Quantum Corp /De/ Q4 FY2026 Earnings Call

Ladies and gentlemen, greetings and welcome to the Quantum Corporation Fiscal Fourth Quarter and Full Year 2026 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow a formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded for replay purposes. It is now my pleasure to introduce your host, Quantum's Vice President, Corporate Affairs and Corporate Secretary, Tara Ilges. Please go ahead.

Good afternoon, and thank you for joining today's conference call to discuss Quantum's fiscal fourth quarter and full fiscal year 2026 financial results. With me on today's call are Hughes Mayrath, Quantum CEO, and William White, our Chief Financial Officer. Following management's prepared remarks, we will open the call up to questions from analysts. Before we begin, I would like to remind you that comments made on today's call may include forward-looking statements. All statements other than statements of historical fact should be viewed as forward-looking, including any projections of revenue, margins, expenses, adjusted EBITDA, adjusted net income, cash flows, or other financial, operational, or performance metrics. These statements involve known and unknown risks and uncertainties that we refer to as risk factors. Risk factors may cause our actual results to differ materially from our forecast. For more information, please refer to the detailed descriptions we provide about these and additional risk factors under the risk factors section in our 10-K and 10-Qs filed with the Securities and Exchange Commission. The company does not intend to update forward looking statements once they are issued whether as a result of new information future events or otherwise except where required by applicable law please note that today's press release and management statements during today's call will include certain financial information in gap and non-gap measures we will include definitions and reconciliations of gap to non-gap items in our press release with that it's my pleasure to turn the call over to quantum ceo hughes mayrath

Thank you, Tara, and good afternoon, everyone. Thank you all for joining us today. I'll start with an overview of our fourth quarter. I'm pleased to report that we delivered a strong close to fiscal 2026. Our fourth quarter revenue of $78 million was $10 million above our guidance midpoint, up 5% quarter over quarter and 27% year over year. Demand was solid across our storage solutions, driven by continued growth in data and increasing AI-related workloads. Our ability to grow faster was limited by supply chain and fulfillment timing, particularly around disk and tape drives, which continues to be a factor for us in the near term. That said, we expect greater backlog conversion heading into the second half of this fiscal What we're hearing from our customers is very consistent. They're dealing with much higher data volumes and looking for better ways to manage at scale. Rising primary storage costs and lengthy supply chain for flash and disk are affecting their ability to grow within budget. Power constraints are increasingly putting their growth at risk, especially in AI, HPC, and research protocols. That's where we're seeing increasing demand for our solutions. Our ongoing focus is to support our customers' need to manage the right data for the right workload at the right cost. With our portfolio across Scalar, DXi, ActiveScale, and StoreNext, we can support both high-performance requirements and long-term, lower-cost storage in a single-integrated approach. This is a critical priority as customers look for practical ways to manage both growth and cost in their environments. We're seeing very strong momentum in object storage, with revenue from our active-scale solutions tripling year-over-year, driven by new use cases around large-scale data management and AI workloads. Adoption of active scale cold storage solution continues to ramp, and we expect ongoing strong demand due to our unique capabilities and performance. We're also seeing more customers actively moving data out of primary storage and adopting tiered storage architectures. That's driving increased interest in tape and object storage, particularly in large-scale environments where cost and power really matter. As an example, we recently announced a partnership with Pink Elephant. Pink Elephant is a sovereign MSP in Europe. We're using our solutions to deliver cost-effective and energy-efficient data-resilience services. The true value of ActiveScale was evident following an incident involving a fire in one of their data centers. And may I say the fire was unrelated to our equipment. But because they have deployed ActiveScale across multiple data centers, while the affected data center was down, their service remained uninterrupted. It's an excellent example of how our technology performs in real-world conditions and why experience and resiliency matter. We've been tested, and our unique capabilities are unmasked, enabling business as usual for our customers. We recently won a large deployment with the Global Sports Network, who will be using active scale code storage with our integrated tape libraries to host their full content archives. We also continue to see existing customers expand their active scale environments towards hundreds of petabytes on the way to exabyte scale. I would now like to talk about our sales performance. We ended the quarter with great pipeline momentum and with a record $45 million backlog, which is largely tied to supply availability, particularly around disk and tape components. Tape library sales and funnel are incredibly strong. However, we're currently limited by IBM's ability to deliver more tape drives. We're actively managing the supply chain challenges with our partners and expect to see much better conversion of the backlog as we move through the second half of the fiscal year. We will continue to navigate the industry-wide supply constraints, but expect continued volatility in the coming months. Looking at the full year, fiscal 2026 was a year of clear progress for quantum. This past year, most of our growth was in the enterprise storage market, delivering a healthier revenue mix for the company. Since I assumed to see a role in June, we focused on improving execution, lowering our cost structure, and strengthening the balance sheet. Those actions are reflected in our results. We've strengthened our balance sheet through a combination of fully paying off our term debt obligations, converting notes into common stock, and increasing our cash balance through a $100 million equity raise. We're particularly proud of the quality of the investors in this latest offering as it validates our strategy and market position. Simply said, Quantum is in its strongest financial position in decades. With this major financial transformation, plus our sales momentum and innovative products we're developing, I'm feeling very positive for the future. As we move into fiscal 2027, we're in a much stronger position than we were a year ago. Demand continues to grow, and we expect this momentum to persist over the next 24 months. We're seeing our pipeline grow as organizations continue to adjust their storage strategies in response to AI, cost, and power constraints. Our priorities remain the same, drive sustained revenue growth, recovery of margin towards 40%, improve operational efficiency, and continue executing with focus and discipline across all functions of the business. Overall, Quantum is operating from a position of renewed strength. I'm very excited about the opportunity we have in front of us as the proliferation of AI-driven data rapidly reshapes the industry and drives demand for our tiered storage solutions. With that, I'll turn it over to Will to go through the financials.

Thank you, Hughes. Good afternoon to those joining us on the phone and webcast. I'll provide an overview of the company's GAAP and non-GAAP financial results for our fiscal fourth quarter that ended on March 31, 2026. The revenue of the quarter was $78 million, increasing $3.4 million, or approximately 5% sequentially, from $74.6 million in the prior quarter. This increased to 27.3% over $61.3 million in the prior year's fourth quarter. The revenue of $78 million exceeded our guidance midpoint of $68 million by approximately $10 million, driven by strong enterprise demand across all major product lines worldwide, as well as improved shipping velocity near the end of the quarter. As a result of the robust demand, our quarter-end backlog more than doubled sequentially to approximately $45 million. This is significantly above our historical backlog run rate of 8 to 10 million. We anticipate near-term backlogs remain meaningfully above our recent run rate given high demand and component part availability. That gross margin for the fourth quarter was 35.7, compared to 38.8 in the prior quarter and 39.6 in the fiscal fourth quarter of 2025. The decline was driven by several factors. The most notable impact was from the unpredictable increase of numerous industry-wide component prices, which required fulfilling some previous backlog at less favorable margins. Gross margin was also impacted by a revenue decline and higher margin service revenue. Despite component cost volatility headwinds, we remain committed to improving gross margins back toward 40% over time. To this end, we are planning systems and processes to improve component cost visibility and strengthen margin management, including actively re-quoting orders where appropriate to protect margins on future sales. We anticipate these new internal processes to support a gradual recovery in our gross margin in the coming quarters. Gap operating expenses for the fourth quarter were $30.4 million compared to $30.1 million in the prior quarter and $35.8 million in the year-ago quarter. Operating expenses on a non-gap basis for the fourth quarter were $27.5 million, in line with our original guidance, compared to $26.9 million in fiscal third quarter and $29.4 million in the fourth quarter of fiscal year 2025. Higher sales commissions drove a sequential increase in operating expenses as a result of increased revenue. Excluding commissions, non-GAAP operating expenses were flat sequentially. The year-over-year decrease reflects the continued relied savings from a lowered cost structure following our restructuring actions throughout fiscal year. For the full fiscal year, non-GAAP operating expenses decreased by approximately $11.6 million, or 10%, from fiscal year 2025. This decrease in operating expenses coincided with higher revenue year-over-year demonstrating our operational leverage. We remain committed to disciplined cost management and operational efficiencies going into the fiscal year, 2027, and we currently expect to hold non-GAAP operating expenses flat year-over-year. GAAP net loss in the fiscal fourth quarter was $9.5 million, or a loss of $0.66 per share, compared to a net loss of $27.8 million, or a loss of $2.03 per share in the previous quarter, and a net loss of $7.7 million, or a loss of $1.26 per share in the prior year's fourth quarter. The prior quarter gap net loss included $28.9 million of debt extinguishment costs. Non-gap loss of the fourth quarter was $3.1 million or a loss of $0.21 per share compared to a net loss of $4.9 million or loss of $0.36 per share in the prior quarter and a loss of $12.1 million or loss of $1.98 per share in the prior year's fourth quarter. Improvement in non-GAAP net loss for the fourth quarter reflected a combination of higher revenue and significant reduction in operating expenses. This includes approximately $2.9 million of interest expense in the quarter that will not continue beyond the fiscal quarter as a result of the recently announced debt elimination, which I will thus discuss in more detail shortly. The test that EBITDA for the fourth quarter was a positive $1 million, above the midpoint of our original guidance and compared to a positive $2.9 million in the fiscal third quarter of 2026 and the negative $3.9 million in the prior year quarter. A year-over-year improvement of approximately $4.9 million reflects the benefit of previous restructuring and ongoing cost discipline. Sequential step down reflects the higher commission and lower gross margin discussed earlier. We believe we will begin to see improvements in our quarterly EBITDA in fiscal year 2027 over our EBITDA this quarter. Turning to an overview of debt and liquidity as of March 31st, cash equivalents and restricted cash at the end of the fiscal fourth quarter were approximately $16.2 million. Total outstanding debt, so between term debt and our convertible notes, was $55.9 million and $90 million, respectively. At the end of the quarter, the company's net debt position was approximately $130.4 million. As Hughes previously highlighted, subsequent to quarter end, we announced a series of transactions that significantly strengthened our balance sheet and will support our future growth. First, the company completed a private placement led by Two Seas Capital and Oaktree Capital, with participation from several other institutional investors, generating gross proceeds of $100 million. Additionally, Dialectic Technologies agreed to voluntarily convert the entire outstanding principal amount of its senior secured convertible notes, together with all associated accrued and unpaid interest, into shares of our common stock. Third, a majority of the proceeds for the private placement was used to repay all previously outstanding term debt, with the remaining net proceeds to be utilized for working capital and general corporate purposes. The $94.7 million in net equity proceeds and subsequent full repayment of approximately $56 million of term debt and conversion of all outstanding convertible notes materially changed the company's liquidity position. Post-transaction, the company added approximately $36.9 million of cash, net of interest and fees, to its balance sheet and has no outstanding debt. In addition to meaningfully de-risking the company's overall financial position going forward, we now have significantly greater financial flexibility to support ongoing operations as well as to make investments in the future growth of the company. Turning to the company's outlook for the fiscal first quarter of 2027, as conveyed in our remarks on today's call, we are seeing strong and sustained demand from customers. Acknowledging our substantial backlog and continued strong bookings, our near-term revenue will be determined by the extent to which we can fulfill and ship orders in the supply-constrained market. The company's fiscal first quarter had historically averaged a 5% seasonal decline versus the fiscal fourth quarter over the past five years. Due to the strong demand we have seen thus far in the fiscal first quarter, we expect sales to reflect better than typical seasonality and our guiding revenue to be approximately $75 million, plus or minus $2 million. At the midpoint, this represents approximately 17% growth year over year. We expect first-quarter non-GAAP operating expenses to be approximately $27 million plus or minus $1 million. As a result, non-GAAP adjusted net loss per share for the fiscal first quarter is anticipated to be negative $0.15 plus or minus $0.10 per share, based on an estimated 24 million shares outstanding on a weighted basis. Adjusted EBITDA for the first quarter is expected to be $1.5 million plus or minus $1 million. With that, I'll now turn the call to the operator for the Q&A session.

Thank you. And at this time, we will conduct our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, to queue up for a question, press star 1. We'll pause for a moment while we pull for questions. And our first question comes from Jacob Stefan with Lake Street Capital Markets. Please do your question.

Yeah, hey, guys. Appreciate you taking the questions. Nice quarter and nice guidance. you know with the 45 million dollars in backlog you said a couple of times throughout the call you expect to see backlog conversion improve throughout the year I guess if you could kind of break down you know what what your confidence level is in that and you know is that is that coming from the you know the actual supply side and IBM or is that coming from somewhere else

hi Jacob yeah I think it's a little bit different between flash drives test drives and tape drives As IBM is continuing to ramp up production of tape drives throughout the year, our understanding is still a little tight in this quarter, in the June quarter. But as you go into September and December quarter, we should see a lot more tape drives out there, which would allow us to convert the backlog into revenue on the tape library side. With regards to this drive, I think it's still going to be tight, but some of the vendors are actually right now procuring disk drives with some of the chassis, for example, Supermicro. And I think having some capital also allows us to, with the financing, to go place orders a little bit more aggressively in terms of procuring both servers and disk drives and flash drives. So I think as we get into the summer and the second half of the year, we should be able to convert a backlog into more revenue.

Okay, got it. And then just touching on kind of the gross margins, I know the comment this quarter was that you had to fulfill some orders at, you know, less favorable gross margins. But, you know, with $45 million in backlog, I guess, you know, is that a concern moving forward or do you have a different kind of dynamic pricing strategy in place to mitigate that?

Yeah, so I think the dynamics are changing between the March quarter and June quarter in the sense that, like, in the March quarter, this is when everything went to hell, where, you know, we saw huge increases in disk drives and flash drives and certain pricing, pricing on shipment, pricing on arrival to the dock. I think now the industry has adjusted slightly better in terms of, you know, telling us a bit ahead of time what the prices are back to that. It doesn't mean that the prices are lower and the customers can swallow it. But I think everybody understands the situation better now as we're speaking right now versus four or five months ago. So now we have to do a better job of, you know, trying to match up the cost of the supply chain to the orders. And, you know, obviously there's still some tightness with the customers. If you look at government customers or government contracts that are in the backlog, it's really hard for them to – it's hard to regrow those deals without losing them. But I think in general, I think, you know, we can work on the gross margin and improving it through the rest of the year.

Got it. And maybe just to kind of touch on that again, so what percentage or, I guess, any way that you can break it out, you know, how susceptible or sensitive are your customers to, you know, change in price?

You know, it really depends. It depends a little bit on the customer and on the situation, right? Because the things, the situation you got into were, you know, government customers or contract or research customers on their contract. Like I saw last week that, you know, they get awarded a certain amount of money and they're getting inspected for the gear. And if you just don't fulfill the gear on time, then they basically like have to basically cancel the contract, right? So these are extremely price sensitive situation and there's a mix, you know, small mix of those, right? You know, then there are customers like when the price increased a lot and several times without the quarter, throughout the quarter, you had to re-close some of the deals two or three times. I think now it's slightly more stable than in the March quarter. So, you know, once there's more stability, you can control the margins a little bit better. It's when there are major hikes and you get kind of the disconnect between your cogs and the price you're closed to the customers.

Got it. Very helpful. Yeah, yeah, absolutely. Maybe just one last one for me. Last quarter, you guys talked about tape sales doubling sequentially. This quarter, you mentioned active scale revenue had tripled year over year. I'm wondering if you had any kind of update on the overall tape sales as it relates to last year versus even last quarter.

Yeah, I would say our strategy really is in component tightness, we can move some of the data from primary storage to tape. Active Scales is actually a combo of flash and disc plus tape, so it's not 100% tape. But what it does is it makes the tape experience much faster on ingest and on cataloging and on retrieval. So basically, that solution is very appealing for everybody because you can actually get high performance that you would get on disc and then you can benefit from the cost and the power consumption of tape and that's been what's tripling year over year. And as we're looking forward, that combo of disk drives and tape drives seems to be the winning combo. And as we go back into some of the classic enterprise use cases as well, you can go figure out that about half of the data of the customers on primary storage is usually not used. Before in the past years, you can have like buy more disk drives or buy more flash drives. I think people just realize they can't do it right now with today's budget. So that's where we're hitting the playbook, so if that helps.

Okay, got it. Very helpful. I appreciate it.

Thank you. And a reminder to the audience to ask a question, press star 1 on your phone. Our next question comes from Nahal Chokshi with Northland Capital Markets. Please state your question.

Thank you. We've got a good quarter, especially on the demand side. And with respect to the demand side, you're giving us this backlog number of $45 million. I presume this is largely all product, and our math suggests then that product will be in the $70 million to $75 million range, which I think would then be up basically 2x year-over-year. Could you confirm if that's approximately right? Yeah, thank you, Noel. That is approximately right. Okay, great. And so I believe that this represents an even more bigger acceleration from the product demand that we're seeing in the December quarter of about, I think, 30% or 35% here in the year. So this acceleration that you're seeing, would you attribute it mostly to component price increases, or is there a material element associated with incremental unit demand?

We're still analyzing the average selling price, but for most of our products, that was primarily driven by demand. It was not driven by average selling price, at least for the fourth quarter.

So units, basically, more units, more – well, and these would be basically more LTO 10 units or is it more hard-driving units?

There's a little bit of both, right? There's a little bit of both. I mean, what's changed you over a year really is active scale really take off the most, which is the combo of disk drives and tape drives into an object store. And that's really been the case right now. It's accelerated for like three or four quarters.

Doesn't ActiveScale have a much higher gross margin profile than the rest of your product portfolio?

It typically does, but, you know, mind you that, like, this drive in the March quarter, price increased 250%. Paid drives have started to increase in Q1 and continue to increase through Q2 with two more increases. So when you start essentially quoting customers, some of them are government customers that we've talked about in the past, it's creating an issue because there's delay between the moment you quote the customer and you can fulfill both the disk drives and the LTO drives in it. So you re-quote it the best you can, but it's been difficult, calls, especially in the March quarter, because there were several successive increases that came out of the left field. And these were essentially what we call like the pricing on shipment, which is kind of crazy, right? Because our shipment can be anywhere from 6 to 12 to 13 weeks after you've quoted the customer. So that was really dynamic of the March quarter that was particularly harmful for everybody in the market.

Okay. Can you give us a sense as far as how much of a shift and mix towards the active scale you're seeing? Is it like, you know, from 10% to 20% on a two-to-two basis in dollar terms?

Yeah, I mean, we don't disclose our product breakdown in dollar terms, but I can tell you our test scale tripled year over a year. And we're continuing to see momentum as we're right now in the late June timeframe. And we're seeing a lot of demand for active-scale cold storage.

And then this active-scale cold storage, you would directly link towards the AI and HPC environments that you talked about earlier in the call?

It's AI. It's HPC. It's in the media entertainment market where they use it for a repository of anything they do at M&E. It's in genomics customers. It's in medical research. Everybody consumes a lot of data. And they need to have it available either for research or for access or to rehydrate back into an M&E space. So it's across many verticals that are big data usages.

Okay. And then you talked about expectations of getting back to a 40% gross margin. But if this mixed shift persists and with normalized supply chains at some point in time, then is that 40% gross margin correct or is it actually much higher?

Yeah, I mean, I think, you know, look, when we started the journey about a year ago, you know, I thought we could be in the 40, you know, our goal was to be in the 43%. Um, but we still like assume, you know, we assume that like, um, there's still going to be issues, um, with regards to procuring, um, flash and disc and tape for several quarters. I think it's less volatile than like the March quarter, but we do expect to see continuing price increase, um, across storage for the foreseeable future, which is hard to recover margin unless you're willing to do it at the cost of your relationship with customers and partners right so there's always a way in the short run to say okay well i'm just going to go behave a certain way and but i think you're creating potential issues i went to see a very large customer in europe last week that said oh my god you storage vendors are taking advantage of this to increase their margin and powering it publicly and um i mean that's the strategy of some vendors, I think we're trying to be more channel friendly and customer friendly, but we have to find the right balance of also not letting the gross margin deteriorate, right? So, so there's a little bit of both, you know, going to take several aspects into consideration.

Right. Okay. Well, let's just assume that you get back to 40% gross margin. What is the corresponding operating margin you can achieve, assuming that you continue to see sustained growth and achieve the operating leverage you hope to achieve all the time?

As we look at our gross margin going into the next year, we see a lot of benefits from holding the line on our fixed cost of goods. So that will be one benefit where we'll see increasing benefits as our revenue increases. We'll also see natural benefits from the average selling prices. While they were not a large impact in Q4, we expect them to be increasingly an impact and a beneficial impact to our margins going into this next year.

I mean, I guess that's a little what I'm trying to say is that can your OPEX get down to, say, 20% of revenue, or is it more like 30% of revenue? to give us a sense as far as like on a percent of revenue basis of where it can go as you achieve scale?

Certainly as we look at the next year, we're seeing our operating expenses to be held flat. That's obviously the targets as we get to the back half of the year on revenue. We haven't released those, but we do see our operating expenses holding flat, and we're definitely holding the line for the entire year. So I'd say that as our revenue increases, as we're anticipating, we'll see a corresponding decline in OPEX as a percentage of our revenue.

Okay. All right. Thank you very much.

Thank you. And ladies and gentlemen, there are no further questions at this time. So with that, we will go ahead and conclude today's call. Thank you for participating, and all parties may disconnect. Have a good evening. Thank you.