Quantum Fiscal Second Quarter 2027 Earnings Call and Webcast - QUANTUM CORP

Ladies and gentlemen, greetings and welcome to the Quantum Corporation Fiscal Second Quarter 2027 Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded for replay purposes. It is now my pleasure to introduce your host, Quantum's General Counsel, Tara Ilges. Please go ahead. Good afternoon, and thank you for joining today's conference call to discuss Quantum's fiscal second quarter 2027 financial results. With me on today's call are Hughes Mayrath, Quantum President and Chief Executive Officer, and Hiral Patel, our Chief Accounting Officer. Following management's prepared remarks, we will open the call up questions from analysts. Before we begin, I would like to remind you that comments made on today's call may include forward-looking statements. All statements other than statements of historical fact should be viewed as forward- looking, including any projections of revenue, margins, expenses, adjusted EBITDA, adjusted net income, cash flows, or other financial, operational, or performance metrics, as well as statements regarding demand, backlog, supply constraints, growth, profitability, liquidity, interest expense, and our fiscal third quarter outlook. These statements are based on our current expectations and projections and involve known and unknown risks and uncertainties that we refer to as risk factors. Risk factors may cause our actual results to differ materially from our forecast. For more information, please refer to the detailed descriptions we provide about these and additional risk factors under the Risk Factors section in our 10-K and 10-Qs filed with the Securities and Exchange Commission. The company does not intend to update forward-looking statements once they are issued, whether as a result of new information, future events, or otherwise, except where required by applicable law. Please note that today's press release and management statements during today's call will include certain financial information in GAAP and non-GAAP measures. We will include definitions and reconciliations of GAAP to non-GAAP items in our press release, which is available on the Investor Relations section of our website at quantum.com. With that, it's my pleasure to turn the call over to Quantum CEO, Hughes Mayrath. Thank you, Tara, and thank you, everyone, for joining us today. Before I begin, I would like to officially welcome Jim Clancy as Quantum's new Chief Operating Officer. As you know, Jim served on our board of directors this past year. Jim and I also worked together at EMC, and his experience scaling businesses, driving execution, and leading high-performing organizations will be instrumental as we continue building Quantum into a significantly more valuable company. We've also strengthened our finance organization with the addition of Haral Patel as chief accounting officer and Mahul Patel, head of financial planning and analysis. Jim, Haral, and Mahal, welcome to Quantum. We're excited to have you on board. One year ago, when I joined Quantum, our priorities were clear. Strengthen execution, improve financial performance, simplify the business, and position the company for sustainable growth. We've made meaningful progress across each of those areas. Our financial position is stronger. Our operations and execution have improved. Our ability to procure, build, and ship products has strengthened significantly. significantly. And we're seeing increasing validation of our strategy in the marketplace. Perhaps the clearest evidence of that progress is profitability. In the second quarter, we generated more EBITDA than we did in the previous seven fiscal years combined. In fiscal Q2, revenue grew 43% year-over-year and 11% sequentially to more than $89 million, dollars driven by a strong demand across the business particularly within our secondary storage portfolio we achieved record core invoicing and ended the quarter with a record backlog of nearly 100 million dollars importantly this growth was not concentrated in a single geography or customer segment revenue increased year-over-year across all regions driven by secondary storage solutions tape remained the most consistent growth driver across the business complemented by exceptional demand from hyperscale customers which increase more than 2.6 times the over year our strategy to evolve our distribution model major is also working well for example our partner in china grew from zero to well above 30 million dollars in one year We also saw continued momentum in active scale code storage, which uniquely combines object storage and tape within a single data lifecycle strategy to continuously optimize cost, efficiency, and accessibility. During the quarter, we secured the largest active scale order in company history and closed multiple seven-figure active scale cold storage opportunities across a broad range of customer use cases. Another highlight was a major hyperscaler deployment representing one of the most significant purchase orders in Quantum's history. The customer selected Quantum Scalar i7 Raptor following an evaluation process that spanned more than three years with reliability, density, and infrastructure efficiency serving as key differentiators. This win reinforces our ability to support some of the world's largest and most demanding data environments. We expect I-7 Raptor production to ramp significantly in the coming quarters as it becomes a preferred choice for high-density, high-performance cold storage environments. Hyperscalers are becoming more aggressive in their use of tape. We're now seeing multi-quarter demand planning from four customers, and we expect to add more accounts in the upcoming quarters. Tape is becoming increasingly strategic to their long-term growth as AI continues to play a strain on infrastructure. We're also encouraged that Fujifilm is recognizing the long-term opportunity. Fujiflm has announced plans to quintuple production in the coming years, further validating our view that tape is entering a sustained growth cycle. We continue to see a shift towards larger, more strategic opportunities across a broad range of customer environments. We achieved record bookings in North America. with prior year period, we closed nearly twice as many core transactions above half a million dollars, including 50% growth in deals exceeding $1 million. We're also seeing the benefits of the work we've done with our channel ecosystem. Our core channel business grew approximately 30% year-over-year globally, reflecting continued strength in the enterprise business. Supply constraints continue to affect shipment timing. However, our ability to secure hard disk drives improved during the quarter, allowing us to fulfill previously delayed hard disk drive orders. Demand remained ahead of available supply in certain areas, particularly media intake. This contributed to the record backlog and gives us greater planning visibility moving forward. We also continue to expand our success cross-selling additional quantum technologies into accounts that had previously deployed only a single product line. This is our strategy in action, establish a foundation around a critical customer requirement, then expand our footprint as needs evolve. More broadly, these wins demonstrate our ability to secure new accounts, deepen existing relationships, and increase our share of customer spending over time. With hyperscale critical infrastructure, government, and enterprise environments, we're seeing more opportunities to bring the broader quantum portfolio into strategic customer accounts. As organizations face accelerating data growth driven by AI, analytics, compliance, and cyber resilience requirements, they are under increasing pressure to control infrastructure costs while retaining more data for longer periods. We believe this creates a significant market opportunity for intelligent data optimization. In response, during the quarter, we announced Quantum Autonomous Data Management, or ADM, which we believe is the most advanced data analytics and management platform available from a storage company. Unlike solutions that stop at visibility, ADM combines intelligence with action. It's tightly integrated with active skill called storage in our tape portfolio, enabling customers to continuously optimize data placement based on value risk and cost this helps reduce infrastructure spending while maintaining accessibility control and security one year ago our focus was on fixing the fundamentals we believe this quarter's results demonstrate continued traction and the benefits of that work more importantly we're executing better we're building and shipping products more efficiently fulfilling customer demand more effectively, and winning larger, more strategic opportunities. Combined with the market trends we're seeing around data growth, AI, and infrastructure efficiency, we believe Quantum has a strong foundation as well as position for continued growth. With that, I will turn the call over to Hiral Patel, our Chief Accounting Officer, who will review our financial results in more detail. Thank you, Hughes. Good afternoon to those joining us on the phone and webcast. I'll provide an overview of the company's GAAP and non-GAAP financial results for our fiscal second quarter that ended on September 30, 2026. Revenue in the quarter was $89.6 million, increasing $8.8 million, or approximately 11 percent sequentially from $80.8 million in the prior quarter and an increase of approximately 43 percent over 62.7 million in the prior year fiscal second quarter revenue exceeded the high end of guidance range of 82 million plus or minus 2 million primarily due to price and volume mix gap gross margin reached 41 percent in the second quarter up 170 basis points sequentially and 340 basis points year over year the notable improvement in gross margin reflects a combination of stronger pricing and cost execution while we are focused on driving further margin improvement we expect pricing volatility related to ongoing component shortages to remain a headwind going forward gap operating expenses for the second quarter were $29.9 million compared to $26.7 million in the prior quarter and $31.7 in the year-ago quarter. Operating expenses on a non-GAAP basis for the second quarter, were $26,9 million, which was at the lower end of our guidance range of $27 million plus or minus $1 million. This compared to a non-GAAP operating expenses of $25.1 million in the prior quarter and to $24.8 million in the second quarter of fiscal year 2026. The sequential increase in non-GAP OPEX primarily reflected a combination of incremental investment in R&D and higher sales commission associated with revenue growth in the quarter. Operating income was $6.8 million on a GAAP basis and $9.9 million on non-GAAP basis. This compared to a non-GAP operating income of $6,600,000 in the fiscal first quarter and a non-gap operating loss of $0.6 million in the prior year quarter. We generated approximately $14 million of operating cash flow in the quarter compared to approximately 0.9 million in Q1 marking our second consecutive quarter of positive operating cash flow. The improvement reflects stronger operating performance and operating cashflow also benefited from normal working capital timing during the quarter including accounts payable. Gap net loss in the fiscal second quarter was 44.8 million or a loss of 1.14 per share, which included a negative 51.5 million impact associated with changing fair value of warrant liabilities. This compares to a net loss of 155.3 million or loss of 7.06 per share in the previous quarter, which included multiple one-time items related to the extinguishment of company's debt and convertible notes totaling approximately 158 million, and a net loss of 46.5 million, or a loss of 3.49 per share in the prior year's second quarter. Excluding the change in fair value of warrant liabilities, as well as stock-based compensation, non-GAAP for the fiscal second quarter was 9.8 million or income of 0.25 per share. This compares to net income of $4 million or income of 0.18 per share in the prior quarter and a net loss of $7.1 million or loss of 0,554 per share in the Prior Fiscal Second Quarter. The achievement of non-GAAP adjusted net income for the second quarter reflected the company's higher revenue as well as expanded gross margin. Adjusted EBITDA for the second quarter was a positive 11.1 million, which was 4.1 million above the high end of our guidance range. This compares to a positive 8 million in the fiscal first quarter and a positive 0.5 million in the prior year quarter. The year-over-year improvement adjusted EBITD of approximately 10.6 million came on 26.9 million of incremental revenue reflecting the benefit of our previous restructuring ongoing cost discipline turning to debt and liquidity cash and cash equivalents and restricted cash at the end of fiscal second quarter were approximately 67.5 million up from 54.6 million at the end of fiscal first quarter 2027. following the repayment of all outstanding debt in the fiscal first quarter the company remains debt free and we've encouraged no interest expense during the fiscal second quarter turning to the company's outlook for fiscal third quarter of 2027 as conveyed on today's call we continue to see a strong demand from our customers coupled with our substantial backlog and continued strong bookings we expect near-term revenue upside to be a function of our ability to secure components in a supply constrained environment and ship incremental orders as such we expect fiscal third quarter revenue to be approximately 91 million plus or minus 2 million at the midpoint this represents approximately 22 growth year over year we expect third quarter non-gap operating expenses to be approximately 28 million plus or minus 1 million with the sequential increase reflecting sales commission on stronger performance and an increase in the pace of r d hiring as a result non-gap net income per share for the third quarters anticipated to be 0.20 plus or minus 0.10 per share based on an estimated 39.5 million weighted average basic shares outstanding adjusted EBITDA for the third quarter is expected to be $9.1 million, plus or minus $1 million. With that, I'll turn the call over to the operator for questions. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. And our first question will come from Brett NoBlocks with Cantor Fitzgerald. Hey, thanks for taking our question. This is Ben on for Brett. I guess I'm curious, any update as to revenue split by end market and how that has changed and how you expect it to change? So basically, if you were to go look at enterprise hyperscaler and mid-market, I would say the mid-markt is slightly up to flat in revenue. It's getting a little harder to self-take regardless of those prices in the SMB space or the mid-market space. Enterprise continues to be super robust, and hyperscalers going forward should see an increased share. It's not increased share in the past quarter, but going forward, we expect hypers scalers to come back and be a stronger part of the revenue. Very helpful. Thank you. Again, that is Star 1, if you would like to ask a question. We'll go next to Jacob Steffen with Lake Street Capital Markets. Jacob Steppen, Lake Street, Capital Marks, Hey, guys, congrats on a nice quarter here. Maybe, Hughes, if we could just kind of touch on some of the supply constraints again. I know you said Fujifilm was quintupling capacity over the next several years. that relates to kind of ibm and how you see the the kind of back half of your uh your fiscal year playing out as it relates to uh supply sure so um i would say in the past quarter we've seen some relief on this drives um which have helped us so that was kind of a good sign i'm not sure it's a forever sign of like um you know the market's getting better but um we had an easier time getting disk drives albeit at a higher price with regards to tape drive um you know we expect production to continue to ramp um year over year but we just don't know how quickly ibm is going to ramp tape drives that's the big unknown right their statement of direction is on a year-over-year basis they'll double but they really can't tell us what happens in calendar q4 calendar q1 exactly either so that's that's a bit of a known um but we we do expect to continue to trend up um with regards to media um we're seeing there are too many vendors sony and fuji um you know expect sony to be flattish next year because they're literally need investments to scale up. Fujifilm is making those investments as they have mentioned. So they're putting quite a bit of investments out there at quintuple capacity. So we think that that's going to bear its fruits sometime in the next year or so. So it's good for the industry. Got it. Very helpful. And maybe if you could just touch on the active scale traction. It seems like the pipeline's expanding nicely here, but curious if you could kind of give us any more insight to how you see that product line ramping. Yeah, I mean, it's been consistent progress. It's active-scale cold storage, so it's a combination of flash, disk, tape kind of solution that works out really, really well for enterprise customers. I think it has potential for MSPs that has potential for neo-scalers in the future just because of the feature functionality it has and the ability to optimize the way infrastructure can operate with good SLAs at low power and low cost. So, I mean, right now we are seeing active scale really continue to shine really in the enterprise, but I think it can potentially move up in some of the MSPs and some of the neoscalers in the next year or so. Got it. And maybe just last one for me. We've seen, you know, continued margin expansion over the last several quarters. I guess, you knows, from your perspective, how do you feel like margins are trending? Where do you think, you now, we can get to within the next 18 months or so? In the next eight months, the goal is 43. I think, you know, the problems to short-term, like short-time pipeline and cost and, you know, which deals we have, there's just a lot of margin variability depending on what product line it is or whether it's enterprise or hyperscaler. So there's a little bit of uncertainty still, like I think in the market, but going forward the goal has always been to get back to closer to 43 as soon as possible. Very helpful. I appreciate it, Hughes. Thank you. And a final reminder, if you'd like to ask a question, please press star 1, and we'll pause for just a moment. and this concludes our question and answer session and we'll conclude today's teleconference we thank you for your participation you may disconnect at this time and have a wonderful day