Good day, ladies and gentlemen, and welcome to Quantum fiscal year first-quarter 2020 earnings call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Rob Fink. Sir, the floor is yours..

Thank you, operator. I'd like to welcome everyone to the call. Hosting the call today are Quantum's Chairman and CEO, Jamie Lerner, and CFO, Mike Dodson. Please be aware that some of the comments made during this call may include forward-looking statements.

All statements other than statements of historical fact are statements that could be deemed forward-looking. Quantum advises caution and reliance on forward-looking statements.

Forward-looking statements include, without limitation, any projections of revenue, margins, expenses, adjusted EBITDA, adjusted net income, cash flows or other financial items.

Any statements concerning the expected development, performance, market share or competitive performance relating to products or services and the expected timing of relisting securities on the national exchange. 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 risks and additional risk factors are set forth in Quantum's periodic filings with the Securities 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 Securities and Exchange Commission.

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 applicable 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 US, or GAAP. You can find a reconciliation of these metrics to reported GAAP results in the reconciliation table provided in the Company's press release.

I would like to remind everyone that this call will be available on Quantum's website for at least 90 days. A link to a website replay of this call is also provided in the earnings press release and is available on the Company's website at investors.quantum.com.

With all that said I would now like to turn the call over to Quantum's Chairman and CEO, Jamie Lerner. Jamie, the call is yours..

brought our SEC filings up to date; reconstituted Quantum's Board with high quality directors providing meaningful [governance] and leadership to our Company; removed 73% of the vice president and above executives and, after some limited rehires, shrunk senior management by 45%. Today's team is that streamlined and highly experienced.

Recruited over 10 new executives from the best organizations worldwide to comprise our new executive leadership team, including a new Chief Executive Officer, Chief Financial Officer, Chief Revenue Officer, Chief Accounting Officer, Chief Information Officer, General Counsel, VP of Supply Chain, Corporate Controller and Director of Internal Audit.

Adopted new business priorities, standards and governance practices focused on ethical business practices and strategic initiatives to drive margins based on selling unique and defendable intellectual property versus reselling third-party technology.

Eliminated over $70 million in annualized operating service and supply chain expenses including a reduction of over 300 employees. Completed a $210 million refinancing of the Company to provide more liquidity and flexibility. Overhauled the sales compensation plan to reward our sales team based on margins as opposed to top-line revenue.

Curtailed reselling low margin third-party products aimed at boosting revenue at the expense of margins. Gross margin improved 3 percentage points year-over-year. Met the challenges of the financial restatement effort required to address decisions made by the previous executive management team.

As Mike will discuss shortly, the impact of the financial restatement was nearly exclusively related to the timing of the revenue recognition. Settled civil litigation related to the restatement, which includes the derivative case and the class-action case and all settlement amounts are covered by insurance.

While we've been strengthening the Company's financials, we've continued to innovate at a rapid pace to take advantage of the emerging market opportunities in video storage infrastructure. These are the core technology and product accomplishments and advancements we've made.

We have capitalized on tape's emergence as a key technology for long-term cold storage with both hyperscaler and enterprise customers. These hyperscalers are using tape as the basis for cold storage in the cloud because tape is anywhere from one-third to one-sixth the cost of alternative storage technologies.

This is a significant new market opportunity for tape and requires a very different architecture compared to traditional tape backup. Quantum has been established as a leader in this new market for tape and expects this emerging opportunity to reverse the historic secular decline of the enterprise tape backup market.

Speaking of our tape business, as announced just last week, the LTO media manufacturers have resolved their long many years' dispute that has been affecting supply of LTO-8 and other LTO-8 media generations and creating headwinds for our royalty revenue streams.

Going forward, we expect LTO media supply to return to normal, which we believe will drive increased royalties and increased demand for tape storage systems and media.

In April we announced the Quantum F series, a new line of NVMe flash storage arrays for editing, rendering and processing of video content and other large unstructured data sets based entirely on our new cloud storage platform software. This is Quantum's first release of an entirely new product in close to 10 years.

The NVMe storage market will grow significantly over the coming years as NVMe replaces traditional SaaS SSD arrays. And by leveraging RDMA networking technology we will also help our customers move from legacy fiber SAN environments to less expensive Ethernet networks.

The F series is in production with customers and is one of the fastest video storage and processing platforms available today. We also announced the VF series, a hyper converged platform for video surveillance recording and management of building systems to capitalize on the ongoing growth of the surveillance storage market.

This product is also in production with customers and is being resold by some of the world's largest surveillance integrators. The new Quantum R series is a line of ruggedized removable storage systems for in-vehicle data capture, mobile surveillance and military applications.

This ruggedized automotive grade edge storage platform can be installed in cars, planes, buses, trains and remote non-data center environments. Autonomous test vehicles are our largest use case for the R series today.

We are enabling all of our products with Quantum cloud-based analytics, enabling monitoring and configuration directly through the cloud; essentially connecting all of our products and our deployments to the Quantum distributed cloud.

We feel this will offer not only a significantly better customer experience, but also enables Quantum to shift to an as-a-service recurring revenue model for many of our customers.

These product and technology enhancements are all part of our larger strategy focused on video and video-like data with a renewed focus on driving high margins based on designing and selling products with unique and defendable intellectual property.

As we look ahead we see there is a substantial opportunity to drive further revenue and margin growth by moving to both a hyper converged and software defined architecture across our product portfolio; to value engineer our products to improve performance while reducing costs; and to increase the value of our software by making it more searchable, more accessible and more intelligent.

I look forward to speaking more about our progress in these and other areas as we go forward. Today Quantum is poised for sustainable and profitable growth with solutions that meet the needs of a large customer base both today and tomorrow. We have shareholder friendly and industry-leading corporate governance.

Our challenges are mostly behind us and we are excited for the future. I'd now like to turn the call over to Mike Dodson, our CFO, to discuss the financials.

Mike?.

tape storage systems represented 30%; high-performance shared storage represented 15%; device and media represented 12%; backup storage represented 5%; service revenue represented 32%; and royalties represented 6%.

Gross profit in the quarter was $45.8 million or 43% gross margin compared to $46.3 million in gross profit and 43% in gross margin in the first fiscal quarter last year. Total operating expenses were $43.1 million or 41% of sales compared to total expenses of $50.7 million or 47% of sales in the year ago quarter.

SG&A expenses declined 11% to $34.4 million compared to $38.5 million in the year ago quarter. R&D was $8.4 million, up 1% compared to $8.3 million in the year ago quarter. The Company incurred $8 million compared to $10.5 million in the year ago quarter for nonrecurring charges representing restatement and restructuring expenses.

The Company incurred $6.3 million in interest compared to $3.9 million in the year ago quarter. The net loss was $3.8 million or $0.11 per diluted share, compared to a net loss of $7.5 million or $0.21 per diluted share in the year ago quarter. Adjusted EBITDA increased 82% year-over-year to $13.1 million compared to $7.2 million a year ago.

I would also like to give some color related to our outstanding share count. First, when we record a loss we will only include weighted average shares outstanding excluding dilutive equity instruments like warrants and employ equity awards. For example, in the first fiscal quarter of 2020 the weighted average shares used was 36 million.

When we have net income we will use a share count that includes dilutive equity instruments. For example, in the first fiscal quarter of 2020 the fully diluted shares would have been $41 million. Also, included in our diluted share count are approximately 11 million warrants held by our current and former lenders.

Our headcount at the end of the first fiscal quarter of 2020 was 816. Now turning to the balance sheet, cash and cash equivalents were $10.8 million at June 30, 2019 compared to $10.8 million as of March 31, 2019. These amounts exclude, as of the end of both fiscal periods, $5 million in restricted cash required under the credit agreements.

Our long-term debt outstanding amounted to $146.1 million net of $16.4 million in unamortized debt issuance costs and $1.7 million in current portion of long-term debt. This compares to $145.5 million as of March 31, 2019 net of $17.3 million in unamortized debt issuance costs and $1.7 million in current portion of long-term debt.

Quantum also has a revolving credit facility that was not drawn down at either March 31, 2019 or June 30, 2019. Our financial performance in the first fiscal quarter of 2020 relative to the financial covenants in our debt agreements was very strong.

For example, for the trailing 12-month EBITDA covenants, the Company's performance was $10 million and $13 million higher than the two bank agreement covenants -- keeping in mind the bank agreements have a few differences in the EBITDA calculations than the Company uses to report our financial performance. Now turning to our financial guidance.

For the second fiscal quarter management expects revenues in the range of $99 million to $105 million. Excluding approximately $3 million in nonrecurring charges, we expect resulting adjusted net income to be in the range of $2 million to $4 million. Adjusted EBITDA is expected to be in the range of $10 million to $12 million.

For the remaining three quarters of fiscal 2020, Quantum expects total revenues to increase by $15 million to $30 million or 6% to 10% compared to the same periods in the prior year, with revenues from new products increasing as the year progresses.

Due to our tight cost controls and the Company's focus on improving gross margins, Quantum expects adjusted EBITDA to increase to a range of $50 million to $55 million or by 55% to 70% for the full fiscal year compared to the prior fiscal year.

So in summary, first I would like to reiterate how pleased we are to be complete with the financial restatement process and now current with our SEC filings. To put this incredible cash burn rate and management distraction behind us is a major accomplishment for the current management team.

Second, as Jamie and I have outlined, the transformation of Quantum is well on its way as evidenced by the establishment of the new strategy to lead video storage market by storing and managing video and image data across a wide range of industries; the realization of $70 million in annualized expense reductions; and our focus on gross margin improvement and revenue quality, not just on volume or what we describe as empty calories.

Third, the initial results of Quantum's transformation can be seen in the improved financial performance as evidenced by the significant growth in our adjusted EBITDA in fiscal year 2019 by $38 million over the prior year.

In addition, the first fiscal quarter of 2020 adjusted EBITDA of $13.1 million easily supports our current guidance of fiscal 2020 adjusted EBITDA of a range of $50 million to $55 million. With that let me turn the call back over to Jamie for closing comments..

Thanks Mike. Today represents the completion of a huge body of work and it is a major step for the Company as we transform.

I'd like to thank Mike Dodson, our CFO; our Chief Accounting Officer, Lewis Moorehead; the quantum finance team and all of our legal and accounting partners for the massive effort that has gone into completing the restatement process. We've made tremendous progress to improve the earnings power of Quantum.

We built a solid and stable financial base for the right leadership and governance structures. And we've put a renewed focus on driving high margins by designing and selling innovative products to solve the world's biggest challenges around video and video-like data. We're excited for the future look forward to sharing our progress as we move forward.

I would now like to open the line for questions.

Operator?.

[Operator Instructions] Our first question comes from Eric Martinuzzi from Lake Street. Go ahead, Eric..

Thank you. Congratulations on reaching this moment and closing this chapter. I'm sure you guys -- nobody's happier than I am to see you reach this point. It's been 18 months of question marks and we can solidly answer, will these guys get their SEC financials ever completed, and you have done that. So congratulations there.

I wanted to talk kind of people first and then product and then just recap the broad strokes here. So, you have had an awful lot of change on the people side. You've pulled 300 employees out of the business. You talked about some of the senior-level management changes that you've had.

Do you feel like you've got the team you need? Are there any other direct reports for you, Jamie that you need to bring on? And then where are we as far as the lieutenants and privates and further down the line?.

Yes, I think it's safe to say that we've made a lot of progress on our transformation, but it's by no means done. So, in the first year our goals were to stabilize the Company. So, it was really about survival and stability. So we put in a leadership team that we knew could turn the Company around.

Now as we emerge from that we're thinking less about surviving and we're thinking a lot more about thriving. So, I think were now beginning -- I think we have the core leadership team in place but we're starting to up-level the leadership team globally in pockets where we can begin to expand. I would say much of the hiring is around new functions.

Our video surveillance practice is new and that's new skills. Our NVMe practice is quite new. Some of our sales practices in autonomous vehicles are quite new. So, those require newer skill set from our traditional skills, so those are the pieces we are really filling in. But I would say the core leadership team is in place..

Okay. And then shifting over to the product side, you talked about some of the investments that you've made, the F-Series for the NVMe and the VF-Series, the R series, but as far as what rings the register, what's baked into that outlook that you've got? And by the way, I'm excited to be talking about Quantum as a growth company again.

But you've outlined a 6% to 10% growth opportunity here and where are we really ringing the register? Is it with a classic cold storage tape system to a hyperscaler? Is it the enterprise coming back online? Is it the median entertainment core? What's really ringing the register in that 2020 revenue outlook?.

When we put together our annual operating plan our thought was we should build the plan based on products, customers and selling patterns that we know well. So, I would say we put very little expectations and contemplation on new product sales into the AOP. I would view new product sales predominantly as upside.

Where we see growth is the expansion in both royalty and new tape systems based on the availability of LTO-8. The ever-growing expansions of our video customers driven by the higher fidelity video and the much more demanding video visual effects that we are seeing moviemakers, television makers putting into production.

And finally, the single biggest trend we're seeing is that tape has been invited to the cloud. Three years ago tape was not part of hyperscaler cloud architecture. Today it's part of every hyperscalers architecture. And the core reason is tape is simply the only economic way to store data at the exabyte scale.

And we have some hyperscalers that are north of 30 or 40 exabytes.

And all of them in the last year have moved from being questioning whether tape should be part of their architecture to I would say most every major hyperscaler is in some form of purchasing process or deployment process for tape, but it's very different than what enterprises use tape for. It is not a backup application.

It is a live data storage application for people storing data where they don't mind waiting a minute or 2 to see that data. They just want to store it inexpensively for 30, 40 or 50 years.

That tier of storage, including all the software that enables that, is a very new opportunity for us and that is I would say the largest driver of it at this point..

Okay then last question, just so I don't hog the microphone here. I've got plenty more but I'll limit it to three. The 2020 outlook, if I do the quick math based on the Q1 print and then the commentary in the press release, it looks to me like a top-line of about $420 million to $430 million for revenue for 2020.

Is that correct?.

Yes, that would be in the ballpark..

Okay, and then the $50 million to $55 million of adjusted EBITDA, that's margins in the range of 12% to 12.8%. Not to get nitpicky right out of the gate, but you're already about 12.4% here in Q1. Q1 is historically your most challenging quarter.

Where are we -- I guess maybe where we are investing the incremental dollars here? Because I would expect the revenue growing sequentially, some EBITDA margin expansion, but we are not guiding for that out of the gate so we must be investing.

Where are we investing?.

I would say you're correct in that we do have a certain level of seasonality. So, any one year is not going to be linear. Or if we are growing, it's not going to be linear. To the extent we have those types of variations quarter to quarter, and it really doesn't impact our investment decisions on a longer-term basis.

So, when we put together, for example, our annual operating plan, we have programs in place that will just run through the year, understanding that the revenue may ebb and flow a little bit given the seasonality, but it doesn't really impact our investment decisions on a quarterly basis..

Okay, I'll leave it there. Thanks for taking my questions and congratulations again on getting back to up-to-date SEC filings..

Our next question comes from Chad Bennett from Craig-Hallum. Go ahead, Chad..

Hey, guys. Thanks for taking my questions. I would echo Eric's sentiment, finally getting through this. I know it's been challenging and, quite frankly, the numbers around EBITDA earnings power and just your ability to sustain the business in the midst of transforming it under the hood I think are eye-opening. So, kudos to you guys.

So maybe just a follow-up, I think on one of the questions previously on the new products. And maybe even more broadly, Jamie, and I know you touched on it in the call.

But I think everybody that's known the name in the past have really, if you've dug into it, there's some hidden software capabilities within this Company that I think have been underappreciated or leveraged for some time.

So, I know you've transitioned especially around the product portfolio around software defined products or software defined storage and cloud-based storage. Can you give us a sense of where you are in that journey, Jamie? And then maybe I think the previous question he might've touched on it.

But what are your expectations for the new software defined products looking out 12 months if you can -- I know we're just getting into actually having expectations, but how should we think about that?.

Yes, I mean -- well first of all, you are absolutely right. This Company has a huge amount of software that it's very hard to sell it, appreciate it, monetize it when it's bundled with a box. So, we've been thinking about our financial strategy in light of our architectural strategy.

So, architecturally one of the first things we have to do is separate the software from the hardware. That's why we're just completely obsessed about all of our products being software defined, that they can run on any box.

So, if the US government wants to buy from one server vendor in China they buy from another server vendor, we are not in any way tied to them. So, every single product in this Company is in some form of transformation to being fully software defined.

That's why when you look at our new products like the VF-Series, the F-Series, those new products are totally software defined. Secondly, we are then moving to hyper converging that software. What that means is that software doesn't run on a bare metal server, it runs in a virtual machine.

The reason we're doing that is now not only are we software defined, but we can run on VMWare, we can run on open source software, we can run on Amazon, Google, Azure. And so, now that piece of software, once it's totally decoupled from the hardware, we can now change our pricing model and our go-to-market model.

And that we're basically selling you software, whether it is software for automating tape backup, whether it's software for making movies, software for sequencing a genome. We're going to give you that software. And then the next question is where you do like it.

Would you like it on your own hardware? What type of hardware? Would you like that hardware from us? Would you like to put it on the cloud? And by making those fundamental architectural changes we are going to actually begin to sell software in this Company, really storage software and move further and further away from being a box vendor.

And when you move to those software models we can also move away from a one-time box sale to a recurring revenue model where you can buy that software on a monthly subscription, a yearly subscription. So, we're making the core product changes to enable us to make the business model changes that we need to make.

So what you're going to see like you saw in the F-Series, that product now uses 100% of our software. We are not OEM-ing or licensing software from others.

Also, you'll see like the VF-Series, it is fully hyper converged and you're going to see every product this fall is going to be hyper converged and run simultaneously on hardware, run virtual machine or run directly on the cloud. And we're moving everything there really between now and January of this year..

So, just I guess, and maybe Mike can jump in also.

But whether it is VF-, F-Series, R-Series, hyper converged -- as we see more business or more material revenue from these products, do we -- can you give us just the magnitude of gross margin impact? Are we going from, Chad's words, mid-40 gross margins to 70% -- or any type of color there?.

First, I would say we are in the very early days with these products. So, I would think as we ramp them up, as we gain an appreciation for the competitive environment that we're in these new markets, we'll be able to provide more guidance. But at this point it's just too early..

Okay, understood.

And then, Jamie, going back to what we've seen in the industry around tape and hyperscalers really taking off, is there a way to think about how much of the tape business today is more growth in nature versus maybe traditional enterprise backup?.

Yes, the way I think about the tape market is somewhat different. I think the tape backup space is there, it's there for a long time. You still have people backing up mainframes and backing up client/server systems. I think that is a business with a very, very long tail.

I also think you are seeing a certain return to that business as people realize if you're doing large backup jobs it's still the most economic way. And I'd really -- for everyone on the call I would ask you to think about tape as purely an economic vehicle. The technology isn't necessarily sexy; it's not bleeding-edge.

What it is though is it is the cheapest way to store data for decades. And I think people are realizing in both backup jobs that it's the cheapest way to operate compared to alternatives. But the other thing is we're seeing a trend -- certainly the hyperscalers as I described are using it.

But I also want to say that enterprises used to store data because they were told they had to, regulatory compliance. I think enterprises now -- their preference is to keep every single bit of data they have in case they ever need it later.

If they ever learn to analyze it later, if new technology becomes available where they could harvest insight out of that data. So, I think a lot of organizations are coming to us saying, well, if you could make it cheap enough we would store all of our data.

So, we're accessing new opportunities for archives where people are saying you've now crossed a dollar per terabyte threshold where we're going to make a decision to store much more data. So, we're seeing this cloudlike architecture.

Certainly we're selling it to the top seven hyperscalers, but now we're seeing the cloud 100, those fast followers starting to use this technology. We're starting to see manufacturing companies saying why we don't store every photograph we take on the manufacturing floor, just keep them forever.

We're seeing retail chains saying, well, why don't we keep the video surveillance of everything we've ever seen in our stores and maybe one day we'll be able to analyze that and gain insights about shopping behaviors.

And I think that trend, in my opinion, is reversing all previous trends and making tape a growth business purely driven by the amount of data you can store at the most aggressive price and that is just opening up new opportunities.

And it does require very different architectures that, in my personal opinion, we're leading the world in those cloudlike architectures for tape..

Right. And maybe one last one for me. It's great to hear or see a consortium around LTO-8 finally came together, I guess is the easiest way to put it.

Mike, have you -- I know it's kind of more of a year-end event or calendar year event -- year-end event for LTO-8, but have you factored in any improvement in the quarterly run rate, royalty run rate there from LTO-8 in your EBITDA expectations for this year?.

I think when you look at our guidance; we were assuming a pretty steady run rate there. So, I would expect we would have upside as it relates to anything on that front..

Our next question comes from Bob Evans Pennington Capital. God ahead, Bob..

I'll echo previous comments -- congrats on getting all this work done and the transformation you've made so far. A lot of my questions were already answered, but I guess this is probably more for you, Jamie.

Can you comment on the sectors that you expect to see the most growth? I would assume hyperscalers is probably the area where you would expect the most dollar volume growth but correct me if I'm wrong. And then as we look at -- you are now growing, I think your guidance was 6% to 10%.

Do you see yourself as a company where -- should we expect to see an accelerating growth rate as we look out into the future? And how do you view this Company now that you're -- like you said, you're no longer in survival mode but more in growth mode?.

Yes, I mean quite frankly we're still learning how to drive this vehicle. What we're doing is we have a series of hypotheses we're testing and they're growth hypotheses. One hypothesis that I think we've tested and now confirmed is that there are massive tape opportunities with the cloud operators.

And I would throw in that hyperscaler market the huge national labs, large federal governments, gigantic enterprises. But with the world's largest holders of data, there's a very new opportunity with them. The other hypothesis we have is that the largest video use case is not television and movies.

We do quite well in that space, but the largest video use case is video surveillance. It's actually 60% of all the data produced on this planet comes off of video surveillance cameras. For many companies the 10 or 20 cameras in their lobby generate more data than their entire IT department does in a year.

So, the cameras are just voracious data collectors and consumers. And so, I really view video surveillance as probably the largest total addressable market that we have. We are new at it; we're just -- our product is somewhat new. So, we are building that, but I'm feeling pretty good about that space.

And I also think the F-Series really opens us more from just doing video editing to doing more genomic analysis, video analysis, more high-speed applications than just video editing. So, we're just experimenting with what are those use cases, how different are those buyers. But I really think we are in a selling motion with the hyperscalers today.

We are building that selling motion in video surveillance and we're building that motion in analytics as well and all the supporting partnerships. So those are the areas that we're looking at. We have some tertiary markets we are optimistic about but just developing.

That's medical and surgical video, manufacturing quality assurance video, people taking photographs on manufacturing lines. And I guess I forgot to speak about an area that we're actually very surprised about our growth in which is in autonomous test vehicles.

We are seeing some of the vehicles we are involved in making -- they are using 300 to 400 petabytes of data. So, we are seeing an opportunity for the R series to collect data in autonomous vehicles. We are seeing an opportunity for StorNext to be used as the vehicle analytic platform that actually does quality assurance testing of the vehicle.

And then because so much data is being generated, tape is being used as a low-cost place to store the data between analytic runs to lower the total cost of running a laboratory. So, that area also we've made a number of hires in Detroit and in Germany as we are building our business with the automakers there. So, we've got a live of efforts underway..

Okay.

And to Chad's earlier question as it relates to software and software margins, is it fair to assume that -- as you grow and mature in that business, that part of the business should see normal software margins in the future? Maybe not right away but it should grow to that level?.

Yes, I mean, we just have to learn what's going to happen here. And there are two buying motions, right? There's the customer that says I'm just going to buy software from you and I'll buy hardware myself.

And I think there is the customer that says I'd like the hardware from you because I just want you to make it work right for me and I want you to take care of that system for me.

So, we are working to a software model, but I'm still seeing the buyer saying, I want to buy your software but why do we do appliances also so that I know you're going to give me a fully working system.

So, I think the industry is in transition there as a lot of companies are moving to these more software-based models, to get the software to a point where it's just completely seamless with the hardware. And customers aren't as worried about getting hardware and software together mainly so that you support the whole system..

Our next question comes from Ephraim Fields of Echo Lake Capital. Go ahead..

Hi. Congratulations once again on all your progress. I was trying to understand your free cash flow generating abilities. I was wondering if you could help me understand -- maybe you could start with the $50 million of adjusted EBITDA, how that would translate into free cash flow for you guys..

Yes, I mean when we give guidance and we're looking at our adjusted EBITDA, understanding we've taken all of the nonrecurring items out of that. So it's really a reflection of our underlying business or operations potential.

If you were to look at this year and our range of guidance, understanding that we've got approximately $24 million, $25 million of interest. So, half of that is at an actual cash outlay. So half of that is gone and then you're dealing with the other half.

And the other half really -- we look at that as if -- as we grow we've got working capital requirements, our capital structure has been sized that we've got a $45 million revolver but we haven't drawn down on that. And we'd like to be able to fund our operations and fund our growth on our own cash generation.

If we ever get into any tight working capital situations we do have the revolver there to back us up. But we do feel comfortable that between our cash generation and revolver we will be able to fund our growth very easily..

And ballpark how much should CapEx be this year?.

Yes, CapEx is typically I'd say between 2% and 3% of revenue. So, we are not a very capital intensive company..

Our next question comes from Orin Hirschman from AIG. Go ahead..

Hi. How are you? And again echoing congratulations on the years and years of work from both of you. You obviously do have a great cash generation story and hopefully there is a little bit of growth here and then more coming. I specifically want to focus on the cloud opportunity.

Are there still new products that you need to address an opportunity? Or is the issue really that you've planted some of those new products already at the existing cloud providers and that there was confusion on the future of LTO or tape in general and that confusion is beginning to come to an end and hopefully people are ready to adopt? Can you give us a lot more color?.

Yes, I mean, I guess I would say all of the above. I think there are some cloud providers who just plowed ahead with LTO-7 and design for that. We have a couple customers that just said, look, we'll trial your equipment but we're not going to buy in volume until we know this legal issue has been resolved.

I think it did concern some supply chain organizations. I wouldn't say it was universal, but I can say several large cloud providers were uncomfortable moving forward until this was resolved. Secondly, the cloud providers have very deeply unique architectures and very unique points of view.

Some of them want to compete on having the lowest cost technology. Some of them want to compete by having the most available technology. Some of them want to compete by being able to service the equipment with very few people. So, what I'm finding is we are not able to just show up with one product and service them all.

They are asking for specialized implementations. Some of the cloud providers want to run the equipment in containers, some of them want to water cool it, some of them want additional robotics and density. Some of them want full software stacks from us. They want us to provide the software that operates them in their cloud.

Some of the cloud providers have actually asked us to run their cloud for them actually help them manage the tape, give them managed services to operate it. So, these buys are very large, many tens of millions of dollars purchases over time.

So, very often I would view it as almost a year-long process to understand their requirements, modify product if needed to meet their requirements and then go through a very rigorous testing process before they deploy and then when they deploy it is at -- think of it as 18 wheelers of equipment, like multiple 18 wheelers a week.

So, when they turn the engine on it turns on very aggressively..

You mentioned that they are in different -- so, just two follow-ups on that point.

One is do you need to do a lot of new existing work? And the second question is they sound like they are -- like you describe that they are in various points of or how far along they are getting closer to more mass purchases as opposed to task -- in terms of trying to see whether some of them are ready.

Is that a 2021 fiscal -- end of 2020?.

I mean I would tell you we have at scale customers today. We are in bidding processes for other at scale customers. So, I think this is a trend that'll go on for a number of years and most of these clouds are growing. So they are not a -- they buy once and they are done.

Their data footprint -- we often joke it is a data landfill, is just filling and filling and filling. So far they didn't -- an enterprise account will buy enough data to cover them and then you go sell to them three years later. Our hyperscaler accounts are almost buying at a continuous rate.

And I think we are in those cycles today and I think that will carry on for at least the next three years..

Our next question comes from David Duley from Steelhead Securities. Go ahead, David..

Thanks for taking my question. I have several.

I guess first of all, can you help us understand what the SAM is of this tape storage overall market for you guys?.

The SAM, meaning like the total addressable market or the size of the market?.

Yes..

I'm reticent to venture a guess because I know analysts cover this and do market sizing and I just don't have that data directly in front of me..

How big is the tape business revenue wise for you guys at this point dollars on an annual basis? And what do you think your market share is? Maybe we can back into it that way..

We run -- if you were to go back to 2017, we were over $100 million. If you look at the -- 2019 we're just under $90 million and it has ebbed and flowed through that period. So, that's kind of our run rate and that is just for the systems alone, that doesn't include the related service that goes with it..

And so -- and what do you think your market share is? If $90 million is your run rate, are you 50% of the market, 70% of the market, 20%? Any rough guess? I don't have the data about the size of the market, so I was just looking for you guys to give me some sort of benchmarks..

I'm just reticent to guess because, like I said, I know IDC and others, they track our market share versus IBM's and Spectra and they have it by just size of the market and it's pretty well tracked. I'd -- rather than guess I think we can just send you the -- I know our product managers track it pretty closely..

Okay.

How about this? What hurdles need to be jumped over in order to get relisted on NASDAQ? And then what hurdles or things need to be submitted to the SEC to make the investigation go away?.

First, as it relates to getting relisted, once we get to a $4 stock price it's literally a matter of days as long as our application is in and we're ready to go. So, that's really first -- dependent on a $4 stock price and then it would be days after that to be relisted on NASDAQ.

As it relates to the SEC, and what I shared in the prepared comments, we have ongoing discussions with them. It's obviously confidential. Whenever we get to a point where we have something material to disclose we will disclose it at that time..

Okay. And then final thing for me is you gave a breakdown of the cost reductions I think of the $70 million and it just struck me as interesting how a huge portion of that came from sales and marketing. Why -- when I think about cutting costs for the Company there's always costs in that area to cut, but that seems like a really large number.

So, just curious why most of the cost reductions came from that area..

Yes, this is Jamie. What we observed in that time, I think we would have territories where you had many sales reps who just weren't at quota, they weren't achieving quota. But if your goal is to just hit top line you kind of don't care if a rep is at quota or not as long as they contribute a little more money.

When we moved in with a mindset of we want our reps to be productive, we want them to be profitable, we want them to generate -- pay for themselves, their sales engineer and related costs. So, we found that we could go to drastically less salespeople who are just much more productive.

Instead of having three sales reps that do $1 million a year let's have one sales rep that does $3 million a year. So we drastically increased the productivity of the reps. then you have the associated sales engineers, channel coverage, inside salespeople.

We also found in our sales organization there were a lot of inefficiencies, a lot of processes that are manual or paper-based or were done over the telephone. And our new CIO has been able to put in more efficient processes, methods and systems where we didn't need as large of a sales operations staff as well.

And finally, we were spending way above our peer groups in marketing. Marketing events with really no measurement of return on investment. So, going to trade shows and throwing parties and things that perhaps generated some sales value but probably weren't optimal.

And we reduced our marketing spend to activities that we have very demonstrable return on investment and that's really where -- we took a lot of savings from that area. We also closed some geographies. We had sales teams in far-flung geographies that as a standalone business just didn't justify themselves.

We were in remote geographies in Asia where we hadn't been profitable there for years and we just came forward and said we are going to -- we're going to turn those businesses off and make up for it in other geographies where we can do profitable business.

In many areas in Asia the margin pressure is just so intense, we simply weren't able to maintain a price point and a margin level where we could justify selling our product in that geography..

Well, congratulations on getting this restatement behind you. And in listening very carefully to what you guys have done, it really sounds like you've taken a good strategic look at the business and have uncovered all sorts of things that you can save money on and grow top line. So, I look forward to the story unfolding over the next year or two..

Our next question comes from Aaron Martin from AIG. Go ahead, Aaron..

Hi. Congratulations. One of the technical questions has been answered, so I want to stick to housekeeping ones. Mike, you said the lender had 11 million warrants.

Is that correct?.

Yes, yes..

And then the fully diluted share count you said was 41?.

Right, currently at the current stock price, yes..

Okay, so if there's 36 million common shares then all the warrants in -- not using the treasury method, just throwing everything in the kitchen think it's more like 47.

Is that correct?.

Yes, it would definitely be higher and I wanted to give that warrant number so people understood, when those things get exercised they're coming in. And the exercise price of those things is between $1 and $2. So, I don't know when they will get exercised; they have got a 10-year life on them, but they are out there..

Got it. And then in the financials you have an item, an insurance receivable of close to $10 million. What is that and, as it relates to your balance sheet, as we resolve the different investigations, have you foreseen that receivable being collected in a reasonably soon time..

Yes, I mean that is a -- for no better description, a gross up on our balance sheet where we have settled the class-action litigation. So, we've recorded both the liability and the asset as covered by insurance, so it's just a timing difference..

So, liability has not been paid out yet either?.

Right, correct. End of Q&A.

Thank you. I'd now like to turn the floor back to management..

Well, I would like to thank everyone for participating in our call today. Mike and I are excited about the business, as is all our employees worldwide. So again, thanks, everyone. I look forward to meeting many of you in person in the coming months. Thank you..

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time and have a wonderful day..