Q1 2020 Earnings Call
Ladies and gentlemen, thank you for your patience. Please remain on the line. Your conference will begin momentarily again, we do appreciate your patience. Please remain on the line. Your conference will begin in just a few moments.
Good day, ladies and gentlemen, and welcome to quantum fiscal year first quarter 2020 earnings call.
All lines have been placed on a listen only mode and the floor will be open for questions and comments. Following the presentation. If you should require assistance throughout your conference. Please press star zero on your telephone keypad to reach a live operator.
At this time it is my pleasure to turn the floor over to your host Rob. Thank you Sir the floor is yours.
Thank you operator, I'd like to welcome everyone to the call hosting the call today are quantum's, chairman and CEO , Jamie Lerner and CFO , Mike Dodson.
Please be aware that some of the comments made during this call may include forward looking statements all statements other than statements of historical facts or statements that could be deemed forward looking.
Quantum advisors caution and reliance on forward looking statements forward looking statements include without limitation any projections of revenue margins expenses adjusted EBITDA adjusted net income cash flows or other financial items any statements concerning the expected development performance market share or competitive performance relating to products or services and the expected timing of Relisting securities on a national exchange.
All forward looking statements are based on information available to quantify on the date hereof.
These statements involve known and unknown risks uncertainties and other factors that may cause quantum's actual results to differ materially from those implied by forward looking statements, including unexpected changes in the company's business.
More detailed information about these risks and additional risk factors are set forth in quantums periodic filings with the Securities and Exchange Commission, including but not limited to those risks and uncertainties listed in the section entitled Risk factors and Quantums quarterly report on Form 10-Q , and annual report on Form 10-K as filed with the Securities and Exchange Commission.
Quantum expressly disclaims any obligation to update or alter its forward looking statements, whether as a result of new information future events or otherwise, except as required by applicable law.
Also note that on this call the company will be discussing non-GAAP financial information.
Management is providing this information as a supplement to information prepared in accordance with accounting principles generally accepted in the U.S. or GAAP you can find a reconciliation of these metrics to reported GAAP results in the reconciliation table provided in the company's press release.
I would like to remind everyone that this call will be available on quantum's website for at least 90 days a link to a web website replay of this call was also provided in the earnings press release and is available on the company's website at investors that quantum dot com.
With all that said I would now like to turn the call over to Quantums, Chairman and CEO , Jamie Lerner, Jamie the call is yours.
Thank you Rob and thank you to everyone that is joining us today.
It's been a long time since quantum conducted a conference call and this is my first call as part of an entirely new leadership team.
I'm excited to unveil a leaner more product and technology focus quantum to our shareholders a company poised for growth.
The progress we have made in improving the earnings power of quantum is clearly evident in the guidance, we issued with today's press release, which anticipates 50 million to $55 million in adjusted EBITDA for the full fiscal year.
[noise] Quantums former executive team are focused on maximizing top line revenue.
Based on what we learned during our restatement process. We believe now that this led to a series of poor business decisions, resulting in not only incorrect financial results, but also an FCC investigation.
Let me now explain what we've been doing to entirely transform quantum during the last year and a half and give you an overview of the progress we have made.
Our transformation is based on a new strategy formed around two core tenants.
Juan the projection that 80% of the world's data by 2025 will be video our video like data.
And two quantums customers find us to be a leader in both the high speed processing of video and the long term low cost cold storage of video and unstructured data.
Crime already provides a video infrastructure to many of the world's largest studios and post production houses corporate brands sports networks and franchises airports research institutions and the world's largest hyperscalers.
Given the massive total addressable market across these industries and the strength of our core technology assets. We have set our focus on leading this video storage infrastructure market.
This represents a new market opportunity for quantum and makes us deeply relevant to our traditional enterprise and media and entertainment customers along with the world's largest hyperscalers.
We feel this strategy will also enable us to expand into rapidly growing adjacent markets with very similar technology requirements, such as video surveillance autonomous vehicles medical and surgical video manufacturing video for quality assurance.
Satellite and Geo spatial imagery.
Military and tactful applications video search analytics and more.
To execute on this strategy, we have navigated the investigation and restatement of the prior teams financial results and conducted a significant operational restructuring with a rightsized expense structure more liquidity and improved corporate governance.
To date, we have executed the following steps.
Brought our SEC filings up today.
Reconstituted Quantums board with high quality directors, providing meaningful governments and leadership to our company.
Remove 73% of the vice president and above executives and after some limited rehires shrunk senior management by 45%.
Today's team as both streamlined and highly experienced.
Recruited over 10, new executives and the best organizations worldwide to comprise our new executive leadership team, including a new Chief Executive Officer, Chief Financial Officer, Chief Revenue Officer, Chief Accounting Officer, Chief Information Officer General Counsel VP of supply chain corporate controller and director of internal audit.
Adopted new business priorities standards and governance practices focused on ethical business practices and strategic initiatives to drive margins based on selling unique and defendable intellectual property versus reselling third party technology.
Eliminated over $70 million in annualized operating service and supply chain expenses, including a reduction of over 300 employees.
Completed a $210 million refinancing of the company to provide more liquidity and flexibility.
Overhauled the sales compensation plan to reward our sales team based on margins as opposed to top line revenue.
Curtailed reselling low margin third party products aimed at boosting revenue at the expense of margins.
Gross margin improved three percentage points year over year.
That's the challenges of the financial restatement effort required to address decisions made by the previous executive management team.
As Mike will discuss shortly the impact of the financial restatement was nearly exclusively related to the timing of the revenue recognition.
Settled civil litigation related to the restatement, which includes the derivative case and the class action case.
And all settlement amounts are covered by insurance.
While we've been strengthening the company's financials, we've continued to innovate at a rapid pace to take advantage of the emerging market opportunities in video storage infrastructure.
These are the core technology and product accomplishments and advancements we've made.
We have capitalized on tapes emergence as a key technology for long term cold storage with both Hyperscaler and enterprise customers. These hyperscalers are using tape as the basis for cold storage in the cloud.
Because tape is anywhere from one third to one sixth of the cost of alternative storage technologies.
This is a significant new market opportunity for tape and requires a very different architecture compared to traditional tape backup.
Quantum has been established as a leader in this new market for tape and expects this emerging opportunity to reverse the historic secular decline of the enterprise tape backup market.
Speaking of our tape business as announced just last week. The LTL media manufacturers have resolved their long many years dispute that has been affecting supply of LTL weight and other LTL weight media generations, and creating headwinds for our our royalty revenue streams.
Going forward, we expect LTL media supply to return to normal.
Which we believe will drive increased royalties and increased demand for tapes stored systems and media.
In April we announced the quantum F series, a new line of Nvme me flash storage arrays for editing rendering and processing of video content and other large unstructured data sets based entirely on our new cloud storage platform software.
This is quantums first release of an entirely new product and close to 10 years Dnbi me storage market will grow significantly over the coming years as the nvme he replaces traditional SAS SSD arrays.
And by leveraging our D.M.A. networking technology, we will also help our customers move from legacy fiber San environments.
To less expensive Ethernet networks.
The F series is in production with customers and is one of the fastest video storage and processing platforms available today.
We also announced the VM series, a hyper converged platform for video surveillance recording and management of building systems to capitalize on the ongoing growth of this of this surveillance storage market.
This product is also in production with customers and is being resold by some of the world's largest surveillance integrators.
The new quantum our series is a line of Ruggedized removable storage systems for in vehicle data capture mobile surveillance and military applications. This ruggedized automotive grade edge storage platform can be installed in cars planes buses trains and remote non datacenter environments.
Autonomy is test vehicles are our largest use case for the R series today.
We are enabling all of our products with the quantum cloud based analytics, enabling monitoring and configuration directly through the cloud essentially connecting all of our products and our deployments to the quantum distributed cloud.
We feel this will offer not only a significantly better customer experience, but also enables quantum to shift to an as a service recurring revenue model for many of our customers.
These product and technology enhancements are all part of our larger strategy focused on video and video like data.
With a renewed focus on driving high margins based on designing and selling products with unique and defendable intellectual property.
As we look ahead, we see there is a substantial opportunity to drive further revenue and margin growth by moving to both a hyper converged and software defined architecture across our product portfolio.
To value engineer products to improve performance, while reducing costs.
And to increase the value of our software by making it more searchable more accessible more intelligent.
I look forward to speaking more about our progress in these and other areas as we go forward.
Today quantum is poised for sustainable and profitable growth with solutions that meet the needs of a large customer base, both today and tomorrow.
We have shareholder friendly and industry, leading corporate governance.
Our challenges are mostly behind us and we're excited for the future.
I'd now like to turn the call over to Mike Dodson, our CFO to discuss the financials.
Mike.
Thank you Jamie.
I would first like to note that we released a tremendous amount of information today.
Including the press release and related financial information.
A Form 10-K , covering fiscal 2017 through 2019.
As well as the Form 10-Q for the first fiscal quarter of 2020 ended June Thirtyth 2019.
These filings bring the company current as it relates to FCC reporting.
In summary, I'll be covering the following points.
First we have completed the effort related to the financial restatement, primarily related to misstatements in prematurely recognized revenue.
The nonrecurring charges for professional fees associated with the restatement effort are largely behind us after today.
Second I will provide more details on the restructuring effort that has eliminated approximately 70 million in annualized operating service and supply chain costs.
Third I'd like to focus on gross margin improvements.
Supporting profitable growth.
All of which have netted out to be sick to be significant year over year improvement in adjusted net income and adjusted EBITDA.
I will also review the results for our first fiscal quarter.
2020, as compared to a year ago quarter.
Related to the financial Restatement, we announced last September the company had substantially completed our internal investigation related to the misstatements in previously issued financial statements.
In summary, these misstatements related primarily to premature.
Excluding the first and last quarters of the restatement period. The average quarterly net revenue adjustment range from approximately a decrease of 7 million two an increase of 5 million.
Just to be clear the revenue restatement.
Impacted the timing of revenue not the quality or the accuracy of the revenue itself.
These restatement adjustments did not impact historical our current cash balances.
And there were no significant accounts receivable write offs over the restatement periods.
The inventory that is remaining in the field at distributors yet to be sold through to an end customer has been paid for by the distributor.
The total cost to be incurred for professional fees related to the internal investigation.
The financial restatement and related activities as approximately $33 million.
To put this cost into perspective from the date that we received the subpoena from the FCC and January 2018 through today.
This financial restatement process has cost the company approximately $57000 a day and professional fees.
And these nonrecurring charges for the most part stopped today.
Also related to the financial restatement process. There is an ongoing investigation by the SEC.
We have produced a substantial.
Volume of documents to the FCC and continue to cooperate with the FCC staff.
At this time our attorneys.
Have advised us that the substance of these conversations.
Our confidential.
As soon as we have any material news, we will share that with you.
Thanks.
As Jamie mentioned earlier, we have completed a significant restructuring over the last 18 months and eliminating approximately $70 million in annualized operating service and supply chain costs.
Resulting in a leaner more nimble cost structure going forward.
The top three categories of costs represent 95% of this reduction was 70% of the total attributed to head count related costs, 12% to marketing programs and 7% to travel related expenses.
Reductions in annualized costs of 60 million and operating expenses were the majority of the 70 million total reduction.
The total operating expense reductions were comprised of 73% and sales and marketing.
14% in R&D.
And 13% in GNS.
All of these cost savings exclude the impact of nonrecurring costs.
Also as Jamie mentioned earlier, a key contributor to our transformation is to focus our entire organization on a gross margin improvement and revenue quality.
Not just on volume or what we describe as empty calories.
In the short term this puts pressure on the topline and leads to lower revenue levels.
As part of our improving gross margins, we have reduced the spending levels and service and supply chain over the last 18 months by an annualized $10 million.
We have put processes and incentive structures in place to capture more value for our products and services and also initiated programs to value engineer products that will ultimately resolve and result in lower bill of material costs.
Finally, we have curtailed reselling low margin third party products aimed at boosting revenue, but produces empty calories on the gross margin line.
As evidence of these efforts the gross margin improved three percentage points in fiscal 2019% to 42%.
From 39% in fiscal 2018.
As a result of our cost reductions and margin expansion, we have significantly improved our financial performance.
In fiscal 2019, we generated 32.5 million and adjusted EBITDA.
Compared to negative adjusted EBITDA of $4.5 million in fiscal 2018.
Or an increase of $37.3 million year over year.
In the first quarter of fiscal 2020, we generated $13.1 million in adjusted EBITDA.
And 82% improvement over the first quarter last year and reflects the current run rate of over 50 million annually.
Our guidance underscores this run rate as we are projecting 50 to 55 million and adjusted EBITDA for the full fiscal year.
Our revenue levels are lower than when quantum last reported financial results, but we are significantly more profitable.
We believe the 105.6 million in revenues in the first fiscal quarter of 2020 provides a good baseline, but as we look forward. We believe we have upside opportunities from the new products and royalty revenue.
With our gross margins currently in the low 40% range and with our streamlined expenses. We believe we are well positioned to deliver sustainable adjusted EBITDA.
Now let me summarize the results for the first fiscal quarter of 2020.
Our revenue was $105.6 million compared to $107.5 million in the first quarter.
Our 2019 is a decrease of 2% and reflects our focus on higher margin revenue.
Breaking this down as a percentage of total revenue tape storage systems represented 30%.
High performance shared storage represented 15% device and media represented 12%.
Backup storage represented 5%.
Service revenue represented 32%.
And royalties represented 6%.
Gross profit in the quarter was $45.8 million.
Or 43% gross margin compared to $46.3 million in gross profit and 43% and gross margin in the first fiscal quarter last year.
Total operating expenses were $43.1 million or 41% of sales compared to total expenses of 50.7 million or 47% of sales in the year ago quarter.
As DNA expenses declined 11% to $34.4 million compared to $38.5 million in the year ago quarter.
R&D was $8.4 million up 1% compared to $8.3 million in a year ago quarter.
The company incurred $8 million compared to $10.5 million in a year ago quarter for nonrecurring charges, representing restatement and restructuring expenses.
The company incurred $6.3 million in interest compared to 3.9 in the year ago quarter.
The net loss was $3.8 million or 11 cents per diluted share compared to a net loss of $7.5 million or 21 cents per diluted share in the year ago quarter.
Adjusted EBITDA increased 82% year over year to $13.1 million compared to $7.2 million.
A year ago.
I would also like to give some color related to our outstanding share count.
First when we recorded a loss we will only include weighted average shares outstanding excluding dilutive equity instruments like warrants and employee equity awards.
For example in the first fiscal quarter of 2020, the weighted average shares used was 36 million.
When we have net income we will use a share count that includes dilutive equity instruments. For example in the first fiscal quarter of 2020, the fully diluted shares would have been $41 million.
Also included in our diluted share count are approximately 11 million warrants held by our current and former.
Lenders.
Our headcount at the end of the first fiscal year fiscal quarter of 2020 was 816.
Now turning to the balance sheet.
Cash and cash equivalents were $10.8 million.
At June Thirtyth 2019, compared to 10.8 million as of March 31, 2019.
These amounts exclude as of the end of both fiscal periods.
$5 million in restricted cash required under the credit agreements.
Our long term debt outstanding amounted to 140 146.1 million net of $16.4 million and unamortized debt issuance costs at $1.7 million in current portion of long term debt.
This compares to a 145.5 million as of March 31, 2019, net of $17.3 million in unamortized debt issuance costs and $1.7 million and current portion of long term debt.
Quantum also has a revolving credit facility that was not drawn down at either March 31, 2019 or June Thirtyth 2019.
Our financial performance in the first fiscal quarter of 2020 relative to the financial covenants in our debt agreements was very strong.
For example for the trailing 12 month EBITDA covenants, the company's performance was $10 million and $13 million higher than the two bank agreement covenants keeping in mind the bank agreements have a different have a few differences.
In the EBITDA calculations.
Than the company uses to report on our financial performance.
Now turning to our financial guidance.
For the second fiscal quarter management expects revenues in the range of $99 million to $105 million.
Excluding approximately 3 million and nonrecurring charges.
We expect resulting adjusted net income to be in the range of $2 million to $4 million.
Adjusted EBITDA is expected to be in the range of 10 million to 12 million.
For the remaining three quarters of fiscal 2020.
Quantum expects total revenues to increase by 15 million to $30 million or 6% to 10% compared to the same periods in the prior year.
With revenues from new products, increasing as the year progresses.
Due to our tight cost controls and the company's focus on improving gross margins quantum expects adjusted EBITDA to increase to a range of 50 million to $55 million or by 50.
5% to 70% for the full fiscal year compared to the prior fiscal year.
So in summary, first I would like to reiterate how pleased we are to be complete with the financial restatement process and now current with our SEC filings.
To put this incredible cash burn rate and management distraction behind US is a major accomplishment for the current management team.
Second as Jamie and I have outlined the transformation of quantum is well on its way as weve as evidenced by the establishment of the new strategy to lead video storage market by storing and managing video and image data across a wide range of industries.
The realization of $70 million in annualized expense reductions.
And our focus on gross margin improvement and revenue quality not just on volume or what we described as empty calories.
Third the initial results of Quantums transformation can be seen in the improved financial performance as evidenced by the significant growth in our adjusted EBITDA in fiscal year 2019 by $38 million over the prior year.
In addition, the first fiscal quarter of 2020, adjusted EBITDA of $13.1 million easily supports our current guidance fiscal 2020, adjusted EBITDA of a range of 50 million to 55 million.
With that let me turn the call back over to Jayme for closing comments Jamie.
Thanks, Mike.
Today represents the completion of a huge body of work and is a major step for the company as we transform.
I'd like to thank Mike Johnson, our CFO .
Our Chief Accounting officer, Louis more had.
The quantum finance team and all of our legal and accounting partners for the massive effort that has gone into completing the restatement process.
We've made tremendous progress to improve the earnings power of quantum we built a solid and stable financial base for the right leadership and governance structures.
And we put a renewed focus on driving high margins by designing and selling innovative products to solve the world's biggest challenges around video and video like data.
We're excited for the future and look forward to sharing our progress as we move forward.
I'd now like to open the line for questions.
Operator.
Thank you the floor is now open for questions. If you do have a question you May press star one on your telephone keypad at this time.
If your question has been answered you can remove yourself from the queue by pressing Juan.
We do want to limit it to one question or comment. So please do that and again its star one please hold while we poll for questions.
And our first question comes from Eric Martin Martin Musee from Lake Street Go ahead Eric.
Thanks, Congratulations on reaching this moment and closing this chapter I'm sure you guys.
Nobody happier.
Then.
And I am he reached this point it's been.
18 months of question marks and we can solidly answer will these guys get their FCC financial to ever completed and you have done that so congratulations there.
I want to thank our kind of.
People first and then product and then just kind of recap the broad strokes here. So you have had an awful lot to change on the people side.
You've pulled 300 employees out of the business.
You talked about some of the senior level management changes that you have do you feel like you've got the team you need are there any other direct reports for you Jamie that you need to bring on and then where are we as far as the lieutenants and and private and further down the line.
Yes, I mean.
I think it's safe to say that you know we've made a lot of progress on our transformation, but it's no by no means done.
So in the first year, our goals were to stabilize the company.
So is really about survival on stability. So we put in a leadership team that we knew could turn the company around.
Now as we emerge from that we're thinking less about surviving and we're thinking a lot more about thriving. So I think we're now beginning I think we have the core leadership team in place, but we are starting to up level the leadership team of globally.
In pockets, where we can begin to expand I would say much of the hiring is around new functions.
Our video surveillance practices, new and Thats new skills, our Nvme me practice is quite new.
Some of our sales practices in autonomous vehicles are quite new so those required newer skill sets from our traditional skills. So those are the pieces were really filling in but I would say the core leadership team is in place.
Okay.
And then shifting over to the product side, you've talked about some of the investments that you've made the F series for the Nvme me via theory, though.
The R series.
But as far as what ring the register would what's baked into that outlook that you've got and by the way I am excited to be talking about quantum as a growth company and again, but you've outlined.
Right at 10% growth opportunity here and where are we really ringing the register is it with.
Classic.
Cold storage tape system to a hyperscale or is it the enterprise coming back online to secure the media and entertainment core what's really ringing the register a net 2020 revenue outlook.
Yes, well when we put together our annual operating plan.
Our thought was we should build the plan based on products customers and selling patterns that we know well.
So I would say we put very little.
Expectations in contemplation on new product sales into the LP I would view new product sales predominantly as upside.
Where we see growth is the expansion in both royalty in new tape systems based on the availability of LTL eight.
The ever growing expansions of our video customers driven by the higher fidelity video and the much more demanding video visual effects that were seeing moviemakers television makers putting into production.
And finally, the single biggest trend we're seeing is that tape has been invited to the cloud.
Three years ago tape was not part of a hyper scale our cloud architecture.
Today, it's part of every Hyperscalers architecture.
And the core reason is tape is simply the only economic way to store data at the exit bite scale and we have some hyperscalers that are north of 30 or 40 Exabytes.
And all of them in the last year have moved from being questioning whether tapes should be part of their architecture to I would say most every major hyperscaler is in some form of.
Purchasing process or deployment process for tape, but it's very different than what enterprises use tape or it is not a backup application. It is a live data storage application for people storing data, where they don't mind waiting a minute or two to see that data. They just want to store. It inexpensively for 30, 40, or 50 years and that tier of storage, including all the software that enables that is a very new opportunity for us and that is.
I would say the largest driver of that at this point.
Okay and then last question just so I don't have the microphone here I've got plenty more but on a limited to three.
The 2020 outlook if I do the quick math based on the Q1 print and then the commentary in the press release it looks to me like a top line of about $420 million to $430 million revenue for 2020 is that correct.
Yes that would be in the ballpark.
Okay, and then the 50 to 55 million of adjusted EBITDA margins in the range of 12% to 12.8%.
Your.
Not to get Nit picky right out of the gate, but you're already about 12.4% here in Q1 Q1 is historically your most challenging quarter.
Where are we I guess, maybe where are we investing the incremental dollars here because I would expect the revenue growing sequentially.
Some EBITDA margin expansion, but we're not guiding for that out of the gates, we must be investing where are we investing.
Well I would say you're you're correct in that we do have a certain.
The level of seasonality so any one year is not going to be linear.
Or if we're growing.
It's not going to be linear.
To the extent, we have those types of variations quarter to quarter and it really doesn't impact.
Our investment decisions on a longer term basis. So when we put together for example, our annual operating plan I mean, we have programs in place that will just run through the year understanding that the revenue may ebb and flow a little bit given the seasonality, but it doesn't really impact our investment decisions on a quarterly basis.
Okay I'll leave it there thanks for taking my questions and congratulations again on getting back to it.
After data SEC filings.
Okay. Thanks, Thanks, Eric.
And our next question comes from Chad Bennett from Craig Hallum Go ahead Chad.
Hey, guys. Thanks for taking my questions.
I would echo air sentiment.
Finally, finally getting through this I know, it's been challenging and quite frankly, the numbers around EBITDA earnings power and just your ability to sustain the business in the midst of transforming it under the Hood.
I think our eye opening so kudos to you guys.
Thanks, Chad.
So so.
Maybe just a follow up I think on one of the questions previously on on the new products and maybe even more broadly.
Jamie and I know you touched on it in the call but.
I think you know.
Everybody that's known the name.
In the past have really if you've dug into it.
Theres some hidden software capabilities within this company that I think have been.
Under.
Appreciated or leveraged for some time, so I know youve.
Transition, especially around the new product portfolio around software defined products or software defined storage and and cloud based storage can you give us a sense of where you are in that journey, Jamie and then maybe al.
I think the previous question he might have touched on it but what are your expectations for the new software defined products looking out 12 months. If you can I know were shifts.
Just getting into AG actually having expectations, but how should we think about that.
Yes.
I mean.
Well first of all you're absolutely right. This company has a huge amount of software that it's very hard to sell it appreciate it monetize it when it bundled with a box.
So we've been thinking about our financial strategy in light of our architectural strategy. So architecturally one of the first things we have to do is separate the software from the hardware. That's why we're just completely obsessed about all of our products being software defined and they can run on any box. So if the U.S. government wants to buy from one server vendor in China. They buy from another server vendor, we're not in any way tied to that so every single product in this company is in some form of transformation to being fully software defined that's why when you look at our new products like the B S series. The F series those new products are totally software defined.
Secondly, we're then moving to hyper converging that software what that means is that software doesn't run on a bare metal server.
It runs in a virtual machine. The reason we're doing that is now not only we software defined but we can run on Vmware. We can run on open source software, we can run on Amazon, Google Azure and so now that piece of software and once it's totally de coupled from the hardware. We can now change our pricing model and our go to market model and that we're basically selling used software whether its software for automating tape backup whether its software for making movies software for sequencing a genome we're going to give you that software and then the next question is will where would you like it would you like it on your own hardware what type of hardware would you like to hardware from US would you like to put it on the cloud and by making those fundamental architectural changes, we're going to actually begin to sell software in this company really storage software and move further and further away from being a box vendor.
And when you move to those software models. We can also move away from a onetime box sale.
To a recurring revenue model, where you can buy that software on a monthly subscription yearly subscription so were making the core product changes to enable us to make the business model changes that we need to make so what you're going to see like you saw in the F series that now that product now uses a 100% of our software were not OEM being our licensing software from others.
It also you'll see like the VM series, it's fully hyper converged and you're going to see every product. This fall is going to be hyper converged and run simultaneously on hardware run virtual machine or run directly on the cloud and we're moving everything they're really between now and January of this year.
So just I guess and maybe.
Mike can jump in also but it is whether its vs. F series R series.
Hyper converged.
As we see more business or more material revenue from from these products.
Do we can you give us just a magnitude of gross margin impact are we going from.
No chance words, mid 40 gross margins to 70% or.
Any type of color there.
Well first I would say we're in the very early days with these product yet so I would think as we ramp them up as we gained an appreciation for the competitive environment that we're in in these new markets I will be able to provide more guidance.
But at this point, it's just too early.
Okay understood.
And then Jamie.
Going back to.
What we've seen in the in the industry around tape and Hyperscalers really taking off.
Is there a way to think about how much of the tape business today is.
More growth in nature versus maybe traditional enterprise backup.
Yes, I mean, the way I think about the tape market is somewhat different.
I think the tape backup space is there it's there for a long time and you still have people backing up mainframes and backing up.
Client server systems side, I think that is a business with a very very long tail.
I also think you are seeing a certain return to that business as people realize.
Thank you for doing large backup jobs, it's still the most economic way.
And I'd really.
For everyone on the call I would ask you to think about tape is purely an economic vehicle.
The technology isn't necessarily sexy, it's not bleeding edge, what it is though as it is the cheapest way to store data for decades.
And I think people are realizing.
In both backup jobs that.
It's the cheapest way to operate compared to alternatives, but the other thing is we're seeing a trend.
Certainly the Hyperscalers as I described are using it but I also want to say that enterprises.
Used to store data because they were told they had to regulatory compliance.
I think enterprises now their preferences to keep every single bit of data they have.
In case, they ever need it later, if they ever learn to analyze it later, if new technology becomes available where they can harvest insight out of that data.
So I think.
You know a lot of organizations are coming on saying well if you can make it.
At cheap enough, we would store all of our data. So we're actually seeing new opportunities for our archive where people are saying you've now crossed it dollar per terabyte threshold, where we're going to make a decision in a store much more data. So we're seeing this cloud like architecture, certainly were selling it to the top seven hyperscalers, but now we're seeing the cloud 100, those fast followers starting to use this technology or starting see manufacturing company, saying why don't we store every photograph we take on the manufacturing floor.
Keep them forever, we're seeing retail chain, saying well why do we keep the video surveillance of everything we've ever seen in our stores and maybe one day, we'll be able to analyze that and gain insights about shopping behaviors and I think that trend in my opinion is reversing all previous trends and making tape a growth business.
Purely driven by the amount of data you can store at the most aggressive price and that is just opening up new opportunities and it does require very different architectures that in my personal opinion, we're leading the world in those cloud like architectures for today.
Right.
And maybe one last one for me.
It's great to hear Zee.
The consortium around LTL weight.
Finally came together I guess is the easiest way to put it yet.
Mike have you.
I know, it's it's kind of more of a year end event or calendar year event year end event for LTL weight.
But have you factored in any any improvement in kind of the quarterly run rate royalty run rate there from LTO eight in your EBITDA expectations for this year.
I think when you look at our guidance, we were assuming a pretty steady run rate. There. So I would expect we would have upside as it relates to anything on that front.
Got it okay, guys nice job, it's been a long time come in thanks.
Okay. Thanks. Thanks.
And our next question comes from Bob Evans from Pennington Capital go ahead Bob.
Good afternoon Alex.
Hi, I'll echo previous comments.
No.
Congrats on getting all this work done on the transformation you've made so far.
A lot of my questions were already answered, but I guess this is probably more for you Jamie can you comment on.
The sectors that you expect to see the most growth I would assume hyperscalers is probably the area, where you would expect the most dollar volume growth.
Correct me, if I'm wrong and then as we look at you are now growing I think your guidance of 6% to 10% do you see yourself as a company where.
That's your start is that Threeq did expect to see an accelerating growth rate as we look out into the future and how do you view. This company now that you're like you said you're.
No longer in survival mode, but more in growth mode.
Yes, I mean.
I mean quite frankly, we're still learning.
How to drive this vehicle.
What we are doing is we have a series of hypotheses, we're testing and their growth hypotheses one hypothesis and I think we've tested and now confirmed is that.
There are massive tape opportunities with the cloud operators.
And I would throw in that Hyperscaler market, the huge national labs large federal governments gigantic enterprises, but would the the very world's largest holders of data.
There is a very new opportunity with them.
The other.
Hypothesis, we have is that the largest video use case.
Is not television and movies, we do quite well in that space, but the largest video use case is video surveillance, it's actually 60% of all the data produced on this planet comes off of video surveillance cameras.
For many companies the the 10 or 20 cameras in their lobby generate more data than their entire IP department does in a year.
So is it a cameras are just virena shifts data collectors and consumers and so I really view video surveillance is probably the largest total addressable market that we have our new at it we're just our product somewhat new.
So we're we're building that but I'm feeling pretty good about that space.
And I also think the F series really opens us more from just doing video editing to doing more genomic analysis video analysis.
More high speed applications than just video editing. So were just experimenting with will what are those use cases, how different are those buyers, but I really think it's we're in a.
We're in a selling motion with the Hyperscalers today.
We're building that selling motion in video surveillance, and we're building that motion and analytics as well in all the supporting partnership. So those are the areas that we're looking at.
We have some tertiary markets that we are.
Optimistic about but just developing thats medical and surgical video.
Manufacturing quality assurance video people, taking photographs on manufacturing lines.
And I guess I forgot to speak about.
An area that we're actually very surprised about our growth in which is in autonomy as test vehicles.
We're seeing some of the vehicles were involved in making it and they're using a three to 400 pad of bytes of data. So we're seeing an opportunity for the R series to collect data and economist vehicles, we're seeing an opportunity per store next to be used as the vehicle analytic platform that actually does quality assurance testing of the vehicle and then because so much data is being generated tape is being used as a low cost place to store the data between analytic runs to lower the total cost of running the laboratory.
So that area also we made a number of hires.
And.
In Detroit and in Germany, as we are building our business with the automakers. There. So we we've got a lot of.
A lot of efforts underway.
Okay and to Chad's earlier question as it relates to software and software margins.
Is it fair to assume that.
No as you grow and mature in that business that we that part of the business should see normal software margins in the future, maybe not right away, but it shouldnt go to that level.
Yes, I mean, we.
We just have to learn what's going to happen here and there's two buying motions right. There is the customer that says I'm just going to buy software from you.
And I'll buy hardware myself.
And.
I think there is the customer that says I'd like the hardware from you because I just want.
You to make it work right for me and I want you to take care of that system for me. So we're working to a.
A software model, but I'm still seeing the buyer, saying I want to buyer software, but why don't we do appliances also so that I know you're going to give me a fully working system. So I think the industries and transition there as a lot of companies are moving to these more software based models to to get the software to a point, where it just completely seamless with the hardware and customers aren't as worried about getting hardware and software together, mainly so that you support level system.
Okay.
Thanks for answering my questions and congrats again.
Thanks, Bob.
And our next question comes from field from Echo Lake Capital go ahead.
Hi, Congratulations once again on all your progress.
I was trying to understand your free cash flow generating ability. So I was wondering if you could help me understand maybe start with the.
$50 million of adjusted EBIT da how that would translate into free cash flow for you guys.
Yes, I mean, when we when we give guidance and we're looking at our adjusted EBITDA understanding we've taken all of the nonrecurring items out of that.
So its really are and it's a reflection of our underlying business our operations potential.
If you were to look at this year in our range of guidance understanding that Weve got approximately 24 million $25 million of interest.
So half of that is going is at an actual cash outlay right. So half of that is gone.
And then you're dealing with the other half and the other half really.
We look at that is.
If.
As we grow we've got working capital requirements, our capital structure has been.
Sized that we've got a $45 million revolver, but we haven't drawn down on that so and we'd like to be able to fund our operations and fund our growth on our own cash generation.
If we ever get into it to any tight working capital situations. We do have the revolver there to back us up but we do feel comfortable that.
Between our cash generation revolver, we will be able to fund our growth very very easily.
And ballpark, how much should capex be this year.
Our Capex is typically I'd say between two and 3% of revenue. So we're not a very capital intensive company right. Okay.
Terrific well, thanks very much.
Okay. Thanks.
And our next question comes from Orin.
First one from GE go ahead.
Hi, how are you and Ken echoing resolution.
Years and years of work.
Both of you.
Thanks.
Thanks.
You, obviously do have a great cash generation story and hopefully there is a little bit of growth here and then more coming.
So we want to focus on the.
Cloud.
Opportunity, Okay still new products that you need to address an opportunity or is the issue really that you've planted some of those new products already at the existing cloud providers and that there was confusion on the future of LTL or tape in general and then confusions beginning to come to an end and hopefully people ready to adopt you kind of give a job we'll call it.
Yes, I mean, I guess I would say all of the above.
I think there are.
Some cloud providers, who just plowed ahead with LTL seven and.
Design for that.
We have a couple of customers that just said look we'll trial your equipment, but we're not going to buy and volume until we know this.
Legal issue has been resolved I think it did concern some supply chain organization. So.
I wouldn't say it was universal, but I can say several large cloud providers were uncomfortable moving forward until this was resolved.
Secondly.
The cloud providers have very deeply unique architectures and very unique points of view.
Some of them want to compete on having the lowest cost technology some of them want to compete by having the most available technology some of them want to compete by being able to service the equipment with very few people.
So what I'm finding is we are not able to just show up with one product and service them all.
There are asking for specialized implementations.
Some of the cloud providers want to run the equipment in containers.
Some of them want to water cool it some of them want additional robotics and density some of them want full software stacks from us they want us to provide the software that operates them and their cloud some of the cloud providers have actually asked us to run their cloud for them actually help them manage the tape help them give them managed services to operated so.
These buys are very large.
Tens of many tens of millions of dollars purchases overtime.
So very often I would view it as almost a year long process to understand their requirements.
Modified product if needed to meet their requirements and then go through a very rigorous testing process before they deploy and then when they deploy it said.
You know think of it as 18 wheelers have equipment like multiple 18 wheelers a week so when they when they turn the engine on it turns on very aggressively.
You mentioned that they are in different so just to follow up on that 0.1 is do you need to to a lot of new existing work.
And second question is that they sound like they're like you described that they're at various points of.
How far along that youre getting closer to more purchases coke to test.
In terms of trying to see whether some of them are ready the 2021 fiscal 2020.
I mean, I would tell you we have add scale customers today.
We're in bidding processes for other add scale customers. So I think this is a trend will go on for a number of years and most of these clouds are growing so they are not a they buy once and they're done.
Their data footprint, we often joke its data landfill as just filling and failing and failing so.
So far they have they didnt, an enterprise account will buy an updated a cover them and then you go sell to them three years later, our hyperscaler accounts are almost buying at a continuous rate.
And I think we're in those cycles today, and I think that will carry on for the at least the next three years.
Okay. Thanks, so much.
Yes.
And our next question comes from David Duley from Steelhead Securities Go ahead David.
Oh, Thanks for taking my question I had several I guess first of all what can you help us understand what the the Sam is of this tape storage overall market.
For you guys.
It's Sami and like the total addressable market or the size of the market yes.
Yes, I mean I.
I'm reticent to venture to gas because I know analysts cover this and do market sizing and I just don't have that data directly in front of me.
How big is the.
Business revenue wise for you guys at this point dollars on an annual basis.
And what do you think your market share was made we can back into it that way.
Yeah, well I mean, we run if you were to go back to 17, we were over 100 million. If you look at the 2019 were just under 90 million.
And again, it's ABS and flowed through that period. So that's kind of our run rate and that is just further systems alone that doesn't include the related service that goes with it.
And.
So.
And what do you think your market share is it 90 million is your run rate are you, 50% of the market, 70% of market, 20% any rough guess.
I don't have the data about the size of the market. So I was just looking for you guys to give me some sort of benchmarks.
<unk>.
British reticent to gas because like I said, I know IVC and others I mean, they track our market share versus IB Oems and spectrum. They have it by the size of the market and.
It's pretty well tracked and.
Uh huh.
I'd rather than gas I think we just send you the I mean, I know our product managers track it pretty closely.
Okay, how about that.
What hurdles or need to be jumped over in order to get re listed on NASDAQ and then what.
Hurdles or things need to be.
Submitted to the FCC to make the investigation go away.
Yeah first as it relates to getting re listed now once we get to a $4 stock price.
You know is literally a matter of days as long as our application is in and we're ready to go so that's really first.
Dependent on a $4 stock price and then it would be days after that.
To be re listed on NASDAQ.
As it relates to the FCC.
And what I shared in the prepared comments.
We have ongoing discussions with them. It's obviously confidential whenever we get to a point where something material to disclose we'll disclose at that time.
Okay and the final thing from me is.
Do you have a breakdown of the cost reduction.
I think at the $70 million and it just struck me as.
Interesting how a huge portion of that came from sales and marketing.
Hi.
You know what I think about.
Cutting cost to the company, that's there's always cost in that area to cut but that seems like a really large number so just curious why.
Most of the cost reductions came from that area.
Yeah. This is Jamie I mean, what we observed in that time.
I think we would have.
Territories, where you had many sales reps, who just weren't at quota they weren't achieving quota, but if your goal is just to have topline you kind of don't care, if a rapid that quota or not as long as they contribute a little more money.
When we moved in with the mindset of we want our reps to be productive we want them to be profitable.
I want them to generate you know pay for themselves their sales engineer and related costs.
So we found that we could go to drastically last salespeople, who are just much more productive.
Having three sales reps to do a millionaire, let's have one sales reps. It does 3 million a year. So we drastically increase the productivity of the reps then you have the associated sales engineers channel coverage inside salespeople.
We also found in our sales organization. There are a lot of inefficiencies a lot of processes that are manual paper based store were down over the telephone and our new CIO has been able to put in more efficient processes methods and systems, where we didnt need is large debate sales operations staff as well.
And finally, we were spending way above our peer groups in marketing.
Marketing events with really no measurement of return on investment.
So going to trade shows and throwing parties and things that.
Perhaps generated some sales value, but probably werent optimal and we reduced our marketing spend to activities that we have very demonstrable return on investment.
And Thats really where.
We took a lot of savings in that area.
We also closed some geographies we had sales teams in far flung geographies that as a standalone business just didn't justify themselves we were in.
Remote geographies in Asia, where we hadn't been profitable there for years and we just came forward and said we're going to.
We're going to turn those businesses off and.
Make up for it in other geographies, where we can do profitable business.
In many areas in Asia. The margin pressure is just so intense we simply weren't able to maintain a price point and a margin level, where we could justify.
Selling our products in that geography.
Well congratulations on getting the restatement behind you in and listening very carefully to what you guys have done it really sounds like you've taken a good strategic look at the business and have uncovered all sorts of things that you can save money on and grow topline. So look forward to the story unfolding over the next year or two.
Okay.
And our last question comes from Allan Martin from AI Jie go ahead Aaron.
Hi, there. So again congratulations a lot of technical questions have been answered. So what is the two housekeeping ones like you said the lenders had 11 million warrants so correct.
Yes, yes.
So if the and then the fully diluted share count you said it was 41.
Right currently we're at the current stock price yes.
Okay. So if we were to instill that is 36 million common shares and then all the warrants in not using a treasure, but just doing everything in the kitchen sink its more like 47 is that correct.
Yes, it would definitely be higher and it.
I wanted to give that warrant number so people understand when those things get exercise are coming in right and the exercise price of that those things are between one and $2. So I don't know when they'll get exercised they've got a 10 year life on them.
But they are out there.
Got it.
And then in the financials you have been ideal image assurance receivable of close to 10 million Bucks.
What is that.
And as it relates to balance sheet as we as we resolve the different investigations.
Do you foresee that receivable being collected.
Yes reasonably soon time.
Yes, I mean that is a for no better description of a gross up on our balance sheet, where we have settled the class action litigation. So weve recorded both the liability and the asset as covered by insurance. So it's just a timing difference.
Well, so liabilities not been paid out yet either.
Right correct.
Okay. Thank you refer to capturing more offline.
Okay. Thanks, Thanks there.
Thank you I would now like to turn the floor back to management.
Well I'd like to thank everyone for participating in our call today, Mike and I are excited about the business as as is all our employees worldwide. So again, thanks, everyone I look forward to.
Meeting many of you in person in the coming months.
Thank you.
Thank you. This does conclude today's conference. We thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.