Jamie Lerner - Chairman, Chief Executive Officer Mike Dodson - Chief Financial Officer Brian Cabrera - Chief Legal and Compliance Officer

Good afternoon, everyone! And thank you for participating in today's conference call to discuss Quantum’s Financial Results for the Fourth Quarter and Full Fiscal Year 2022. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Brian Cabrera from Quantum.

Good afternoon and thank you for joining today's conference call to discuss Quantum's fourth quarter fiscal 2022 financial results. I'm Brian Cabrera, Quantum's Chief Legal and Compliance Officer. Joining me today are Jamie Lerner, our Chairman and CEO; and Mike Dodson, our CFO. This afternoon we issued a press release, which you can access under the Investor Relations selection of our website at www.Quantum.com. We are using a slide presentation in conjunction with today's call and this is also accessible under the same section of our website. During today’s call our comments made include forward-looking statements. All statements other than statements of historical fact should be viewed as forward looking. These statements include any projections of revenue, margins, expenses, adjusted EBITDA, adjusted net income, cash flows or other financial items. These statements may also concern the expected development, performance and market share or competitive performance of our products or services. All forward-looking statements are based on information available to Quantum as of today’s date. We advise caution in relying of these statements as they involve known and unknown risks and uncertainties we refer to as Risk Factors. Risk factors may cause our actually results to differ materially from those implied by the forward-looking statements, including unexpected changes in our business. We include detailed information about these and additional risk factors under the sections labeled Risk Factors in our Quarterly Report on Form10-Q and the Annual Report on Form 10-K which we filed with the Securities and Exchange Commission. We do not intend to update or alter our forward-looking statements, 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. If you are unable to listen to the entire call at this time, we will make a recording available for at least 90 days in the Investor Relations section of our website. Now, I would like to turn the call over to our Chairman and CEO, Jamie Lerner. Jamie?

Thank you, Brian, and thank you all for joining us today. Earlier this afternoon we announced results for our fourth fiscal quarter and fiscal year 2022. I'm encouraged by the progress we made throughout the year, delivering growth in recurring software revenue, integrating three acquisitions to build out our portfolio of solutions for video and unstructured data, and resetting our balance sheet with the recently completed rights offering. Today I will talk more about the progress we are making in our supply chain and how we plan to improve Quantum's earning power going forward. Our fourth fiscal quarter revenue was up year-on-year and exceeded our preliminary results, and our backlog remains at near record levels. Our fiscal year 2022 revenue grew 6.7% year-on-year and we made significant progress towards building recurring revenue, exiting fiscal year 2022 with $7.4 million of subscription software ARR and $160.5 million in high value recurring revenue. The number of active subscription customers grew to 356, an increase of 290% year-over-year and we expect continued growth in the fiscal year 2023 based on all the work we have done over the last four quarters to transition our product lines. Earlier this quarter we completed an oversubscribed rights offering to strengthen our balance sheet by reducing debt and increasing our cash position. With the completion of the rights offering, we have reduced our net debt balance by two-thirds from just under $150 million at the end of fiscal 2019 to currently just under $50 million. In addition, we have reduced cash paid for interest expense from $24.3 million in fiscal year 2021 to an estimated $8 million annual interest expense in fiscal year 2023. Mike will discuss more about our balance sheet in his section, as well as how we have reset all debt covenants to more…

Thank you, Jamie. Welcome to the call today! During the current year we grew recurring software subscription revenue to a total ARR of $7.4 million, as we transitioned StorNext, ActiveScale, DXi and CatDV products to a software subscription model. We also completed two acquisitions that established us as a serious player in a multibillion video surveillance storage market. Also during the year we saw record breaking backlog driven in large part by the demands of our hyperscale customers that we were not able to fulfill due to ongoing supply chain constraints. So, fiscal 2022 was productive, but also a year with challenges. Our revenue although higher than the prior year was lower than expected, primarily driven by supply chain constraints seen by much of the industry, as well as the lack of a recovery for our U.S. federal business. Our gross margins were under pressure by unprecedented component prices and supply chain logistic cost increases, and to a lesser extent at less favorable product revenue mix. And finally, our operating expenses increased primarily due to the integration of the operations from recently acquired businesses. These factors contributed to a weaker than expected operating results and significantly lower EBITDA. Jamie has already touched upon our plans to address these challenges and I will go into more details later in my prepared remarks. In conjunction with our focus on driving the transition to a recurring software subscription model, we wanted to introduce the supplemental metrics that we will use to track and report our progress. The first key metric that we will be reporting is Annual Recurring Revenue or ARR. We ended fiscal 2022 with ARR at $7.4 million. The actual related revenue recorded for the year was $8.4 million. The number of customers under active contract at year-end was 356. Another…

Thanks Mike. Even as we navigated challenging global supply environment and an increasingly challenging economic environment, Quantum is well positioned to execute on our long term strategy. In the last three years we have built the leading portfolio of solutions for video and unstructured data that has dramatically expanded our addressable market. Our balance sheet is stronger than ever and we have reduced our debt and associated interest expenses by two-thirds. We have a strong base of $160 million of recurring revenue, and we have demonstrated the ability to grow our current software revenue across our product lines. And we are committed to our long term vision of becoming predominantly a software company focused on storing, protecting, archiving and enriching video and unstructured data in all its forms. With that, we will now take any questions you may have. Operator?

[Operator Instructions] Our first question is from George Iwanyc with Oppenheimer. Please proceed with your question.

Thank you for taking my questions. So Jamie, could you give us maybe a little bit more color on what you're seeing in the macro environment? Have there been any changes to the sale, linked in sales cycles? Are you having different types of conversations with customers in any region?

Yeah, hey George! Thanks for the question. I am seeing a more value oriented customer and what I mean by that is a customer – I think during the best of times people are left price and value sensitive and they want to be with what is viewed as the hottest start up or what is say, you know the widest hot trends. I'm seeing people returning more to value, where they are looking at Quantum as you know many of our products are value oriented. People you tape because it’s really good bang for the buck and really good value. People are looking at our compression technology in DXi, because again it compresses 20:1, so it's really good value. StorNext gives you flash like performance with a lower cost, disk based product, so again it's a value oriented technology, so I've – and I see that in the hyperscalers as well, where they are becoming more oriented for value. So in that sense I'm seeing the value oriented portions of the portfolio selling really well. Your i3 product is having record sales where I think more and more smaller companies are leveraging tape, both for its resilience to ramp somewhere, combined with the fact that you can get a lot of storage at a really aggressive price.

Okay. And that – may just building on that with the follow-up question. From a regional standpoint in Europe and Asia, are there any unusual dynamics going on there?

No. Europe continues to be really strong for us. The only areas that I've got a question mark on, one is U.S. federal. We're going – next quarter is you know the final end of the year for U.S. federal. Last year it was pretty soft, so it's going to be interesting to see federal spending returns to historic levels. In addition, we did have to walk away from about $1 million in revenue in Russia because of the changes there, but I don't think that was a big hit to us, but we did walk away from about $1 million in revenue to predominantly Russian television and media and entertainment outlets. And the area where we're just seeing tremendous growth is in China and I expect India as well, just given the populations are so large and growing so quickly and so we're putting a lot more energy into those regions, but I've not seen a macro slowdown in Europe.

Thank you.

Our next question is from Craig Ellis with B. Riley. Please proceed with your question.

Yeah, thanks for taking the question. This one has two parts to it, one for Jamie, one for Mike. Jamie you mentioned in your prepared remarks that this year your targeting EBITDA expansion via sales growth, operating expense reduction, margin expansion initiatives and supply chain strategy. Can you just speak qualitatively to how those would rank in magnitude relative to the EBITDA expansion you would hope to drive, and Mike since margin expansion initiatives were part of that, it was helpful to get your quantification around OpEx help. But can you help us understand what kind of gross margin expansion you'd expect in the back half of the year, since it sounds like it'll be pretty flat in the first half from current levels.

Hey Craig! Good to talk to you. I want to talk about how we're going to achieve EBITDA expansion before major programs. The first program is, we are looking to reduce our spending. We’re targeting roughly a reduction of $8 million annually. We've already actioned over $5 million of that or roughly two-thirds of that work is already done, and the remainder is in sight to try and get our adjusted OpEx roughly at $35 million. That's an important action. It's something we control completely and can execute and that's why we’re mostly already executed on that program. The second program as you know, we've implemented two price increases. I don't feel and I'm not seeing enough return from that. So we are contemplating a third pricing action, which could take place as a price increase, a discount reduction, there's a variety of ways to achieve it. But we are roughly around July 1 going to implement another pricing action to drive more margin, increased margin and offset continual price increases that we’re seen. On the sales expansion plan, our number one goal and that is to fill key territories where we are under-represented. So it's putting sales teams into the critical territories that we’ve historically driven the best sales and margin from, combined with changing a bit of our channel focus and a bit of our sales focus from niche sales in automotive, medical, media and entertainment, to more of a generalized enterprise focus, as our portfolio becomes more generally targeted to the enterprise. And then our fourth initiative is all about supply chain, reducing the broker buys, changing out bespoke components to more commodities, engaging with our critical suppliers and then vertically integrating more of the technology down in Mexico, so we don't need to ship it very far. We just build and vertically integrate as much as we can in Guadalajara and limit the amount of logistics required to build our products. We think those together, our first focus is to get back to a $25 million EBITDA run rate and then that's our first milestone and we would view that as we're healthy, and then the second milestone is to get to back to a $50 million EBITDA, where we view ourselves as prosperous.

Got it. And Mike, any color on second half gross margins?

Well, the second half, you know as we had said in the prepared remarks, the first half we expected to see a lot of the same pressure points. Hardly PPV which we’ve amortized – we’re going to be amortizing over the first half, so we're really – even though the underlying market is getting better there, we just have carryover of that. But we would expect that we’re at 38% margin now, steady improvement in the back half that would build EBITDA, build our gross margins and it'll be – it’s a 2 points matter, you know plus or minus to get into the low 40’s. If we're successful there is a lot of unknowns in dynamics. Obviously the inflationary cost environment is going to be a big driver for that. If that continues and we don't see much relief there, it'll just stretch it out a little longer.

Got it. And then the follow-up question on the number of subscription customers up 100 quarter-on-quarter, so Jamie that's 2x what the change was in the prior quarter, so real nice quarter-on-quarter gain, so good for the team. What drove that and what's the path for something that – you know I've had 750 in the back of my mind. This is the number we need to get to, to convert the installed base. How do we get there?

Yeah the – I guess there’s a good and bad in your question, meaning, the reason why it accelerated is we got several of our products moved from a perpetual model to a subscription model. And by getting more products on the model we're getting more customers. The challenge is we were – it was harder than we had expected to get those products converted, so they converted much later in the year. We had expected them to convert to subscription several quarters earlier, and be at a larger number than 356 at the end of the year. So we got the work done, we've done all the products converted, but a little later in the year than we anticipated. So now we're at the right run rate, so I think we're accelerating the way we want to be, just a little later at the end of fiscal ‘22 than we had hoped.

That makes sense. And within some of the objectives that you talked about on the earlier question, where would you expect or want the number of subscription customers to be when we exit fiscal ‘23?

I think we're thinking about it more in terms of the ARR, and I think we're still trying to figure out how that translates to customers, because we've done some ARR deals that are $2 million a year and we have some that are $2,000 a year, right, and they are both one customer. And so I'm thinking about it more in terms of the ARR. And we know we minimally want to double the ARR and we think we can do quite a bit better than that, but our focus is to minimally double and try and go beyond that in our ARR. And what that is in terms of customers, I think that's less clear [ph].

Okay, got it. Thanks guys.

Yeah, thanks Craig!

Thanks Craig!

Our next question is from Max Michaelis with Lake Street. Please proceed with your question.

Hey guys! Just one for me, it's about price increases. I know you guys said you guys were going to increase prices again here in July. Just wondering if you guys have gotten any feedback, maybe some push back from customers and have you seen any customer attrition from your first price increase? I believe it was last quarter.

Yeah, the short answer is no, and you know I think if I were to fault ourselves, I think we've been so sensitive about it that we've been too modest in the price increases. I'm seeing our competitors and the people we buy from increase their prices 10% to 25%, and we were much more modest than that. You know we increased list prices up to 15%, but then after we apply discounts and rebates and what not, it came to something much more modest in the low to mid-single digits, and quite frankly we've been not as aggressive as we have needed to be in that. So the price increases have worked. We haven't seen any churn, we haven't really seen any loss in business, but the opposite is we've been too modest and we need to turn those prices up more, given the amount of price increases we’re seeing in shipping, warehousing, trucking fees, chips, connectors, you name it, we just got to lift our prices more to just offset the prices that are coming into us and we're going to do that quite rapidly here.

Alright, thanks guys!

Yeah.

Thanks Max!

Our next question is from Nehal Chokshi with Northland Capital Markets. Please proceed with your question.

Yes, thank you. And it looks like bookings using shippable backlog was about $101 million, which is a little above what we were expecting. Still down a little bit, $3 million I think from the December quarter to $104 million. So what were the q-over-q downticks from a portfolio perspective for that bookings trajectory, albeit so very good I think.

Well, I'm not sure exactly where your pulling the numbers from, but what I would say is we have some enormous backlog expansion from predominately our large hyperscaler customers placing two and three quarter out orders on us. The idea being, if we placed a very large order on you, going out several quarters that will improve our ability to get supply and in our conversations with them, our conversation with our suppliers, that isn't getting quantum or getting the hyperscaler anymore material, just because they placed a giant purchase order on us. And so I think if you look at the graph that was provided in the power point, you'll see that the big out quarter orders are coming down a bit, because I think there's less motivation to place those enormous out quarter orders, and the part you see growing in the bookings or the backlog is the things that are shippable immediately, we just don't have the parts to ship. So it’s a higher quality backlog, because more of it is shippable immediately.

Yep, yep, so the cal [ph] comes from calculating the change in shippable backlog, from that particular slide that you're referencing, plus the revenue in the March quarter and its December quarter. So the shippable backlog was up I think $9 million q-over-q in the December quarter and $6 million q-over-q in the March quarter. We weren't expecting it to be up $6 million q-over-q in the March quarter, so that's why I'm saying, ‘Hey! That's better than what we expected.’ Yet it’s still down q-over-q when you look at the bookings, shippable bookings basically, so that's the question, and you know the question is, which parts of a product saw that q-over-q downtick in terms of the bookings.

Okay. Sorry, was there a question?

Yeah, the question is that from a bookings perspective, which we can back out based on that slide that you provide, shippable bookings perspective, bookings was down $3 million q-over-q. Much better than what we were expecting, but still down $3 million q-over-q. From a product perspective, which products were down q-over-q?

Yeah, I mean I think we really don't go into that level of detail on our bookings. I mean we know as we’ve shared you know where the revenue is and where the revenue strength is and where the revenue had declined.

Right, understood, understood. And what's – so it’s great to see the revenue outlook, as well as the statement of expected cash flow improvement for a full year. But what's your outlook for bookings, which is you know the true, rather shippable bookings which is you know the indicator for demand as opposed to supply here?

Well, I guess…

We provided guidance on booking.

Yeah okay, understood, alright. And then the $25 million milestone, what's your thinking on timeframe for getting to that annualized level?

Yeah, I mean we haven't provided annual guidance on EBITDA margin or revenue at this point, there's just too much uncertainty. You know our goal obviously is to get there as fast as we can. I think it's going to take quarters to get there. I have every confidence we have everything at our disposal to return to that level, but we are not providing EBITDA guidance at this point. There's just too much uncertainty.

Uncertainty, yeah.

Yep, yep, especially in the context of the four levers that you're talking about, certainly I understand that.

Yeah.

Okay, and then can you give a specific update on the Pivot3 video surveillance asset purchase?

Yeah, that business is performing quite well. We've closed now multiple million dollar plus deals with U.S. Federal Agencies, with large universities and school districts. One of the world's largest shipping and logistics companies did an enormous purchase with us, so I think it's going well. I think for us to break out will be that selling video surveillance becomes part of everything Quantum does. Today we have a specialist team that can sell it really well. What we need is the generalist team, the 200-plus sales people we have to all sell it to their customers versus a specialist team and that's going to take a while for everyone to fully understand how to sell that technology, how to explain it, how to be comfortable engaging with our customers and that's one of our big goals for the year, is move it from a specialist sale to a generalist sale, and we think that's going to allow us to expand. I think the margins of that business have been really good, better than we expected and the traction through the acquisition has maintained pretty steady. Sometimes an acquisition can destabilize a business for a period of time, and we've seen sales be pretty steady through the whole transition from Pivot3 being independent to being part of Quantum.

Great! Thanks for that update.

Yeah.

Thanks Nehal.

Our next question is from David Duley with Steelhead Securities. Please proceed with your question.

Yeah, thanks for taking my question. I think in the past you mentioned that you had a critical IC component shortage in your tape storage business. I'm just wondering when would you think that that particular issue will be solved? And are you waiting for that particular customer to add capacity, which I'm guessing that would be calendar year end before that problem is solved, or have you been able to shift the designer or shift the manufacturing of that product to a different source?

Okay, I think what we're talking about is the tape drive.

Yes.

And that is only made by one company in the world, so there are not alternative suppliers. We engaged very deeply with this supplier. I personally fly out to meet with them, with other executives, and I would say the relationship is really strong. I would say that the communication and transparency is better than it's ever been. But at the same time, they are making that product or a pretty large amount of it in China. There's all the issues that we know about in China, so they are not clear to build in volume. They are under very constrained volumes. I feel comfortable we're getting a high quality allocation of the volumes that they are making. I think those allocations are going to go up, and I think they are taking the steps that they need to take to bring their volumes up. And they're still telling us, while we're constrained now, they believe they can meet our demand for the year. Now clearly they're not meeting our demand now, but they think they can pick it up in the subsequent quarters this year to get us at or pretty close to our full demand, we'll see. But so far I'm pretty encouraged with what I'm hearing, but we are in a situation where we have to work very closely with the supplier, because there are not alternative suppliers for this component.

So that chip design cannot be ported to a different manufacturer?

The subcomponents can, yes. So the components that are constrained inside the drive, they are looking at alternative suppliers, they are changing out chipsets, they are looking at alternative ways, they are now manufacturing in multiple countries. So they are taking the steps, but like a lot of us are seeing, you move from one ship that's constrained to one that isn't, and just about as soon as you do that, that chip you move to becomes contracted. I mean because all of us are doing the same thing. We're all flip flopping from one chip to another to find supply and just about everyone's getting constrained.

Okay. Now as you mentioned, hopefully in the back half of this year, this particular supplier picks up its supply to you of this component for your tape drives, and I assume what that would mean would be is you would then sometime in the back half of this calendar year or the first part of next year, sometime in that time frame you would be able to ship to current demand from hyperscale customers and shrink this little backlog that they’ve built.

Correct.

Your right, yeah.

Okay, that's it from me.

Okay, thanks Dave.

We have reached the end of the question-and-answer session, and I will now turn the call over to Jamie Lerner for closing remarks.

Yeah, thank you. Listen, I want to thank everyone for the support of Quantum. Many of you on this call participated in our rights offer and I want to thank you for that. Thank you, your show of support of the company and I feel like we've got strengthen in our balance sheet. I got to say, the timing of the rights offer was pretty excellent given that capital is getting more expensive and more constraints. So I think we have the capital we need. I think we've got the portfolio we need and we're taking the very aggressive steps to get back to the levels of EBITDA that our investors expect, and I have every confidence we're going to get there. So thank you everyone, and given how late we are in this call given our end of year, we’ll be back on the conference call in six or seven weeks with Q1 results, so we’ll all speak then. Thank you.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.