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By | Chris Mellor 4th May 2009 06:02

Quantum: hot air balloon or just a basket case?

Debt and tape ballast weighing it down

Quantum made a sizeable loss last year, and faces trouble in its efforts to return to the black. The financial promise of its DXi deduplication technology isn't enough to overcome the dead weight of its debt liabilities and tape ballast. A return to profitability could happen in the next few months, though, with Dell lending a hand.

Tape and disk protection vendor Quantum's situation is laid bare in its 2009 fourth quarter (Q4) and full year results. Q4 fiscal 2009 saw revenues of $168m, 27 per cent less than the year-ago quarter (Q4fy08: ) with a net loss of $10m (-$0.04/share), revenues being considerably worse than Wall Street estimates.

Full fy09 revenues were $809m, 17 per cent less than fy08, with a large net loss of $356m (-$1.70/share)

Its gross margin rates were 37.5 per cent for Q4fy09 and 37 per cent for the full year, its highest for eight years. The company has been migrating to tape products with higher margins and lower volume, but sales of these has not raised its profits overall and overall sales revenues declined from this strategy as well as from the recession.

Delayed profitability, debt and bailout

In a multi-year effort, Quantum is being transitioned from a tape technology and systems vendor to having a storage systems business model under CEO Rick Belluzzo, meaning it is entering the disk-based protection and deduplication market with its DXi product range. This technology came to Quantum with its acquisition of tape library vendor ADIC. Since then, the rise of disk-based protection, virtual tape libraries and so forth, has caused tape product-based revenues to decline.

Disk system revenues are rising at Quantum, up 93 per cent in Q4 fy09 compared to the prior year's quarter. It's still not fast enough to offset the fall in tape product revenues. Belluzzo has only been able to keep investors happy by promising jam, mucho jam, tomorrow. Naturally the recession has put off profitability, delaying the promised jam-rich tomorrow and causing Quantum to take advantage of EMC help to deal with part of its debt mountain and help ensure DXi technology developments.

We should expect enhancements to its deduplication software as well as a new DXi hardware platform during the next twelve months.

Quantum generated enough cash in the quarter to pay off $92m of its senior debt in fy09, 27 per cent of the outstanding balance at the end of fy08. Even so, it needed EMC cash to cover separate debt liabilities and continue developing its technologies. EMC licences the DXi deduplication technology and Dell is also intending to sell products using it. The EMC deal is now delivering revenue to Quantum but the timing of Dell's DXi product offer is not known and Quantum has to grit its teeth in patience waiting for the Dell cash delivery to start.

It's that cash delivery, along with hopes of a shallower than feared recession, that will enable Quantum to turn the corner and start making profits. But it's finely balanced: tape revenues are consistently heading south with no change of direction in sight. Data Domain is still leading the deduplication market with a new quad-core, quad-socket hardware platform expected in the third quarter of this year.

Dell cash and good execution of technology development is needed to increase the heat of the DXi burner, and enable the debt and tape ballast holding Quantum back to be counterbalanced, enabling Belluzzo to return Quantum to profitability. If this doesn't happen in 2010 then questions, serious questions, might start being asked about Quantum's direction. ®

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