Quantum Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2019 (fiscal 2019 second quarter). Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted. Quantum provides storage and data-management products, services and LTO-related royalties.
Financial performance
| Metric | Three months ended September 30, 2019 | Prior-year quarter | Six months ended September 30, 2019 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $105.8 | $89.9 | $211.4 | $197.4 |
| Gross profit / margin | $43.5 / 41.1% | $35.5 / 39.5% | $89.3 / 42.3% | $81.9 / 41.5% |
| Operating income (loss) | $4.2 | $(3.4) | $6.9 | $(7.7) |
| Net loss | $(2.3) | $(21.6) | $(6.1) | $(29.1) |
| Adjusted EBITDA (non-GAAP) | $12.7 | $2.4 | $25.8 | $9.6 |
Quarterly revenue grew 18%, led by product revenue, up 32%. Secondary storage systems rose 41% and primary storage systems rose 29%; service revenue declined 3%. Management attributed product growth to hyperscaler customers, U.S. primary-storage growth, and improved LTO tape supply after a market dispute was resolved. Quarterly product gross margin increased to 27.4% from 20.0%, primarily due to cost reductions and a more favorable product mix. GAAP diluted loss per share was $0.06, versus $0.61 a year earlier.
For the six-month period, revenue increased 7%; product revenue rose 13%, while service revenue declined 2% and royalty revenue declined 3%. Operating results improved, but the prior-year comparison included a $12.4 million debt-extinguishment loss. Interest expense increased to $12.7 million from $8.6 million, primarily due to higher debt. Adjusted EBITDA and adjusted net income are non-GAAP measures; the filing cautions they have limitations and should not be considered substitutes for GAAP results.
Cash, liquidity and debt
- Cash and cash equivalents were $6.0 million at September 30, 2019, down from $10.8 million at March 31. An additional $5.9 million was restricted, including a required $5.0 million reserve.
- Operating cash flow was negative $9.7 million for the six months, compared with positive $2.7 million a year earlier. The company cited working-capital movements, including lower deferred revenue associated with the timing of service renewals. Investing cash outflow was $1.3 million; financing cash inflow was $6.0 million.
- Gross borrowings were approximately $170.7 million, including a $163.8 million senior secured term loan and $7.0 million drawn under the PNC facility. Reported long-term debt, net of issuance costs and including the current portion, was approximately $155.3 million. Term-loan and PNC interest rates were 12.1% and 8.0%, respectively.
- PNC borrowing availability was $14.8 million after the draw, subject to borrowing-base and other terms. Quantum reported compliance with its debt covenants as of the filing date, but the covenants require progressive improvement in financial metrics; noncompliance could impair its ability to service obligations.
- The balance sheet reported a $203.1 million stockholders’ deficit and current liabilities of $151.7 million against current assets of $129.0 million.
Outlook, risks and notable matters
- No specific financial guidance or quantified forecast is provided in the filing. Management stated its belief that existing cash and capital resources would fund planned expenditures and debt service and sustain operations for at least the next 12 months, while noting that additional debt or equity financing may be sought and may not be available on acceptable terms.
- Management cited service-renewal timing, legacy-customer support renewals, product demand, cost control, and debt service as relevant operating and liquidity factors. Results may vary with seasonal and short-term changes.
- Disclosure controls and procedures were concluded to be ineffective at September 30 because of material weaknesses in internal control over financial reporting. Remediation efforts were ongoing.
- An SEC investigation related to the company’s financial-statement restatement remained ongoing; Quantum said it was cooperating. A securities class-action settlement of $8.2 million was covered by directors’ and officers’ insurance and awaited final court approval as of the filing. A derivative-action settlement, including governance reforms and insured attorneys’ fees, received final approval in September 2019. The company said the stayed patent case was not expected to have a material adverse effect.
- Quantum had $21.5 million of non-cancelable inventory purchase commitments. It also had approximately 11.4 million lender warrants outstanding, exercisable at stated prices and subject to adjustment, creating potential dilution. The filing disclosed no new restructuring plan in the six months; remaining facility restructuring accruals were expected to be paid by March 31, 2020.
- Adoption of lease accounting resulted in $11.9 million of right-of-use assets and $13.1 million of operating lease liabilities at September 30. The company reported $118.0 million of unrecognized tax benefits, including interest and penalties; approximately $11.2 million could become recognizable within 12 months as statutes of limitations expire.
Important facts for investors to verify
- Whether operating cash flow, cash balances and available credit are sufficient to meet debt service and working-capital needs, particularly as deferred revenue changes with renewal timing.
- Compliance with the term-loan and PNC financial covenants and the availability of further PNC borrowing capacity.
- Progress on remediation of the material weaknesses and any developments in the SEC investigation or related litigation.
- Whether product growth, including growth from hyperscaler customers, is sustained and offsets declines in service renewals and LTO-related revenue.
- Potential dilution from lender warrants and the effect of high borrowing costs on future earnings and cash generation.