Quantum To Begin Trading on Nasdaq, Returns to Profitability in Fiscal Q3
Improvements cap four-year restructuring effort by the storage-technology provider
Quantum has announced that the company’s common stock will begin trading on the Nasdaq Global Market beginning at 9:30 a.m. ET on Monday, Feb. 3 under its existing symbol, QMCO. In addition, the company revealed financial results for its fiscal third quarter (ending Dec. 31, 2019), showing a significant improvement in operating margin and a return to profitability for the first time in more than four years.
“Listing on Nasdaq signals the end of an arduous restructuring process and validates our increasing confidence that the new, stronger, profitable Quantum is much better positioned for the future,” said Jamie Lerner, chairman/CEO, Quantum, in making the announcement. “With our relisting, we are pivoting to the second phase of transformation, where we will be moving from making the company sustainable on a long-term basis to growing on a long-term basis. We have reestablished Quantum as a leader in storing and managing video and video-like data, with differentiated solutions that meet a large and growing need. We have rebuilt the earnings power of Quantum, and we are now poised for sustainable profitability. This profitability gives us tremendous momentum as we further advance our transformation.”
Strong Third-Quarter Numbers
The strong fiscal-third-quarter gross margin of 45.6% reflected a favorable sales mix and Quantum’s focus on a value-selling approach. Excluding the contribution from royalty revenue, the company’s gross margin reached 43.4%, compared with 39.3% in the year-ago quarter. This translated to a significant improvement in operating margin and a return to GAAP profitability, with $4.7 million in net income, compared with a net loss of $4.3 million in the same quarter last year. Year-to-date, Quantum’s gross margin was 43.3%, compared with 41.7%, an improvement of 160 basis points.
“We continued to advance our strategic transformation, focusing on margin expansion and profitability as we reposition Quantum as an innovator, poised to solve the biggest challenges around video and video-like data,” said Lerner. “This return to profitability validates the success of our transformation and provides momentum as we uplist to the Nasdaq.”
Quantum Emerges From Struggles With Nasdaq Listing, Profitability
The Nasdaq relisting and return to profitability marks an emergence from a dark period for Quantum. In September 2018, while under previous management, the company revealed wrongful revenue-recognition practices in an SEC filing. This was followed by an internal investigation and the filing of corrected financial statements in August 2019 for its 2015, 2016, and 2017 fiscal years. In addition, the New York Stock Exchange delisted Quantum for failure to file accounts in January 2019.
After a series of five CEO changes in just six months, Lerner came aboard in June 2018 and has led the company in a turnaround that has culminated in a return to profitability, improved operating margin, and a listing on the Nasdaq. He described his vision for rebuilding the company in an SVG interview in December 2018 and updated its progress in October 2019.
Quantum achieved its profitability guidance for the quarter, despite generating revenues that were lower than expectations, primarily as a result of the volatility inherent in its hyperscaler business, where timing of large orders can fluctuate based on a variety of external factors.
“Our third-quarter results demonstrate that — with an improved sales mix, continued operational efficiency, and sales discipline — we can drive incremental profitability even across slightly lower revenue,” Lerner added. “The long-term business opportunity in the archive-tape–storage market remains significant, so, while we expect our hyperscaler business in the short term to continue to be volatile, longer term, we anticipate adding new hyperscaler customers, which will help address non-linear purchasing patterns from a concentrated customer base. As a result, we have made the prudent decision to adjust our full-year guidance. This decision underscores the short-term volatility related to larger customers who are looking to leverage the reliability and value that tape offers, giving us increased optimism in the opportunity as we work to accelerate top-line growth in fiscal 2021 and beyond.”
Among the key moves that led to Quantum’s turnaround was the release of the NVMe-powered F-Series in 2018. The Quantum F2000 storage server has become a big hit for the company, which released a lower-priced NVMe storage appliance, the F1000, this month. In addition, Quantum has targeted markets outside of M&E, launching products focused on video surveillance and automotive driver assistance (ADAS). Quantum has also made a major push toward more cloud-based SaaS offerings and hybrid on-premises/cloud workflows.
“Our offerings in the video and video-like–data portion of our business remained strong, and we continue to see growing demand for our differentiated solutions,” Lerner said. “Our focus is to increase the contribution from these products, which maintain a better margin profile, which should mitigate the timing of hyperscaler revenue over time. Our new F-Series solutions had their strongest quarter yet. I am encouraged with the momentum for these products, and this reinforces my confidence in sustainable, profitable growth.”
Third Quarter of Fiscal 2020 vs. Prior-Year Quarter
Revenue was $103.3 million for the third quarter in fiscal 2020, up 1% from $102.0 million in the year-ago quarter.
Gross profit in the third quarter of fiscal 2020 was $47.1 million, or 45.6% gross margin, compared with $43.1 million, or 42.2% gross margin, in the year ago quarter. Gross margins improved year over year primarily because of a sales mix weighted toward more-profitable product lines and service offerings as well as cost reductions across a wide range of products.
Total operating expenses were $35.4 million, or 34.3% of revenue, in the third quarter of fiscal 2020, compared with $39.6 million, or 38.8% of revenue, in the year-ago quarter. Selling, general, and administrative expenses declined 15% to $26.1 million for the third quarter of fiscal 2020, from $30.5 million in the year-ago quarter. Research and development expenses were $9.3 million in the third quarter of fiscal 2020, up 18% from $7.9 million in the year-ago quarter.
Net income was $4.7 million, or $0.10 per diluted share in the third quarter of fiscal 2020, compared with a net loss of $4.3 million, or $0.12 per share, in the year- ago quarter.
Excluding non-recurring charges, stock compensation, and restructuring charges, adjusted met income was $7.3 million, or $0.16 per diluted share, in the third quarter of fiscal 2020, compared with $3.4 million, or $0.08 per diluted share, in the year ago quarter.
Adjusted EBITDA increased $3.6 million to $14.7 million in the third quarter of fiscal 2020, from $11.1 million in the year-ago quarter.
Year-to-Date Fiscal 2020 vs. Year-to-Date Fiscal 2019
Revenue was $314.7 million and increased 5% for the first nine months of fiscal 2020, compared with $299.4 million in the year-ago period. The growth was driven by a 10% increase in product revenue with growth across all product lines, which was partially offset by declines in royalty and service revenues. The modest decline in service revenues was primarily due to the timing of customer installation scheduling.
Gross profit for the first nine months of fiscal 2020 was $136.4 million, or 43.3% gross margin, compared with $124.9 million, or 41.7% gross margin, in the year-ago period. Gross margins improved year over year primarily because of cost reductions in cost of service and across a wide range of products and a sales mix weighted toward more-profitable product lines.
Total operating expenses for the first nine months of fiscal 2020 were $117.8 million, or 37% of revenue, compared with $129.2 million, or 43% of revenue, in the year-ago period. Research and development expenses increased 13%, to $27.1 million for the first nine months of fiscal 2020 from $24.0 million in the year-ago period. Selling, general, and administrative expenses declined 10%, to $89.7 million for the first nine months of fiscal 2020 from $99.7 million in the year-ago period, driven by lower costs associated with the financial restatement and related activities and overall lower operating expenses as a result of efforts to streamline processes and tools and reduce the company’s facilities footprint.
Net loss was $1.4 million, or $0.04 per share, for the first nine months of fiscal 2020; in the year-ago quarter, net loss was $33.4 million, or $0.94 per share.
Excluding non-recurring charges, stock compensation, and restructuring charges, adjusted net income was $17.8 million, or $0.40 per diluted share for the first nine months of fiscal 2020, compared with $1.9 million, or $0.05 per diluted share, in the same period last year.
Adjusted EBITDA increased $15.9 million to $40.5 million for the first nine months of fiscal 2020, compared with $20.7 million in the year ago period.
Balance Sheet and Liquidity as of Dec, 31, 2019
Cash and cash equivalents of $7.5 million as of Dec. 31, 2019, compared with $10.8 million as of March 31, 2019. These amounts exclude $5.9 million in restricted cash required under the company’s credit agreements.
Outstanding long-term debt as of Dec. 31, 2019, was $152.4 million, net of $14.6 million in unamortized-debt–issuance costs and $1.7 million in current portion of long-term debt. This compares with $145.6 million of outstanding debt 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. The increase in long-term debt from March 31, 2019 was primarily due to borrowings of $5.3 million at Dec. 31, 2019, from the revolving-credit facility to meet short-term working-capital requirements.
Total interest expense was $6.4 million and $19.1 million for the three and nine months ended December 31, 2019, respectively.