity buys.
Starting to replace and 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 install basis there so our quarterly.
All 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 service.
Yes, a nice dynamic to have.
So with that well one clarification, so Mike for the backlog how long do those orders extend out inside of 12 months backlog at 24 months backlog, what's the duration of the orders and that extended backlog.
It's about three quarters.
Great question, Okay. So so that.
Yes.
It's something I want to tie into the gross margin point that you made with gross margins in the third quarter being flattish. So if we've got a backlog that $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.
The robust period of secondary demand where mix is really working against the blended gross margin average.
Hey, Greg it's Jamie.
Okay.
The reason.
For the gross margin pressure is that.
As we increase.
Our hyper scaler sales every additional million dollars that we bring in Duluth gross margin because it's margin dilutive business.
So to offset that.
We need to do.
Inc include a mix.
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 a bit and some of that is a result of us moving our sales organization from single product sellers.
Two portfolio sellers right our strategy is to sell our customers a full end to end portfolio of unstructured data products. So we've been shifting our sales force to a I would say.
More capable enterprise seller, but when you transition our 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 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.
Making pretty significant changes in the makeup of our North American and U S Federal sales org.
Okay, Jamie so just to tie that in with some of the numbers from the Investor presentation, and then after a quarter or two with primary kind of staying said is $10 billion level, you would expect it to get back to the mid teens and with that you'd get some upward mix pressure on gross margins is that how we should look at it.
Yes, I think youre going to see primary storage increase and I think youll see secondary storage sales into the enterprise and enter U S Federal increase.
And that's how we're going to restore margins right we do about.
No.
Kind of in the mid forties of margin to the U S enterprise.
And where in the <unk> and in some cases 70 is when we're selling to certain government.
Specialized government programs.
So.
You can imagine.
The impact of 70 points margin business when it is offsetting margins.
In the 18% to 20% of the Hyperscale.
Yes makes sense.
And that business really.
That makes a big impact to the margin. So it's really about mix and so we feel really good about the strength of our cloud business now, we're putting a lot of energy into our North America enterprise and our U S federal business to get that mix, where we need to get the margins climbing back up into <unk>.
The <unk> and ultimately where we hope to get to is into the <unk>.
Got it.
Okay, and then last one before I hop back in the queue.
The dust.
Subscription customers again, I think for about the third consecutive quarter up by about 100, so nice to see.
But Mike you indicated that your expectation for.
That that our target was pushed out from the end of this year to early 'twenty four and so it seems like that $100 million are that 100, the quarter pacing or the value per deal or in aggregate just isn't pacing as you had expected can you talk about what it will take to accelerate the customer adds from.
100, I know have asked about that before.
Four but it seems a very critical question for getting the business to about 60% gross margin target very long term.
Yeah, Hey, Craig.
What we feel good about is our new customers are moving to subscription.
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 have been buying for us for 10 years 15 years, and they're pretty set and how they buy from us and when we move them to subscription it's just a very diff.
Current sets of pricing levels and they are used to and so we're looking at different certain customer incentives certain sales incentives channel incentives to accelerate.
Moving to 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.
Yes, those incentives makes sense thanks, Jim.
Thanks, Craig.
Our next question comes from the line of Ryan Meyers with Lake Street Capital markets. Please proceed with your question.
Hey, guys. Thanks for taking my question just one for me I was just wondering if you could highlight your operating expense reduction efforts and if you feel like there is 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 is opportunity to lower those even more.
Yeah, Thanks, Ryan Yes.
As we reported coming in at $35 million was the target that we had for the end of the year. So we're two quarters ahead, there and we still will continue to optimize and look at what we can do where we can do it if we can do things in lower cost geographies will take advantage of that.
We look to optimize our facility footprint further so we would expect to keep at this level if not do better as we go forward.
Our target.
Great. That's helpful. Thank you.
Thanks Ryan.
Our next question comes from the line of George <unk>.
<unk> with Oppenheimer. Please proceed with your question.
Thank you for taking my questions, Jamie maybe just expanding on.
The economy, and what Youre seeing there I know you talked about the sales transition with the new hires and all of that but are you seeing any areas where.
Macro headwinds are impacting the business.
Yes.
Our business certainly isn't as large as others, who are seeing headwinds, we're certainly not macro economy.
But at the same time I have to say I am not seeing.
Deals being significantly pushed out because of economic concerns I'm not seeing delays I'm not seeing projects cancelled and it may be.
The areas that we play in data protection, which is I don't think Thats, an area where people will cut costs.
I don't see people canceling.
Media and entertainment they are 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.
Don't see TV stations canceling shows.
Don't see people cutting corners on anti ransomware or data protection until maybe it's the areas that we play maybe it's that our products are value oriented.
But I am not and I have recently spent a lot of time with our sales team I am not seeing dill.
Delays cancellations and that's why you see us for now multiple quarters in a row raising our revenue outlook.
Because our issues have been supply based and as Thats coming down, we're just seeing more and more sales flow through.
Alright, and just following on that supply challenges.
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 the.
The visibility definitely a lot clear at this point.
Yeah.
It'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 were being asked.
Not seeing the need to do these.
Very expensive.
<unk>.
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.
D commenced but so far we're a month into this quarter, we're not seeing decommit, we're not seeing broker fees were not seeing expediting fees and we are receiving materials as expected.
The only thing that I would say, we see a bit of as some products up slightly longer lead times.
Products, we used to see in two to four weeks are now four to eight weeks.
And that's why we're.
Kind of moving to more of a more natural shippable backlog of 10 or $12 million, when we used to be down to 2% or $3 million.
<unk> products, where we get orders in the last two or three weeks of the quarter, we're not going to pay expediting fees to get that we just rather roll that into the next quarter and get better linearity and better predictability in our business.
Okay.
Alright, and just my last question highly.
Highlighted.
AWS marketplace availability.
<unk> and <unk>.
Extended partnership.
How are how is the ecosystem evolving where are you focused on adding.
New partners and 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 the use cases.
Today, we are in the end to end provider.
We provide a full suite of offerings. During every lifecycle stage for unstructured data. So now we're working with different partners, we're way more relevant to the enterprise than we used to be.
So our largest effort.
Globally in all our theaters, which are North America Asia Pac and EMEA. We are recruiting new channel partners that are more enterprise oriented that are more broad in their scope than the niche partners that we worked with historically and we think that is where we're going.
To 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 press star one on your telephone keypad to join the question and answer queue.
Our next question comes from the line of David Duley with Steelhead Securities. Please proceed with your.
Yes, congratulations on the.
Nice results sequentially.
Couple questions from me as.
As far as.
Your Hyperscale business.
You're kind of seeing a little bit of a slowdown in the growth rates of North American customers.
I think some slowdowns in internationally as well how should we translate that into the growth rate of your business.
To this area and I guess.
Maybe if you could look into next calendar year or.
Just help us maybe understand what the growth rate will actually be this calendar year.
Yes, I can speak to why this occurred we are not seeing a slowdown in the economy anything like that we're transitioning a salesforce thats been here for many years as single product sellers into portfolio sellers 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 is a learning curve.
So that I think thats, 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, we're guiding to.
To that point, Dave we are having our analyst day on November 17th So we'll be looking out.
Five years and will go year by year. So we definitely can give a lot more color as we go through the presentation.
Yes.
For calendar 2022 can you just gave guidance for the December quarter, and I don't have the numbers in front of me what do you think the Hyperscale business did in calendar 2020 will do if you hit your guidance.
For the current quarter for the current quarter, the hyperscale or continues to grow.
If you just assume that you hit your numbers in the current quarter for Hyperscale or what will the growth rate be 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 hyperscale or some of the biggest group included in that.
Business unit.
Complicated.
Fifth secondary ground, that's been growing significantly.
I don't know grew 33%, while the Hyperscale are true.
3%.
Secondary group.
Secondary.
Okay as.
As far as the Hyperscale business is mainly a north American business or is there any risks.
International restrictions in China and whatnot.
Jetson International business, we have Chinese hyper scaler use hyper scalar is we have telcos that are trying to be hyper scalar. So it's an international business.
<unk>.
Tape, which is predominantly what we sell is a product that the Chinese government has said they will not be trying to make.
Similarly, India, saying that as 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 you touched.
Touched upon that a little bit, but you've talked about how your federal business is weak and your media and entertainment business was weaker in your enterprise U S. Non hyperscale enterprise business as well.
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.
And we will continue we think we will continue to guide us as you know.
Think of it as we've hired over 15, new sales reps, so last quarter with a 99. There are 15 sales reps, who contributed nothing now theyre 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 thats going to contribute so we were feeling pretty good about the hires we've made about the boot camps and the training. We've done they are going into territories that are not cold they work cultivated prior to them as large.
Install basis in those territories so.
That's part of the reason Youre seeing us.
Not only have beaten.
Our range has been above our range, but guiding up as well.
Great. Thank you.
Yeah.
And our next question comes from the line of John <unk> with <unk> Capital. Please proceed with your question.
Yeah, guys. Thanks, a lot and nice work in the backlog and hitting the numbers.
I guess, everybody is trying to kind of get to the same answer here and so I'll ask the same question a different way, which is you got into one of three it's great.
And.
Dave just asked about kind of the mix here with hyper scaler 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 Hyperscale orders and yet you're also talking about these 15, new sales guys, which I'm excited about gaining traction in things like primary storage in federal in media and entertainment.
That somehow it should imply higher gross margins, so I can't quite square that circle.
Yeah. So.
Youre absolutely right.
And that we have been growing our hyper scaler business, while having some historic declines in our most profitable most 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 is increased service sales, which is a little more challenging in the short term.
So we knew about this over a year ago, we've done the recruiting we've done the hiring we've done the training and if 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're going to come online, we don't know exactly how.
How to forecast that yet and so we've guiding too.
Sure.
Strong.
EBITDA.
The other thing, though if you look at that $96 million in backlog what does it tell you.
If it's mostly hyper scalar that means not only as hyper scaler sales gone up this quarter Theyre, probably going to go up in the quarters in front of us.
So that means that an additional headwind that we have to sell into to.
To offset the dilution of increasing hyperscale or sales.
So and we haven't fully characterize that yet and thats why EBITDA of $3 five is strong but it also has some conservatism in that we just don't know exactly how effective and the timing of these new reps coming on board is.
I've met with them all personally.
I can tell you. This is a much more experienced much more.
Mature enterprise selling org than we've had in the past.
Im really optimistic about them, but I cannot draw a line through their performance yet because it's just too new.
Okay.
So.
Like in the case of federal just to focus on specific vertical typically.
This was that quarter.
Is that something where you still think your new sales rep is going to be able to drive growth in federal maybe year over year, but.
Maybe sequentially because it didn't seem like it was that great quarter for federal.
Got it.
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 huge usually use it or lose it money in the government's sweeps quarter, which ends September 30.
But with a continuing resolution theyre carrying money from last year forward.
So I'm feeling pretty good about our U S federal business Im feeling really good about the programs that we're part of and that there is going to be pretty big refresh budgets there. So.
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 are in that segment.
<unk>.
I am pretty optimistic about how that group is going to perform and I'm feeling pretty good about how the U S government.
With suites.
Did not do use it or lose it money any monies they allocated last year. They kept almost all of those monies that where they couldnt get deals done they kept their money is allocated into the new year.
Gotcha.
So one other interesting area, you've now had for a little over a year.
As in your in your SaaS business, you're almost $10 million in IRR.
Can you give me a little color on.
Hey, what does that represent what would that have been.
Something far greater.
Revenue had it been kind of traditional revenue that you booked or not.
And what does the margin profile 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 or margin.
In the old model when people bought appliances.
Where the software was bundled into it they undervalued our software.
Often wanted it almost for free and they didnt 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 were paid for our capacity. So we had revenue leakage in the old model and we plug those leaks. So definitely the new <unk> model is better for <unk>.
<unk> from total revenues captured over lifetime as well as <unk>.
The margin.
So.
I am very glad we made the transition.
I like seeing the I also think we posted pretty strong <unk> numbers. In addition to <unk>. So I like how that's building.
On the traditional model, we would've gotten more cash upfront and some people might say that.
They like 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 in that we're providing incentives for customers to buy on a monthly subscription, but pay 36 months in advance and the majority of our customer.
Or is are opting for the 36 months in advance to get some of the incentives and discounts for paying upfront.
Got you.
Two more I'll try and keep them quick.
The you said, 85% of backlog was hyperscale or does that mean, 15% is is not even tape oriented in knits and other products or is it just not in hyper scaler, but it's still in tape.
No.
Good example is.
Some of our customers and.
In our video surveillance business need boxes with a lot of Gpus in them to do facial recognition our license plate recognition or advanced analytics. Those boxes are about an eight week lead time. Some of them are 12 week lead times. So basically what you sell in this quarter you shipped next quarter. So we do have servers.
On.
Those kind of delays the F series as you know have very expensive nvme in it.
And some of that Nvme is 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 of the quarter. So it's not all day.
Got you.
My last one.
So.
Roughly you're doing $100 million of revenue, you've got 35% gross margin, which is 35 million you've got $35 million in an opex. It seems like this is kind of breakeven.
Hi.
Or do.
Do we feel confident because it's pretty lumpy right you've got.
Some quarters, you got 44% tape and Youre, 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 going to see sequential growth from here or is there still going to be a lot of seasonality.
Even though you are guiding to $3 5 million in EBITDA, you did generate a little cash this quarter, we love to see that.
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 it topline growth is at top line growth and gross margin growth is it more gross margin growth in topline growth what do you what do you what do you yes.
Again, where you're going I mean, I'll tell you exactly kind of how we're running the business one is.
We feel pretty comfortable with the backlog with what we see we are running at a $100 million plus per quarter now consistently.
We think that can be.
With the new sales team coming online that can get to 110 115.
That's where we're trying to get to in 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 we're grinding costs more we've identified up to another $2 million per quarter of cost 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 in EBITDA, where I know conservatively, that's throwing off at least $1 million of free cash flow.
And Thats, where I am trying to get to is now we're in I mean, it was just a few quarters ago. We were at $300000 in EBITDA now we're at $4 million I got to push that to around $6 million. So we move from positive EBITDA to free cash flow and Thats, 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.
That's how I think about the business right now so my goal as you know.
Beat we've got a pretty good model now, where we have been beating guidance.
My goal is to beat 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 gone on a conference call. So I really appreciate it.
Thank you.
And our final question comes from the line of Neil Doshi with Northland Capital markets. Please proceed with your question.
Yes.
My congrats on the strong bottom line.
So a lot of discussion here on the new quota sales reps here just to level set.
Total.
Hearing sales reps you have now.
We're.
Well, we have outside and inside quota carrying reps, but rough and tough I'd say, it's about between 50 and 55 quota carrying people.
Okay.
And prior to the restructuring.
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 Cisco.
Go where there's 2500 products are down where theres 2000, plus products. So it's <unk>.
These are salespeople that may be a little more tenured a little more experienced.
<unk> cost a little more.
They carry much higher quotas and they do more targeted account selling than what we did previously was just anything you can any one is in front of you are new reps are moving to more named accounts, where they just work 20 to 25 accounts, but do a lot more inside those accounts.
Got it okay and just to be clear then.
Prior to the restructuring each quota carrying sales reps.
It was effectively a point product sales person and you converted most of them to a multi product salesperson those that werent converted were let go and you hired a new <unk>.
I mean the numbers.
About 15 in North America, but I'd think of it as some of our salespeople.
<unk> made the transition from being maybe focused on a certain area to being more generalists.
I think everyone knows that there's been a lot of turnover in all U S businesses. So we've had a certain amount of turnover ourselves.
We've had certain people that just werent successful here. So we've had a series of reasons of why we've cycled people over.
But in that process, we move to <unk>.
And sellers versus point products 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 were investing in training boot camps. All of the things we can do to get them up to quota as fast as we can and we think that will rebalance the mix and by rebalancing the mix.
The margins should go up.
Yes, but I think it was 35.
We're expecting 35 to be the low point.
And we just got to bring it up from here.
Yeah, absolutely, okay, and just to be clear.
<unk> believe youre not seeing any negative macro signs at this point in time.
I am not but we're a small business and we operate in a few niches.
So I don't have the view that a.
Massive company like a dollar Cisco or HP half, 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.
Ceos Bulge bracket companies.
Understood and then finally can you just.
Might have missed this but love to hear an update on the <unk> acquisition.
<unk>.
Yeah.
<unk>.
I mean, those guys are doing phenomenal.
Just one another huge department of Homeland Security Award.
They are.
They're doing really well I think they've got some long lead time products, because what's happening with video surveillance as 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.
Kind of pre buy systems, it's just too much inventory risk.
But I like where that business is going the other thing is a lot. We just did.
Across Asia Europe and.
Three different <unk>.
Meeting with partners in the U S. We do annual elevate conference. So we brought in over 100 partners in Asia, a 150 partners in Europe , and probably close to 200 partners in New York, La and DC and the product that I found.
And what everyone was most excited about adding to their portfolio was video surveillance.
Particularly in Asia, we had to go back into a whole another series of meetings about surveillance. So.
It's generating a lot of excitement in the partner base.
So.
So.
I think thats a good buy for us I think we've.
Got a lot of innovation there. The USP is now shift the unified surveillance platform, which is the integration of pivot three worthy and cloud and assets.
Where the software runs on any server any hypervisor can run on the cloud.
Virtualized so.
I think the technical architecture has is in a leadership position and it really is the platform of choice. If you cannot lose any frames a video so if youre a police department of Homeland security.
Fence Department.
Run a casino a bank or you just cannot run any risk of losing that video.
<unk> platform is the leading platform for those use cases.
Great. Thank you for that update.
And 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.
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.
There are still supply chain disruptions, so theres still a lot of uncertainty, but our products are value oriented we think they do well when customers have to spend wisely and we like how our products are positioned for this market and.
We look forward to speaking to you all on November 17th we will be having our annual Investor day, and we'll be updating our five year model with what we've learned over the last year. So I look forward to seeing you. All then until then thanks, so much and we'll talk soon.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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