Quantum Q1 '97
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Quantum Q1 '97
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(FOOL CONFERENCE CALL
SYNOPSIS)* By Dale Wettlaufer (MF Raleigh)
Quantum Corporation Q1 1997 Conference Call BUFFALO, N.Y., /FOOLWIRE/Aug. 9, 1996--Quantum Corp. (NASDAQ/NMS:QNTM) announced sales for its first fiscal 1997 quarter (ended June 30, 1996) of $1.15 billion and net income of $3.8 million or 7 cents per share fully diluted. These results are consistent with the guidance the company gave in its press release of June 12. Sales in the prior quarter were $1.23 billion and were $941 million in Q1 1996. OEM revenue was 64% of total sales; Quantum's top five customers accounted for 42% of sales. Compaq and IBM sales each comprised 10% of sales. Distributor sales were 36%, up from 32% last quarter, and international sales were 54%, compared to 55% last quarter. Sales of high-capacity products were 14% of revenues and DLT represented 11% of revenues.
Gross profit margin was 12.2%, down from 13.1% last quarter. The drop in margin was attributed to price softness in key desktop capacity points in distribution and also to the higher percentage of distribution sales. Operating expenses were 10.8% of sales, flat in dollar terms with last quarter. Tax rate was 26%. Receivables were up with days-sales- outstanding increasing to 58 days from 53 days last quarter. This was due to the backloaded character of the quarter as well as the higher percentage of distribution sales. Inventory was down $10 million from last quarter as the Atlas 1 drive sell-out progresses. Inventory components are: Raw materials, $90 million; W-I-P, $60 million; and Finished goods, $300 million. Turns decreased slightly to 9.0 from 9.3 last quarter.
Use of cash this quarter was driven by two working capital issues: The increase on days-sales-outstanding and also the balancing of the build plan in the quarter, which layed up more inventories and gave the company less leverage between inventories and accounts/payable. The company believes it will generate cash next quarter. While cash is sufficient at the moment, the company is evaluating options to strengthen the balance sheet. Given the stock price at the moment, though, they are not looking at the issuance of any equity. Capital equipment additions in the quarter totalled $44 million and depreciation totalled $21 million; dep. and amort. was $28 million.
The company expects September results to be flat compared to the June quarter and also expects that the September portion of the quarter will backload the results for the entire 90 day period. Although MKE will ramp up volume production of Atlas 2 this quarter, operating leverage achieved through this line will not be felt until Q3. About 2/3 of September quarter shipments will be made up of new products as the company continues its transition to higher-end SKUs. The company does expect improvement in both revenues and unit count in the December quarter. The key bottom-line leverage in Q3 and past that should come from the successful completion of the transition of high-end production to MKE.
According to Michael Brown, Quantum's chief executive officer, Quantum continues to execute the plan it announced in January to bring the high-end disk drive and recording heads businesses to profitability and rebuild the company's earnings potential. "We are now mid-way through that year-long turn-around plan. This quarter was especially difficult for us because of the softness in demand for desktop drives we commented on in June," said Brown.
According to preliminary data from International Data Corp., June quarter shipments of personal computers (PCs) and hard disk drives for PCs were flat with the March quarter, despite previous expectations of growth.
"We shipped 5.5 million drives this quarter, compared to a record 6 million units in the March quarter," said Brown. "Even with that decline in shipments, we remain the leading supplier of hard disk drives for the desktop personal computer market, and our desktop business remains solidly profitable." Desktop shipments totalled 5.2 million, compared with a record 5.7 million in the March quarter. "Given the fall in our backlog, experienced midway through this past quarter, we are reasonably pleased with our recovery. However, it is clear that we lost some [market] share in the quarter to Western Digital. WD did a great job in executing with a cost-effective 1.6 GB drive, one of the sweet spots of the market this summer." The Scirocco 1.6GB MR drive was simply not cost competitive and did not ship in high volume. While MR progress in shipments in the last quarter did not go as well as the company had hoped, they gained vital learning curve experience in desktop MR.
Quantum's DLT tape business continued to grow faster than the overall tape drive market. "With growth in sales of 16% from the March quarter, our DLT tape products now represent 11% of our total sales.
"In addition to maintaining our growth and success in the tape drive business, we are focused on the transition of our high-end drive manufacturing to Matsushita-Kotobuki Electronics (MKE)," said Brown. "We believe that this transition will enable us to deliver the superior quality and production ramp capability to high-end customers that have been critical to Quantum's success in the desktop drive marketplace. There are significant challenges in our business, particularly in this manufacturing transition, but we believe we are taking the necessary steps to build a stronger and more profitable company over time," said Brown.
The company has closed down both its high-end drive factories on schedule and is above schedule on selling out the Atlas 1 drives. Atlas 2 is in qualifications with 10 high-end OEM customers. Mass production is expected to begin next month at MKE. In the tape business, DLT brand tapes continue to grow faster than the rest of that industry. Sequential growth in the last quarter was 16%. DLT sales were 11% of Quantum's sales this quarter. The company remains the second-largest tape drive supplier in the world.
The Fireball TM drive is shipping its MR [megneto resistive] desktop drives of 1 and 1.2 GB on 3.5" platters, giving Quantum high-performance 1-3.8 GB MR desktop drives. Bigfoot 5.25" drives has been a risk based on the premise that consumer application needs would outpace the advance in aerial density. During the quarter, the company did experience difficulties with Bigfoot although its ramp was strong, with one million drives shipped in the quarter. These drives are now shipping Compaq Presarios, H-P Pavilion, and Acer Aspire PCs. Other OEMs have expressed interest in volume orders of Bigfoot. If secured, these orders would allow Quantum to ramp and achieve efficiencies which would not be available in producing 3.5" drives in such quantity.
Q&A
As discussed in the June pre-announcement conference call, Quantum's operating losses in the high-end products and head systems were in the $50-55 million range for this quarter. The results for the September quarter should be similar but should start to improve after that. Breakeven is projected for these units by the March quarter (Q4 1997).
Less than half of finished goods inventory was associated with high-end Atlas 1, ahead of expectations.
Positive forward-looking statements on cash flow were repeated--this includes the cash outflow effects of a restructuring charge taken in 1996. These charges should be depleted by the end of September. Working capital requirements are operating within loan covenants and there is still headroom on revolving credit.
Overall unit production looks to hold steady in the next quarter; the company looks forward to calendar Q4 if the trends they saw last year recur. The plan is to keep on ramping Bigfoot through the fiscal year and to continue delivering quality high-end products to its customers.
MR heads, from both Quantum and its suppliers, did not yet reach the price points the company had projected in its planning. MR head efficiency gains and pricing are heading in favorable directions, inside and outside Quantum. H2 FY 1997 looks to be favorable in these regards. Quantum believes that the Fireball TM is the first desktop 3.8 GB drive available.
The growth rate in consumer demand for storage capability may be growing faster than aerial density improvements--market demand is very strong for low-cost, higher-capacity drives. The company's 5.25" drive (the same slot size as a standard CD ROM) addresses this need, as does MR investment. The company believes that aerial density advances combined with the 5.25" form factor will give them a compelling market entry in terms of $/MB.
The company would like to achieve 40% in-house head production over the next year. For now, the strategy is to use captive head production in the high-end drives where they hope volume is best and operating margin leverage is greatest. The high-end drive business is planned to reach breakeven by the end of March and build high-end profitability from there.
Fully-diluted EPS includes the effect of conversion of notes. [In that case, accounting convention dictates that fully-diluted EPS includes interest expense not booked and as well as a higher share count]. The number to look at for comparisons is the primary EPS. Some voluntary conversions did take place when the stock was in the 20s.
European demand is still unpredictable.
Cap ex. for the year is planned to be $175 million.
The company expects that their current product cycle will be strong enough that operational cash flow will strengthen and create a stronger balance sheet than they currently have. With the current stock price, the company is more favorably disposed to debt-based, rather than equity-based, capital issuance. The company's past charge for restructuring is being worked down, as is the level of Atlas 1 inventory. Future cash flow needs are becoming more clear as these happen and as the company moves up the learning curve on their key strategies. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |