Hello, everyone, and thank you for joining today's Quantum Fiscal Fourth Quarter and Year Ending March 31, 2020 Earnings Conference Call. As a reminder, all callers are in a listen-only mode. But you will have the opportunity to ask questions following today’s prepared release. For opening remarks and introductions, I am pleased to yield the floor to Mr. Rob Fink with FNK IR. Welcome, Rob.

Thank you, operator. I'd like to welcome everyone to the call. Hosting the call today remotely are Quantum's Chairman and CEO, Jamie Lerner; and CFO, Mike Dodson. Please be aware that some of the comments made during today's call may include forward-looking statements. All statements other than statements of historical facts are statements that could be deemed forward looking. Quantum advises caution in reliance on forward-looking statements. Forward-looking statements include, without limitation, any projections of revenue, margin, expenses, adjusted EBITDA, adjusted net income, cash flows or other financial items, as well as anticipated impact of the COVID-19 pandemic on Quantum's financial results, any statements concerning the expected development, performance, market share or competitive performance relating to products or service, and the expected timing of relisting of our shares, which has already happened. All forward-looking statements are based on information available to Quantum 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 risk factors and additional risk factors are set forth in Quantum's filings with the SEC, including, but not limited to, those risks and uncertainties listed in the section entitled Risk Factors in Quantum's quarterly report on 10-Q and Annual Report on Form 10-K as filed with the SEC. 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 law. Also, please note that on this call, the company will be discussing non-GAAP financial information. CEO and CFO are providing this information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States, or GAAP. You can find reconciliation of these metrics to the reported GAAP results in the reconciliation table provided in the company's earnings release. I would like to remind everyone that this call is available for replay on Quantum's website for at least 90 days. A link to the website replay of this call was provided in the earnings release, which is also on the company's website at investors.quantum.com. With all that said, I'd like to turn the call over to Jamie. Jamie, the call is yours.

Thanks, Rob. And thank you all for joining us on today's call. When I first joined the company a little over 18 months ago, we were a company in crisis. We are in the midst of a multi-year financial restatement process, we were subsequently delisted from a major national exchange, we hadn't released a new product in over 10 years, and the business had been in a long secular decline for many years, without a clear business or architectural vision. Putting key new leadership in place, we built a transformation strategy. And fiscal 2020 was a year in which we delivered on the first phase of our turnaround, with a focus on stabilizing the company and setting up for growth. To that end, I'd like to highlight some major accomplishments we achieved over the last year. We launched the StorNext F-Series NVMe storage line based on our own storage and software-defined block strategy. This new product line was a major contributor to the growth in our primary storage business that we saw in FY 2020. We established the top market position for tape and hyperscaler cloud environments. We continue to innovate in that area and view this segment as a growth driver for the business going forward. We completed the acquisition of the ActiveScale object storage business from Western Digital in March, our first acquisition in many years, and the reception from customers and partners has been extremely positive. This acquisition was almost immediately accretive to our operating results. We continue to recruit and promote top executive talent to lead our transformation. This included Regan MacPherson as our new Chief Legal Officer; James Mundle, as the new Global Channel Chief; and as a part of moving to a GM organizational structure, Ed Fiore as our new GM for our Primary…

Thank you, Jamie. Welcome to everyone who has joined our call today. First, I'd like to echo a few of Jamie's comments regarding our progress this past year, which has enabled Quantum to better weather the challenges of the COVID-19 pandemic. In addition to being more strategically focused, we are operating at a more appropriate cost level and capital structure that provides us the flexibility to see us through until our customer activity levels return to more normalized levels. Let's first review the full year financial highlights. Revenue for fiscal 2020 was essentially flat at $402.9 million despite a late March slowdown driven by COVID-19. The flat year-over-year performance was driven by a 3% increase in product revenue, with growth in primary storage and medium devices, partially offset by a decline in secondary storage systems. This modest increase in product revenue was offset by a similar decline in services, primarily due to reduced support renewals from the legacy backup customers combined with declines in royalty driven by lower unit volumes as the primary use of take -- transitions from backup to archive implementations. Year-over-year, gross margins expanded 120 basis points to 42.8%. Our progress reflects reductions in cost of service across a wide range of products, the sales mix weighted towards more profitable product lines. We remain focused on selling value rather than selling on price, while avoiding low-margin commoditized revenue. I will address the sequential quarterly decline in our gross margins as well as our near-term outlook later in the call when discussing the quarterly results. We improved our profitability across all key metrics due to careful expense management. We significantly reduced operating expenses as a part of our aggressive efforts to rebuild the earnings power of Quantum, we eliminated over $21 million year-over-year to $151.3 million or 38%…

Thanks Mike. We've come a long way in a very short period of time. The earnings power of Quantum is evident, though the short-term reaction to COVID will impact our results for the first half of our fiscal year. We're increasingly optimistic about the longer-term opportunities before us and believe the second half of this fiscal year will reflect the improvements we've made. We'll now be happy to answer any questions you may have, Operator?

Gentlemen, thank you for your remarks. [Operator Instructions] We'll take our first question from Craig Ellis at B. Riley FBR. Please go ahead, Craig.

Yeah. Thanks for taking the question. And thanks guys, thanks for all the detail on both the quarter and year. Mike, I just wanted to start with a few financial clarifications as it relates to some of the comments around guidance first. With regard to the COVID-19 issue, is there any impact to supply, or is -- are the things that you're seeing with respect to the crisis of demands related in the $73 million revenue guidance.

Yeah. I would say that the supply chain has been challenged. We've been able to address many of the challenges, but it hasn't -- I mean, definitely, the impact is more on the top line in our customers' demand than challenges from a supply chain.

Got it. And then nice to see ActiveScale off to a very strong start. Can you quantify the amount of revenue that was reported in the fiscal fourth quarter? And while we're in a macro environment here, how should we think about what a normalized revenue level would be for ActiveScale?

We don't break out separately product revenue or revenues related to acquisitions. I mean, as we had outlined on the call, we did recognize revenue right out of the chute, so there was a little bit of pent-up demand there. It's a business that we know very well. We have OEM-ed that equipment for years. We know the technology very well. So it's something that inherently was in our run rates historically. So the incremental addition is muted to a certain extent, I believe we were the largest OEM for Western Digital for that product. But I think it's fair to say it's not going to move our numbers as it relates to that product per se. I think some of the synergy that we're going to see out of that acquisition will be on the technology side and what we do with other products in conjunction.

Got it. And then moving maybe to some of the more strategic items and customer items, Jamie, if I could flip you. Can you just help us understand the tone of business in some of your different customer groups as we've moved through the calendar first quarter? Where were we when we started the quarter? Where are we now in areas like media, entertainment in areas like government, health care, et cetera?

Yeah. I would say the broader enterprise and probably, to a greater extent, in media and entertainment, there is a market change in behavior. And the behavior started with just a drastic slamming on the brakes of all spending. And then the first thing that opened up was, what I would say is monies for continuing operations. So -- but new projects -- so I would say in March, we saw just people hitting the brakes. April, May, as things -- COVID begun to normalize, we saw spending. And if you see much of the spending that we're anticipating this quarter is related to maintaining operations. And that's not just paying maintenance. That's also keeping systems running. So that would be buying more capacity, replacing older equipment to keep the system running so people are spending with us, particularly the installed base to keep all their systems that they bought from us running, keep them healthy, keep them have capacity, mainly the behavior that we've seen that is the shortfall is stopping of new projects, new projects for a new movie, or new projects for the start of a sports season, or enterprises looking to begin new projects in and around analyzing unstructured data. It's that new projects that really, I would say in April and May, we just didn't see activity on. I would say, in the last three weeks, we're beginning to see a return to activity of the large projects. I haven't seen us lose them that haven't gone to the cloud or gone somewhere else. I've seen them put on hold. I've seen people have checked in with us and say they expect to resume as soon as their operations resume. But we did start seeing signs of life in the last couple of weeks. We're seeing various television -- movie companies are calling us again to say, hey, we're -- we want to start talking about projects. Sports franchises have been reaching in saying, hey, we're looking at starting our seasons in limited ways, and we want to pick up projects as well as enterprises. There have been three groups that have been moving somewhat unaffected during this time, and that's been government, not just the U.S. government, but governments around the world have continued spending on both civilian and military projects. And the U.S. government has continued a little slower in their procurement, but for the most part, they are taking on big new projects and big capital expenditures and moving forward. I would also say, healthcare, including not just hospital, but bioinformatics, genomics, drug development, and life sciences, that whole segment has continued mostly unaffected during this. And finally, I would say the cloud operators and cloud providers have continued their programs with us and evaluations on schedule and undelayed. But I would say of the two forces, it's obvious from our projections that the people slowing down have outweighed the people -- or the smaller amount of people who've carried on unaffected.

That's extremely helpful color. And if I could follow-up just on one of the points, I think investors and the company have been looking for some hyperscale, some cloud customer expansion either late this year or next year. How does the company feel about the potential to broaden its customer base in that narrow, but quite large vertical.

Well, I would say, a number of things have developed. The first is our large hyperscaler had really told us they would -- were needing to slow down. They were having trouble digesting the equipment, finding places for it. That has unpicking up and we now have better line of sight into that, and that is rebounding. We have also had several new hyperscalers reach out to us and would like to begin advanced dialogue. One of them actually is taking equipment in an accelerated way to accelerate their trials. The trials that we have ongoing have moved to advanced stages where they actually have equipment -- new equipment, and they are testing it pretty vigorously. So, we're moving to -- moving off of the paper trial to actually physical equipment, on-premise, being tested, and integration work happening. And finally, we're starting to see more customers reach out to us and saying, I'd like you to build for us what you build for the cloud guys. We think have and are amassing enough data where we need our own internal cloud, be very large automakers, large branches of the national laboratories, and the government agencies, large genomic and healthcare and life sciences archive, we're just seeing a number of people saying, we think the data we have is big enough where we can cost to buy our own. So, our hyperscaler business is actually starting to expand into very large telco, very large enterprise. They need a slightly different product, but not radically different. So, that business, I would say, is becoming more robust. It also has a long sales cycle. But I think that long sales cycle is justified, because once a customer makes a commitment like that, it's probably a seven-year to 10-year commitment, minimum. So, the longer the -- the bigger the plane, the longer the runway.

Yes. That's interesting and sounds encouraging for the business. Mike, if I could just ask you a final question before getting back in the queue. Following the announcement on the – on the updated covenants that the company was able to achieve with its fund raise and the claw back elements and improvements in terms of the amount that can be clawed back and the reduced penalty. A question is, are there any restrictions on what you could do there? Is it possible to execute on that with an equity offering and with a debt element, or does it have to be just equity? Any color on how you might be able to utilize that claw back to the equity would be helpful? Thank you.

Yeah. I mean it's an equity claw back structure, so the thought is to issue equity. We can do up to 50%. And it was 25%, so we were able to double how much we can pay off with equity from that standpoint. Plus, we reduced the penalty. The penalty was 12% to use that equity claw back, now it's 5%. So we were able to double the amount that we could claw back and at a much lower penalty rate. So we felt really good about that – those changes in the amendments.

Mr. Ellis, thank you for questions today. Next, we'll hear from Eric Martinuzzi with Lake Street.

Yeah. I want to pick up on the credit facility amendment, the term loan amendments there as well. You originally – with the premium results in early April, you were talking about mid-May. Was it these changes to the debt facility that caused things to kind of run out a little bit longer, or was it more, hey, let's get a better feel for our business is where our FY 2021, is what FY 2021 is going to look like that drove the delay more?

Well, I think it was a combination of both, Eric. We initially – when we realized that COVID-19 was going to have a direct impact on our revenues late March, we want to get ahead of the game. We got waivers on the covenants, so that we could put a stake in the ground at that point. And then, we wanted to get more visibility what we believe next year would look like. We wanted to only do one set of amendments with both the term loan lender and the revolver lender. So it's orchestrating those two parties getting better – a little better visibility, at least, so that we could set the covenants, because we set them all the way through. And the other good news out of doing that was we're able to negotiate basically a holiday on all the covenants with the exception of an availability covenant. So we've got quite a bit of flexibility for a year as it relates to the covenant coverage. But it really was – it's just a lot to go through and it always takes more time than you think it will take, but we're very pleased on the final outcome.

Okay. I wanted to dive into the Q1 guidance and figure out what I can learn. The Q4 royalty revenue, I assume that was kind of at $5 million even. There wasn't – that to my mind, I think that generates debt throughout the quarter, and there's less of a big slug towards quarter end, correct me if I'm wrong there. But what should we be thinking about FY 2021, not just Q1, but royalty in general, because we do still have the need to, as you say in the press release, the short-term impact of the pandemic is not – growth of video.

Right. And I would expect there's going to be continued pressure on that line item. So that will be – that won't escape the impact of COVID-19 and it'll be impacted just as everything else is initially. We'd expect it to come back, there is bigger factors that are at play. It's – as the use of tape moves from backup to archive, we're in that transition right now. I think that's some of the pressure we see there as well as moving between generations is always a little difficult period to predict, but always puts pressure on it as well. So really, we've got two factors from a business standpoint that are impacting royalties on top of the COVID-19 backdrop.

Okay. And then, Jamie, big picture here, we have this, kind of, seismic shift with the arrival of the pandemic. Are there any -- it's pretty easy to focus on the negative, right? We've got a real pretty substantial down negative on the product. But have any doors been opened or any new markets? Have any of the verticals -- have you been surprised just in your pipeline analysis over the last, call it, 60 days since the prelim results came out…

Yeah. I mean, there's a lot that I'm pretty encouraged by. One is our U.S. Federal team is killing it. We are just becoming more relevant in unstructured data in the government, and that's everything from the national labs to space programs with NASA. We want to go to Mars with NASA. There's going to be a lot of imagery there. There's a huge amount of work, whether it's disease modelling, warfighter modelling. There's just a huge amount of work happening in the national laboratories. And every single thing that we do in our military is video attached. So, I just think that is a big growth area for us. I think the cloud is realizing that they are growing. They're growing in the pandemic. They're generating more unstructured data, predominantly video and photographs. And I'm seeing those guys not only stay on, but in cases accelerating the evaluation and the onboarding of our tech. I've also seen our -- what makes our storage fast is not the storage in all cases. It's the network, right? We allow data to go get to our storage faster than our competitors. It's not just that we can store it faster, but we can move it from where -- move the data to our storage faster. So I've seen a lot of acceleration where people are working remotely or working from home, and they're using our technology to accelerate data transfer from at-home or remote facilities. And so that use case is becoming more prevalent, and we're becoming more relevant. The other thing I've seen is we had talked about wanting to do more than media and entertainment, right? Okay, we're really good in movies. We're really good in television and sports, but we've got to be relevant in other used cases. And…

Okay. Well, I appreciate those green shoot highlights there of the pipeline. I'll seed the floor. Thanks.

Eric, thank you for your questions today. Gentlemen, we'll hear next from Chad Bennett with Craig-Hallum.

Great. Thanks for taking my questions. Mike, can you just speak to how you're thinking about cash flow relative to the $8 million loss for the quarter.

Yes, I mean, as I highlighted in our comments, from operations we basically netted out. And when we looked at the total use of cash over the whole year, you really could boil it down to our CapEx and our acquisition of ActiveScale. When we look forward, our cash flow breakeven is plus or minus $85 million. So we're still in a position where we'd expect to burn a little bit of cash next quarter. But that's why -- we've been able to get amendments to our credit agreements, have access to additional liquidity, as well as we've always had our $45 million line that helps cover the ebbs and flows, in particular, working capital. So it's something that we feel very good where we are today. We think we're positioned well. We can address any cash requirements that we see. And we can also fund, as we climb out of this, the working capital requirements to support growth. So we think we're positioned…

So the excess $20 million of liquidity, was that on the revolver side, I assume, or was that term?

No, that's term.

Okay. So, where is -- can you give us a snapshot of where the debt is today?

Well, its $20 million higher, right, than it was before the amendment. And you've got our balance sheet. So…

Okay. All right. And then just, obviously, we're in a pretty unique environment, to say the least. But considering your guys commentary on starting to see a pickup in the last couple of weeks on the enterprise side, and obviously, Fed seems to be doing very well. And I think you spoke about your hyperscaler, your existing customer starting to get back on track. Just, again, I know it's a tough environment to speak to this, but if we look at the September quarter, considering where June is going to be, would you expect better seasonality than normal for that quarter, or is it too early to tell?

We are…

I think -- Jamie, why don’t I take a first crack, and then I'll let you follow-up? But I mean, the visibility is very difficult, so it's hard for us to look forward. We do believe, as Jamie has been articulating, that when we do figure this out, we believe there is a pent-up demand. So you would think that you've got more business coming because of this pent-up demand at that point. But when is that point reached is obviously the big question.

Okay. Thanks so much

Gentlemen, next we'll hear from David Duley with Steelhead Securities. Please go ahead, David.

Yes. Thanks for taking my questions. It sounds like, when you talk about the trends in your business that things are getting better across some of your major categories. And so, is it safe to assume that June will be the bottom or the low point in revenue in this little cycle?

I mean, none of us have a crystal ball, but with the data in front of me today, I would say the bottom is behind us. And I would expect, at current course and speed, the September quarter will be better than the June quarter.

Okay. And as far as what the lead times go, what are your lead times for your secondary storage systems currently?

It depends – there's a bunch of different products in that mix, DXi, Tape and ActiveScale, so it depend what products. Our enterprise products from when we get a purchase order to when we shipped is two to four weeks. The longer lead time products are specialized, very large-scale systems predominantly for hyperscalers. Those have more of a, eight to 12-week manufacturing lead time.

Yes. Yes.

Okay. So your hyperscalers had long lead times. And so, you probably have some sort of indication from them…

They give us demand things...

Things are getting better in that particular business, you have to have some sort of indication from them since the lead times are so long that…

Right.

Okay. So this is…

They give us…

…based on, your gut feeling, it's based on what your customers are actually doing.

Yes. We get written demand schedules and manufacturing schedules going months into the future.

Now, is it just me but some of these guys is the big hyperscale customers, their revenue was up like 40% or 50% year-over-year on $6 billion and $10 billion numbers. I know that they're in digestion mode, but wouldn't you think that sort of increase in business would drive your key customer to be back at the table in a significant way here soon?

Yes.

That's all the questions I have now. Thank you.

Mr. Dodson, Mr. Lerner, thank you for your information that you shared with us today. We have no further questions from the audience. I'd like to turn it back to our leadership team for any additional or closing remarks that you have.

Well, I just want to thank everyone for today's call. And I hope you and your families are safe during these unprecedented times. And look forward to speaking to you guys next quarter. And then we'll be back on the phone in 90 days. So thanks, everyone.

Ladies and gentlemen, this does conclude today's teleconference. And we do thank you all for your participation. You may now disconnect your lines. And we hope that you enjoy the rest of your evening.