Quantum : Earnings Call Transcript FY 2023

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

QMCO.OQ - Q4 2023 Quantum Corp Earnings Call

EVENT DATE/TIME: JUNE 06, 2023 / 1:00PM GMT

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JUNE 06, 2023 / 1:00PM, QMCO.OQ - Q4 2023 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

John A. Fichthorn Dialectic Capital Management, LLC - Co-Founder and Portfolio Manager

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

Greetings. Welcome to Quantum's Fourth Quarter and Fiscal Year 2023 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 fourth quarter and fiscal 2023 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 facts 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've referred 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 our financial statements we make during today's call 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?

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JUNE 06, 2023 / 1:00PM, QMCO.OQ - Q4 2023 Quantum Corp Earnings Call

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

Thank you, Brian, and thank you all for joining us today. Earlier today, we announced our results for our fourth quarter and full fiscal 2023 with revenue results that exceeded the high end of guidance.

We are pleased with the revenue results. We feel good about the supply chain, and we're excited about recent product launches, but we have work to do in fiscal year 2024 to improve our bottom line results. Today, Ken and I will walk through actions we have taken to strengthen our company and deliver adjusted EBITDA of at least $20 million, as we described in our press release.

Turning to Slide 3. Here is a brief overview of the results from the quarter and the full fiscal year. We finished the quarter with $105.3 million in revenue, above the high end of guidance and an increase of 10.7% year-over-year.Non-GAAP gross margin of 35.5%. Adjusted EBITDA of $1 million compared to $400,000 a year ago, driven by higher revenue and improved operating performance.

For the full fiscal year 2023, we delivered revenue of $412.8 million, an increase of 10.7% year-over-year, primarily driven by strong demand from hyperscale customers and growth in our video surveillance business. Non-GAAP gross profit in fiscal 2023 was $147 million or 35.6% of revenue, primarily driven by a higher mix of low-margin hyperscaler business, along with inflationary cost pressures in our supply chain. And adjusted EBITDA in fiscal 2023 was $11.8 million.

Now turning to Slide 4. I would like to share some operational insights from the quarter. We exceeded revenue and EBITDA guidance in fiscal Q4 based on another strong quarter of hyperscale sales, a sequential increase in royalty revenue and improved operational execution. We had an incredible year of hyperscale sales with 2x revenue growth versus the prior year. As we discussed, that segment is characterized by generally lower margins. So, the hyperscale business has had a strong influence on our revenue and margin mix profile.

In addition to strong hyperscale sales, we are pleased with the progress we are seeing in our video surveillance business and improving our efforts to sell the full portfolio of products. We continue to see improving conditions internationally, and we are starting to realize the results of our transformation work, especially in the Americas.

As an example, we are seeing a higher volume of large deals becoming a bigger component of our revenue mix in the pipeline. As part of the sales transformation, we are directly engaging in larger "Enterprise" deals, especially in areas of repatriation of data back on Premise from Cloud providers. We also are extremely encouraged that our end-to-end portfolio of products is gaining traction, supporting AI/ML projects and expanding deeper to other verticals.

An illustration of this was a large-scale deal we closed in the financial sector at one of the largest banks in Asia and a [Fortune 50] (corrected by company after the call) company.

We are also working on several OEM partnership opportunities with global technology providers. Just this past quarter, we secured an ActiveScale OEM win at a global provider of video streaming solutions that will add to our subscription ARR in fiscal year 2024.

Expanding our solution footprint at existing accounts is a key part of our strategy. It is also notable that in fiscal Q4, we are selected by a West Coast Major League Baseball team to provide AI-driven analytics for their video and image content. This team is an existing Quantum StorNext customer, and we were able to drive a broader engagement with them to help them catalog, analyze and enrich their content to drive better fan engagement. This is a perfect example of our end-to-end strategy coming together and represents the opportunity in front of us to move from storing data to analyzing, managing, and enriching it to drive improved business outcomes.

These sales highlights are just an example of our sales transformation strategy. As we focus our execution to improve revenue mix, this includes growing Total Annual Recurring Revenue.

Another positive indicator in fiscal year 2023 was that we grew the subscription ARR by 81% year-over-year to $13.4 million in subscription ARR and over $22 million in TCV bookings. We anticipate our continued innovation will accelerate future growth of subscription ARR into new markets for us, such as the high-growthall-flash storage market.

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JUNE 06, 2023 / 1:00PM, QMCO.OQ - Q4 2023 Quantum Corp Earnings Call

Driving improved operational efficiency is another part of our transformation. Our supply chain continues to stabilize and improve with greater parts availability and at lower costs, and we expect that to carry forward into fiscal year 2024.

Also, our focused efforts to improve working capital and decrease inventory, yielded positive results to further strengthen our company.

As we execute our strategy, it is important that we operate our company to drive profitable growth. To that end, we recently implemented a global efficiency plan and worked with our lenders to improve our strategic flexibility by securing additional liquidity through an upsizing of our existing debt. Ken will discuss these items in more detail during his prepared remarks.

Turning to Slide 5, I would like to give you an update on our product innovation progress. On April 3, we announced Myriad, a new all-flash storage platform for the enterprise. This is a huge milestone for the company and introduces a totally modern software design to one of the highest growth segments in storage right now. The initial reception has been incredible, starting with phenomenal press coverage and positive reception from industry analysts and experts. We then showcased Myriad at the NAB trade show, which is the largest broadcast trade show in the world, with an opportunity for us to meet with our customers in this space.

The reception from our customers and partners has been outstanding. They were frankly blown away that Quantum has been able to develop an all-newsoftware-defined storage platform to address this space. And the innovation was recognized by the industry with Myriad winning 3 industry awards, including this year's NAB Show Product of the Year.

We also introduced the latest version of our Unified Surveillance Platform software at the ISC West Trade Show in March. The Unified Surveillance Platform is the culmination of our strategy to combine the best software innovation from Pivot3 with a totally modern software platform that can run on any hardware. The Unified Surveillance Platform has also been recognized with multiple industry awards and will be a key opportunity for us to build on the success we achieved in our video surveillance business this year.

With the introduction of Myriad and the Unified Surveillance Platform, Quantum now offers end-to-end solutions for the world's biggest unstructured data workloads, including AI and machine learning, corporate video for entertainment, branding and communications, video surveillance, massive data lakes for archiving and digital preservation and data protection.

Only Quantum offers solutions that cover the entire data life cycle from high-speed ingest and processing through "forever" data archiving, along with AI-enabled data cataloging and monitoring software for managing and enriching unstructured data.

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

Kenneth P. Gianella - Quantum Corporation - CFO

Thank you, Jamie. Please turn to Slide 7, and I'll provide an overview of the financial results, starting with our fiscal fourth quarter.

As Jamie previously highlighted, strong operational execution in the fourth quarter of 2023 drove revenue above the high end of our guidance at $105.3 million. This was approximately an 11% increase year-over-year, representing our strongest fiscal fourth quarter since fiscal 2017.

This growth was led by another strong quarter of secondary storage accounting for 42% of total revenue, up 1,000 basis points year-over-year on continued strong sales of hyperscalers.

Adjusted EBITDA in the fourth quarter was $1 million and above our guidance. This represents a 2.5x improvement compared with $400,000 in the prior year quarter, driven primarily by higher revenue.

Now turning to Slide 8, I'll provide a breakdown of this quarter's revenue results and the year-over-year trends.

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JUNE 06, 2023 / 1:00PM, QMCO.OQ - Q4 2023 Quantum Corp Earnings Call

Our presentation of revenue has been enhanced to better show the performance of our Primary and Secondary storage systems from both perpetual license and subscription delivery. Services on this slide is highlighted as our traditional Quantum Services only and does not include subscription.

Primary storage revenue was $14.4 million, down approximately 8% both year-on-year and sequentially. Secondary storage systems revenue increased 40% year-over-year and decreased 12% sequentially to $46 million or approximately 44% of total revenue. While our sales to hyperscale customers were down sequentially, the significant traction we have achieved in the hyperscale vertical continued with 62% year-over-year growth.

Looking at our Services business revenue in the fourth quarter was $29.9 million, down approximately 6% over year due to a continued decline in support renewal revenue driven by end-of-service-life on our older tape product lines. We anticipate the declines in Services revenue to begin to level off in the first half of this fiscal year.

Next, in Devices and Media, while there was some sequential improvement, revenue was down approximately $600,000 or 5% year-over-year.

And finally, Royalties in the quarter increased sequentially and year-over-year to $4 million.

Moving to Slide 9, I want to provide a review of our Annual Recurring Revenue and Subscription metrics.

Total Annual Recurring Revenue, or ARR, for the full year 2023 was approximately 38% of our total revenue at $155.9 million, with the gross margin on the combined business being approximately 62%. As a company, we are focused on improving our total ARR by maximizing our Quantum Service opportunities to both our partners and customers globally, combined with our strategic shift to delivering more of our solutions via software and service subscriptions.

Our Subscription offering is a strong proof point of the success of our business transition efforts. The Subscription portion of our total ARR increased approximately 81% year-over-year and approximately 20% sequentially in the fourth quarter to $13.4 million. Today, we have over 734 cumulative active customers with over 78% of our new software sales being subscription, up from only 25% in the prior year.

As a reminder, Quantum now has subscription offerings that span our full portfolio, with the exception of tape. Plus, we are very encouraged by the progress we are seeing in the renewal of initial subscriptions in early fiscal 2024.

Now turning to Slide 10, let's review our fourth quarter GAAP results. GAAP gross margin for the fourth quarter was 30.2%, which reflected the unique product mix that we discussed last quarter as well as a $5.3 million nonrecurring inventory reserve adjustment caused by pandemic-driven excess and obsolescence of certain inventory due to legacy products being discontinued.

GAAP net loss in the fourth quarter was $13.6 million or a loss of $0.15 per share. The increase in loss per share was primarily due to the previously mentioned gross margin, and as anticipated, higher operating expenses.

Now turning to Slide 11 for non-GAAP metrics. Non-GAAP gross margin for the fourth quarter was 35.5% compared with 38.4% in the prior year quarter and 36% sequentially. As previously mentioned, we had a large Life Sciences deal in Europe that was dilutive to gross margin, but a strategic account for us to grow long term.

Non-GAAP operating expenses were $37 million in the fourth quarter, which was flat year-over-year and an increase from the $34.5 million last quarter. The expected sequential increase was due to end-of-year commissions, seasonally higher payroll taxes and an increased investment in sales and marketing initiatives.

Non-GAAP adjusted net loss in the fourth quarter was $3.7 million or a $0.04 loss per share. And finally, adjusted EBITDA in the fourth quarter was $1 million and above our guidance.

Now turning to Slide 12, I'll provide brief highlights of our fiscal 2023 results. Full year 2023 total revenues increased $40 million or by approximately 11% to $412.8 million. Growth was driven by strong performance in secondary storage systems with our hyperscale customers.

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