Quantum Q2 2025 Earnings Call Transcript

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Provided by Quartr
November 13, 2024

Key Takeaways

  • Positive Sentiment: Non-GAAP operating expenses were reduced by ~9% year-over-year and restructuring actions are expected to deliver $40 million in savings by the end of FY 2025, underpinning improved profitability.
  • Positive Sentiment: Quantum projects positive free cash flow in the back half of FY 2025 and full-year cash flow positivity in FY 2026 for the first time in five years.
  • Positive Sentiment: Trailing 12-month Annual Recurring Revenue reached $146 million (51% of total revenue), with subscription ARR up 28% year-over-year to $19.6 million and 88% of new unit sales on a subscription basis.
  • Neutral Sentiment: Q2 backlog climbed to $14 million, about $4 million above typical levels, reflecting ongoing supply-chain lead-time challenges for high-speed all-flash systems.
  • Positive Sentiment: New product momentum continued with strategic wins for the DXI T Series all-flash appliance, the launch of the Scalar i7 Raptor tape solution, and growing deployments of Myriad and ActiveScale.
AI Generated. May Contain Errors.
Earnings Conference Call
Quantum Q2 2025
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good afternoon, and welcome to Quantum Corporation's 2nd Quarter Fiscal 2025 Financial Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note, today's conference call is being recorded for replay purposes. I will now turn the conference over to your host, Brian Cabrera.

Operator

You may begin.

Speaker 1

Good afternoon, and thank you for joining today's conference call to discuss Quantum's Q2 fiscal 2025 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.

Speaker 1

All statements, other than statements of historical fact, should be viewed as forward looking, including any projections of revenue, margins, expenses, adjusted EBITDA, adjusted net income, cash flows or other financial, operational or performance topics. These statements involve known and unknown risks and uncertainties we refer to as risk factors. Risk factors may cause our actual results to differ materially from our forecast. For more information, please refer to the detailed descriptions we provide about these and other additional risk factors under the Risk Factors section in our 10 Qs and 10 ks 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.

Speaker 1

Please note that our press release and the management statements we make during today's call will include certain financial information in GAAP and non GAAP measures. We include definitions and reconciliations of GAAP to non GAAP items in our press release. Now I would like to turn the call over to our Chairman and CEO, Jamie Lerner. Jamie?

Speaker 2

Thank you, Brian, and thank you all for joining us. Earlier today, we announced our results for our Q2 fiscal 2025. Turning to Slide 3, here are some brief highlights from the quarter. We finished Q2 'twenty five with $70,500,000 in revenue, GAAP gross margin of 41.5 percent and adjusted EBITDA approximately breakeven. Sales bookings and customer win rates were largely in line with our expectations as we continue our business rotation toward our long term initiatives and growth of profitable revenue streams.

Speaker 2

This quarter's execution resulted in a higher than anticipated backlog of approximately $14,000,000 $4,000,000 above typical run rate. Evidence of our transformation can be seen in the progress of gross margin improving 4.90 basis points sequentially to above 41%, as well as non GAAP operating expenses being reduced by approximately 9% year over year. These actions contributed to our achievement of breakeven adjusted EBITDA for the quarter and have set a positive operating path towards EBITDA growth for the remainder of the year. Quantum continues to focus on business efficiency by enhancing operations and driving more automation into the business. Combined with this quarter's actions, our restructuring and operational improvements are expected to result in almost $40,000,000 in total savings as of the end of our fiscal year 2025 compared to fiscal 2023.

Speaker 2

These actions are also improving our free cash flow, which is expected to be positive in the back half of fiscal year 2025 and driving fiscal 2026 to be cash flow positive for the first time in 5 years. Turning to Slide 4. Let me share some proof points to our go to market strategy and how our innovation agenda continues to center on accelerating future growth. First example is this quarter, a leading broadcaster in the Americas and an existing Quantum customer for over a decade selected Myriad and significantly grew their existing active scale environment with active scale cold storage. This deal also leveraged our Quantum Go subscription solution, highlighting our plans to empower our customers to innovate and allow them to focus on their data rather than their storage infrastructure costs.

Speaker 2

Another example of innovation yielding near term results is our new DXI T Series all flash data protection appliance we recently launched. We've had multiple strategic wins against competition this quarter based on its superior data reduction and recovery rates. These deals have been closing rapidly. The majority in under 30 days from deal discovery, demonstrating the critical importance of cyber resilience in today's market and the compelling value proposition that our DXI solutions provide. While our future growth is led by Myriad and ActiveScale, it remains important to maintain a strong base with our traditional data protection offerings.

Speaker 2

The Scalar i7 Raptor, our latest tape innovation to support growing AI use cases is now shipping under limited availability. Built to handle advanced AI workflows for hyperscale customers, MSPs and large enterprises, the Scalar i7 Raptor delivers the most efficient, dense and low cost solution for AI data lakes. Demonstrating its leadership in the market, we already have a multimillion dollar purchase order in house from 1 of the world's leading cloud platforms. These are just some examples of our go to market progress and how our innovation can help accelerate our growth. Now let me hand the call over to Ken for a financial update.

Speaker 3

Thank you, Jamie. Please turn to Slide 6, and I'll provide an overview of the GAAP financial results for our fiscal 2nd quarter. Revenue was $70,500,000 a decrease of approximately 7% year over year and down approximately 1% from the prior quarter. Sales bookings for the quarter were consistent with our overall business expectations as we continue to transform the company, even though operational headwinds related to the supply chain continued in the most recent quarter. The year over year decrease in revenue reflects lower contribution from our primary storage solutions.

Speaker 3

Backlog in the quarter remained elevated at approximately $14,000,000 and above our target run rate of $8,000,000 to $10,000,000 as higher supply chain lead times continue to persist. Our GAAP gross margin for the period was 41.5 percent compared to 43.3% in the year ago quarter and 36.6% in the prior quarter. The year over year driver was predominantly from revenue mix towards lower margin product lines. Sequentially, we saw higher margins due to operational efficiency gains and improved product mix. GAAP net loss for the Q2 was $13,500,000 or a loss of $2.82 per share, which included approximately $4,700,000 of onetime expenses related to our debt and restructuring activities.

Speaker 3

Importantly, we anticipate the one time related to our restructuring activities will significantly subside in the back half of our fiscal year. Now turning to Slide 7 for non GAAP metrics. Non GAAP operating expenses were $30,400,000 in the 2nd quarter, an approximate 9% reduction from the $33,300,000 last year and effectively flat against the prior quarter. This decrease in operating expenses was the result of our proactive actions to improve process and productivity, and we anticipate lower operating costs at or below these levels as continued cost actions begin to take hold in the back half of our fiscal year. Adjusted EBITDA in the second quarter was essentially breakeven at a negative $300,000 compared with a positive $1,700,000 in the prior year Q2 and a negative $3,100,000 in the prior quarter.

Speaker 3

This quarter's sequential EBITDA improvement primarily reflects the benefits of our operational cost controls despite revenue being at the lower end of guidance. As Jamie mentioned, we remain focused on streamlining our processes and enabling automation to reduce our Our focus remains on improving EBITDA and total profitability. Our focus remains on improving EBITDA and total profitability. EBITDA improvement over the coming quarters will be accelerated from not only our global restructuring, but from the rollout of our updated product portfolio and enhanced go to market model. An area of focus for us in particular is annual recurring revenue, where we anticipate our efforts will continue to deliver sequential and year over year improvements in profitability in the second half of FY 'twenty five and beyond.

Speaker 3

Moving to Slide 8, I want to provide an example of where our focus towards recurring revenue and subscription based selling is taking hold with an update of our annual recurring revenue and subscription metrics. Total annual recurring revenue or ARR for the trailing 12 months was approximately 51% of our total revenue at $146,000,000 with the gross margin on the combined businesses being approximately 67%. As a company, we continue to focus on our total ARR by maximizing our Quantum subscription opportunities in both our partners and customers globally. The best way to demonstrate our progress is through our subscription ARR, where in the Q2, the subscription portion of our total ARR increased approximately 28% year over year and approximately 5% sequentially to $19,600,000 with over 88% of new unit sales in the quarter being subscription based. Continuing this rotation and focus on ARR is a key element towards our long term business model.

Speaker 3

Now please turn to Slide 9 for an overview of debt and liquidity at quarter end. Cash, cash equivalents and restricted cash at the end of the second quarter were approximately $17,000,000 Outstanding debt split between term and our revolver was $104,700,000 $28,300,000 respectively. At quarter end, the company's net debt position was $114,600,000 Over the last several years, the company has had significant cash spend on one time consulting, a new ERP, updated infrastructure, new product introductions and restructuring expenses. We are pleased to announce that we are substantially complete with these efforts and anticipate the back half of FY 'twenty five returning to operating cash flow positive with a full year cash improvement year over year. Turning to Slide 10, let me close out with the company's guidance for our fiscal Q3 and an updated view of fiscal 2025.

Speaker 3

First, we anticipate total revenue in the 3rd quarter to be approximately $72,000,000 plus or minus $2,000,000 This reflects management's view of ongoing operational headwinds, including transition to a new manufacturing partner during the quarter. We expect non GAAP operating expense to be $31,000,000 plus or minus $1,000,000 reflecting aggressive cost reductions over the last 2 years. As a result, non GAAP adjusted net loss per share for the Q3 is expected to be negative $0.75 plus or minus $0.05 per share based on an estimated 4,800,000 shares outstanding. Adjusted EBITDA for the Q3 is expected to be approximately $2,000,000 While the Q3 'twenty five guidance at the midpoint is essentially flat year over year, the adjusted EBITDA guidance is almost $5,000,000 improvement from the prior year. Turning to our fiscal year FY 'twenty five outlook.

Speaker 3

While we are exceeding our expectations on product mix, gross margin and cost improvements, we need to continue focus on improving our overall revenue execution. We see improvements in second half of FY 'twenty five continuing into FY 'twenty six. However, having factored into our updated annual guidance the operating impacts in the first half and the Q3 outlook, with this information, we have adjusted our fiscal year FY 'twenty five outlook to a target of $280,000,000 plus or minus $5,000,000 with adjusted EBITDA expected to be $3,000,000 plus or minus $2,000,000 While our revenue is lower year on year at our current guidance midpoint, the operational actions we have taken have improved our adjusted EBITDA by almost $10,000,000 over the prior year. We have substantially completed our operational and infrastructure improvement efforts in the first half of fiscal twenty twenty five. And Quantum remains focused on returning to growth by driving new and innovative products into the marketplace, improving our customers' experience and leveraging our global footprint to improve our overall service model.

Speaker 3

We anticipate these efforts to yield growth in revenue, profitability and free cash flow in the second half of FY 'twenty five and beyond. With that, I'll now hand the call back to Jamie for closing remarks.

Speaker 2

Thank you, Ken. As Ken mentioned, our strategy remains intact as we reallocate resources towards high priority growth initiatives, particularly Myriad and Active Scale. The go to market approach for our new solutions is a key element of the company's growth strategy as we ramp up new cutting edge solutions. One area in particular that we're evolving is our sales model to focus dedicated sales resources on select product lines. This approach will enhance our geography based sales reps, allowing a deeper focus on how our growth solutions provide customer value, enhance support to our channel partners and expand collaboration with product management and marketing.

Speaker 2

Combining our latest innovations with these go to market enhancements is a key part of executing on our business model. These actions are already producing green shoots across our more modern products, while at the same time solving the critical needs of our customers in today's data era. We anticipate this trend to accelerate pipeline growth in the second half of our fiscal year 2025 and continue into fiscal year 'twenty six. In summary, we have completed the heavy lift on the operational model, we have fully refreshed our product portfolio and we are now actively engaged in reenergizing our go to market approach. All of these combined create positive momentum in the coming quarters and beyond.

Speaker 2

Thank you for your time today. Operator, we are ready to open the call to questions.

Operator

Thank you. We'll now be conducting a question and answer Our first question is from Eric Martinuzzi with Lake Street. Please proceed with your question.

Speaker 4

Yes. I wanted to touch on the revenue shortfall and the linkage with the supply chain issue. I understand the backlog at $14,000,000 is roughly $5,000,000 higher than what you guys would typically finish out a quarter with. But just given that you are aware of the issues, what steps did you take to try and correct the issue? And what's ongoing with trying to get that supply chain issue fixed?

Speaker 2

Sure. The way I'd characterize is the sales team brought in the purchase orders needed to meet guidance. As you know, some of the purchase orders come in late in quarter and we've been rotating our portfolio more to high speed all flash offers. And as you've been watching high speed all flash system, particularly those from Super Micro, have long lead times. So we've been finding that the lead times on SSDs and high speed servers that use SSDs just have longer lead times.

Speaker 2

And so we used to have about 2 to 3 week lead time on that type of server. Now it can be up to 10 weeks. Now one way we solve for that is we purchase them 10 weeks in advance, but it gets pretty dangerous buying a lot of that equipment in advance because your customer the configurations change during the quarter and you can end up buying the wrong equipment and have inventory you can't get rid of. So we're doing our best job to pre order systems, but we're not ordering them so far in advance that we end up with scrap material. So I think you'll see a little elevated backlogs for a period of time.

Speaker 2

But what I felt good about is the bookings were on target and all flash systems just have longer lead times right now.

Speaker 3

And we anticipated some of that, Eric, going into the quarter. It was just still way elevated from where we planned.

Speaker 4

Sorry, could you repeat that, Ken?

Speaker 3

Yes. We anticipated some of the longer lead times coming into the quarter. It just persisted much deeper than we had planned for.

Speaker 4

Got you. You. And your comment about the decline in primary storage, that is the same issue we're talking about here, right? It's not like the demand wasn't there. It was just we didn't we weren't able to fulfill the orders.

Speaker 3

That's correct.

Speaker 2

Our primary storage is where you see them predominant all flash systems.

Speaker 4

Okay. All right. And then you talked about some positive proof points in the business. Is there any metrics you can put around key performance indicators regarding Myriad and Active Scale, either revenue or number of units, just showing that progress between Q1 and Q2 and what's got you so excited about the back half?

Speaker 3

Yes. I mean, I'll start with I can start, Jamie, with the pipeline. When you look at the pipeline growth and what we're seeing, Eric, it's jumped considerably quarter over quarter. And we are seeing the focus from our teams and what we're seeing in the field of that growing into the second half and in FY 'twenty six. Jamie, anything else you want to add to that?

Speaker 2

Yes. I think the other metric that we're pretty proud of is we crossed over 1,000 customers on subscription with us, on subscription software.

Speaker 4

Okay. All right. And then the cash you had talked about Q2 that you were anticipating a challenging cash usage quarter that looks like the burn was about $14,800,000 You also said that's going to reverse that we'll get to positive free cash flow in the back half. Is that do you have a dollar amount for Q3 that you're targeting as far as cash from ops?

Speaker 3

No. We're not putting this exact number out there, but the signpost that we want to give to folks is, if you think about the CapEx spend that we've been talking about the last few years, particularly on putting a new ERP system in, having a new R and D facility, over the last two years, that's about $30,000,000 worth of CapEx one time. Then you add into the covered over Q1 and Q2. That covered over Q1 and Q2. That total cost is somewhere within another $15,000,000 to $20,000,000 spent.

Speaker 3

So as you start into the back half of the year and start looking to FY 'twenty six and you get out of those headwinds that we've had of refreshing our product line, refreshing our processes in our systems, restructuring globally to operate more effectively and efficiently, That's where you see the pickup in the back half of the year even at lower revenue levels. That's where you see the pickup on free cash flow doing cash flow positive as well as FY 'twenty six being a full year of positivity just from these actions we've taken.

Speaker 4

Got it. Okay. That covers the questions for me. Thank you.

Speaker 3

Thanks,

Speaker 2

Eric.

Operator

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

Speaker 5

Yes. Thank you. Good to see that bookings were where you were expecting in the backlog there. What kind of conversion rates relative to historical levels are needed to reach the breakeven free cash flow in fiscal 2H 'twenty five that you're talking about?

Speaker 3

Conversion rates on what I didn't understand the question.

Speaker 5

Of your pipeline, of the pipeline that you guys have developed?

Speaker 3

Well, yes, I don't know if I have an exact answer of 1 to 1. I can say that our pipeline is growing and our win rates, while they're slightly down from prior years, we expect that to go up. The way I really look at it is about the rotation of the product mix, right? Getting and slowing down the service declines year over year and getting that recurring revenue as we talked about on the call back up and guaranteeing that as well as getting a real new baseline of our OpEx. If you look at the cost downs we had, we're down 8% year over year on the OpEx side of things on a non GAAP basis.

Speaker 3

Those indicators are 2 great ones to say, if you can have a recurring revenue in an OpEx base that you can be near breakeven on your cash flow, then you start seeing the top line one time sales really carry and grow that. That's kind of the inflection point that we're in. So I don't have an exact number of pipeline to win rate to free cash flow. I look at it that even at these 200 if we stayed flat year over year at what we guided at a midpoint 280, we would be positive operating free cash flow next year is the best pinpoint I could give you. Understood.

Speaker 5

And then are you seeing different conversion rates of your pipeline by products, I. E. It's myriad at active scale has materially different win rates relative to your older products?

Speaker 3

Yes. So I think it's still early days to say whether they're higher or lower. I'd say active scale is on par with prior years. We did see a bit of a dip down in our enterprise tape business. That's why we're super excited about the i7 coming out and being a category killer to get those win rates back up.

Speaker 3

But everything else we're seeing flat to slightly up in every other category. But our traditional categories our legacy products tend to be

Speaker 2

DXI is significantly up and we think that trend is going to continue. Myriad is up just coming off a tiny base. But DXI is really a thing that's surprising us the most with our T10 and T20 all flash products. Those seem to be accelerating faster than they have in the past and accelerating faster than we actually planned internally. And I think a lot of it's just from the innovation we've been doing around the products when our larger peers in the space, particularly Dell, just there just hasn't been a lot of innovation or activity in their product lines.

Speaker 5

Yes. And when you said to refer to Dell, you're really referring to Dell's main products?

Speaker 1

Yes.

Speaker 5

Okay. All right. Got it. Okay. That's great.

Speaker 5

And are you guys expecting elevated backlog to persist into the March quarter? Because I believe that your updated fiscal year 'twenty five guidance implies typical March Q seasonality, which would beg the question, why wouldn't that be buffered with the elevated backlog that you have right now?

Speaker 3

Well, we're snake bit on that front in 2 ways going into this quarter. One is the we're expecting that those headwinds to persist where we thought they were dying down. The second one is we're doing a factory transition. We're consolidating our manufacturing operations into one new location, and that's happening at the end of the quarter. So we're buffering that along with it in our guidance.

Speaker 5

Okay. Thank you.

Operator

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Jamie Lerner for any closing comments.

Speaker 2

All right. Thanks everyone for joining us and we will be speaking again in 90 days. Thank you.

Operator

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

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