Good day, ladies and gentlemen, and welcome to your Quantum Fiscal Second Quarter 2021 Earnings Webcast. All lines have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Rob Fink of FNK Investor Relations. Sir, the floor is yours.

Thank you, operator. I'd like to welcome everyone to the call. Hosting on the call today are Jamie Lerner, Quantum's Chairman and CEO; and Mike Dodson, Quantum's CFO. 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 that could be deemed as forward looking. Quantum advises caution in reliance on forward-looking statements. Forward-looking statements include, without limitation, any projection of revenue, margin, expenses, adjusted EBITDA, adjusted net income, cash flows or other financial items as well as the anticipated impact of the COVID-19 pandemic and Quantum's financial results. Any statements concerning the expected development, performance and market share or competitive performance relating to products or services. 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 the forward-looking statements, included unexpected changes in the company's business. More detailed information about these risk factors and additional risk factors are set forth in Quantum's periodic filings with the Security and Exchange Commission, including, but not limited to, those risks and uncertainties listed in the section entitled Risk Factors in Quantum's quarterly report on Form 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 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 the reported GAAP results and the reference affiliation table provided in the company's earnings release. I would like to remind everyone that this call will be available for replay on Quantum's website for at least 90 days. A link to the website replay of this call is also provided in the earnings release, which was available at the company's website at investors.quantum.com. With all that said, I'd like to turn the call over to Chairman and CEO of Quantum, Jamie Lerner. Jamie, the call is yours.

Thank you, Rob, and thank you all for joining us on today's call. On our last quarterly conference call, I stated that I believe the worst of the COVID-19 impact and disruption was behind us. The results of the second fiscal quarter support this. Our results in the second fiscal quarter exceeded our forecasted outlook benefiting from the strength of our federal government business and solid sales execution. We experienced a gradual recovery throughout the quarter with purchasing and procurement activity ramping up across most end markets. There's some encouraging signs of our customers starting to spend again on new projects and new business initiatives. And while there are signs of lights and media and entertainment, we now believe the recovery in that industry may take more than one or two quarters, given how the pandemic has impacted movie and TV production and professional sports. We have expanded our salesforce to those industries that are growing during COVID. And as we expand our product portfolio this quarter, our story becomes even more relevant outside of our core media and entertainment markets. In response to the pandemic and the short-term volatility it created, we continue to maintain discipline with our expenses, while increasing our investment in research and development, to support the introduction of new software products. The 300 basis points sequential improvement in gross margin achieved during the quarter bolstered our adjusted EBITDA to $8.9 million meaningfully exceeding our guidance. Even with lower revenue levels, we are now a self-sustaining business. While the worst is behind us from short-term perspective, I'm even more encouraged with the progress we have made in continuing Quantum's transformation. At our Analyst and Investor day in August, we discussed the next phase of our transformation and laid out the strategy for how we will continue…

Thank you, Jamie. Welcome for everyone that has joined our call today. As Jamie mentioned in his opening comments, the second fiscal quarter of 2021 demonstrated the worst of the COVID-19 impact seems to be behind us. And our end markets are generally in a recovery mode. Revenue was $85.8 million in the second fiscal quarter, compared to $105.8 million in the year-ago quarter and exceeded the high end of our guidance we provided on our previous call. The year-over-year decline of $20 million or 19% was driven by lower revenues across all the companies vertical markets with the exception of the federal government business, largely due to the COVID 19 pandemic, as well as a fluctuating purchase cycle with our hyperscaler customers. Despite the fluctuating purchasing cycles with our hyperscaler customers to-date with the new hyperscaler customer starting initial production buys during fiscal 2021, we expect the level of business from the hyperscalers in the current fiscal year to approximate the prior year. While we are encouraged by the growth opportunities presented by the new hyperscaler customers, we are mindful that these customers are expected to have dual sourcing strategies for production buys, and each customer has a different cadence to ramping up their archive storage systems and their related data centers. Taking these points into consideration, we believe it could be a multi-year period to ramp the new hyperscaler production buys to full capacity levels that we have experienced with our long-standing hyperscaler customer. The gross margins in the second fiscal quarter were 45.1%, compared to 41.1% last year. Despite recording lower service revenues and royalties, both high margin contributors, gross margins expanded due to a more favorable mix of enterprise products as well as reduced repair costs in our service business. In total, operating expenses in the…

Thanks, Mike. In summary, this was a productive and encouraging quarter for Quantum signaling that the worst of COVID-19 is behind us. As we continue this transformation, our focus is on helping customers unlock the value of their video and unstructured data in a way to new it to solve their most pressing business challenges. While we transform our business model to drive more predictable revenue streams and expanded margins. My excitement at our potential continues to grow. With that, we'll now take any questions you may have. Operator?

Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] We will take our first question from Craig Ellis with B. Riley Securities. Please go ahead, sir.

Thanks for taking the question and congratulations on the very strong results. I just want to start with a couple of clarification and I'll start with gross margin, which was very strong, nice 300 basis point increase. Mike, was that entirely due to the mix that we saw inside of the products business, or were there other factors at play? And if so can you just give us a breakdown of what the contributing factors worked about big sequential move?

Yes. I mean, it was within our product group. We had just a very favorable mix and of course with a higher federal business that will always help our mix gross margin wise. So that was probably the biggest contributor toward the rich margin. And I would just, say that it's not necessarily sustainable when we look forward. But we are very pleased to have a strong performance this quarter.

On that note, Mike, is it fair to say that, we know that government seasonality is very strong in the September quarter, isn't typically a strong in the December quarter and it sounds like from some of the hyperscale commentary that that should be rising. So is it fair to say that mix would be working more against gross margin in the fiscal third quarter versus the tailwind that it provided in the second?

Yes, that’s correct.

Okay. And then a followup question and it relates to some of the hyperscale commentary and guys, thanks for really clarifying how you're engaged with a number of players there. Mike, I wasn't clear on your comments regarding revenue potential relative to an existing customer where you expressing that combined the three incremental hyperscale engagement could match that, or were you speaking to them individually potentially matching that level with the other customer?

No, I was grouping all the hyperscalers. So when we looked at our revenue from our legacy hyperscaler last year on an annual basis, we would expect this year the legacy plus the new customers that are just starting to ramp up would be consistent year-over-year in total.

Okay, got it. And then I'll just ask one more and then hop back in the queue. Jamie, there's a large player in the tape business that has recently announced that it's going to split its business. And it looks like its extracting managed infrastructure from software and hardware. Those types of things often create customer uncertainty and its real clear from Analyst Day. Quantum has established its own path and you're driving towards a different business model, but is that kind of thing create any incremental opportunity to neither your products business services or with what you'll be announcing with your next software release here on the 10th of November.

Yes, I mean, I can speak in detail to what our friends at IBM are doing. But I can speak about what we're doing. And at this stage, we are innovating in not just tape architecture, but in tape software, faster than anyone else in the market. We are going to be announcing in just 13 days not only do we lead the world in hyperscaler archive density and serviceability and electromechanical design of our robots. But beyond that, we're actually going to be providing the entire software stack that is needed to run that at exabyte scale. And we'll be the first vendor to come out with a complete multi exabyte scale software stack that can be literally rolled directly in production with cloud players. And so I think our speed of innovation is beyond anyone else's, IBM or anyone else in the archive space. I think our software integration and software innovation is unmatched. And that's why you see us, bringing up those R&D investments. We are cutting costs almost everywhere else, but we are increasing the costs in our innovation and our leadership position. So I think their issues at IBM are less about breaking the business apart. I don't see that changing their innovation cycle. I don't see that changing their velocity. And I think why hyperscalers are choosing us is just the speed of innovation, the rate of creativity and the breakthroughs – repeated breakthroughs in software are just making us the clear choice for the exabyte scale customer.

That's very helpful. Thanks, Jamie. Thanks Mike.

We'll take our next question from George Iwanyc with Oppenheimer. Please go ahead.

Thank you for taking my questions. So Jamie building on your comments on the software and the next generation opportunities, can you give us a sense of the ability to reach new customers with the type of development you're doing and the type of TAM expansion that's on the table as the software rolls out?

Yes, I mean, we've been very intentional over the last nine months that we have to reach a broader customer base. Our management team feels, and I think many people feel that this is a K shaped recovery. There are businesses that have been blessed by COVID-19 and businesses that have been put in a very tough and challenging place. And we've been shifting our sales to the businesses that are benefiting. And that is online business, online video. When you think about video, it is very hard for television and movie companies to produce new video. Yet, there's a huge amount of video on TikTok, Instagram, Facebook, and other online outlets, YouTube. And so we are realigning to a broader set of markets. We're realigning to a broader set of geographies, and we're putting our investments in the products that are most topically selling during this period. And that includes a lot of TAM expansion for us. We put new leaders into Europe. We put new sales leaders into Europe. We put new sales leaders into Asia. We have begun adding more enterprise sellers, not just media and entertainment focused sellers, but broader, skilled people who can sell into the general enterprise. And I think host our announcement in November in 13 days, we are going to have a portfolio which is much more broadly applicable. We’re launching an entirely new file system that is applicable in every enterprise there is. It is not just for movie making, or just for very high-end video, it’s a broad-based enterprise platform. And I think this reduces our risk by being over rotated into any one vertical and drastically increases our TAM size. So it's pretty exciting. We've been recruiting a lot of new channel partners beyond our traditional channel partners that have different geographic reach and have different vertical reach. And those verticals include assisted and autonomous driving, video surveillance, life sciences and healthcare, as well as just general enterprise. And the feedback we've gotten so far is very encouraging. So more to come in 13 days.

Okay. And just briefly following-up on that go-to-market transformation that you're talking about, can you give us a sense of how healthy the lift in productivity from a sales perspective and the overall pipeline plan is?

Yes, right now we measure our future quarters with a variety of metrics that include the creation of new opportunities, it includes a number of RFPs we receive, it includes an analysis of average deal size, how large are the deals that we are bidding on, how many deals are we bidding on, how many new people are reaching out to us. And right now that is just shy of our historic highs. So we're not – and exactly back to the highs we once were at, but fairly close. And what it is, is it is activity in new markets, new segments, new geographies that is starting to accelerate our business. And I expect that just to continue to grow as we head into the spring and into the summer. I think it will have a drastically larger pipeline we're working over the next several months. And the trends have been pretty steady over the last six months. And again, post November 13, I think, we just, we appeal to a much broader set of customers than we historically have.

Thank you.

Next, we'll go to Chad Bennett with Craig-Hallum. Please go ahead, sir.

Great. Thanks for taking my questions. Nice job again on a really good seasonal quarter guys. Jamie, I just want to follow-up comment that you made and just to clarification and maybe elaboration on it. And you talked about newly developed primary storage system that would start shipping in fourth quarter, and I believe that's attached to, or connected to one of your newer hyperscaler customers. I guess first is that correct? And then can you, at least it sounds pretty interesting to me at least elaborate kind of what type of, kind of use case or innovation that's bringing to them?

Yes, I guess my point is we're not just a one-trick pony to the hyperscaler. I think most of what we talked about is selling enormous tape libraries to the hyperscaler. We've moved beyond that and they are buying other technologies from us. And I think that's encouraging. And more encouraging is those primary storage technologies they're buying from us. The core reason, the core differentiator is what they are buying from us is software. And that has been a key goal over the last two years that we want to appeal to our customers with multiple products and we want to increasingly appeal with software-driven, software-defined, or software-led products. And we are in the middle of that with one of the hyperscalers, actually two of them, one of them we're giving them a new primary storage product. And one of them is not just buying tape hardware, but is buying the management and all the storage software with it as well. So we're really reaching out beyond just selling large quantities of hardware. And those…

And Jamie, this includes and is more than StorNext?

Yes, it doesn't include StorNext. It’s a…

It does not?

No, it's a different product.

Okay. very interesting. Okay. And then maybe just an update on next-generation LTO. I think we're onto 10. Just timing there and then Mike could probably handle that also. But just how you expect the royalty piece to flow over the next couple of quarters if you can give that type of visibility there?

Well, I can give a little update. For those of you who follow the LTO world, LTO-9 is lite. And probably as pursuant to my comments earlier on IBM, they are late and they are quite a bit late. So that will, I think, delay any LTO-9 uplift that anyone may have expected, and that will push LTO-10, which is probably about two, two-and-a-half to three years away, I mean it pushes that out as well. So I mean that obviously has us concerned. And increasingly we've been designing our business. I think this quarter is a great example where we're not dependent on that trust fund. We're not dependent on that royalty. So we are increasingly designing the business that we can meet all our revenue objectives, all of our margins and earnings objectives on our own steam. And increasingly looking at the royalty as upside, as we have gone through the lawsuits between Sony and Fuji, and now the delays and all the knock on effects. We have really changed our thinking just two years ago where it was something we were really highly dependent upon. And as you've seen while we've had record lows in the royalty, we've been having record highs in our margins. And it just shows our management team's strengths of how we're running the business. And just to break that reliance on something that we just don't control. So in our models, we've kept it very conservative of what our expectations are on the royalty. And Mike, I don't know if you have further comments.

Yes, I agree with everything that you've outlined Jamie. And when we look at our run rate, the last couple of quarters it's been $3 million and change. But we would be between a $ million and $4 million in the foreseeable future, unless something changes significantly. That's about where we would expect to be.

Okay. And then maybe just one last one for me, and maybe it's just an observation, potential confirmation by you guys. So Mike, you spoke about – it sounds like decently better than normal seasonality in the fourth quarter, the March quarter, and potentially even being up sequentially from the December quarter, which would be very good. But I mean, if we're talking that type of momentum directionally, I mean, we cross back into year-over-year revenue growth, but most importantly product revenue growth I mean, it has to move back into the kind of mid to upper teens to, to kind of have that type of directional revenue progress. Is that a fair assessment?

Yes, I mean, when you do the math and you understand that the royalty is lower, right, that the service business is more or less starting to level off and we're working really hard to increase that and take it off the golden glide, than we've seen over the recent past to continue to move north and to buck the trend of the seasonality that typically the Q4 is lower. That's a strong statement as far as how well our products are doing. And part of that of course, is we're just getting back to our historical levels, right. We're still climbing out of coming off the low at the June quarter due to COVID. So part of it is we're calling back out, but everything else that we've been doing to introduce new products, go into new markets, go leverage geographies, it all starts to come together as we can put more and more of the COVID impact behind us.

Great, sounds good. Thanks much.

Okay.

We'll take our next question from Eric Martinuzzi with Lake Street. Please go ahead.

Yes, regarding the operating expense expectation for the December quarter, you did keep a lid on expenses, the sales and marketing wise, but you are investing R&D. What should we be planning for as far as your operating expenses for December in comparison to the September quarter?

Yes, I would say that we'll continue to work to optimize that. I mean, two of the primary areas in general would be facilities and looking at understanding how we can better utilize the remote activity that we have through this pandemic time kind of leads us to be more efficient on the facilities, which takes more time to do that type of restructuring. But that's definitely will allow us to be more efficient on OpEx and then always the continued move to add people and grow our resources in more cost efficient areas. And to say it another way not to increase it in higher cost areas. So we'll continue that trend as well. But if you were to look at it by function, the G&A should be staying flat, you'll see sales and marketing go up because as our revenues go up, one other biggest variable cost is on the commission side. So I would expect sales and marketing to increase as our revenues increase. And then R&D, you won't see that go down and you'll probably see it gradually go up just because it's so important for us to maintain the innovation and keep moving new products out.

Okay. That's helpful. When you talk about the business where hey, Fed was great. And that was offset by COVID and then declining those COVID related impacts to your other vertical markets. You specifically talked about media and entertainment. Are there other verticals that are kind of on the wrong side of the K-shaped recovery, besides M&E that you're talking about?

I mean, M&E is the most obvious and the one that we're most known in. I think it varies, I mean, it varies. It's not like we have a heavy business in hotel and airline, but what we're doing is more intentional in that we've gone out and studied who on the top side of the K, is growing very quickly and has a lot of unstructured data, is in a geography that's expanding quickly and needs the products of the kind we have. And we are redeploying to those verticals. So those are online retail, particularly online retail that has a lot of videos. If you look at like home improvement sites, there's huge amounts of video that also includes social media that has a large amount of video and photography. It includes over-the-top video providers, video broadcasters, and life science research, drug development, genomic research. So we have been identifying the industries that are on the top of the K that use a lot of unstructured data, unstructured data that needs very high speed processing, as well as needs to be archived for many years. Autonomous vehicle makers also fit into that category and have been deploying our resources into those areas. And they are, while I don't expect media and entertainment to recover over the next, three or four quarters, it'll be probably depressed for another year. I expect that to be completely offset by these other areas that we're entering and all the data I’m seeing you are supporting them.

I understand.

You can think of it as we're just adjusting to a new normal.

Okay. And that's certainly captured in the outlook, I'm sure. Just a clarification on the share count, Mike, you talked about, hey, if we had had a positive net income, it would have been roughly eight million shares at dilution. Is that to say then, based on your guidance for Q3 here, where we're kind of bopping around breakeven on the adjusted net loss to be a $1 million plus or minus a million that if we're positive, then use that 48.3, or should we be modeling, kind of a creep in there alongside the 48.3?

Mike, you may be on mute.

Sorry that was – I just gave you a wonderful answer Eric.

And I almost heard it.

I was going to say, it's the conundrum you face when you're close to breakeven you are a little bit profitable, a little bit of a loss, and it's just a different – it'll be a different share count, depending on which side you end up, right. If you are loss, you don't bring in the dilutive securities using the treasury stock method. If you're a profit, you do. But it's kind of splitting hairs, because you're talking about a $0.01 one way or the other, right. But it's just the difference between the what number you use for a gain and what number you use for a loss.

Okay. And then obviously keeping the share price in mind as well. Okay, well that covers it for me. Thanks.

Okay, thanks Eric.

We'll take our next question from David Duley with Steelhead Securities. Please go ahead.

Yes, thanks for taking my questions. And congratulations on the revenue recovery. I guess the first question for Mike, you talked about how hyperscale revenue, I guess, will be flat this fiscal year versus last fiscal year, or is that a calendar number? And could you help us understand what exactly hyperscale revenue was last year?

Yes, sure. I mean, it is the fiscal year, fiscal year over fiscal year. And we don't break out. When we look at revenue by verticals, or by customer, we don't break that level of information now.

Okay. And then I guess you've portrayed having a couple of new hyperscale customers in the pool now that are starting their volume ramps or moving stuff into production. And you've talked about how the opportunity with these two other folks aren't nearly as big as your initial customer. For an assortment of reasons, I guess, dual sourcing and whatnot. But over time, once these two new customers ramp up, what do you think is kind of the TAM or opportunity for per large customer or any sort of metrics you can help us understand what your qualitative comments mean to an actual revenue figure going forward?

Well, again, we don't talk about individual customers, Dave, not that I don't want to answer your question. But what I did mention in our prepared remarks was we would expect, it could take years for these guys to build up to the same level that we've seen from our legacy customer. So it's definitely going to be something that will be gradual over time, and it's just very difficult to predict. Just on a standalone basis predicting one customer is difficult. And these guys will just ramp up over time. And will they be bigger, will they be smaller, it's just very difficult if not impossible to predict.

Okay. Now I guess you have a new product coming in 30 days you mentioned. I guess it's my impression and just listening to what you guys said about this, is this kind of a scale down hyperscale product for the enterprise. And just help me understand there's an awful lot of Fortune 500 companies, many more than the 10 or 12 hyperscalers worldwide. But how big of an opportunity to market do you think this can ultimately be for you guys?

Well, we're introducing multiple products on the 13 and multiple enhancements to existing products. And the TAM is I would just say it is much larger than what we do today. In the Analyst Day, we talked about potential TAMs, but I would say this is order of magnitude increase of the aperture of our TAM. This is a 10x widening the TAM from kind of traditional tape, hyperscaler tape, and media and entertainment. This is enterprise wide, hybrid and multi-cloud storage play. So this is – it’s irrelevant to cloud storage, it's relevant to on-premise, it's relevant to again, hybrid and it's relevant to any enterprise that's managing a large amount of unstructured data. And I would say as opposed to 10 years ago, I think, almost every major company today has petabyte or larger not just archives, but collections of structured data. And that is what we're trying to expand into. And we're starting that on the 13. It'll take – it's a multi-year journey. But we're coming at it pretty aggressively. And there will be a lot more product details. I don't want to scoop those product details now, but in 13 days it's not just one product we're announcing.

Okay. Final one from me is you made some commentary about the March quarter, not seeing seasonality, like you typically might. That's completely understandable given you're coming off the trough with the COVID. But I'm just kind of trying to pin you down a little bit more, do you think that means that revenue can be flat, or up, or will it just be down less than it normally would be?

Yes, the purpose of providing that guidance was to help everyone understand that what we typically see, we don't expect. So at the very least, what we're saying is it should be flat. But the visibility is just very difficult at this time.

And there is a typical sequential decline in the March quarter for you guys over whatever period of time that you think is relevant for us to measure this progress against?

Sorry, could you repeat that? I'm not quite sure I understand.

Yes, historically the March quarter is down sequentially versus the December quarter. What is the typical seasonal pattern of decline in the March quarter versus the December quarter?

Yes, I want to say that it was probably high single digits, low double digits in that range, but it didn't always follow that for different reasons, but it's just normal seasonal.

Okay. That helps me with this average number. Thank you very much. And congratulations on nice results.

Thanks Dave.

For our next question we'll return to Craig Ellis with B. Riley Securities. Please go ahead, sir.

Yes, thanks for taking the follow-up question. Jamie I wanted to go back to the analyst stay and kind of ask a question related to that, but also with the product announcement that's coming up in early November. So not to put the cart before the horse, but beyond what is going to be a very significant software announcement, what are some of the things that investors should have their eye on over the next three to six months that are milestones, that show that Quantum is on track with the transformation you identified at Analyst Day?

It may be longer than three to six months, but at some point in the transformation Mike will begin talking about the company using different metrics. And they will be the metrics of a software company and the metrics of a recurring cloud software company. You don't hear us typically talk about ARR, right. You don't typically hear us talk about TCV and RPO. And I think your queues and we do not know yet, and we're working very closely with our customers as we rollout this new business model. And we have to gather metrics, we're iterating, we're getting feedback and iterating and getting more feedback and making adjustments. We're very much doing this rollout hand in glove with our customers. And as it becomes significant, we'll begin talking about it again, using these new metrics, new measurements, new guideposts. And I think when Mike rolls those out into an earnings call will be the first signposts that the numbers are significant and we're starting to share them with the investment community. I think that may be longer than three to six months, but I don't think that's longer than a year.

That's helpful. On that note, Mike, with the upcoming software release it will be offered via subscription model, does that mean that we'll be looking at deferred revenue? And if so, how is that incorporated into the guidance that was provided for, I think, it was $93 million in midpoint revenue for the quarter?

Yes. I mean, when we look at our business in the near term, the expected financial impact is very minimal from the new products. So I would say that it wasn't much of an impact in what we looked at next quarter.

Got it. But six to 12 months from now, it should be a much more significant impact?

Yes.

That and other things like Storage-as-a-Service. Okay, got it. Yes, gentlemen, thank you very much.

Ladies and gentlemen, that will conclude our question-and-answer session for today. We'll now turn the floor back over to Mr. Lerner.

All right, well, thanks everyone. I know we are executing a profound, pervasive and somewhat rapid transformation. And I think it’s only appropriate given the time that we’re using this crisis to accelerate our transformation. And we will be working as hard as we can to get you guys the most up-to-date information, the most up-to-date metrics as we go through this. So hopefully, the next time we’ll talk will be on the 13, and then again at our next call. So thanks everyone for joining.

Ladies and gentlemen this does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time. And have a great day.