Q3 2023 Quantum Corp Earnings Call

Greetings.

Welcome to the quantum Corporation third quarter fiscal 2023 financial results Conference call.

At this time all participants are in a listen only mode.

<unk> and answer session will follow the formal presentation.

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Please note this conference is being recorded.

I'll now turn the conference over to your host Brian <unk> you may begin.

Good afternoon, and thank you for joining today's conference call to discuss Quantum's third quarter fiscal year 2023 financial results.

Brian Cabrera Quantum's, Chief administrative officer.

Joining me today are Jamie Lerner, our chairman and CEO and Ken <unk> 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 and relying on these statements as they involve known and unknown risks and uncertainties, we refer 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 it's.

Whether as a result of new information future events or otherwise except of course 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 today, we announced our results for our third quarter of fiscal 2023 with revenue results that exceeded the high end of guidance.

And a significant year on year improvement in our operational performance.

Turning to slide three.

Here is a brief overview of the results from the quarter.

We finished the quarter with $111 2 million in revenue.

Which is above the preliminary results, we announced in January and represents an increase of 17% year over year.

And also the highest quarterly revenue result, since I joined the company.

Gross margin improved sequentially to approximately 36%.

Adjusted EBITDA increased sequentially and year over year, $6 3 million driven by improved product mix and lower operating expenses.

And we exited the quarter with approximately $15 million of shippable backlog.

Within the range, we expect to maintain going forward.

Now turning to slide four I would like to share some operational insights from the quarter.

We delivered year on year revenue growth in almost all segments of our business, including another strong quarter of Hyperscale sales.

We still see several hot pockets of supply constraints, let's see promising signs as the supply chain for tape drives and other components continues to improve.

Inflationary costs remain elevated in most cases.

As lead times come down and the market improves we are cautiously optimistic.

Next I would like to give an update on the rest of our portfolio.

We had a strong quarter in our video surveillance business and although that market is characterized by large deals and long sales cycles. We are encouraged by the traction we have seen since we acquired the pivot III surveillance business last year.

We continue to be recognized for our technical innovation and in December we were acknowledged with three more surveillance industry Awards.

We also saw positive year on year growth with our data protection business in all three geographies as enterprise. It departments continue to invest in their data protection infrastructure and strengthening cyber security.

Turning to slide five.

I'd like to give you an update on our transformation progress.

Our end to end portfolio, it's really coming together it is resonating with customers and partners and our customers want to do more with quantum.

As we introduce new products and convert and expand our customer base. We will continue to grow recurring software revenue as we laid out during our Investor day in November .

One of our key strategies to drive growth is to expand our selling motion from point products to selling end to end solutions within large organizations.

I am encouraged by the evidence of early success, we're seeing with this model, particularly in Europe and Asia.

Characterize those research reagents as being approximately a year ahead of our North American business in terms of their ability to sell the whole portfolio.

As I've stated in the past growing our software and systems business in North America will be a key driver for both future revenue growth and improved gross margins.

We have made investments in the North American sales team to drive growth and historically strong segments for us such as media and entertainment and the U S Federal government.

Over the past year, we have also invested in the infrastructure and tools.

Our enterprise selling capabilities and broaden our footprint in large accounts.

While I anticipate this transformation to continue into fiscal 2024, we are pleased with the progress we are making.

We are also continuing to.

We are introducing new software features.

Higher portfolio.

And we have begun briefing key customers and industry analysts on the next generation storage software that we mentioned at our Investor day.

So far the feedback has been very positive and we expect to begin early access trials. This quarter in advance of announcing publicly in the first half of next fiscal year.

This new product will further strengthen and differentiate our portfolio and allow us to participate in some of the fastest growing segments and data storage.

We will be able to talk more about this exciting new offering in the near future.

Turning to slide six I would now like to introduce our new CFO Ken GNL.

Ken joined quantum on January 12th as our Chief Financial Officer, and proceeds Mike Dodson.

I'd like to take a moment to thank Mike and acknowledged the transformational work he accomplished at quantum as well as his financial leadership through a very challenging period.

Mike will remain with the company in an advisory role until August .

Ken has extensive financial and operational experience at technology companies and his background makes him well suited to help lead us through the next phase of our strategic priorities, which include driving EBITDA expansion.

Delivering consistent operating results in.

And delivering improved value to our shareholders Ken welcome to the team and I will turn it over to you to walk through the financial results.

Thank you Jamie it's a pleasure to be on the call today and I am extremely excited to be here at quantum and for the opportunity that lies ahead as we advance the strategy that you Mike and the rest of the leadership team started.

With that let's get into it please turn to slide seven and I'll provide an overview of the financial results for our fiscal third quarter.

As previously highlighted by Jamie revenue increased 12% sequentially and 17% year over year to approximately $111 million, which was above the preliminary results we announced in early January .

This also represented the highest quarterly revenue in the last five years.

Earnings per share improved over 89% year on year to <unk> <unk> per share loss on a combination of improved operational performance and lower operational expenses, which were down 9% year on year.

Both GAAP operating income and adjusted EBITDA.

Were the highest since fiscal 2021.

Okay.

Looking at other metrics in Q3, shippable backlog at quarter end decreased to approximately $15 million from $20 million last quarter as supply constraints improved.

As we are cautiously optimistic about the improving supply chain situation, we expect to maintain shippable backlog and a range of 10 million to $15 million going forward.

Active subscription software <unk> annual recurring revenue or <unk> increased approximately 20% sequentially and approximately 84% year over year to $11 2 million.

On over 660 cumulative active customers as our subscription software continues to gain traction.

Now turning to slide eight I would like to break down this quarter's revenue results.

Primary storage revenue was up 1% compared to prior year and up 42% sequentially to $14 million contributing to the sequential growth in primary storage was a solid uptick in both of our store next file storage software and pivot three video surveillance solutions.

As with the last few quarters. The biggest mover continues to be our secondary storage systems with revenue, increasing 66% year over year, and 15% sequentially to $50 7 million or 44% of total revenue as we saw strong orders from both our enterprise.

And hyperscale customers.

Next turning to devices and media.

There was some sequential improvement revenue was down approximately $3 million or 24% year over year, primarily due to less global demand for tape cartridges in the period.

Turning to our services business. The revenue was essentially flat year over year. The results reflect year over year growth in <unk> driven by new active subscriptions.

Offset by a continued decline in support renewal revenue due to end of support life on legacy products.

We anticipate services revenue will be maintained around this level in the near term.

And finally royalties declined year on year as we saw less global demand for tape cartridges.

Now turning to slide nine let's review, our third quarter fiscal 2023 GAAP results.

GAAP net loss in the third quarter was $2 2 million.

Or a loss of <unk> <unk> per share compared to a net loss of $11 1 million or a loss of <unk> 19 per share in the prior year third quarter.

This improvement was driven by significantly higher revenues and lower operating expenses due to prior restructuring actions and other cost controls.

Now please turn to slide 10 for non-GAAP metrics.

non-GAAP gross margin was 36% compared with 37, 3% in the prior year and 35, 4% sequentially, both driven primarily by product mix.

With the significant revenue contribution from lower margin Hyperscale sales this product mix largely offsets the cost reduction initiatives and other favorable pricing actions taken over the last year.

As Jamie mentioned sales and product mix improvements are a top priority in support of expanding gross margins and driving increased EBITDA.

On a non-GAAP basis operating expenses decreased approximately 5% year over year to $34 5 million in the third quarter due to cost controls and a traditionally lower end of calendar year costs.

We expect operating expenses to be approximately $1 million higher than the fourth quarter due to end of your commissions seasonally higher payroll taxes and other inflationary pressures.

non-GAAP adjusted net income in the third quarter was $1 6 million or <unk> <unk> per diluted share compared to an adjusted net loss of $4 6 million or loss of <unk> <unk> per share in the prior year.

The significant year over year improvement in both Bottomline results reflects the company's previously implemented cost reduction actions combined with strong topline growth.

And finally, adjusted EBITDA increased to $6 3 million.

Compared with $758000 in the prior year, the improving EBITDA.

For the quarter is a combination of achieving scale at higher revenue levels.

Improving product mix and continuing to implement cost controls.

Now please turn to slide 11, where I'll give an overview of our debt and liquidity at the end of December .

Outstanding debt split between term and our revolver was $103 $6 million slightly down from prior year levels cash.

Cash and equivalents at the end of the third quarter were $26 million compared with $4 million a year ago.

Our net debt position of $77 6 million gives us a street net leverage of <unk> seven times, our trailing 12 months adjusted EBITDA when looking at our bank calculation. There are a few adjustments to the trailing 12 months adjusted EBITDA calculation, such as FX and.

Tori provisions, which give us a bank net leverage of four six times all of these factors put us in a good place heading into the fourth quarter.

Turning to other liquidity metrics interest expense in the third quarter was $2 $7 million compared with $2 4 million in the prior year.

Adjusted working capital was approximately $73 million.

Year over year and sequentially on higher inventory receipts at the end of the quarter.

And finally, we would like to work down our DSO numbers over the next few quarters, but overall cash conversion metrics remain strong.

Now please turn to slide 12 for a look at the company's fiscal fourth quarter guidance.

First we anticipate total revenue in the fourth quarter to be $102 million plus or.

Is $2 million at the midpoint this would equate to a year over year growth of approximately 7% the.

The expected sequential decrease from the third quarter, primarily reflects seasonality experienced at the beginning of the calendar year.

This is combined with the expected normalization of shippable backlog in the supply chain goes.

Going forward.

We expect non-GAAP adjusted net loss per share to be <unk>, plus or minus <unk> <unk> per share.

On an estimated 93 3 million shares outstanding.

Adjusted EBITDA for the fourth quarter is expected to be approximately half a million dollars.

To give some color on the non-GAAP EPS and adjusted EBITDA Guide.

There are a few factors I would like to highlight.

For the fiscal fourth quarter, we anticipate a two to three point reduction in gross margin sequentially due to product mix that will temporarily impact our performance this quarter.

This is combined with the previously discussed operating expense factoring in such as end of year commissions and other inflationary increases that will have a near term impact to our results.

Looking forward, we do anticipate margins and EBITDA to bounce back as we take actions to improve in future quarters.

Before turning the call back to Jamie I want to emphasize that although I have been here a few weeks I've hit the ground running in conjunction with Jamie and our executive team. We are actively exploring ways to accelerate our operational plan with margin expansion, improving profitability with product and structural cost initiatives.

Lives and looking to accelerate growth and innovation with the introduction of new software products and services in the coming year.

Thank you for your time and I look forward to meeting you all soon with that I'll now hand, the call back to Jamie for closing remarks.

Thanks, Ken.

<unk> had a great quarter and we're constructive on the progress we're making.

Not always a straight line.

I'm really encouraged by the direction and improvements to our sales model.

And the recovery in the supply chain and our development of an end to end portfolio and upcoming new product introductions.

As Ken mentioned.

While we are cautiously optimistic heading into this new year were not standing still.

We are actively working to increase margins and profitability looking to accelerate efforts to drive cost out of our operations.

And we will continue our innovation to remain a global leader in managing and storing unstructured data.

With that let's open it up for questions operator.

Yeah.

Thank you we will now be conducting a question and answer session.

I would like to ask a question. Please press star one on your telephone keypad.

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For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.

Our first questions come from the line of George ironic with Oppenheimer. Please proceed with your question.

Thank you for taking my question, Jamie maybe starting with the progress Youre seeing on the sales front.

Yes.

Highlighted pretty strong results in Asia and Europe .

Do you see those types of patterns being replicated in North America like what are you focusing on near term.

Yes.

The model is based on deploying sales resources.

Into our highest margin end markets.

And that has traditionally been large enterprise.

Certain segments of media and entertainment.

And large federal governments.

And so what we've been doing is going into the largest geographies going after the largest companies.

And also <unk>.

Going after <unk>.

Segments of again government business public sector business that.

Have traditionally been very successful for us so yes. It is.

Really been about.

Going to where the margin is.

Yeah.

Okay. Thank you and maybe taking into the seasonality you are seeing when you maybe look further in the year, what kind of patterns should we anticipate.

The visibility you have right now.

I would expect we have a pretty well worn pattern. That's played out for quite a few years.

So I would expect us.

Some of those patterns, we came off of a little bit with the upheaval from supply chain or upheaval from the pandemic, but we see ourselves returning to more of the quantum classic seasonality.

With.

Kind of a softer Q4, and then building up for our strong strongest quarter being Q3.

Yes.

Thank you and then maybe just one more question for you Kevin.

Congratulations on joining.

Quantum so when you look at product mix can you kind of give us a sense of how you see that progressing from a margin perspective through the year.

Yes, Thank you George well one of the things that we wanted to focus on with this Q4.

Is going to be a bit of an anomaly with what we saw the growth coming back with if you look at the work that we've done over the prior year, we had a lot of work on margin improvement and fixing that mix, but this quarter coming up Q4, we see particularly large volume of hyperscale coupled with.

With our unique customer deal.

We had to be a little bit of aggressive on because we wanted to real good proof point in the healthcare space, particularly genomics.

To be more precise.

In gaming that proof point in the sector that has a lot of unstructured data modeling management of large quantities of that unstructured data was important for us to grab and so we got a little bit ahead on the pricing and where we saw our cost downs coming on that product set, but we think thats going to start normalizing heading into Q1.

<unk>.

The rest of 2020 for fiscal year, So I think you're going to start seeing that normalize.

Jamie said, we are seeing progress.

Within across the Geos, particularly in our primary storage space, we see that continuing into the new year, and Thats really where we feel more comfortable with the strength on the margins.

Okay.

Thank you.

Thank you. Our next question is coming from the line of Craig Ellis with B Riley Securities. Please proceed with your question.

Thanks for taking the question Jamie Congratulations on the five year high quarterly revenues and.

And welcome to the team I look forward to working with you. So I'll start with a clarification just on the quarter's revenue upside versus initial guidance can you give us some further color on.

Where that.

Where that came from was it more on the Hyperscale side. The enterprise side and then what was the linearity of the strength through the quarter pretty steady or was it more backend loaded.

Well I'll start with that it came a little bit more backend, but the first thing we saw was strength in the supply chain coming back so having that kind of loosen up gave us the ability to fulfill more demand, particularly within the hyperscale.

Side of things.

The linearity side, it's we tend to be Q month.

Month, one month, two a little bit lighter with month, three coming on strong and that linearity kind of help held true to it but we were able to fulfill a little bit more demand because the free up of the supply chain allowed us to ship some more of that pent up demand and backlog.

Got it and Jamie I think when we spoke three months ago. One of the things you were looking for is that for some of the sales changes you're making to really help accelerate primary storage and is that what youre seeing and with the strength in Europe and Asia, because headline primary was pretty flat.

But just walk us through the impacts you're getting as you make some of the adjustments to the sales team.

Yeah.

I mean I wouldn't over rotate on primary and that we can achieve the same or even stronger margins and secondary the DSI product is our highest margin product active scale is also often sold software only at north of 80% margin. So there's a lot of margin in the secondary.

Products.

And there's a lot of products and secondary that are beyond just hardware.

But.

What we're seeing.

And what we're most focused on.

Is the ability to sell the whole portfolio.

So we have a lot of historic accounts that bought a product from us and what we're seeing to the new sales team as the new sales training and the new sales incentives.

Going into our accounts and selling them our primary product.

Store next door surveillance selling them secondary products selling them management software.

Selling multiple products and often those products as a solution, where we combine multiple products to solve a business problem or solve the management initiative.

And I think that's been going well in Europe , and Asia and.

The teams that we said it about a year behind in North America, but I'm seeing the pipeline. The initial deals and I think thats going to flow right through North America and have a.

A pretty it should have a meaningful impact on our margins as that.

As we roll through that predominantly the U S sales team.

Got it and related to that and selling the solution subscription adds new customers.

We're about 100 in the quarter and it looks like that was about the third consecutive quarter.

Getting that many new customers on subscription.

What should we think through calendar 'twenty three four.

New customer adds to the program should it click along around 100, a quarter or do you see an inflection coming and if so what's the catalyst.

So I'm not giving you an exact number we're really pleased about how we're seeing the active subscription sales going.

The thing to highlight to everybody out there is that the product set that we started with for the first set really only touches about 30% of our installed base. So focusing with these initial set of sales in these initial set of products. We're really pleased with with where the product is going and we'd expect to continue to see strong growth.

Momentum there because we're going to be focusing on this.

Trying to acquire as our customers and more importantly, our sales channel becomes more comfortable with the selling motions around.

This new product set versus just a point of sale.

Got it better installed base scoping is it's good context, Ken lastly.

Regarding the gross margin outlook the decline of about 250 basis points to around 33, and a half how much of that is the big health care deal that you flagged versus other things and and as the recovery back north of 35% towards 40, but really just working that through or are there new initiatives that you.

And the team are executing and if so what are they and when do you expect to get a payoff from them.

Predominantly the headwind was this this large deal that we were talking about.

But I don't want to downplay the other work that we're doing to continue that rotation in the margin back up.

There is a lot of things that we have on deck that even in my short time here.

People have been really active in showing the game plan of how we get there of making sure that we're very focused on manufacturing in our services team as.

As we highlighted before there's been a pretty steady decline within the services business with our legacy side of the business.

As we rotate away from these end of life older products that starts bleeding off and we're really doing a job of rationalizing how that team looks to service that base, but then also leaning into the active subscriptions to continue to fill that growth. So I think youre going to start seeing that help in 'twenty for going forward is.

Well as some of these actions, we're taking and cost downs of products and narrowing that product portfolio to be more effective and efficient. So it's.

It's not just the one customer flush.

Flushing through deal I think there's going to be other factors involved in a lot of self help that is going to get us to where we need to be going forward.

Got it thanks, Ken Thanks, Jamie.

Thanks, Craig.

Thank you. Our next question is coming from the line of <unk> with Northland Capital markets. Please proceed with your question.

Thank you and congratulations on the strong results, both top and bottom line.

Jamie.

You're talking about the progress, we're making with solutions selling.

Note that APAC because ahead of North America.

Why are they ahead.

They started earlier.

They were smaller geographies that were less of a risk to our business. So we consciously said look let's start there.

North America, such as <unk>.

And part of our revenue engine. It just kind of an unsafe place to experiment with.

Asia and parts of Europe , we could do some trials of these new models.

With a much lower.

Lower risk until we started there had some really good success in Australia. Some good access.

Across Korea and have been having a lot of success in France, Germany, England and now we're sweeping that across North America.

What are the metrics that you're looking at these smaller two years in APAC that tells you. This is indeed, what works really well.

Yes, we look for a couple signs one is are there multiple multiple product families on a single quote.

Versus instead of just selling.

Movie, making or just selling video surveillance are you able to sell multiple product families high speed storage archive storage surveillance storage all part of a single deal so multiple product families.

The second thing you'd expect with multiple product families as a larger ASP.

And lastly, because you're solving a business problem versus selling terabytes.

Capacity are terabytes, you would you expect to get a higher margin when youre solving business problems. So that's really the trifecta is multiple product families on one quote higher asps and higher margins.

I'll just add Jamie that goes to the higher contribution per rep. So you have the body out there that is up selling multiple products and solutions and youre getting more yield per rep, right and with that a lot of that run rate business, where we sell a single product, we're not walking away from that business, but instead.

Net of having a outside sales rep with a very high comp plan selling a run rate product, we're pushing more of that to the channel and more of that to our inside sales organization. So the transactional part of our business, we're doing that more cost effectively.

And focusing the most scaled experienced an expensive part of our selling engine to a multi product family sale versus a transactional sale.

Okay.

Great color.

What does.

Cash flow uplift youre seeing in terms of.

S T.

And margin indeed.

Small geos.

Yes, I mean, we're not putting those metrics into our <unk>.

Package of metrics at this time, but we are seeing asps going up we are seeing relevance go up.

And I would measure that in the number of CIO that are meeting with us when we're a transactional vender versus you're helping them solve one of their top initiatives I. Just think we're seeing more relevance we're getting more time, we're getting more mind share.

And.

I have visibility into the quotes that we're putting out in the future and I'm seeing the quotes get bigger and another sign of it working is.

When youre solving a business problem you can't win with a quote you have to write a proposal and describe what Youre doing described how are you going to change their business, our health care business and it's amazing how many more proposals, we're putting out than what we used to just kind of drop a quote and youre basically winning on price.

Sure.

Winning on availability of materials now we're winning on.

The merits of the solution and the uniqueness of the solution that's take.

<unk> taken a number of years to get here, but we really have the portfolio now where we can assemble highly differentiated proposals.

Versus cost effect of quotes.

Okay, Great and then Ken.

This is a much tighter range of revenue guidance.

We typically have been seeing over the past four six quarters is this.

Yeah.

Philosophies that you're bringing to the table or is this just simply a reflection of a better visibility.

A little bit of both right I mean, I think number one it's important to we want to send a signal to our investor base.

That as we look down the road. This is what we have a feel for.

But also more importantly, we didn't want to put such a large range out there.

That it would skew people's thoughts because again, great quarter, we had in Q3, but.

But the seasonality that we saw coming into this quarter, we've really wanted to send a signal that.

We had visibility into the range and we didn't want people to get ahead of themselves.

On the numbers. So that's the reason why we put a little bit of a tighter range. This time.

As we go into the new year, we are going to be looking at as we get more visibility some other metrics and way to give you guys a little bit more of a near term view not just a quarter view of what we're thinking and where we're going in as I work with the team and Jamie we're going to see where we can expand some of that visibility for you all in the future.

Okay, Great and then.

Yeah.

Any early thoughts on fiscal year 'twenty four it looks like.

Based on what you're guiding to here, even excluding the train that backlog it has probably about 5% year over year growth in demand here.

Is that how we should be thinking about for fiscal year 'twenty four or.

It's a different framework you should we should think about here.

Well I appreciate the effort, but we're not guiding 24, but we did want to give people would view on a couple of key metrics that were slightly down this quarter that we don't believe that that is going to be a trend going forward, particularly on the margin side of it.

So I think we'll give you guys. The 24 guidance in a couple of months here.

Okay, and then any thoughts on what the macro backdrop it looks like for you guys.

Yes, I mean.

I know a lot of my peers are signaling slowdowns in conservative Nisan.

I don't want to second guess them.

We're guiding up 7% year on year right. So we're guiding the strongest revenue quarter in quite a few years in our queue.

Q4.

So we're not guiding to signaling we're seeing a big slowdown.

And that May just be a reflection of the segments we plan.

I mean.

Our biggest segment of secondary storage, which is protecting and backing up data and I don't think that correlates to global economies, meaning if the economy is doing poorly people don't say well I guess, we're not going to back up our data I guess youre still going to backup and protect your data so that the trend we're dealing with it's less of a Mac.

<unk> trend, it's a trend that the world is creating more data.

Regardless, what the economy does that data needs to be protected and backed up I do think the movie making industry is seeing a recovery in there, making just as many movies as they did in the past I think ransomware, whether theres a good economy, our core economy I think people are spending money to protect against ransomware.

The segments that we plan.

Predominantly do not seem to be.

Negatively affected the way laptops and other parts of other segments are being impacted so.

Right now our.

Our guide does not guide to.

Seeing major negative macroeconomic trends.

Great. Thank you.

Okay.

Thank you our next questions come from the line of Eric Martin <unk> with <unk> capital markets. Please proceed with your question.

Yes, I had a question regarding the guidance if I go back the past couple of years.

The sequential revenue Q3, Q4 last year, we were flat of the.

A year prior to that we were down about $6 million sequentially.

I understand there is seasonality, but it seems it seems like a pretty dramatic.

Dramatic step down Q3 to Q4.

Would you care to comment on that.

So I think the prior flat I'll start with was more supply chain driven than anything.

I think the other step down if you will.

Going back to what this current quarter looked at the supply chain loosening backed up allowed us to fulfill a little bit more of that hyperscale demand.

Which had a little bit of elevation in the quarter I go back to what Jamie said, though a 7% year on year number and if you look its the strongest Q4 that we've had in several years, even before the supply chain impacting it.

We think it's a strong indication heading into 'twenty four.

So really the supply chain the outperformance in Q3, you are saying that supply chain loosening hubs.

<unk> or <unk>.

Created kind of a bigger starting point.

Okay, and then helping us.

Yes, and then just.

Again the sequential.

No.

Guide on the adjusted EBITDA also seems.

I know, we're talking about product mix taken roughly 2.5% out of that.

$102 million midpoint guide.

Another $1 million for the Opex higher but thats still seems.

The $5 million of adjusted EBITDA, It seems like a pretty dramatic step down.

Is that conservatism that you're kind of baking in there.

Just from.

From the $6 three of those airplanes five six dramatic.

I think mix has a lot to do with it. So if you start with the topline and looking what youre shipping out there the mix with the Hyperscale plus this one customer that has a lot of fall through to EBITDA that was an impact.

We were purposely mindful to also point out the Opex increase with the commissions and the other end of year elements. We are seeing some inflationary pieces, where the opex run rate will probably be more around that 35, 36 range going forward with some of that inflationary and merit pressures going forward.

So you.

You take the million dollars from the Opex piece that we called out.

Give or take and then you call out the points of margin.

That's about two to three.

Plus a bit but fell off.

Uh huh.

Okay and then.

Royalty continues to dwindle here I think on a year on year basis I'm looking at.

If I just replicate what you did in Q3 into Q4, we'd be up about 20%.

I know you're not guiding at the product line, but just at a high level.

Is this the new normal or should we anticipate continued erosion.

<unk>.

The royalty.

Yes.

I think it's probably safe to say I think we were at $2 8 million I think $2 8 million as the new normal.

And.

None of us have a crystal ball, but I would say unless something changes I think.

Brandon around two eight is about right for for your model.

Got it thanks for taking my question.

Yeah.

Thank you there are no further questions at this time I would now like to hand, the call back over to Jamie Lerner for any closing comments.

Okay.

Thanks to everyone for joining us today, we're pleased with the results and <unk>.

Have a lot of work in front of us, but it's great to have Ken on board and have some fresh legs here and we're excited about.

Q4, and entering the new year. So thanks to everyone. Thanks for joining.

Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.