Quantum : Earnings Call Transcript Q1 2024

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EDITED TRANSCRIPT

QMCO.OQ - Q1 2024 Quantum Corp Earnings Call

EVENT DATE/TIME: AUGUST 08, 2023 / 1:00PM GMT

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AUGUST 08, 2023 / 1:00PM, QMCO.OQ - Q1 2024 Quantum Corp Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Brian E. Cabrera Quantum Corporation - Senior VP, Chief Legal & Administrative Officer and Secretary

James J. Lerner Quantum Corporation - Chairman, President & CEO

Kenneth P. Gianella Quantum Corporation - CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Craig Andrew Ellis B. Riley Securities, Inc., Research Division - Senior MD, Director of Research and Senior Semiconductor & Capital Equipment Analyst

Eric Martinuzzi Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

George Michael Iwanyc Oppenheimer & Co. Inc., Research Division - Associate

Nehal Sushil Chokshi Northland Capital Markets, Research Division - MD & Senior Research Analyst

P R E S E N T A T I O N

Operator

Welcome to Quantum's Fiscal First Quarter 2024 Financial Results Conference Call. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to Brian Cabrera, Quantum's Chief Administrative Officer. Thank you. You may begin.

Brian E. Cabrera - Quantum Corporation - Senior VP, Chief Legal & Administrative Officer and Secretary

Good morning and thank you for joining today's conference call to discuss Quantum's First Quarter Fiscal 2024 financial results. I'm Brian Cabrera, Quantum's Chief Administrative Officer. 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.

Some of our comments during the call today may include forward-looking statements. All statements other than statements of historical fact should be viewed as forward-looking, including any projections of revenue, margins, expenses, adjusted EBITDA, adjusted net income, cash flows or other financial operational or performance topics. These statements involve known and unknown risks and uncertainties we refer to as risk factors. Risk factors may cause our actual results to differ materially from our forecast.

For more information, please refer to the detailed descriptions we provide about these and additional risk factors under the Risk Factors section in our 10-Qs and 10-K filed with the Securities and Exchange Commission. 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.

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.

Now I would like to turn the call over to our Chairman and CEO, Jamie Lerner. Jamie?

James J. Lerner - Quantum Corporation - Chairman, President & CEO

Thank you, Brian, and thank you all for joining us. Earlier today, we announced our results for our first quarter fiscal 2024.

Turning to Slide 3. Here is a brief overview of the results from the quarter. We finished Q1 '24 with $91.8 million in revenue, non-GAAP gross margin of 38.3% and adjusted EBITDA of $0.8 million.

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AUGUST 08, 2023 / 1:00PM, QMCO.OQ - Q1 2024 Quantum Corp Earnings Call

While the revenue came in well below expectations, which I will address in a moment, our global efficiency plan and cost reduction initiatives helped to deliver a 280-basis point sequential improvement in non-GAAP gross margins to above 38% as well as adjusted EBITDA improvements of over 2x year-over-year as we continue to focus on driving improved profitability.

Ken and I will walk through the quarter and the actions we are taking to deliver an improved year-over-year adjusted EBITDA as we described in our annual guidance.

Now turning to Slide 4, I would like to share some operational insights. Several factors impacted revenue falling short of our expectations. First, Media sales that traditionally do not finalize until the last week of the quarter from our partners, and has been traditionally steady for over the last 12 quarters, came in lower than anticipated by $2.3 million in Q1 '24. Investigation into thIS shortfall revealed there was unseen excess capacity in the market compounded by higher-than-anticipated weakness in the Hyperscale vertical marketplace.

Next, we saw some end-of-quarter Hyperscale deliveries that were impacted by unexpected delays. And finally, some primary and secondary orders materialized later than anticipated, impacting this quarter's revenue.

Turning to non-GAAP gross margins, We improved to 38.3% based on improved operational efficiencies in manufacturing and services, combined with the reduced mix of lower-margin Device and Media sales and Hyperscale business. We anticipate the operational improvements in both manufacturing and services to continue through the near term. As you will hear from Ken, we anticipate another 400-basis point improvement to 42% gross margin in Q2 '24.

Margins are also improving with continued growth in our Annual Recurring Revenue and Subscription Revenue. Fiscal Q1 subscription ARR grew by 78% year-over-year to $14.6 million. We continue to anticipate that general availability of Myriad by the end of this calendar year will continue our accelerated rotation from one-time hardware sales to a more stable subscription ARR model.

Next, as a result of our proactive actions, we have made significant progress from our self-help initiatives. This includes improving manufacturing and logistics productivity, reducing discretionary spend, and leveraging our global footprint. These self-help initiatives are a key part of our transformation along with improvements in our ability to sell the full portfolio of products. We expect to see continued positive benefits from these actions in fiscal Q2, given the timing of some actions was implemented late in the first quarter.

As a result, we anticipate non-GAAP operating expenses to begin to trend below $34 million a quarter for the rest of the year as we continue to find opportunities to leverage our Global Footprint, drive deeper cost actions and improve operational efficiencies to increase our profitability.

Finally, I want to address the current market environment and actions we are taking. While there continues to be exponential growth in public cloud, heading into this fiscal year, we are seeing indications that the Hyperscale environment will not be as robust as in prior years. The drivers of this outlook are many, including indications of cloud storage slowdown due to the economic environment, tighter IT budgets, and the emerging trend of repatriation of certain data workloads to on-premise systems. All of these factors have led our Hyperscale partners to a cautious capacity outlook for the next 2 quarters.

Thus, subsequent to the Q1 '24 quarter end, our largest Hyperscale customer informed us that they were pausing all additional orders in our fiscal Q2 '24 with the potential to also extend into fiscal Q3 '24. While they are still deploying our solution from their on-hand inventory, we anticipate this pause in new orders to impact our revenue outlook, as this customer was our only concentration of revenue greater than 10% in fiscal 2023 and represented over $22 million in our most recent Q1 '24.

While this Hyperscale slowdown was anticipated in our initial fiscal year '24 outlook, these recent developments will have a deeper impact than we anticipated, and we estimate that this and the potential for additional Hyperscale slowdowns will impact our initial fiscal year '24 full year outlook by $35 million to $40 million.

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AUGUST 08, 2023 / 1:00PM, QMCO.OQ - Q1 2024 Quantum Corp Earnings Call

In addition, we anticipate this slowdown will also impact Device and Media sales to similar levels as Q1 '24 for the near term. While the media slowdown will have a very low margin impact, we anticipate a revenue impact of approximately $15 million from our original fiscal year '24 outlook. Ken will give you more color on the full impact of guidance and our outlook in his financial update.

While the large Hyperscale drop is disappointing, we are encouraged by the improvement in our end-to-end opportunities in both primary and non-Hyperscale secondary solutions. In Q2, we see the potential for this market to increase 30% to 40% year-over-year. Additional opportunities are opening and being explored at these customers as Quantum now offers a complete end-to-end portfolio. We anticipate this trend to continue into the back half of 2024.

Now I'd like to turn it over to Ken to walk through our financial results and Q2 '24 outlook in more detail. Ken?

Kenneth P. Gianella - Quantum Corporation - CFO

Thank you, Jamie. Please turn to Slide 6, and I'll provide an overview of the financial results for our fiscal first quarter.

Revenue in the first quarter of 2024 was $91.8 million, a decrease of approximately 5% year-over-year and 13% sequentially. As Jamie discussed, lower revenue for the quarter was on softer demand for Devices and Media, Hyperscale delays, and later than anticipated bookings. Even with the lower revenue, our overall profitability has significantly improved.

Our proactive actions in manufacturing and services, along with pricing actions and improving product mix increased our GAAP gross margins 280 basis points to 38.1% on a GAAP basis. We expect this improved operational performance to continue through the year.

Adjusted EBITDA in the first quarter was $800,000. This represented an over 2x improvement compared with $300,000 in the prior year first quarter. This improvement was driven by the better gross margin performance I discussed and the initial benefit of our ongoing cost reduction initiatives.

Now turning to Slide 7. I'll provide a breakdown of this quarter's revenue results and the year-over-year trends.

Similar to last quarter, our presentation of revenue breaks down the performance of our Primary and Secondary storage systems from both perpetual license and subscription delivery. Services on this slide consists of our traditional Quantum Services only and does not include subscription.

Primary storage revenue was $11.1 million, down approximately 34% year-over-year and 24% sequentially. Late bookings in the quarter were the primary driver of this decrease.

To note, our StorNext product, which has a significant installed base serving the media and entertainment industry did not see an impact in Q1 2024 due to the ongoing entertainment industry labor work stoppages. Our outlook for Q2 '24 does factor in modest impacts, and we are anticipating potential second half headwinds if the labor situation does not improve.

Secondary Storage systems revenue increased 21% year-over-year and decreased 12% sequentially to $40.6 million or approximately 45% of total revenue. As Jamie discussed, while our Hyperscale customers were the driver of the year-over-year increase, this vertical was down sequentially on waning capacity needs from cloud providers.

Looking at our Services business, revenue in the first quarter was $28.7 million, down approximately 10% year-over-year, driven by end-of-service-life on our older tape product lines. We anticipate the declines in Service revenue to begin to level off later this fiscal year.

Next, in Media and Devices, revenue decreased approximately 28% year-over-year and was down 24% sequentially to $8.3 million.

In Q1, while the total market capacity for media has remained essentially flat over the last few years, Media's sharp decline from its prior run rate of near $10 million a quarter was driven by an unanticipated dip in demand.

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AUGUST 08, 2023 / 1:00PM, QMCO.OQ - Q1 2024 Quantum Corp Earnings Call

With the recent reductions in Hyperscale capacity combined with the newer generation of LTO coming online later this year, we are shifting our outlook to be approximately $8 million a quarter going forward.

And finally, royalties in the quarter were lower and totaled approximately $3 million. We continue to anticipate royalty revenue to stabilize around current levels or an annualized rate of approximately $11 million to $12 million.

Moving to Slide 8. I want to provide an update of our Annual Recurring Revenue and Subscription metrics.

Total Annual Recurring Revenue, or ARR, for the quarter was approximately 40% of our total revenue at $36.4 million with a gross margin on the combined businesses being approximately 66%.

As a company, we aim to consistently improve our Total ARR by maximizing our Quantum Service opportunities to both our partners and customers globally. Our Subscription growth continues to demonstrate the progress we are making on our business transformation efforts.

In Q1 '24, the Subscription portion of our total ARR increased approximately 78% year-over-year and approximately 9% sequentially in the first quarter to $14.6 million.

Finally, of note, we continue to see strong implementation of our subscription offering with over 89% of new customers on Subscription. Also, as we enter our first subscription renewal cycle, we are very encouraged by the progress we are seeing with a near 100% renewal rate in Q1 '24.

Now turning to Slide 9, let's review our first quarter GAAP results.

GAAP gross margin for the first quarter was 38.1% compared to 35.1% of revenue in the first quarter of 2023. GAAP net loss in the first quarter was $10.6 million or a loss of $0.11 per share compared to a loss of $10.6 million or $0.13 per share in the same quarter last year.

Now turning to Slide 10 for non-GAAP metrics. Non-GAAP gross margin for the first quarter was 38.3%, representing an over 280 basis point improvement, both sequentially and year-over-year.

Non-GAAP operating expenses were $35.5 million in the first quarter, down from $36.3 million year-over-year and down from the $37 million last quarter. Non-GAAP adjusted net loss in the first quarter was $4.8 million or a $0.05 loss per share, flat both sequentially and year-over-year. And finally, adjusted EBITDA for the first quarter improved to $800,000, which shows our ability to improve our operational cost profile despite revenue coming below our expectations.

Our focus on improving EBITDA and total profitability will continue to center on our global cost reduction initiatives and our sales team's effort in driving more end-to-end,higher-marginsubscription-based solutions. We continue to anticipate our efforts will deliver sequential and year-over-year improvements in profitability even on a lower revenue base in fiscal year 2024.

Now please turn to Slide 11 for an overview of Debt and Liquidity at quarter end. Cash, cash equivalents and restricted cash at the end of the first quarter were approximately $25.7 million. Outstanding debt, split between Term and our Revolvers, was $106.4 million, of which includes $15 million in additional debt funding we secured during the quarter in conjunction with greater covenant flexibility. At quarter end, the company's net debt position was $100.6 million.

We remain focused on improving our working capital and overall cash conversion metrics as we drive towards being cash flow positive in the second half of fiscal year 2024.

Turning to Slide 12. I'll now review the company's guidance for the second quarter and fiscal year 2024.

First, we anticipate total revenue in the second quarter to be $80 million, plus or minus $3 million. This outlook was significantly impacted by the recent news from our largest customer.

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