Gentlemen;
Still no time to post anything thoughtful though I can just manage to stay caught up on reading the thread. These past few weeks have been interesting which I will try to distill into some thing useful next week.
Following this post is Gillian Munson's recently published view of Quantum. Also: I agree with Lawrence, Maxtor is looking tasty at these prices.
Sam, Regarding MTIC I agree with Lawrence again. I think the name of their recent customer has more to do with the pop then the actual business involved and not they were very circumspect about just how much business it meant. But MTIC's launch of a national ad campaign along with that announcement was timely and I was a happy beneficiary of the news. I am still a long hauler on the corporate storage systems space and even added a little EMC not long ago. It is this space (market) and QNTM's tracking stock plans that have changed my view of the company and I am glad I own the stock. However Lawrence, I am still very glad I own Seagate as well. I am also glad I own some HTCH but agree that it will take some time for components to shake out and the path to be a bit more clear. I wouldnt touch a head or media company at this point and we will probably not see a point where anything is investable in those battered segments again for a long while.
Best,
Stitch
(I wanna go home)
STOCK CATALYST:
We continue to think that if Quantum can prove out its ability to drive
earnings upside given its' diverisified storage approach, there should
be upside to the stock. CQ1 was good, but there isn't much upside due
to continued disk drive market pressure so even though Quantum has
improved its product positioning the net benefit is hard to see. CQ1
was in line, and, net net, CQ2 estimates are coming down. We believe
that CQ3 and CQ4 have upside potential (particularly in disk drives) as
current products hit full stride but we are not changing our F2000E EPS
of $1.70.
While Quantum looks cheap (particularly if you take higher relative
valuations for the DLT tape business), we believe that without earnings
increases it will be difficult to drive the stock significantly higher
for now. We continue to rate Quantum shares Neutral.
KEY POINTS:
- Quantum's CQ1 EPS of $0.33 were a penny light of our our $0.34E but
in line with the First Call mean. Total revenue fell 1% Q/Q and grew 2%
Y/Y to $1.3B.
- Sales in all businesses except for desktop disk drives (60% of sales)
rose Q/Q in dollar terms. Desktop disk drive revenue fell 3% Q/Q (down
12% Y/Y) on an increase in units offset by a 6% Q/Q ASP decline (ASPs
were down 19% Y/Y). High end disk drive sales were up 3% Q/Q as Quantum
slowly improved unit volume albeit in a tough pricing environment.
The Specialty Storage Products Group (30% of sales) had a good quarter.
DLT product, media and royality revenue to Quantum (ex. eliminations)
rose 1%Q/Q and 52%Y/Y to $390MM.
- All of Quantum's businesses enjoyed improving gross margin Q/Q and
overall gross margin rose 290 basis points Q/Q to 20.9%. The biggest
Q/Q jump in gross margin was in the disk drive group where desktop
margins went from 7.6% to 10.4% and high-end margins went from 11.7% to
14.3%.
- Quantum's product pipeline is good in all of its businesses and the
company has improved its disk drive positioning a lot. We believe that
Quantum will be first to market with 6.8GB per platter desktop volume.
However, the disk drive market remains fiercly competitive and this
competition is causing increased pricing pressure (Quantum indicated
that pricing got worse at the end of the quarter) which continues to eat
at the upsides.
- We are lowering our CQ2E EPS of $0.32 to $0.31. We expect the First
Call street mean of $0.35 to come down.
- We are maintaining our low-on-the-street F2000E (Mar) EPS of $1.70.
Given industry dynamics, we suspect that the First Call mean of $1.80
will come down tomorrow.
- Quantum's plan to split its stock into trading stocks continues to be
in place. With SEC approval expected in May, Quantum could enact this
plan in June.
DETAILS:
CQ1:99 Revenue of $1.3B - Up 2% Y/Y
CQ1:99 operating EPS were $0.33 (from EPS of $0.02 last year) and were a
penny light of our $0.34 estimate but in line with First Call.
Quantum reported CQ1:99 revenue of $1.3B (up 2% Y/Y, but down 1% Q/Q).
Sales in all businesses except for desktop disk drives (60% of sales)
rose Q/Q in dollar terms.
In disk drives, Quantum continues to have a strategy that focuses on
three areas: 1) quality, 2) asset management, and 3) time-to-market
execution. Quantum is beginning to qual and ramp the Fireball CX 6.8GB
per platter, and it is starting up with its Altas IV and Atlas 10K.
Quantum's desktop hard disk drive (HDD) sales (60% of sales) fell 12%
Y/Y and fell 3% Q/Q to $785MM on 9%Y/Y disk drive unit growth to 6.7MM
units (up 3% Q/Q). Quantum indicated that it maintained its #1 position
in the desktop market, and that it is the primary supplier to four of
the top PC OEMs. Desktop Average Selling Prices (ASPs) fell 19% Y/Y and
6% Q/Q to $118.
Enterprise disk drive sales (10% of sales) fell 5% Y/Y and were up 3%
Q/Q at $134MM. Per Quantum, a 10% Q/Q enterprise drive unit increase to
427,000 drives was offset by a 11%Y/Y and 8%Q/Q ASP decline.
DLTtape sales of $348MM (27% of sales) were up 35%Y/Y and were up 5%
Q/Q. This included roughly $37MM of media royalties. DLT unit
shipments were 136,000 in the quarter. Quantum indicated that its
installed base of current-generation DLT drives had surpased one
million, and that the installed base of media was roughly 30MM.
Quantum announced the DLT8000 80GB drive this week. This product is the
follow on to the DLT7000. Volume should begin late in the quarter.
Quantum also indicated that SDLT will begin to be qualled in C2H and
that the company expects the real ramp for the product to come in early
C2000.
ATL Products revenue was $63MM (up 18% Q/Q). The company is pleased
with its product line up in ATL and indicated that it had been qualified
at IBM in the quarter.
Revenue by Geography. Sales in the Domestic business were $681MM (down
2% Y/Y, and up 3% Q/Q) and represented 52% of sales. International
sales rose 6% Y/Y to $628MM (down 5% Q/Q) to 48% of sales.
Revenue by Channel. Sales to OEMs in total were $785MM or 60% of sales
(down 7% Y/Y, and down 4% Q/Q). Distribution sales at $483MM (up
14%Y/Y, and up 4% Q/Q) represented 37% of sales. Quantum increased
sales to the channel on a limited basis to take advantage of product
positioning. However, the company indicated that it believes its
current channel inventory of about 3.5 weeks is well below the
industry's 5 week level. DLTtape media royalty represented 3% of sales.
The top customer in the quarter was Hewlett Packard (HWP, $80,
Outperform, Covered by Tom Kraemer) at 14% of sales. Compaq (CPQ, $24,
Neutral) represented 12% of total revenue. The company indicated that
the remainder of its top customer mix was made up of Dell (DELL, $43,
Outperform), Apple (AAPL, $46, Neutral), and Gateway (GTW, $71, Not
Rated). Top customers represented 40% of sales.
Gross Margin - Up 290 basis points Q/Q to 20.9%.
Gross margin rose 290 basis points Q/Q to 20.9% and was driven by a
better mix of disk drive products during the quarter as well as internal
improvements in the high-end disk drive business. Pricing pressure
heated up in the disk drive business late in the quarter. This should
cause gross margin to decline Q/Q in CQ2.
Operating Expenses - End of Fiscal Year Projects
CQ1:99 opex of $185MM rose 33% Y/Y, and 14% Q/Q due to increased end of
year expenses and some R&D related to new product ramps. Quantum
believes opex can trend back to normalized CQ4 levels (near $160MM per
quarter) going forward. R&D increased $10MM Q/Q to $98MM or 7.5% of
sales, while Marketing and Selling rose $5MM Q/Q to $56MM, or 4.3% of
sales.
Quantum reported a CQ1:99 tax rate of 33%.
Balance Sheet Strong - Positioned Well for a Tough Industry.
Quantum's balance sheet is solid. Cash rose $90MM Q/Q to $797MM or
$4.58 per share. Cash from operations was $108MM. Accounts receivable
were down $17MM Q/Q at $647MM and AR DSO's were down 4 Q/Q at 44.
Inventories were up $13MM Q/Q to $272MM (or 20.8% of quarterly revenue)
and based on our L6M calculation, inventory turns rose to 14.9 from 14.3
in CQ4:98.
Outlook - Lowering CQ2 and Maintaining F2000E
The disk drive pricing environment will continue to be very competitive
in CQ2 which will put downward pressure on disk drive revenue, gross
margin and EPS. DLT will be a relatively flattish EPS contributor in
CQ2. Net net, our CQ2:99 EPS goes to $0.31 from our previous estimate
of $0.32. The First Call mean was $0.35.
In fact, Quantum is stuck in a bit of a catch-22 in disk drive at the
moment. Industry watchers have been talking about how winners need to
get a time to market advantage in order to get a relative lead over the
competition. At the end of CQ1, Quantums' desktop disk drive
positioning leads the market and its high end has improved
significantly. However, the tough industry environment plus the fact
that competition is quick on the company's heels is causing the relative
benefit of being a time to market leader to be more muted. In CQ2, even
though Quantum has accomplished a lot in terms of products, the company
will have a tranistional quarter. CQ3 looks like an opportunity for
Quantum to see relative benefit to us.but given industy dynamics it
might be a little early yet.
Over the longer haul, Quantum's financial drivers include an improvement
in the disk drive market environment as well as some improvement in
Quantum's positioning, 25% industry-wide growth in DLT (note that
Quantum's resulting growth rate will be roughly 20% due to the shift in
media sales to licensed media partners), and continued storage systems
growth. Many of these factors are built into our model already and we
are maintaining our F2000E EPS of $1.70 on revenue of $5.5B (up 12%
Y/Y), opex of $666MM (up 5% Y/Y), and gross margin of 20.6%. The First
Call mean was $1.80.
--------------------------------------------------------------------------------------------------------------------------------------------------------CQ2
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