Quantum Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2021. Amounts below are in millions of dollars unless noted. Quantum designs, manufactures, and sells storage technology and services, including solutions for video and other unstructured data. It reports one operating segment.
Financial performance and liquidity
| Metric | Quarter ended Sep. 30, 2021 | Quarter ended Sep. 30, 2020 | Six months ended Sep. 30, 2021 | Six months ended Sep. 30, 2020 |
|---|---|---|---|---|
| Revenue | $93.2 | $85.8 | $182.3 | $159.1 |
| Gross profit / margin | $38.4 / 41.2% | $38.7 / 45.1% | $75.7 / 41.5% | $69.6 / 43.7% |
| Operating income (loss) | $(0.9) | $3.5 | $(1.0) | $0.0 |
| Net loss | $(9.3) | $(4.6) | $(13.4) | $(15.3) |
| Net loss per share | $(0.16) | $(0.11) | $(0.23) | $(0.38) |
- Quarterly revenue grew 9% year over year. Product revenue increased 7%, service revenue 9%, and royalty revenue 20%. Secondary storage systems rose 39%; primary storage systems declined 19%.
- Quarterly gross profit was nearly flat despite higher revenue, and gross margin fell 390 basis points. Product margin dropped 640 basis points to 24.8%, reflecting product mix and supply-chain cost pressures; service margin declined 140 basis points to 60.2%.
- Operating expenses increased 12% in the quarter, led by higher research and development and sales and marketing spending. The company recorded a net $5.0 million debt-extinguishment loss for the quarter, including the effect of the $10.0 million PPP loan forgiveness gain; the filing describes $15.0 million of gross costs associated with repaying the prior term loan.
- For the six months, operating cash flow was negative $15.3 million, versus negative $19.3 million a year earlier. Investing cash flow was negative $7.4 million, including $5.0 million cash paid for the Pivot3 acquisition and $2.4 million of capital expenditures. Financing cash flow was positive $12.7 million. Cash, cash equivalents, and restricted cash decreased $9.9 million to $23.2 million.
- At September 30, cash and cash equivalents were $22.8 million and current assets were $150.2 million versus current liabilities of $152.4 million. Reported debt carrying value was $104.5 million, including current maturities and net of applicable debt issuance costs; the underlying term loan and revolving-facility borrowings totaled approximately $109.4 million. Stockholders’ deficit was $116.0 million.
Material changes and business developments
- Revenue for the six months rose 15% year over year, led by a 46% increase in secondary storage systems and growth in services and royalties. Primary storage systems declined 9%, partly due to a shift toward recurring software subscriptions.
- Supply constraints affected shipments and margins. Backlog rose to $50 million from $30 million at the prior quarter-end; more than 70% was from hyperscaler customers and more than 85% related to tape products. Management expected about two-thirds to ship in the second half of fiscal 2022 and the remainder early in fiscal 2023.
- Quantum acquired specified Pivot3 video-surveillance assets on July 20 for $7.8 million of total consideration, comprising $5.0 million cash and $2.8 million in stock. The acquisition added technology, customer lists, and goodwill. On October 1, after quarter-end, it acquired EnCloudEn assets for $2.3 million cash.
- On August 5, Quantum refinanced its prior senior secured term loan with a $100 million term loan maturing in 2026. The PNC revolving facility was amended on September 30, extending maturity to 2026, setting commitments at the lesser of $30 million or the borrowing base, changing covenants, and removing a $5 million restricted-cash requirement. At quarter-end, $8.6 million was available under the PNC facility.
Outlook, risks, and contingencies
- No numerical earnings or revenue guidance is provided in the filing. Management said demand was strong but supply-chain disruptions remained a constraint, and that COVID-19 and its economic effects could continue to affect liquidity and capital resources.
- The new debt agreements include minimum-liquidity, net-leverage, and fixed-charge-coverage covenants. Term-loan interest was 6.75% at quarter-end; the PNC facility rate was 2.34%. Failure to meet covenants could adversely affect financial condition and debt service capacity.
- Quantum had $57.3 million of non-cancelable inventory purchase commitments with contract manufacturers and suppliers. Changes in forecast demand could create excess or obsolete inventory costs.
- Legal matters include a patent dispute with Realtime Data, which Quantum said was unlikely to have a material adverse effect, and Starboard-related litigation for which Quantum could not estimate the range of possible outcomes.
- The company reported $108.4 million of unrecognized tax benefits, including interest and penalties; after valuation allowances, only $7.5 million would favorably affect the effective tax rate if recognized. Management maintained valuation allowances against most U.S. and certain foreign deferred tax assets.
- Management reported disclosure controls and procedures were effective at a reasonable-assurance level and no material changes to internal control occurred during the quarter. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether supply constraints ease and the reported $50 million backlog converts to revenue on the expected schedule.
- Whether revenue growth—particularly in secondary storage and subscriptions—can improve gross margins amid product-mix and supply-cost pressures.
- Cash burn, borrowing availability, and continued compliance with the revised debt covenants and liquidity requirements.
- Integration and expected returns from the Pivot3 and EnCloudEn acquisitions, including the effects of acquisition-related costs and dilution.
- Developments in the Starboard litigation, the Realtime Data appeal, and the company’s substantial inventory commitments and unrecognized tax benefits.