Can Quantum Corp. Leap Over a Lower Bar?
    February 14, 2011  PSW Staff
    Over the past year, the data storage devices industry has been outperforming the S&P 500,
    and even technology as a whole.  Things have really started to accelerate over the past six
    months, and a relatively small group of stocks that focus exclusively on storage look
    unbeatable.  Out of the 8 companies with market caps north of $500 million in the data
    storage device industry, the two largest, EMC Corp. (EMC) and NetApp (NTAP) along with
    STEC, Inc. (STEC) and Compellent Tech. (CML) are trading right at or very close to a 52 week
    high.  Also in this group, Western Digital (WDC), Seagate Tech. (STX) and Brocade
    Communications (BRCD) (see our latest article on BRCD), are all at or near a six month
    high.  The smallest of these eight companies, Quantum Corp. (QTM), has seen a different
    pattern over the past year.

    After climbing from below $2.00 in
    late Summer of 2010 to above
    $4.00 early this year, the gain was
    halved overnight when their fiscal
    third quarter results disappointed
    some robust estimates.  Not only
    did the company fall short on
    revenue, but non-GAAP earnings of
    7 cents a share were below the 9
    cents expected.  GAAP earnings
    disappointed by an even larger
    margin.  What ensured the
    substantial and immediate value
    cut in the stock, however, was the
    companies guidance for the fourth
    quarter causing analysts to cut
    estimates in half.

    Scratching just a tiny bit under the surface reveals evidence that the new forward P/E of 10
    could be a buying opportunity rather than a bad omen.  First of all, the company reached
    profitability for the first time in almost a decade, earning 2 cents per fully diluted share for all
    of 2010.  The company is on track to double that for this year.  During the ten years, the
    company only added about 70 million shares bringing it's total number of shares outstanding
    to 223 million as last reported.

    The company's size and leverage was to the hilt in 2007, and since then, sales, assets and
    liabilities have been cut in half.  The major catalyst of decline has been the slow death of their
    tape automation systems in favor of disk systems and software solutions.  In the last quarter,
    tape revenue declined year over year by about $3 million, or 4%.  Disk systems and software
    solutions grew by $6 million or 19% during the same period.  Disk systems and software
    solutions also grew as a percentage of revenue from 12% to 15%.  Tape Automation
    systems remains at just over 40% of revenue, losing just 0.4% on the year. Numbers also
    suggested that their tape sales are declining slower than the overall tape market, meaning
    they could be gaining market share.  All of this implies that so far, the declines from the tape
    automation are being realized much more slowly than the gains from the disk systems.

    Over the last year, the company has been cleaning up it's balance sheet.  They may be half
    the size they once were, but a leaner business model has put them in a much better financial
    position.  Sequential growth has not only been seen during the last quarter with respect to
    sales and net income, but it has been apparent for over a year now on the balance sheet.  
    For fiscal 2010, the company added $30 million to their cash position, and cut their long term
    debt by 25% to $300 million.  Now, that debt is at $278 million and current assets are at $331
    million.  The company paid down principle on a Credit Suisse term loan, and completely
    eliminated term loans with EMC in favor of adding to their convertible subordinated note
    count.  So in addition to significantly reducing their long term debt, they have also been able
    to slash the interest rates on almost half of it.

    These balance sheet improvements have led to some margin increases as well.  During the
    last quarter, disk system and software solutions margins, which are higher than the tape
    margins thanks to having more branded solutions in comparison to royalty based ones,
    started to make an impact on overall margins as well.  The companies goals seem to be in
    line with reality, they want to continue increasing revenue from disk systems and software
    solutions, and continue to gain market share in the slowly declining tape market.  During the
    last quarter, Quantum did just that, and has foreshadowed similar results for the fourth
    quarter.

    Wall Street clearly wanted more from this company, and took the stock down from near $4.00
    in January to below $3.00 now.  Not all have soured on this potential turnaround, however, as
    the stock is still up more than 100% over the last six months.


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