Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
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Attn: |
Brad Skinner |
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Mark Kronforst |
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Stathis Kouninis |
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Re: |
Quantum Corporation |
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Review of Form 10-K for the fiscal year ended March 31, 2005 |
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and Form 8-K filed October 27, 2005 |
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File No. 1-13449 |
Quantum Corporation (the "Company") submits this letter in response to comments from the Staff of the Securities and Exchange Commission (the "Staff") received by letter dated January 25, 2006 relating to the Company's Form 10-K for the fiscal year ended March 31, 2005, filed June 8, 2005, and Form 8-K filed on October 27, 2005.
In this letter, we have recited the comments from the Staff in italicized, bold type and have followed each comment with the Company's response.
10-K for the Fiscal Year Ended March 31, 2005
Item 7, MD&A of Financial Condition and Results of Operations
Critical Accounting Policies, page 17
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1. |
We have read your response to our prior comment number 1 and believe that disclosures regarding how accurate your estimates related to warranties and contingent tax accruals have been in the past, how much these estimates have changed, and whether these estimates are reasonably likely to change in the future should be provided within the critical accounting policies section. We believe this will allow readers to gain an understanding of the relevant accounting policies and related estimates and evaluate those policies and estimates within the context provided by the required quantitative information. Please revise your disclosures to ensure your critical accounting policies section is complete. |
We will revise our disclosure related to warranties in future filings as follows:
We will revise our disclosures related to contingent tax accruals in future filings as follows:
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Quantum believes that, based on current applicable tax laws, it has provided adequate amounts and recorded liabilities for probable and estimable tax adjustments that may be proposed by various taxing authorities in the U.S., state, and foreign jurisdictions. These estimated liabilities are recorded on a quarterly basis and estimates are revised based upon new information that was not available at the time of prior estimates. Our estimates have in the past been subject to change and we expect that some of our estimates will be subject to change in the future. While our estimated liabilities are recorded based upon existing tax laws, events may occur in the future that indicate payments of these amounts will be less than estimated, in which event reversals of these liabilities would create tax benefits that we would recognize in the periods when we determine that the liabilities have been reduced. Conversely, events may occur in the future that indicate that payments of these amounts will be greater than estimated, in which event we would record tax charges and additional liabilities. For example, we may in the future decide to negotiate with tax authorities regarding our tax liability in a particular jurisdiction, which could result in a different outcome than our expected liability. In addition, the regulatory audit statute of limitations for a particular jurisdiction may expire without Quantum becoming subject to an audit by that jurisdiction or an audit may occur but result in a smaller tax liability than we had estimated, and we would no longer be required to incur any or all of the liability for that audit, as the case may be. For example, in the third quarter of fiscal year 2005, we reversed $15.6 million of contingent tax accruals related to a more favorable than expected outcome of the IRS audit of the fiscal years ending March 31, 1997, 1998, and 1999. |
Revenue recognition, page 50
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2. |
Please revise your revenue recognition disclosures to explain your process for recognizing royalty revenues. Explain that you substantiate delivery through obtaining periodic, timely unit reports from licensees that include quantity of units sold to end users that are subject to royalties. In addition, clarify how you determine the amount of revenue to record using the royalty agreements. |
We will revise our revenue recognition disclosures in our future filings as follows:
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Quantum licenses certain intellectual property to third party manufacturers under arrangements that are represented by master contracts, allowing these third party manufacturers to manufacture and sell certain of our products. As consideration for licensing the intellectual property, the licensees pay us a per-unit royalty for sales of their products that incorporate the licensed technology. On a periodic basis, the licensees provide us with unit reports that include the quantity of units sold to end users subject to royalties. We recognize revenue based on the unit reports, which are provided to us in a timely fashion. The unit report substantiates that the delivery has occurred. Royalty revenue is measured by multiplying the units sold as reflected in the unit reports by the royalty per unit in accordance with the royalty agreements. Royalty payments are made on a per unit basis at a stipulated per unit amount. |
GAAP to Non-GAAP Reconciliation of Consolidated Statements of Operations, pages 79 through 82
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3. |
Please explain to us why you believe labeling restructuring items as “special” is sufficiently different than labeling items as “non-recurring,” “infrequent,” or “unusual” as contemplated by Item 10(e)(1)(ii)(B). |
Historically, the Company has categorized restructuring charges as “special charges”. Special charges are non-recurring, infrequent and unusual items. As noted under response 4 below, over the past several years, the Company has considered restructuring charges to be non-recurring and the charges have been historically excluded from non-GAAP results. The special charges in our past filings derive from a series of distinct and unique events during a period of transition for the Company. These events include, but are not limited to, the disposition of HDD, the sale of the NAS business, the outsourcing of manufacturing and repair operations, consolidations of operations to support our QSD and QSS business segments and integration of operations as a result of the acquisition of Benchmark and Certance. However, the Company is nearing the end of a significant transition and does not expect to exclude restructuring charges from non-GAAP financial measures beyond FQ4 ’06.
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We have read your response to prior comment number 6 and note that you have not proposed any additional disclosures related to your non-GAAP information. Question 9 of the FAQ indicates that presenting a non-GAAP financial measure that eliminates
recurring charges will depend on all the facts and circumstances. If there is a past pattern of the charges, no articulated demonstration that such charges will not continue, and no other unusual reason that you can substantiate to identify the special nature
of the charge, it would be difficult for you to meet the burden of disclosing why the non-GAAP financial measure is useful to investors. Similarly, Question 8 of the FAQ indicates that, while there is no per se prohibition against removing a recurring item, you
must meet the burden of demonstrating the usefulness of any measure that excludes recurring items, especially if the non-GAAP measure is used to evaluate performance. Such measures more likely would be permissible if you reasonably believe that the financial
impact of the item will disappear or become immaterial within a near-term finite period. In addition, we believe more robust disclosures are required in both your filed and furnished documents that contain non-GAAP information, including: |
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Why the adjustments are necessary in evaluating your overall financial and operating performance and why the excluded items should not be considered. For example, it remains unclear to us why recurring restructuring activities that appear to be
critical to the ongoing performance of your business should be ignored in assessing your performance; |
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The material limitations associated with the use of the non-GAAP financial measures; and |
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The manner in which management compensates for the limitations when using the non-GAAP measures. |
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Please note that we believe your disclosures should provide detailed information regarding each non-GAAP measure and each exclusion from the GAAP information. In addition, you should specifically define any references to items such as “overall financial performance,” “operating performance” and “core operating performance” as companies and investors may differ as to what these terms represent and how each should be determined. |
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In addition to GAAP results, management has found, and has been told by investors, that the supplemental non-GAAP financial measures have been particularly useful in assessing the Company’s performance over the last few years because of significant transitions that have occurred. The Company has taken steps to return to profitability following the sale of the HDD business and decline in revenues including restructuring activities related to various acquisitions and divestitures and changes in Quantum’s manufacturing and repair activities. The financial impact of these restructuring activities is large relative to Quantum’s quarterly financial performance and by excluding these charges, which are non-recurring in nature, it allows management and investors to better understand the Company’s business during a time of significant transition. Management has communicated to investors in quarterly press releases and earnings calls that the Company has experienced significant transitions over the last few years, however these transition activities are nearing completion and Quantum does not expect to continue to exclude restructuring charges from non-GAAP financial measures beyond FQ4 ’06.
With our FQ3 ’06 press release, the Company provided detailed information regarding each non-GAAP measure and plans to continue to do so in future furnished and filed documents when non-GAAP measures are shown. Please see the press release in Exhibit A. Additionally, the Company has excluded references to multiple terms such as “overall financial performance”, “core operating performance”, and “operating performance” in order to clarify the financial terms used. Beginning in FQ1 ’07, the Company will exclude stock compensation expense and amortization of intangibles from its non-GAAP results; all other financial results will be included in both the GAAP and non-GAAP financials results.
We hope that you will find the foregoing responsive to the Staff's comments. If you have any further questions or comments, please direct these to me at 408-944-6500. In addition, we would request that you provide a facsimile of any additional comments that you may have to my attention at 408-944-6501. Thank you for your assistance.
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/s/ EDWARD J. HAYES, JR. |
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Edward J. Hayes, Jr. |
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Executive Vice President, Finance and |
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Quantum Corporation |
Exhibit A Press release, dated January 31, 2006.
QUANTUM CORPORATION INCREASES REVENUE AND GENERATES PROFIT IN FISCAL THIRD QUARTER
Delivers Improved Sequential Performance in Revenue, Gross Margins, Operating Expenses and Net Income
SAN JOSE, Calif., Jan. 31, 2006 - Quantum Corp. (NYSE:DSS), a global leader in storage, today announced that revenue for its fiscal third quarter (FQ3’06), ended Dec. 26, 2005, was $218 million, up 8 percent over the same quarter last year (FQ3’05). While the year-over-year increase mainly reflected the contribution from Quantum’s acquisition of Certance in January 2005, revenue also grew 7 percent sequentially. Quantum had a small GAAP profit of $819 thousand, or breakeven on a per diluted share basis. This was down from the 8-cent per diluted share profit in the comparable quarter last year, largely because of a one-time $12.1 million tax benefit in that quarter, but represented a solid improvement over the 7-cent per diluted share loss in the second quarter of fiscal year 2006 (FQ2’06).
In FQ3’06, the company had $11.7 million in non-GAAP net income, its highest level in four years, and non-GAAP earnings per diluted share of 6 cents. This was up 1 cent per diluted share from FQ3’05 and 5 cents per diluted share sequentially. (For a reconciliation of GAAP to non-GAAP figures, please see the accompanying tables under the section on “Use of Non-GAAP Financial Measures.”)
“In the December quarter, we managed through some continuing transition challenges to achieve the significant improvement in our financial performance that we’ve said we expected in the second half of our fiscal year,” said Rick Belluzzo, chairman and CEO of Quantum. “Revenue, gross margins and earnings per share were all solidly higher than in the first two quarters, and we continued to manage expenses. In addition, our non-GAAP net income was the highest it’s been since 2001, reflecting all the work we’ve done to strengthen our operational foundation, integrate Certance and successfully execute on this year’s series of exciting new product introductions.”
The GAAP and non-GAAP gross margin rates in FQ3’06 were 29 percent and 31 percent, respectively, down slightly from the same quarter last year but up 3 percentage points sequentially in both cases. GAAP and non-GAAP operating expenses for the December quarter were $61 million and $56 million, respectively. This was higher than the levels in FQ3’05, largely due to the additional expenses resulting from the Certance acquisition, but lower sequentially.
December quarter revenue in Quantum’s Storage Systems business was $69 million, down from $84 million in FQ3’05, largely as a result of sales weakness at one of Quantum’s OEMs. However, Quantum grew its branded product sales in this business for the third straight quarter, and total Storage Systems revenue increased $2 million sequentially. On a product level, sales of the PX720 enterprise library in FQ3’06 grew 11 percent year-over-year. In addition, the new PX500 Series libraries and SuperLoader™ 3 autoloader – which both began shipping in the September quarter – continued to gain traction with customers. These products have a much better underlying cost structure than those they’re replacing, thereby enabling Quantum to offer users more value-add features at competitive price points while still increasing the gross margin contribution from these product segments.
Following a record September quarter, revenue from Quantum’s DX-Series disk-based backup products – part of the company’s newly named Echelon Disk Platform™ – was roughly flat on a year-over-year basis in FQ3’06. However, shipments (base units plus upgrades) increased during this period, in large part due to existing customers upgrading their systems to take advantage of the additional capacity provided in new versions of Quantum’s DX30 and DX100 released in October. Extending its market reach, the company also announced a major expansion of its disk-based offerings in the December quarter, adding the new DX3000 and DX5000 midrange appliances, as well as the DPM5500 appliance based on Microsoft’s Data Protection Manager. This has already resulted in new business from midrange and small and medium-sized business (SMB) customers that have been looking for the right disk-based backup solution to meet their needs and have seen the superior value Quantum offers through features such as its Optyon™ hardware-based compression technology.
Quantum’s tape drive revenue in FQ3’06 was $89 million, a year-over-year increase of 32 percent due mainly to the contribution of LTO and DAT products acquired from Certance. SDLT 600 and DLT VS160 shipments were up 59 percent and 43 percent, respectively, compared to FQ3’05, but the additional revenue generated did not offset the continued decline in sales of older DLT® tape drives, particularly the DLT VS80 and SDLT 320. Nevertheless, Quantum’s new DLT-V4 tape drive, which began shipping in October, has been well-received by customers. It combines exceptional capacity and performance with value-add capabilities such as monitoring, diagnostics and Write Once Read Many (WORM) that are part of the DLTSage™ architecture. In addition, Quantum recently began shipping the DLT-V4 in its SuperLoader 3 autoloader, leveraging the company’s advantage as a developer of both tape drives and tape automation to provide SMB customers with enterprise-level features in an automated solution for about $1/gigabyte (GB).
Quantum expects to further reinvigorate its DLT tape drive portfolio later this quarter with the launch of the DLT-S4 and SDLT 600A. DLT-S4, the company’s newest super drive, will provide industry-leading capacity, high performance, the lowest cost/GB of storage and the benefits of DLTSage. This will include the new DLTSage Tape Security feature, which uses an electronic key to prevent unauthorized access to data on tape cartridges and will be integrated into both DLT-S4 and DLT-V4 at no additional cost. The SDLT 600A is an enhanced version of Quantum’s SDLT 600 tape drive specifically developed to meet the distinctive requirements of the broadcast and professional video market as it transitions from traditional video tape-based operations to all-digital, file-based workflows.
Tape media revenue in FQ3’06 was $60 million, up 19 percent over FQ3’05, largely due to the contribution from LTO royalties.
In providing guidance for its fiscal fourth quarter of 2006 (FQ4’06), Quantum said that its near-term priorities would be to complete the final stage of its new product introductions, build momentum behind all the products launched during fiscal year 2006, capitalize on the company’s stronger competitive foundation to increase revenue and gross margins, and turn more of its attention to future product direction and roadmaps. Quantum also said that although it has managed through the most difficult aspects of this year’s transitions, it still expects to face execution challenges related to ramping up so many new products.
For the March quarter, Quantum said it expects overall revenues to be in the range of $210 million to $225 million and both GAAP and non-GAAP gross margin rates to be relatively flat sequentially. The company anticipates that GAAP operating expenses will be in the range of $60 million to $63 million and that non-GAAP operating expenses will be in the range of $56 million to $58 million. Quantum expects FQ4’06 bottom-line results, per diluted share, to be in the range of a 1-cent loss to a 2-cent profit on a GAAP basis and in the range of a 3-cent to 6-cent profit on a non-GAAP basis. The GAAP to non-GAAP difference reflects an estimated $5.4 million in amortization of acquisition-related intangibles and $3 million in restructuring charges. (For a reconciliation of GAAP to non-GAAP amounts, please see the accompanying table entitled “Fiscal Year 2006 Fourth Quarter Guidance.”)
Use of Non-GAAP Financial Measures
The non-GAAP financial measures used in this press release – which are non-GAAP gross margin, non-GAAP operating expenses, non-GAAP net income and non-GAAP net income per share – exclude the impact of amortization of acquisition-related intangible assets, restructuring charges and the expected loss associated with the settlement of pending litigation. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies.
Quantum believes that the non-GAAP financial measures provide useful and supplemental information to investors regarding its quarterly financial performance. Specifically, the information provides investors with a view today of how Quantum is expected to perform following the completion of a series of transition activities. Quantum management has found, and has been told by investors, that these non-GAAP financial measures have been particularly useful over the last few years because of the significant changes that have occurred at Quantum outside of its day-to-day business of designing, developing, manufacturing, licensing, servicing and marketing tape drives, media cartridges, tape automation systems and disk-based backup systems. These changes are primarily the result of integration activities associated with a number of acquisitions (such as Certance and Benchmark) and divestitures (such as the hard disk drive and NAS businesses), changes in Quantum’s manufacturing and repair infrastructure and other similar transition activities. The financial impact of these activities, such as the restructuring charges that the company has taken as a result of its Benchmark and Certance acquisitions or the restructuring charges that Quantum has taken as a result of its decision to outsource a significant portion of its tape manufacturing capacity, are often large relative to its overall quarterly financial performance, and most, if not all, charges for a particular transition activity typically are taken in one or two financial quarters but not in other financial quarters, which can adversely affect the comparability of Quantum’s results on a period-to-period basis. In addition, certain activities, such as the closure of the company’s Dundalk, Ireland repair facility, only happen once, and the underlying restructuring charges associated with such activities impact a limited number of quarters significantly, but do not recur. Overall, these transition activities are nearing completion, and Quantum does not expect to continue to exclude restructuring charges from non-GAAP financial measures beyond FQ4’06.
Quantum management thus regularly uses non-GAAP financial measures internally to understand, manage, and evaluate the company’s business results and make operating decisions. For instance, Quantum management often makes decisions regarding staffing, future management priorities and how the company will direct future operating expenses on the basis of non-GAAP financial measures. Quantum management also measures its employees and compensates them in part based on such non-GAAP financial measures. For the same reasons, Quantum management also uses this information in its budgeting and forecasting activities. The non-GAAP financial measures presented here also facilitate comparisons to Quantum historical operating results, which have consistently been presented in this manner.
Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. They are limited in value because they exclude charges that have a material impact on the company’s reported financial results and, therefore, should not be relied upon as the sole financial measures to evaluate the company. The non-GAAP financial measures are meant to supplement, and be viewed in conjunction with, GAAP financial measures. Investors are encouraged to review the reconciliation of the non-GAAP financial measures to their most directly comparable GAAP financial measures as provided in the tables accompanying this press release.
Non-GAAP Gross Margin
The calculation of non-GAAP gross margin is described in the table below. It excludes the amortization of intangibles related to the acquisition of technologies, trademarks and customer list assets of $4.1 million in gross margin for the three months ended December 26, 2005. Amortization of intangibles is excluded from the gross margin because the amounts are non-cash, Quantum cannot influence the timing and amount of the future expense recognition and doing so provides investors and management with better visibility into the components of cost of revenue and operating expenses.
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Three months ended |
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(In thousands) |
December 26, 2005 |
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Gross margin on a GAAP basis |
$ |
63,660 |
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Amortization of intangibles |
4,078 |
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Gross margin on a non-GAAP basis |
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67,738 |
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Non-GAAP Operating Expenses
The calculation of non-GAAP operating expenses is described in the table below. It excludes the amortization of intangibles related to the acquisition of technologies, trademarks and customer list assets of $1.4 million in operating expenses for the three months ended December 26, 2005. Amortization of intangibles is excluded from operating expenses for the same reasons as it is excluded from non-GAAP gross margin described above. The calculation of non-GAAP operating expenses also excludes restructuring charges related to workforce reductions of $3.5 million in operating expenses for the three months ended December 26, 2005. Restructuring charges are excluded for the reasons described above in the introductory paragraphs of this “Use of Non-GAAP Financial Measures” section.
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Three months ended |
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(In thousands) |
December 26, 2005 |
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Operating expenses on a GAAP basis |
$ |
60,702 |
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Amortization of intangibles |
1,420 |
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Restructuring charges |
3,515 |
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Operating expenses on a non-GAAP basis |
$ |
55,767 |
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Non-GAAP Net Income
The calculation of non-GAAP net income is described in the table below. Because gross margin and operating expenses are included in the net income calculation, the net income calculation excludes the amounts for amortization of intangibles and restructuring charges as described for gross margin and operating expenses above. In addition, non-GAAP net income excludes $1.9 million associated with expected charges from the settlement of pending litigation. This amount is excluded as it related to a one-time legacy legal matter.
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Three months ended |
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(In thousands) |
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December 26, 2005 |
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Net income on a GAAP basis |
$ |
819 |
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Amortization of intangibles |
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5,498 |
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Restructuring charges |
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3,515 |
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Loss on settlement |
1,900 |
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Net income on a non-GAAP basis |
$ |
11,732 |
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Non-GAAP Net Income per Share
The calculation of non-GAAP net income per share is described in the table below. Because net income is included in the net income per share calculation, the net income per share calculation excludes the amounts for amortization of intangibles, restructuring charges and the expected loss on the settlement of pending litigation as described for net income above. In addition, the calculation excludes interest on convertible subordinated debt that is required to be added back to the numerator per Standards No. 128 "Earnings per Share" issued by the Financial Accounting Standards Board for purposes of calculating earnings per share.
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(In thousands, except per-share amounts) |
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Three months ended |
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December 26, 2005 |
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Net income on a non-GAAP basis |
$ |
11,732 |
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Interest on convertible subordinated debt |
1,750 |
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Net income on a non-GAAP basis for purposes of calculating earnings per share |
$ |
13,482 |
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Net income per share on a GAAP basis |
$ |
- |
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Amortization of intangibles |
0.02 |
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Restructuring charges |
0.02 |
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Loss on settlement |
0.01 |
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Interest on convertible subordinated debt |
0.01 |
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Net income per share on a non-GAAP basis |
$ |
0.06 |
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Shares used to compute diluted net income per share - GAAP |
185,793 |
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Shares used to compute diluted net income per share - non-GAAP |
222,574 |
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Reconciliation of GAAP and Non-GAAP FQ4’06 Guidance
The table below provides the calculation and adjusting items for Quantum’s FQ4’06 non-GAAP guidance, consisting of non-GAAP gross margin, non-GAAP operating expenses and non-GAAP net income per share. Anticipated amortization of intangibles and restructuring charges have been excluded from the corresponding GAAP measures to derive these non-GAAP measures, for the same reasons that they were excluded from the FQ3’06 non-GAAP measures as described above.
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FISCAL YEAR 2006 FOURTH QUARTER GUIDANCE |
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(In thousands, except per-share amounts) |
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Projected revenue |
$210 to $225 million |
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Projected gross margin on a GAAP basis |
Relatively flat sequentially |
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Adjustment: Estimated amortization of intangibles |
Approximately $4 million |
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Projected gross margin on a non-GAAP basis |
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Relatively flat sequentially |
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Projected operating expenses on a GAAP basis |
Range of $60 to $63 million |
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Adjustment: Estimated amortization of intangibles |
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Approximately $1.4 million |
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Adjustment: Estimated restructuring charges |
Approximately $3 million |
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Projected operating expenses on a non-GAAP basis |
Range of $56 to $58 million |
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Projected net income per share on a GAAP basis |
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Loss of 1 cent to profit of 2 cents |
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Adjustment: Estimated amortization of intangibles |
Approximately 3 cents |
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Adjustment: Estimated restructuring charges |
Approximately 2 cents |
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Projected net income per share on a non-GAAP basis |
Profit of 3 cents to 6 cents per share |
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The projected GAAP and non-GAAP financial information set forth in this table represent forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of risks and uncertainties as identified in the Safe Harbor Statement of the press release. |
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Conference Call and Audio Webcast Notification
Quantum will hold a conference call today, Jan. 31, 2006, at 2 p.m. PST, to discuss its December quarter results. The dial-in number is: (303) 262-2139 (U.S. & International). Quantum will provide a live audio webcast of the conference call beginning today, Jan. 31, 2006, at 2 p.m. PST. The site for the webcast and related information is: http://investors.quantum.com/.
About Quantum
Quantum Corp. (NYSE:DSS), a global leader in storage, delivers highly reliable backup, recovery and archive solutions that meet demanding requirements for data integrity and availability with superior price/performance and comprehensive service and support. Quantum offers customers of all sizes an unparalleled range of solutions, from leading tape drive and media technologies, autoloaders and libraries to disk-based backup systems. Quantum is the world's largest volume supplier of both tape drives and tape automation and has pioneered the development of disk-based systems optimized for backup and recovery. Quantum Corp., 1650 Technology Drive, Suite 800, San Jose, CA 95110, (408) 944-4000, www.quantum.com.
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Quantum, the Quantum logo, DLT and DLTtape are trademarks of Quantum Corporation registered in the United States and other countries. SDLT, DLT VS, Optyon, SuperLoader, DLTSage, Echelon Disk Platform and DX are trademarks of Quantum Corporation. All other trademarks are the property of their respective owners.
"Safe Harbor" Statement under the U.S. Private Securities Litigation Reform Act of 1995: This press release contains "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. Specifically, without limitation, statements relating to: (1) the upcoming product launches of the DLT-S4 and SDLT 600A and their expected features; (2) our near-term priorities and expected challenges; and (3) our financial outlook for the fourth quarter of fiscal 2006, including our revenue, gross margin rate, operating expenses, net income/loss and net income/loss per share, on both a GAAP and non-GAAP basis, are forward-looking statements within the meaning of the Safe Harbor. These statements are based on management's current expectations and are subject to certain risks and uncertainties. As a result, actual results may differ materially from the forward-looking statements contained herein. Factors that could cause actual results to differ materially from those described herein include, but are not limited to, our ability to successfully execute to our product roadmaps and timely ship our products, the risk that lower volumes and continuing price and cost pressures could lead to lower gross margin rate, media royalties from media manufacturers coming in at lower levels than expected, operational risks associated with the changes being made to our manufacturing infrastructure and acceptance of, or demand for, our products being lower than anticipated. More detailed information about these risk 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors," on pages 41 to 51 in Quantum's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 4, 2005 and pages 32 to 42 in Quantum's Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 8, 2005. In particular, you should review the risk factors on pages 41 and 42 of our Form 10-Q under the headings “A large percentage of our sales come from a few customers, and these customers have no minimum or long-term purchase commitments. The loss of, or a significant change in demand from, one or more key customers could materially and adversely affect our business, financial condition, and operating results”, “Our operating results depend on new product introductions, which may not be successful, in which case, our business, financial condition, and operating results may be materially and adversely affected”, “Competition has increased, and may increasingly intensify, in the tape drive and tape automation markets as a result of competitors introducing products based on new technology standards, which could materially and adversely affect our business, financial condition, and results of operations”, “We derive almost all of our revenue from products incorporating tape technology. If competition from alternative storage technologies continues or increases, our business, financial condition, and operating results would be materially and adversely harmed”, and “Our tape media business generates a relatively high gross margin rate, which significantly impacts the total company gross margin rate. If we were to experience a significant decline in the tape media or tape royalty gross margin rate, our business, financial condition, and operating results would be materially and adversely affected.” Quantum expressly disclaims any obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.
QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)
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|
|
|
|||||||||
|
Product revenue |
$ |
184,865 |
$ |
170,492 |
$ |
532,489 |
$ |
466,460 |
||||
|
Royalty revenue |
33,500 |
30,907 |
96,120 |
87,668 |
||||||||
|
|
|
|
|
|||||||||
|
Total revenue |
218,365 |
201,399 |
628,609 |
554,128 |
||||||||
|
Cost of revenue |
154,705 |
141,348 |
454,848 |
384,040 |
||||||||
|
|
|
|
|
|||||||||
|
Gross margin |
63,660 |
60,051 |
173,761 |
170,088 |
||||||||
|
Operating expenses: |
||||||||||||
|
Research and development |
25,546 |
21,239 |
82,216 |
65,781 |
||||||||
|
Sales and marketing |
21,571 |
20,093 |
64,547 |
64,511 |
||||||||
|
General and administrative |
10,070 |
13,335 |
29,898 |
36,541 |
||||||||
|
Restructuring charges |
3,515 |
641 |
13,022 |
10,227 |
||||||||
|
|
|
|
|
|||||||||
|
60,702 |
55,308 |
189,683 |
177,060 |
|||||||||
|
|
|
|
|
|||||||||
|
Income (loss) from operations |
2,958 |
4,743 |
(15,922 |
) |
(6,972 |
) |
||||||
|
Interest income and other, net |
597 |
2,387 |
6,637 |
6,501 |
||||||||
|
Interest expense |
(2,383 |
) |
(2,755 |
) |
(7,756 |
) |
(8,306 |
) |
||||
|
|
|
|
|
|||||||||
|
Income (loss) before income taxes |
1,172 |
4,375 |
(17,041 |
) |
(8,777 |
) |
||||||
|
Income tax provision (benefit) |
353 |
(11,910 |
) |
1,405 |
(8,730 |
) |
||||||
|
|
|
|
|
|||||||||
|
Net income (loss) |
$ |
819 |
$ |
16,285 |
$ |
(18,446 |
) |
$ |
(47 |
) |
||
|
|
|
|
|
|||||||||
|
Net income (loss) per share |
||||||||||||
|
Basic |
$ |
- |
$ |
0.09 |
$ |
(0.10 |
) |
$ |
- |
|||
|
Diluted |
$ |
- |
$ |
0.08 |
$ |
(0.10 |
) |
$ |
- |
|||
|
Weighted average common and common equivalent shares |
||||||||||||
|
Basic |
184,217 |
181,607 |
183,663 |
180,744 |
||||||||
|
Diluted |
185,793 |
219,280 |
183,663 |
180,744 |
||||||||
QUANTUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
|
December 26, |
March 31, |
|||||
|
|
|
|||||
|
Assets |
||||||
|
Current assets: |
||||||
|
Cash and cash equivalents |
$ |
131,836 |
$ |
225,136 |
||
|
Short-term investments |
99,700 |
25,000 |
||||
|
Restricted cash |
558 |
- |
||||
|
Accounts receivable, net of allowance for |
||||||
|
doubtful accounts of $8,059 and $8,962, respectively |
137,491 |
128,627 |
||||
|
Inventories |
73,035 |
67,091 |
||||
|
Service inventories |
54,914 |
55,216 |
||||
|
Deferred income taxes |
11,330 |
11,361 |
||||
|
Other current assets |
35,164 |
47,300 |
||||
|
|
|
|||||
|
Total current assets |
544,028 |
559,731 |
||||
|
Long-term assets: |
||||||
|
Property and equipment, net |
40,562 |
42,716 |
||||
|
Purchased technology, net |
43,104 |
55,075 |
||||
|
Other intangible assets, net |
9,663 |
12,944 |
||||
|
Goodwill |
47,178 |
47,178 |
||||
|
Other assets |
5,200 |
6,970 |
||||
|
|
|
|||||
|
Total long-term assets |
145,707 |
164,883 |
||||
|
|
|
|||||
|
$ |
689,735 |
$ |
724,614 |
|||
|
|
|
|||||
|
Liabilities and Stockholders' Equity |
||||||
|
Current liabilities: |
||||||
|
Accounts payable |
$ |
69,282 |
$ |
81,447 |
||
|
Accrued warranty |
33,436 |
37,738 |
||||
|
Accrued restructuring charges |
12,198 |
7,704 |
||||
|
Short-term debt |
1,488 |
- |
||||
|
Other accrued liabilities |
105,064 |
116,068 |
||||
|
|
|
|||||
|
Total current liabilities |
221,468 |
242,957 |
||||
|
Deferred income taxes |
10,974 |
10,974 |
||||
|
Convertible subordinated debt |
160,000 |
160,000 |
||||
|
Stockholders' equity |
297,293 |
310,683 |
||||
|
|
|
|||||
|
$ |
689,735 |
$ |
724,614 |
|||
|
|
|