Good day everyone and thank you for participating in today's conference call to discuss Quantum's financial results for the second fiscal quarter ended September 30, 2019. At this time, all participants are in a listen-only mode. A question-and-answer session will follow with the formal presentation.

[Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Rob Fink of FNK IR. Please go ahead sir..

Thank you, operator. 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 today may be forward-looking. 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 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 the forward-looking statements, including unexpected changes in the Company's business.

More detailed information about these risks factors 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 law.

Also note that on this call the company will be discussing non-GAAP financial information. Our CEO and CFO are providing this information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States, or GAAP.

You can find a reconciliation of these metrics to the reported GAAP results in the reconciliation table provided in the company's earnings release. I would like to remind everyone that this call will be available for replay on Quantum's Web site for at least 90 days.

A link to the Web site replay of this call is also provided in the earnings press release and is available on the company's Web site at investors.quantum.com. With all that said, I would now like to turn the call over to Jamie. Jamie, the call is yours..

Thank you, Rob. This was another strong quarter for Quantum, providing further evidence that we have the right vision and strategy, solidified operations and our position to deliver profitable growth.

The aggressive streamlining of our expenses over the past two years combined with the renewed focused on growing markets where Quantum can differentiate itself from competitors is paying dividends. On a GAAP basis, we grew revenue by nearly 18% to $106 million representing the fourth consecutive period of quarter-over-quarter growth.

We also expanded our gross margins on a year-over-year basis and generated more than $4 million in income from operations. When excluding stock compensation, restatement costs and restructuring expenses. We generated more than $5 million in adjusted net income for the second quarter in a row and our adjusted EBITDA exceeded $12 million.

Year-to-date, we have generated more than $125 million in adjusted EBITDA demonstrating the earnings power of the new Quantum. We are well on our way to delivering on our full year adjusted EBITDA outlook and have raised the bottom end of our previously issued range by $1 million to $51 million to $55 million.

Our transformation is based on a new strategy formed around two core tenants.

First, the projection that 80% of the world's data by 2025 will be video or video-like data, and second, Quantum is positioned as a leader in a high-speed processing of video and the long-term low cost storage of video, video-like an unstructured data both on-premise and in hybrid multi-cloud environments.

Today Quantum provides the video infrastructure to some of the world's largest studios, post houses, corporate brands, sports networks and franchises, airports, research institution and the world's largest hyperscalers.

The storage of video and video-like data is a major challenge for many companies today and it represents a massive new market opportunity for Quantum. We're no longer just a tape backup company.

Today, we are deeply and increasingly relevant to our traditional enterprise and media and entertainment customers along with the world's largest hyperscalers as a trusted partner providing critical technology for oppressing and accelerating need.

We're confident this strategy will also enable us to expand into rapidly growing adjacent markets with similar technology requirements such as video surveillance, autonomous vehicles, medical and surgical video, manufacturing video for quality assurance, satellite and geospatial imagery, military and tactical applications, video search, analytics, and more.

In the last conference call, I discussed the progress we have made in revamping our product line. I note that while operating expenses declined an additional $4 million sequentially and more than $7 million year-over-year, we have increased our R&D investments to further extend our technological lead.

As part of this, we repositioned our tape offering as a key technology for long-term archive with both hyperscaler and enterprise customers. These hyperscalers are using tape as the basis for archive in the cloud because tape is anywhere from one-third to one-sixth of 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 this historic secular decline of the enterprise tape backup market.

In addition, we have completely refreshed our product line including, first, the Quantum F-Series, a new line of NVMe flash storage arrays for editing, rendering and processing video content and other large unstructured datasets based on our entirely new software defined cloud storage platform.

The F-Series is in production with customers and it's one of the fastest video storage and processing platforms available today. Second, we also announced the VS-Series, a hyperconverged platform for video surveillance, recording and management of building systems to capitalize on the ongoing growth of this surveillance storage market.

This product is also in production with customers and is being resold by the world's largest surveillance integrators. Third, we launched the Quantum R-Series, 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 of the R-Series today.

Fourth, we are making significant investments in our data management and hybrid multi-cloud technology in our StorNext file system, FlexTier and FlexSync software products.

We are enabling our customers to seamlessly move video between multiple cloud providers and locations to take advantage of cost, performance and data protection advantages of a hybrid multi-cloud storage model. Fifth, we're enabling all of our products with Quantum cloud-based analytics, enabling, monitoring and configuration through the cloud.

Essentially connecting all of our product deployments to the Quantum distributed cloud. We feel this will offer not only significantly better customer experience, but also enables Quantum to shift to both a hybrid multi-cloud model and an as a service recurring revenue model for many of our customers.

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

With our clear vision and strategy, improving product and sales execution, operational and spending discipline, the successful activist campaign led by Eric Singer and Viex Capital Partners is now drawing to a close.

Eric Singer is retired from the Quantum Board of Directors to focus his attention on new investments, highlighting his confidence in the company's management team, board governance and turnaround efforts. I would like to personally thank Eric for his tremendous vision, energy, and determination as a key partner in our turnaround.

We have an active search for a new independent board member and are interviewing candidates from a robust pipeline of IT and storage industry veterans. In addition, we revamped our senior leadership all while streamlining our overall headcount and eliminating layers of middle-management. Today's team is both streamlined and highly experienced.

In our last call, I noted that we have 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, VP of Supply Chain, Corporate Controller, and Director of Internal Audit.

During the second quarter, we added to this with a hire of Regan MacPherson, our new Chief Legal and Compliance Officer. Our focused video-based division is resonating with our customers. Our execution is continuously improving and our product and sales strategy is showing encouraging signs that they're working.

The key performance metrics are validating our work efforts. We believe there's substantial opportunity to drive further revenue and margin growth by moving to a software defined hybrid cloud architecture across our product portfolio. I'd now like to turn the call over to Mike Dodson, our CFO to discuss the financials.

Mike?.

Thank you, Jamie. Welcome to everyone that has joined our call today. First, just a quick clarification up front. The financial comparisons to prior period results that I will be discussing in my comments today relate to the financial statements we published in our filings with the SEC on August 6, 2019.

Now turning to the financial results for the second quarter of fiscal 2020. Revenue was $105.8 million in the second quarter compared to $89.9 million in the year ago quarter and represents an increase of $15.9 million or 18%. This increase was driven by higher primary storage systems, secondary storage systems and media sales.

The higher secondary storage system revenue was driven by an increase in hyperscaler business. The higher media revenue was driven by the beginning of a more typical business environment with the resolution near the end of the quarter of an ongoing legal dispute between the two principal's suppliers in that market.

Gross profit in the second quarter was $43.5 million or 41.1% gross margin compared to $35.5 million and 39.5% gross margin in the year ago quarter. The increase in gross profit was primarily driven by an increase in revenue while the increase in gross margin was driven by higher product gross margin.

This increase was due primarily to cost reductions across a wide range of product offerings and a sales mix weighted towards more profitable product lines. While we are encouraged with a year-over-year improvement in our gross margins, we note that the gross margin was 43.4% in the prior quarter.

Sequentially, the largest contributor to the lower gross margin in the second quarter is an unfavorable revenue mix of lower royalty revenue as well as product mix weighted towards lower margin product lines.

Total operating expenses were $39.3 million or 37% of revenue for the second quarter compared to $38.9 million or 43% of revenue in the year ago quarter.

The increase in dollars was driven by increases in research and development expense by $1.5 million and in restructuring expense of $0.5 million which were largely offset by lower sales and marketing and expense of $1.9 million. The increase in research and development expense was primarily due to an increase in headcount.

The increase in restructuring expense represented the final negotiation related to the closure of a facility. The decrease in sales and marketing and expense was driven by lower headcount and a decrease in marketing programs and professional services costs.

The significant sequential decrease of $3.8 million in total operating expenses from $43.1 million in the prior quarter was primarily due to lower professional fees related to the audit and financial restatement partially offset by higher stock-based compensation and restructuring costs.

Our headcount at the end of the second quarter was 817, the company incurred interest expense of $6.3 million in the second quarter compared to $4.6 million in the year ago quarter primarily due to a higher principal balance.

The net loss was $2.3 million or $0.06 per share for the second quarter compared to a net loss of $21.6 million or $0.61 per share in the year ago quarter. The prior quarter included $12.4 million a pretax expense for the extinguishment of debt related to the August 2018 term loan amendment.

The adjusted net income was $5.1 million or $0.11 per diluted share for the second quarter compared to the adjusted net loss of $5.6 million or $0.16 per share in the year ago.

Excluded from the adjusted net income and net loss calculations are non-recurring and other items including restructuring charges, debt extinguishment costs, stock-based compensation and financial restatement costs. Adjusted EBITDA increased $10.3 million to $12.7 million in the second quarter compared to $2.4 million in the year ago quarter.

There's a full reconciliation of our non-GAAP results to the most directly comparable GAAP measure in both the press release and Form 10-Q release today. I would also like to provide 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 employee equity awards. For example, in the first two quarters of fiscal year 2020, the weighted average shares used were 36 million and 36.3 million shares respectively.

When we calculate the net income per share, we use the treasury stock method to calculate the fully diluted share count that takes into consideration dilutive equity instruments. For example, in the first two quarters of fiscal year 2020, the fully diluted share counts were 41.1 million and 44.9 million shares respectively.

Included in our diluted share calculation are approximately 11 million warrants held by our current and formal lenders and 3.5 million shares outstanding in our equity incentive plans.

The sequential increase in our fully diluted share count is primarily driven by the increase in the average stock price during the most recent quarter compared to the prior quarter. Now turning to our year-to-date results.

Revenue for the first half of fiscal year was 211.4 million compared to 197.4 million in a year ago quarter -- year ago period an increase of 14 million or 7%. This entries was primarily due to an increase in secondary storage system revenue driven by growth in hyperscaler business and to a lesser degree growth in the primary storage system revenue.

These increases were partially offset by lower revenues and media, service and royalty revenues. Gross profit in the first half of the fiscal year was $89.3 million or 42.3% gross margin compared to $81.9 million and 41.5% gross margin in the year ago period.

The increase in gross profit was primarily driven by an increase in revenue, while the increase in gross margin was primarily driven by cost reductions across a wide range of products and services. Total operating expenses for the first half of the fiscal year decreased by 7.2 million or 8% compared to the year ago period.

The total operating expenses were 82.4 million or 39% of revenue compared to 89.6 million or 45% of revenue in the year ago period. Selling, general and administrative expenses declined 5.7 million or 8% to 63.6 million for the first half of the fiscal year compared to 69.3 million for the year ago period.

This decrease was primarily due to lower headcount, marketing programs, professional service costs and information system operational costs partially offset by increases in stock-based compensation expense and professional fees related to the financial restatement and related activities.

Research and development expenses were 17.7 million for the first half of the fiscal year up 1.6 million or 10% compared to 16.1 million in the year ago period. This increase is primarily due to higher headcount.

Restructuring expenses decreased 3.1 million or 74% to 1.1 million in the first half of the fiscal year compared to $4.2 million in the year ago period. The net loss was 6.1 million or $0.17 per share for the first half of the fiscal year compared to a net loss of $29.1 million or $0.82 per share in the year ago period.

The adjusted net income was $10.5 million or $0.25 per diluted share for the first half of the fiscal year compared to an adjusted net loss of $3.3 million or $0.09 per share in the year ago period. Adjusted EBITDA increased 16.2 million to 25.8 million for the first half of the fiscal year compared to 9.6 million in the year ago period.

Now taking a look at the balance sheet and cash flows, cash was 6 million at the end of the second quarter compared to 10.8 million at the end of the prior quarter. These amounts exclude $5 million in restricted cash required under the company's credit agreements.

Outstanding long-term debt at the end of the second quarter was 153.6 million net a 15.5 million in unamortized debt issuance costs and 1.7 million in current portion of long-term debt.

This compares to $146.1 million of outstanding debt at the end of the prior period net of 16.4 million and unamortized debt costs and 1.7 million in current portion of long-term debt.

The sequential increase in long-term debt from the prior quarter was primarily due to borrowings of 7 million at the end of the current quarter from the revolving credit facility to meet short-term working capital requirements.

The second quarter experienced cash flow pressures of paying the last remaining significant restructuring costs and professional fees related to the business transformation plans and completing the financial restatement.

This quarter also endeared the annual seasonal decline in deferred revenue and related cash receipts as a significant number of our enterprise customers renew their annual service contracts living up to and just after the end of the calendar year.

Despite a positive cash flow from operating results, these business pressures resulted in a sequential decrease in our cash of 4.8 million and increased borrowing on a revolving credit facility by 7 million.

Looking to the next quarter, the cash flow implications of our guidance for the third quarter represent a forecasted range of adjusted EBITDA of $13 million to $15 million.

With the restructuring and restatement costs largely behind us and after paying approximately $6 million of interest expense as well as the forecast of capital expenditures and foreign taxes, we expect to generate free cash flow during the third quarter that will reverse the cash flow trends we experienced in the second quarter.

Related to our current financial performance compared to our financing bank covenants, we had $9 million cushion on the key trailing 12-month EBITDA covenant and comparable cushions on the remaining covenant calculations.

Now, before we discuss the financial guidance for the next quarter and the fiscal year, I would like to provide an update related to the SEC investigation and the process to relist Quantum on National Exchange. First, related to the ongoing SEC investigation, we continue to cooperate with the staff and provide documentation as requested.

As a practice, we will provide no additional comments regarding the details or status of the investigation and related settlement discussions. Second, related to our efforts to relist on the National Exchange, the process is progressing, but taking longer than we initially anticipated.

During advanced discussions regarding qualifications for listing with representatives from both the NASDAQ and the New York Stock Exchange, it has become clear that they are closely monitoring the progress of the SEC investigation.

Based on this, we remain confident that we will once again be listed on the National Exchange, but at this time it is difficult to provide definitive timing. Now, turning to our financial guidance.

The third fiscal quarter that ends in December is traditionally our strongest of the fiscal year and we expect revenues in the range of 106 million to 112 million, excluding approximately 2 million of stock-based compensation charges.

We are forecasting adjusted net income to be in the range of 6 million to 8 million and related adjusted net income per share of $0.13 to $0.18. Adjusted EBITDA is expected to be in the range of 13 million to 15 million.

For the full fiscal year, Quantum expects total revenues in the range of $424 million to $430 million and adjusted EBITDA in the range of $51 million to $55 million. In summary, the second quarter financial results continued improved financial performance reported last quarter.

With revenue guidance provided for the third quarter of 106 million to $112 million, we are expecting a fifth consecutive quarter of revenue growth.

Through the leadership of the revamped senior management team, the success of the transformation of Quantum is further evidenced by the financial guidance representing the return to GAAP net income in earnings per share for the first time in three years. With that, let me turn the call back over to Jamie for closing comments.

Jamie?.

Thanks, Mike. We've made tremendous progress over the first half of this fiscal year and I'm encouraged by the results we are reporting today. We're committed to driving high margins by designing and selling innovative products to solve the world's biggest technical challenges around video and video-like data.

We have a solid and stable financial base and see additional opportunities to further improve our earnings power. We are value engineering our products to improve performance, while reducing costs and increasing the value of our software by making it more searchable, more accessible, and more intelligent.

We're excited for the future and look forward to sharing our progress as we move forward. I would now like to open the line for questions.

Operator?.

Thank you. [Operator Instructions] At this time we'll go first to Craig Ellis, B. Riley FBR..

Yes. Thanks for taking the question and congratulations on the financial performance. Gentlemen, nice to see. Jamie, I wanted to start-off up perhaps synthesizing a product question with a customer question, you mentioned the F-Series, the R-Series and the VS-Series.

I think the F-Series would probably the one of the products along with some of the products that would stand out with hyperscalers. But three months ago, you indicated that the company was engaged in discussion with numerous hyperscalers. And I'm just wondering, if you can give us an update on that.

It sounded like each had different specific requirements, but how is that going and has the resolution of the LTO legal issues help move any of those discussions forward?.

Yes. With regard to hyperscalers, I think they have two main care abouts. The first is, they want to work with us on architectures that get them the lowest price per terabyte.

So, they're very concerned about density, how do you put the most tape in a physical space and how do you work with that tape for the highest amount of storage density? And they're really looking for the best economics. The second thing they're looking for is, they're buying at such large volumes.

They're deploying at exabyte scale that serviceability is their second largest care about, how do you service just literally acres of equipment in these colossal deployments. And the feedback we're getting is, we're both leading in price performance and we're leading in service ability.

We are in the middle of several test deployments right now where we believe we are the leading solution in them and we expect to be selected for the at-scale deployment, but we are in the test phase.

Many of the hyperscalers build their own software a lot of their own storage software and so it can take anywhere from 10 months to 18 months to test our platforms. And we're right now in that testing phase with three hyperscalers and hoping to prevail in their final selection. But those selections have not been made yet..

That's very helpful. Mike I will ask my follow-up to you. Thanks for all the clarity around the financials. I may have missed it in your prepared remarks, but can you just recap the primary drivers to the 3 million reduction in operating expense in the quarter.

And as we look ahead, beyond the December quarter, we would typically expect things like FICA, potentially a fringe cost adjustments, is there anything as we look beyond the December quarter that we need to be mindful of as we think about operating expense and the excellent job you're doing getting good controls there?.

Sure. When we look out to the next quarter, we would expect as our revenues go up, there is a variable nature to that as it relates to our sales expense. So, we would expect that to increase.

And also we -- it's going to be probably more weighted towards products and that amount will be definitely an impact on the third quarter -- fourth calendar quarter. Besides that, we monitor our expenses very closely. So, we really -- we don't see any other expenses going up from that standpoint in the last -- in the next quarter..

Thanks guys. I'll hop back in..

Okay..

We'll go next to Eric Martinuzzi, Lake Street..

Hi. Congratulations as well not only on the growth, but the double-digit growth. That's just terrific to see. And obviously offers a tremendous amount of leverage in the model. You highlighted the secondary storage growth and you also talked about to a lesser extent the primary storage. I wanted to focus for a moment on the service revenue.

That's really the only part of the revenue stream that decline. When can we expect that to reverse itself given the strength that we're seeing in the product side..

Well, there is a secular decline. We call it the golden glide as it relates to our service revenue. We do see as I had mentioned, the deferred revenue go down this period just as the timing of the contract renewals will happen in the next two quarters.

And also, as we look at tape in general as Jamie has outlined, we look at that as a growth driver and the service related to the tape as we move forward in the area of hyperscalers and tape as an archive versus tape as a backup we would expect that strengths to be shown in the service line as well..

Okay.

But no sense of like, we've got this contraction now and it'll reverse, I don't know, March, June timeframe is that just do the math for me on the deferred revenue that actually is what I'm asking here?.

Oh, okay. Well, the deferred revenue, you collect your cash, you record deferred revenue and then you amortize it down and when everyone's -- but we don't collect that cash evenly during the year, people will sign contracts. We signed much more contracts near the end of the year or at the beginning of the following year.

So, because we're collecting the cash at that time, the deferred revenue gets recorded, right? But what if you're not collecting the cash, then the revenue will just amortize down and the deferred balance comes down.

I don't know if I'm explaining that very clearly, but does that make sense?.

Let me focus to a geographic question, you had good strength in Americas and EMEA was also up, what's behind the -- it's a relatively small decline, but there was a decline in APAC on the total revenue..

Yes. I mean our sales in APAC are pretty small, so one large deal can sway you around. So, last quarter we had close to $3 million deal in Asia. And so it just becomes lumpy because it's a much smaller business. I think in Asia, we have a lot of work to do. I think we have a pretty small team there.

I also think that we probably need to move to an in-country pricing model today. We have kind of worldwide pricing and I think in markets like India, China, Pacific Rim, you probably need a geographic specialized pricing just given how competitive those markets are.

So Asia is our smallest revenue market today, but I think it represents one of the largest potentials for growth. And we're just going to need to put more focus on that market, quite frankly. And during the last year, it just wasn't a focus because of how small its revenue is.

But, as we move out of survival mode and into growth mode, I think you're going to see us put a lot more attention on that market..

Okay. And then, lastly on the royalty revenue that was came in at 5.3 million or so for the September for up year-over-year. But I think we were down sequentially.

What, given the progress that you're seeing with the Fujitsu versus Sony litigation settlement and adoption of LTO-8, what's a good way to think about that for next quarter or for the full year?.

Yes. While things resolved legally, I think there are still three question marks, regarding LTO-8, which is the latest generation and the generation that just became available. The first is, there isn't a lot of factory production capability. So, if you look at the quantities that are available, even today, Sony has almost no product on the market.

Their factories are just not producing it and Fuji is producing it at, I would say, somewhat limited quantities. Secondly, is the pricing of LTO-7 is so aggressive that I think some people are staying with it because when you use it in an MA format, it's only two terabytes less than LTO-8, but it's almost half the price.

And so, and then thirdly, LTO-9, the next generation is only about 18 months away.

So, I think we're seeing at least right now, muted uptake of LTO-8 and I think we'll get a better picture of what's going to happen when the factories are at full capacity and if some of the major hyperscalers make switches from -- which I expect them to do, but I just haven't seen it happen yet, is switched from LTO-7 to LTO-8 and put volume purchases down and we just were waiting for that to happen.

It could happen. I don't think it's going to happen this quarter. It may happen in the next two quarters. So, I'm glad the legal battles are over, but it's -- I would view it as a market that's still recovering..

Okay. To put a finer point on it though, is it safer to kind of model for December what we saw in September or do we kind of split the difference between Q1 and Q2 for those of us….

I think that we look at it as a range of a 5.5 to 6.5. And yes, if you split the middle, you are in the right range..

Okay. All right. Congrats again on the quarter and thanks for taking my questions..

Yes. Thanks Eric..

We are next to Chad Bennett at Craig-Hallum..

Great. Again, kudos on the quarter. Great job out of the gate here execution wise guys. So, Mike, maybe just a little more refinement on the December quarter guide.

What should we expect from a gross margin progression standpoint in the December quarter?.

Well, we typically don't give guidance, we talk about revenue guidance and we talk about the bottom-line guidance and EBITDA. But you would expect the second quarter was under pressure from the royalty.

So that gross margin wise, you would think sequentially would make Q3 stronger from that standpoint and just a higher revenue levels, you usually get a little bit more scaled benefit. But, those are just general trends that I think you should be able to model and….

Okay. And then, maybe for Jamie, if you look at your primary storage growth year-over-year, I mean in the Americas I should say, it nearly doubled year-over-year.

I guess, what's really driving that type of growth? And then maybe, kind of a question integrated in with this one is, is can you talk about what you've seen in terms of the new products F-Series, VS, R-Series and in terms of initial traction here in the September quarter.

And then, maybe what your expectations are for ramp there as we go into next year. And maybe Mike can highlight a little bit on the gross margin profile of those products as they scale. Thanks..

Sure. So in primary storage, our flagship product is StorNext. It's an extremely high speed file system that is predominantly used for manipulating video, television making, movie making, sports, surgical and medical imagery jobs like that.

It's been known as one of the most stable and highest speed file systems, but it's also known as being somewhat hard to use, somewhat complex. And what we've done over the last year or so, we've made the product drastically easier to use. We've made it simplified. We've stabilized it and made it scale even more.

And so, what's happening now is, for a long time it was viewed as, it's really only worth using for the world's most complicated and pressing jobs. But by making it easier to use, by making it simplified, it's now being used for a much larger set of jobs. You don't need as much expertise to use it; you don't need as much services to install it.

It's now usable by a much wider audience of people. And we're going to continue that. We have a new major release coming up in the next several months called StorNext 7, where we're going to make it easier to use than probably any file system of its kind.

We're going to make data movement easier, data management easier, the ability to deploy it seamless and easy. And what we're doing is, we're bringing the incredible performance of this system to just a wider audience of people by making the product just simpler. So, I think that's helping a lot.

Secondly is, the F-Series is a very easy product to bolt-in to our install base. Anyone who's using StorNext today can literally in a few hours bolt-on an F-Series and just by doing that, they get a huge boost in performance.

We've seen customers, 4x, 5x, in some cases, 10x the performance of their existing system just by adding one F-Series box to it. So that has been the naturally easiest new product to bolt into the install base and go. The VS-Series is very compelling, but it's a new market for us.

So, very often video surveillance is tied to the construction of a new airport, a new casino a new bus terminal, a new stadium. So, I'm very encouraged by what we're seeing in that space.

But because we're going to all new customers and an all new market that's often part of construction, that's just a slower business to get going because we're literally entering a whole new space. So I like how the product's going. I like the feedback we're getting. But we expect when you're entering a new market that's take a little longer.

R-Series continues to do well.

Again, it's a lower priced product, but what it's really doing is, it gets us into -- when you do an autonomous vehicle project, the small storage devices in the vehicles are not particularly expensive, but when you have hundreds of vehicles on the road that data actually ends up getting all backhauled to StorNext and to our tape.

So, really the reason we want the edge is to get the core is usually what we're after in those projects. And I like how things are going with autonomous vehicle projects, because the amount of data is now in most autonomous vehicle projects at the hundred petabyte and very often over the 300 petabyte.

And that's where they need to start having discussions with us about tiering the data to save money. And that's what StorNext also does extremely well..

So Chad, as far as your question to margins, just qualitatively, when you look at our product portfolio, at first, if you just look at service; service will be our highest margin. And then, when you look at our products, the lowest margin product would be the device and media.

And then when you look secondary and primary; the primary will be slightly better in margin in general than the secondary. But it just qualitatively gives you a sense of how it falls out..

And it should also be said, we're going to be entirely revamping how we build StorNext over the next six months, we're coming out with a new set of devices and a new technical architecture that is, we expect to change the margin profile of that product.

It's essentially a year long value engineering project to allow us to use hardware much more efficiently, deploy the product much more efficiently and effectively get the customer more performance by buying almost half as much hardware.

And, that is something that will be going into trials around the holidays and we'll start getting into customers' hands, in the -- around March. So very encouraged about a lot of the new developments we've been working on for the last year..

Great. Good to hear guys. Nice job again..

Yes. Thank you..

Thanks, Chad..

We'll go next to David Duley, Steelhead Securities..

Congratulations on nice results. I had a couple of housekeeping questions.

Mike, I think in the press release it mentions the difference between GAAP and non-GAAP earnings is this $2 million in stock comp? Is there any other adjustments on top of that 2 million to get from GAAP to non-GAAP?.

No, not in our guidance..

Okay.

So it's just a $2 million difference?.

Yes..

Okay.

And did you have any 10% customers during the quarter?.

No..

As far as -- I think it's the DS-Series, the video surveillance product. You mentioned you have a bunch of value-added resellers that help you sell that product. Who are some of the big bars that we should be looking to you to sign up going forward that will help you penetrate that market? I'm just not that familiar with that space.

And so I'm just wondering if you could help us understand who some targeted customers are in that space..

Yes. I mean, the customers tend to be large critical facilities, right? So they're going to be public transportation, airports, rail, bus, large prisons, large police departments, stadiums safe cities, projects, universities and K through 12.

There is a wide spectrum of different resellers, you have a lot of local resellers that do K through 12, that do stadiums. There are certain specialized resellers that do building campuses. There is a bunch of large building operations companies, the likes of Siemens and JCI and those large players.

And then you have a lot of small regional players that work in surveillance as well. There is some value added resellers in that space as well. So we're reaching out to both, again, the people with strong local presence. We're looking at some of the large international building operations companies.

We're also partnering with the VMS makers, the milestones and genetechs of the world that make the video management software.

So, really when selling video surveillance, it's an ecosystem where you work with A and E firms, the architecture and engineering firms that are designing the blueprints of these buildings and doing the permitting process of the buildings. You work with security integrators, sometimes a national integrator, sometimes local integrators.

And then, you work with a software that's used for access control, for video management and you've got to work that whole ecosystem over a period of time to win these large projects. And so what we did when we designed the technology is, we wanted to design it, so it could scale down and do very small high-speed projects.

So, we have a bit of a run rate business and then it can also scale up or we can do large stadiums. Those large stadiums, large prisons, large airports, those are one, two, sometimes four year long sales pursuits. So, what we're seeing right now is a lot of the smaller sales, where you can do kind of more of a three month or six months sales cycle.

Whereas like a new stadium that's being constructed could take several years. So, we're working across that, it's still early days for us. I think we've got a handful of salespeople in that area.

We're being somewhat conservative about our investments there, but we're convinced over the next several years that if you've got a video strategy, you simply have to have a video surveillance strategy as well..

Okay. Final question from me is, I think on the last couple of conference calls now you've kind of talked about, value engineering your products and I think for a more software orientation or capturing more value from them, to me that means more software in the total content or bundle.

And how will that, from a macro perspective, how will that impact product gross margins, whatever they are now, is there some sort of goal, did you want to increase gross margins on products by 300 or 400 basis points or just help us frame what we should expect if you're successful on this initiative?.

Yes. I mean, I think I'm really reticent to give you numbers and targets because what, we'll see in tape, what we'll see in StorNext, what we see in the VS-Series. They're just going to be different. And some of it is not entirely known. But what I can do is tell you what we're doing.

Series of efforts, one for example is, we've moved our manufacturing to lower cost countries, so that we pay a lower cost of engineering to build the product. We are vertically integrating the products so that we can have lower costs of materials. We're negotiating the material pricing down.

We're redesigning some of the products so that they use less expensive motors or less expensive chips like PCBAs are using less expensive materials there. We're also tuning our software, so it needs less hardware, needs a smaller CPU, it needs less memory, less stores, so we can run it on less expensive equipment.

So there are many different efforts that are happening. But, the largest is a lot of what we're doing with our products is we're hyper converging them. So instead of a box doing one task, the box may do three, four, or five tasks.

So, instead of it needing four boxes or five appliances or five servers to do a task, we can do that in one server of effectively the same size. So, we're getting much more efficient in our hardware usage and how we build our products. So, again, we're buying less hardware to support a given deployment.

And the other thing we're doing, today, when you buy a product from us, you get one line item, you buy the product, so you don't pay for the software, you don't pay for the appliance. We're teasing those apart now so that you can buy an appliance from us or from someone else. And then you place our software onto it.

And actually the place in some cases, multiple pieces of software on it. So, we're breaking those apart. And so, we can capture the value of our software and actually charge for it as a line item. And these efforts will go on for -- we've been at it for -- at least nine months or more and starting with the easiest things.

Now we're getting to the much harder things where we're actually changing core architecture of product. And it'll go on and we'll share it to you as we achieve it, but we're not putting any projections out there about, where we think we'll be in three months, six months, nine months.

It's just too hard to project, we know there'll be improvements and I think we'll give updates on the improvements, there'll be somewhat obvious as we go through the quarters, but neither Mike nor I have a schedule or a set of projections that we're comfortable sharing..

Thank you..

You're welcome..

Thanks Dave..

We go back to a follow-up from Craig Ellis, B. Riley FBR..

Thanks for taking the follow up. Jamie, I wanted to follow up on one of the points that I thought I had as a takeaway from the last call and tied into some of the commentary around F-Series and R-Series and VS.

A quarter ago, I thought one of the points that the company was making was that this part of the product portfolio was fairly dynamic and the company was really testing a market interest and an appetite for some of the unique solutions that you could provide.

And I wasn't sure if that meant that for the F-Series that over time there would be more than what I think is three offerings now that spend 46 to 184 terabytes, or if there were other solutions that might come into the portfolio.

So, maybe you could talk about that a little bit and give us a better sense for how you're looking at the breadth of the product portfolio..

Yes. I mean, one of the things we -- as it relates specifically to the F-Series, one of the things we realized is the F-Series is a very highly available box. So, it has the highest level of data protection, highest level of redundancy.

But, we've seen customers say, we'd be willing to forego that high-level of redundancy for a much more aggressive price.

So, we're going to be introducing an F-1000 product, which is a much lower cost maybe not as durable of a product, but a much lower cost product and where you're seeing a lot of demand for that and that'll probably be coming out early in the new year.

The VS-Series, similarly we're finding demand for different incarnations, particularly demand for support for many different VMSs so, we are spending a lot of time qualifying different video management software on that platform.

I think in the ruggedized products, we're seeing demand for a all flash and NVMe-based products where they can do just higher speed data collection in the vehicles. And you can achieve with a disc drive. So, we're getting a lot of feedback and we run an all agile development methodology, so we can make changes to our products very quickly.

And for example, the F-1000 is probably will end up being less than a 14-week, development phase.

So, what I really like is, we're able to put product into the market, we're able to get customer feedback and then pivot and iterate at speeds that I just don't see, our larger competitors, I just -- I think they'll spend more time in meetings than we spend developing our products.

And so I really [I'm liking] [ph] the speed of engineering that we're getting. And our customers -- we have customers that have been with us for so long, we can get them technology, they can literally hammer it within a few weeks, give us very detailed feedback.

We iterate on that feedback and our ability to produce a product tight-knit in the market, tune it for that market and get the sales ramp going. I really, really like what I'm seeing across our tape products, across the StorNext products, across our new introductions.

I really like how the innovation is going and I think StorNext-7 is going to be lights out. I really do. I think StorNext-7 with the new hierarchical management policy management and tiering of data, I think it'll set a lot of the standards for data movement and data management in the industry. So I'm feeling pretty good about how engineering is doing.

And I think we've done, Mike and I, really done, I thought a good job in managing expenses. And Mike though, managing of expenses has realized, while we've taking expenses down, we can't starve engineering, right? We're here to innovate, we're here to create, we're here to build new technology and we've got to do that efficiently.

We've got to do more and more of that in low cost geographies, but we can't starve it either. And I think we're getting a good balance there. And the products are, I don't think a quarter goes by where we don't launch a new product. So it feels pretty good right now..

That's helpful. Thank you..

Yes..

That's all the time we have for questions today. I'll turn the conference back to Mr. Lerner for any additional or closing remarks..

All right. Well, I'd like to thank everyone for joining us today. Mike and I look forward to keeping everyone updated and we'll be updating everyone again in 90 days. So thanks everyone for your time and thanks for your support..

Ladies and gentlemen, we thank you for your participation. That will conclude today's conference. You may disconnect at this time and have a great day..