Quantum shares plunge after results

Revenues for the third quarter of fy2012 were $173m, 2 per cent down on the $176m of a year ago. Net income was $3.94m, down from the $5.8m recorded a year ago. These earnings exceeded the Street's expectations so why did investors decide to sell the shares?

It could be the decline in both revenues and profits. Why did this happen? Two words: OEMs and tape.

Quantum is in the closing stages of a multi-year two-fold transition from sales of its tape products through OEMs and the addition of disk-based hardware and software products to its portfolio, such as DXi deduplicating data protection arrays and the StorNext file management software.

The revenue decline was "primarily due to expected reductions in OEM and royalty revenue," and the net income fall was "primarily due to lower tape-related service and media royalty revenue." Set against that was this:

[This quarter] was the ninth consecutive quarter of year-over-year growth in branded revenue, which increased 3 percent and represented 81 percent of total non-royalty revenue. Quantum also generated record revenue of $36 million from disk system and software sales (including related maintenance), which increased 18 percent from the same quarter last year.

Another quarter and we may see the end of revenue declines due to the falling off from OEM tape product revenues and the start of a period of revenue growth as the disk-based hardware and software product revenues continue growing

Jon Gacek, Quantum's president and CEO, offered this thought about the quarter:

We … achieved a new high for disk and software revenue, with a strong contribution from new product sales, and generated our highest level of branded tape automation revenue in eight quarters. Sales of our DXi6701/02 and DXi4601 disk backup and deduplication products were particularly strong, and customers also responded very positively to our new vmPRO virtual data protection solutions … We also saw significant traction with our new StorNext appliances.

We see Quantum managing the loss of huge chunks of tape product revenue through OEMs and the flattening out and decline of growth in the tape market while earning a profit. Good stuff, yet the shares were punished as if the company had made a loss. The outlook for next quarter is for revenues between $160m and $170m and a slightly lower gross margin.

A continued gentle revenue decline on other words, but this patient, which was quite sick last year and the year before, is doing well. It has a good reselling relationship with NetApp, which sorely needs backup-to-disk products in its portfolio and can also make good use of the StorNext software.

The debt from the ADIC purchase is becoming a smaller and smaller factor in Quantum's results. The DXi deduplicating products have been continually refreshed and had performance augmented. There is a low-end NAS product with deduplication, virtual server protection products, and a removable disk backup product.

Nevertheless the outlook is disappointing and that's probably why the stock price took a hit. Quantum is not a glamour stock nor a glamour company; it's a reliable and steady hard-working company that's playing the tape-to-disk product transition hand it's been dealt well and running its affairs well too. Fiscal 2012 may well be seen as the year in which Quantum turned the corner, put its troubled tape days behind it and started on a revenue growth path again. ®