Q2 2025 Quantum Corp Earnings Call
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Speaker Change: Good afternoon and welcome to Quantum Corporation's second quarter fiscal 2025 financial results conference call.
Speaker Change: At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad.
Speaker Change: Please note, today's conference call is being recorded for replay purposes. I will now turn the conference over to your host, Brian Cabrera. You may begin.
Speaker Change: Good afternoon and thank you for joining today's conference call to discuss Quantum's second quarter fiscal 2025 financial results. I'm Brian Cabrera, Quantum's Chief Administrative Officer.
Speaker Change: Speaking first today is Jamie Lerner, our Chairman and CEO, followed by Ken Gianella, our CFO. We'll then open the call to questions from analysts.
Speaker Change: Some of our comments during the call today may include forward-looking statements.
Speaker Change: These statements involve known and unknown risks and uncertainties we refer to as risk factors.
Speaker Change: Risk factors may cause our actual results to differ materially from our forecast.
Speaker Change: For more information, please refer to the detailed descriptions we provide about these and other additional risk factors under the Risk Factors section in our 10-Qs and 10-K filed with the Securities and Exchange Commission.
Speaker Change: We do not intend to update or alter our forward-looking statements once they are issued, whether as a result of new information, future events, or otherwise, except, of course, as we are required by applicable law.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Earlier today we announced our results for our second quarter fiscal 2025.
Speaker Change: Turning to slide three, here are some brief highlights from the quarter.
We finished Q2'25 with $70.5 million in revenue.
Gap gross margin of 41.5%
and adjusted EBITDA approximately break-even.
Speaker Change: Sales bookings and customer win rates were largely in line with our expectations as we continue our business rotation toward our long-term initiatives.
and growth of profitable revenue streams.
Speaker Change: This quarter's execution resulted in a higher-than-anticipated backlog of approximately $14 million and $4 million above typical run rate.
Speaker Change: Evidence of our transformation can be seen in the progress of gross margin improving 490 basis points sequentially to above 41%.
Speaker Change: as well as non-GAAP operating expenses being reduced by approximately nine percent year-over-year.
These actions contributed to our achievement of breakeven-adjusted EBITDA.
Speaker Change: for the quarter and have set a positive operating path towards EBITDA growth for the remainder of the year.
Speaker Change: Quantum continues to focus on business efficiency by enhancing operations and driving more automation into the business.
Speaker Change: Combined with this quarter's actions, our restructuring and operational improvements are expected to result in almost $40 million in total savings.
Speaker Change: as of the end of our fiscal year 2025 compared to fiscal 2023.
Speaker Change: These actions are also improving our free cash flow, which is expected to be positive in the back half of fiscal year 2025, and driving fiscal 2026 to be cash flow positive for the first time in five years.
Turning to slide 4.
Speaker Change: Let me share some proof points to our go-to-market strategy and how our innovation agenda continues to center on accelerating future growth.
Speaker Change: First example, is this quarter a leading broadcaster in the Americas and an existing quantum customer for over a decade.
Speaker Change: selected Myriad and significantly grew their existing active scale environment with active scale cold storage.
This deal also leveraged our Quantum Go subscription solution.
Speaker Change: highlighting our plans to empower our customers to innovate and allow them to focus on their data rather than their storage infrastructure costs.
Speaker Change: Another example of innovation yielding near-term results is our new DXI-T series all-flash data protection appliance we recently launched.
These deals have been closing rapidly.
Speaker Change: The majority in under 30 days from deal discovery. Demonstrating the critical importance of cyber resilience in today's market and the compelling value proposition that our DXI solutions provide.
Thank you. Bye.
Speaker Change: While our future growth is led by Myriad and ActiveScale, it remains important to maintain a strong base with our traditional data protection offerings.
Speaker Change: The Scalar i7 Raptor, our latest tape innovation to support growing AI use cases.
is now shipping under limited availability.
Speaker Change: Built to handle advanced AI workflows for hyperscale customers, MSPs, and large enterprises, the Scalar i7 Raptor delivers the most efficient, dense, and low-cost solution for AI data lakes.
Speaker Change: Demonstrating its leadership in the market, we already have a multi-million dollar purchase order in-house from one of the world's leading cloud platforms.
Speaker Change: These are just some examples of our go-to-market progress and how our innovation can help accelerate our growth.
Speaker Change: Now let me hand the call over to Ken for a financial update.
Thank you, Jamie.
Ken Gianella: Please turn to slide 6 and I'll provide an overview of the GAP financial results for our fiscal second quarter.
Ken Gianella: Revenue was $70.5 million, a decrease of approximately 7% year-over-year and down approximately 1% from the prior quarter.
Ken Gianella: Sales bookings for the quarter were consistent with our overall business expectations as we continue to transform the company, even though operational headwinds related to the supply chain continued in the most recent quarter.
Ken Gianella: The year-over-year decrease in revenue reflects lower contribution from our primary storage solutions.
Ken Gianella: Backlog in the quarter remained elevated at approximately 14 million dollars and above our target run rate of 8 million to 10 million dollars as higher supply chain lead times continue to persist.
Ken Gianella: Our GAAP gross margin for the period was 41.5%, compared to 43.3% in the year-ago quarter and 36.6% in the prior quarter.
Ken Gianella: The year-over-year driver was predominantly from revenue mix towards lower margin product lines.
Ken Gianella: Sequentially, we saw higher margins due to operational efficiency gains and improved product mix.
Ken Gianella: Gap net loss for the second quarter was $13.5 million, or a loss of $2.82 per share, which included approximately $4.7 million of one-time expenses related to our debt and restructuring activities.
Ken Gianella: Importantly, we anticipate the one-time related to our restructuring activities will significantly subside in the back half of our fiscal year.
Now turning to slide 7 for non-GAAP metrics.
Ken Gianella: Non-GAAP operating expenses were $30.4 million in the second quarter, an approximate 9% reduction from the $33.3 million last year, and effectively flat against the prior quarter.
Ken Gianella: This decrease in operating expenses was the result of our proactive actions to improve process and productivity.
Ken Gianella: and we anticipate lower operating costs at or below these levels as continued cost actions begin to take hold in the back half of our fiscal year.
Ken Gianella: This quarter's sequential EBITDA improvement primarily reflects the benefits of our operational cost controls, despite revenue being at the lower end of guidance.
Speaker Change: As Jamie mentioned, we remain focused on streamlining our processes and enabling automation to reduce our ongoing operating and overhead costs.
Speaker Change: This is evidenced by our total expense savings of almost $40 million since the end of FY23.
Speaker Change: Our focus remains on improving EBITDA and total profitability. EBITDA improvement over the coming quarters will be accelerated from not only our global restructuring, but from the rollout of our updated product portfolio and enhanced go-to-market model.
Speaker Change: An area of focus for us, in particular, is annual recurring revenue, where we anticipate our efforts will continue to deliver sequential and year-over-year improvements in profitability in the second half of FY25 and beyond.
Speaker Change: Moving to slide 8, I want to provide an example of where our focus towards recurring revenue and subscription-based selling is taking hold, with an update of our annual recurring revenue and subscription metrics.
Speaker Change: As a company, we continue to focus on our total ARR by maximizing our quantum subscription opportunities in both our partners and customers globally.
Speaker Change: The best way to demonstrate our progress is through our subscription ARR, where in the second quarter, the subscription portion of our total ARR increased approximately 28% year-over-year and approximately 5% sequentially to $19.6 million.
Speaker Change: with over 88% of new unit sales in the quarter being subscription-based.
Speaker Change: Continuing this rotation and focus on ARR is a key element towards our long-term business model.
Speaker Change: Cash, cash equivalents, and restricted cash at the end of the second quarter were approximately $17 million.
Speaker Change: At quarter end, the company's net debt position was $114.6 million.
Speaker Change: Over the last several years, the company has had significant cash spend on one-time consulting, a new ERP, updated infrastructure, new product introductions, and restructuring expenses.
Speaker Change: We are pleased to announce that we are substantially complete with these efforts and anticipate the back half of FY25 returning to operating cash flow positive with a full year cash improvement year over year.
Speaker Change: Turning to slide 10, let me close out with the company's guidance for our fiscal third quarter in an updated view of fiscal 2025.
Speaker Change: First, we anticipate total revenue in the third quarter to be approximately $72 million plus or minus $2 million.
Speaker Change: This reflects management's view of ongoing operational headwinds including transition to a new manufacturing partner during the quarter.
Speaker Change: We expect non-GAAP operating expense to be 31 million dollars plus or minus 1 million dollars reflecting aggressive cost reductions over the last two years.
Speaker Change: As a result, non-gap adjusted net loss per share for the third quarter is expected to be negative 75 cents plus or minus 5 cents per share, based on an estimated 4.8 million shares outstanding.
Speaker Change: While the Q3-25 guidance at the midpoint is essentially flat year over year, the adjusted EBITDA guidance is almost $5 million improvement from the prior year.
Speaker Change: Turning to our fiscal year FY25 outlook, while we are exceeding our expectations on product mix, gross margin, and cost improvements, we need to continue focus on improving our overall revenue execution.
Speaker Change: We see improvements in second half of FY25 continuing into FY26.
Speaker Change: However, having factored into our updated annual guidance the operating impacts of the first half and the Q3 outlook, with this information we have adjusted our fiscal year FY25 outlook.
Speaker Change: to a target of $280 million, plus or minus $5 million, with adjusted EBITDA expected to be $3 million, plus or minus $2 million.
Speaker Change: While our revenue is lower year-on-year at our current guidance midpoint, the operational actions we have taken have improved our adjusted dividend by almost ten million dollars over the prior year.
Speaker Change: We have substantially completed our operational and infrastructure improvement efforts in the first half of fiscal 2025.
Speaker Change: and Quantum remains focused on returning to growth by driving new and innovative products into the marketplace, improving our customers' experience, and leveraging our global footprint to improve our overall service model.
Speaker Change: We anticipate these efforts to yield growth in revenue, profitability, and free cash flow in the second half of FY25 and beyond.
Speaker Change: With that, I'll now hand the call back to Jamie for closing remarks.
Jamie Lerner: Thank you, Ken. As Ken mentioned, our strategy remains intact as we reallocate resources towards high priority growth initiatives, particularly myriad and active scale.
Jamie Lerner: The go-to-market approach for our new solutions is a key element of the company's growth strategy as we ramp up new cutting-edge solutions.
Jamie Lerner: One area in particular that we're evolving is our sales model to focus dedicated sales resources on select product lines.
Jamie Lerner: This approach will enhance our geography-based sales reps, allowing a deeper focus on how our growth solutions provide customer value, enhance support to our channel partners, and expand collaboration.
with product management and marketing.
Jamie Lerner: Combining our latest innovations with these go-to-market enhancements is a key part of executing on our business model. These actions are already producing green shoots across our more modern products.
Jamie Lerner: We anticipate this trend to accelerate pipeline growth in the second half of our fiscal year 2025 and continue into fiscal year 26.
Jamie Lerner: In summary, we have completed the heavy lift on the operational model.
We have fully refreshed our product portfolio.
Jamie Lerner: and we are now actively engaged in re-energizing our go-to-market approach. All of these combined create positive momentum in the coming quarters and beyond.
Speaker Change: Thank you for your time today. Operator, we are ready to open the call to questions.
Speaker Change: Thank you. Well, now we conduct a question and answer session.
Speaker Change: If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.
Thank you.
Speaker Change: Thank you. Our first question is from Eric Martinuzzi with Lake Street. Please proceed with your question.
Speaker Change: roughly 5 million higher than what you guys would typically finish out a quarter with. But just given that you were aware of the issues, what steps did you take to try and correct the issue and what's ongoing with trying to get that supply chain issue fixed?
[inaudible]
Speaker Change: Sure, the way I'd characterize is the sales team brought in the purchase orders needed to meet guidance.
Speaker Change: As you know, some of the purchase orders come in late in quarter and we've been rotating our portfolio more to high-speed all-flash offers.
Speaker Change: And as you've been watching, high-speed all-flash systems, particularly those from Supermicro, have long lead times.
Speaker Change: So we've been finding that, you know, the lead times on SSDs and high-speed servers that use SSDs
Speaker Change: just have longer lead times and so we used to have about
Speaker Change: two to three week lead time on that type of server. Now it can be up to 10 weeks.
Speaker Change: Now, one way we solve for that is we purchase them 10 weeks in advance.
Speaker Change: But it gets pretty dangerous buying a lot of that equipment in advance because your customer the Configurations change during the quarter and you can end up buying the wrong equipment and have inventory you can't get rid of So we're we're doing our best job to
Speaker Change: pre-order systems but we're not ordering them so far in advance that
Speaker Change: we end up with scrap material. So, you know, I think you'll see a little elevated backlogs for a period of time, but what I felt good about is, you know, the bookings were on target, and, you know, all flash systems just have longer lead times right now.
Speaker Change: and we anticipated some of that Eric going into the quarter it was just a way elevated from where we were we planned
Sorry, could you repeat that Ken?
Ken Gianella: Yeah, we anticipated some of the longer lead times coming into the quarter, it just persisted much deeper than we had planned for.
Speaker Change: Gotcha. And your comment about the, you know, the decline in primary storage, that is the same issue we're talking about here, right? It's not like the demand wasn't there, it was just we didn't, we weren't able to fulfill the orders.
Speaker Change: That's correct. Our primary storage is where you see the predominant all-flash systems.
Speaker Change: Okay. All right. And then you talked about some positive proof points in the business. Is there any metrics you can put around key performance indicators regarding myriad and active scale, either a revenue or number of units?
Speaker Change: Just showing that progress between Q1 and Q2 and what's got you so excited about the back half
Yeah, I mean I'll start with...
I can start, Jamie, with the pipeline.
Speaker Change: When you look at the pipeline growth and what we're seeing, Eric, it's jumped considerably quarter over quarter.
Speaker Change: and we're seeing the focus from our teams and what we're seeing in the field of that growing into the second half and into FY26. Jamie, anything else you want to add to that?
Jamie Lerner: Yeah, I think the other metric that we're pretty proud of is we crossed over a thousand customers on subscription with us on subscription software.
Kenneth Gianella. Bye-bye.
Speaker Change: All right, and then the cash you had talked about, Q2, you were anticipating a challenging cash usage quarter. Looks like the burn was about $14.8 million. You also said that's going to...
Speaker Change: that will get to positive free cash flow in the back half. Do you have a dollar amount for Q3 that you're targeting as far as cash from Ops?
Speaker Change: No, we're not putting this exact number out there, but the signpost that we want to give to folks is...
Speaker Change: If you think about the CapEx spend that we've been talking about the last few years, particularly on putting a new ERP system in, having a new R&D facility, over the last two years, that's about $30 million worth of CapEx one time.
Speaker Change: covered over Q1 and Q2. That total cost is somewhere within another 15 to 20 million dollars spent.
Speaker Change: So, as you start in the back half of the year and start looking to FY26 and you get out of those headwinds that we've had of refreshing our product line, refreshing our processes in our systems, restructuring globally to operate more effectively and efficiently.
Speaker Change: That's where you see the pickup in the back half of the year, even at lower revenue levels. That's where you see the pickup on free cash flow, doing cash flow positive, as well as
Speaker Change: you know, FY26 being a full year of positivity just from these actions we've taken.
Speaker Change: Got it. Okay, that covers the questions for me. Thank you.
Thanks Eric.
Speaker Change: As a reminder, if you'd like to ask a question, please press star one on your telephone keypad.
Speaker Change: Our next question is from Nihal Chokshi with Northland Capital Markets. Please proceed with your question.
Yes, thank you.
Good to see that bookings were where you were expecting.
Speaker Change: What kind of conversion rates relative to historical levels are needed to reach the break-even pre-cash flow in fiscal 2H25 that you're talking about?
Speaker Change: conversion rates on on what I'm didn't understand the question of your pipeline of the pipeline that you guys are to have developed
The
Oh, um...
The White Man Pipeline.
Speaker Change: Yeah, I don't know if I have an exact answer one-to-one. I can say that our pipeline is growing and our wind rates while they're slightly down from prior years
Speaker Change: You know, we expect that to go up. The way I really look at it is about the rotation of the product mix, right? Getting and slowing down the service declines year over year and getting that recurring revenue as we talked about on the call back up.
Speaker Change: and guaranteeing that as well as getting a real new baseline of our OPEX. If you look at the cost downs we had, we're down 8% year over year on the OPEX side of things on a non-gap basis.
Speaker Change: Those indicators are, you know, two great ones to say if you can have a recurring revenue in an off-back space that you can be near break-even on your cash flow, then you start seeing the top line, you know, one-time sales really carry and grow. That's kind of the inflection point that we're in.
Speaker Change: pipeline to win rate to free cash flow. I look at it that, you know, even at these 200, if we stayed flat year over year, at what we died at a midpoint 280, we would be positive operating free cash flow next year is the is the best, you know.
pinpoint I could give you.
Speaker Change: Understood. And then, are you seeing different conversion rates of your pipeline by product, i.e. is myriad and active scale has materially different wind rates relative to your older products?
Yeah, so I think it's...
still early days to say whether it's
Speaker Change: whether they're higher or lower. I'd say active scale is on par with prior years.
Speaker Change: We did see a bit of a dip down in our enterprise tape business. That's why we're super excited about the i7 coming out and being a category killer to get those win rates back up.
Speaker Change: but everything else we're seeing flat to slightly up in every other category but there are traditional categories our legacy products tend to be excited
just DXI is significantly up.
and we think that trend is going to continue.
Myriad's up, just coming off the tiny base.
Speaker Change: but DXI is really a thing that's surprising us the most with our T10 and T20 all flash products.
Speaker Change: Those seem to be accelerating faster than they have in the past and accelerating faster than we actually planned internally.
Speaker Change: And I think a lot of it's just from the innovation we've been doing around the products when, you know, our larger peers in this space, particularly Dell, there just hasn't been a lot of innovation or activity in their product lines.
Speaker Change: Yeah, and when you refer to Dell, you're really referring to Dazzle's main products?
Yeah.
Okay.
All right
Got it
Speaker Change: Okay, that's great. And are you guys expecting the elevated backlog to persist into the March quarter? Because I believe that your updated fiscal year 25 guide implies typical March Q seasonality, which would, you know, beg the question.
Speaker Change: Why wouldn't that be buffered with the elevated backlog that you have right now?
Well we're snake bit on that front in two ways.
Speaker Change: for your time today. Thank you. Thank you. And we're going to go through a couple of key things that we're going to be doing going into this quarter. One is the, you know, we're expecting that those headwinds to persist where we thought they were dying down. The second one is we're doing a factory transition.
Thank you.
Thank you.
Speaker Change: Thank you. There are no further questions at this time. I'd like to hand the floor back over to Jamie Lerner for any closing comments.
Jamie Lerner: All right, thanks everyone for joining us and we will be speaking again in 90 days. Thank you.
Thank you. Thank you.
Speaker Change: This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
Thank you.