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Quantum Cor's Q3 2021 Earnings Call Transcript

By Motley Fool Transcribing - Feb 3, 2021 at 9:52AM

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QMCO earnings call for the period ending December 31, 2020.

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Quantum Corp. (QMCO 6.41%)
Q3 2021 Earnings Call
Jan 27, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Quantum's financial results for the third quarter of fiscal year 2021. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Leanne Sievers with Shelton Group.

Leanne Sievers -- Investor Relations

Good afternoon, and thank you for joining today's conference call to discuss Quantum's third-quarter of fiscal 2021 financial results. I'm Leanne Sievers, president of Shelton Group, Quantum's investor relations firm. Joining me today are Jamie Lerner, chairman and CEO; and Mike Dodson, CFO. This afternoon, we issued a press release, of which you can access a copy on Quantum's website at www.quantum.com under the investor relations section.

There is also a slide presentation that we will be using in conjunction with today's call that may be accessed through the website link on the IR website and is also posted as a PDF in the investor relations section. As a reminder, comments made during today's conference call may include forward-looking statements. All statements other than statements of historical fact can be deemed as forward looking. Quantum advises caution and reliance on forward-looking statements.

These statements include, without limitation, any projections of revenue, margins, expenses, adjusted EBITDA, adjusted net income, cash flows or other financial items, as well as the anticipated impact of the COVID-19 pandemic on Quantum's financial results, any statements concerning the expected development, performance and market share or competitive performance relating to products or services. All forward-looking statements are based on information available to quantum on the day hereof. These statements involve known and unknown risks, uncertainties and other factors that may cause Quantum's actual results to differ materially from those implied by the forward-looking statements, including unexpected changes in the company's business. More detailed information about these risk factors and additional risk factors are set forth in Quantum's periodic filings with the Securities and Exchange Commission, including, but not limited to, those risks and uncertainties listed in the section entitled risk factors in Quantum's quarterly report on Form 10-Q and annual report on Form 10-K as filed with the SEC.

Quantum expressly disclaims any obligation to update or alter its forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law. Additionally, the company's press release and management statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms. Included in the company's press release are definitions and reconciliations of GAAP to non-GAAP items, which provide additional details. Those of you unable to listen to the call at this time, a recording will be available for at least 90 days in the investor relations section of Quantum's website.

Now, I'd like to turn the call over to chairman and CEO, Jamie Lerner. Jamie, please go ahead.

Jamie Lerner -- Chairman and Chief Executive Officer

Thank you, Leanne, and thank you all for joining us on today's call. Earlier today, we announced very solid results for our fiscal third quarter, with revenue exceeding our guidance and demonstrating our second consecutive quarter of sequential growth coming off the COVID-related lows in the first fiscal quarter. Also, as outlined in the press release, we expect next quarter revenues to be well over the current Street consensus and sequentially flat in what is typically a seasonally weak quarter I'm encouraged by the progress we are making in our transformational growth initiatives, as well as the gradual recovery we are seeing in some of our core vertical markets. Our results in the third quarter reflected a combination of factors, including initial recovery in our core media and entertainment, and data protection businesses, as well as sequential and year-on-year growth in new use cases in markets driven by new product introductions and our recent acquisitions.

I'll talk about some of these highlights in a moment. We also made significant progress during the quarter in terms of advancing our strategy and vision to be the leader in video and unstructured data solutions. During the quarter, we expanded our portfolio of solutions to store, manage and protect unstructured data across its life cycle while advancing our transition from a hardware-centric business that is representative of a onetime purchase to a software solutions-oriented company with a recurring revenue model. In November, we introduced StorNext 7 and our all-terrain file system, ATFS, and an expanded ActiveScale object storage portfolio, all of which are targeted to be available on a subscription basis.

StorNext 7 is the latest version of our award-winning file system. We've added new features so that our customers can leverage the performance of NVMe storage to speed up production, reduce data center costs and simplify their network infrastructure. We've also made StorNext 7 easier to manage with a streamlined and simplified user interface. Our ATFS network attached storage platform offers new levels of visibility into data by integrated data classification.

It is easy to deploy, easy to use and prospects can download and install ATFS to trial it and see how it can help them better manage their valuable file data. We also expanded our ActiveScale product line with new models and new features to help customers secure their data against ransomware and other forms of cyber attacks. Although in the very early stages of ramp-up with customers, we are encouraged by the early traction we are seeing in fiscal Q3 from these new products. Also, earlier this week, we announced the launch of the H2000 Series of hybrid storage arrays based on the same software-defined architecture as our award-winning F-Series.

This new line is more tightly integrated with StorNext. And as a platform, it is the basis for future product offerings, such as an all-in-one media appliance that will run StorNext and CatDV in a single H-Series hyper-converged storage server. We also added CatDV to our portfolio in December through our acquisition of Square Box Systems. CatDV is an AI analytics software platform that helps customers unlock the business value in their data and also adds a growing and profitable software business unit to our portfolio.

We are already working on integrating CatDV with our StorNext product to expand our market reach in growing video production segments, such as corporate video, sports, government and education markets. We see potential to eventually expand the software to other markets such as genomic research, autonomous vehicle design, geospatial exploration and any use case dealing with large unstructured data. We are excited about the potential to grow and scale this business as an AI analytics platform for video, digital images and other forms of valuable file data. With the addition of CatDV, along with other new products we've introduced in the last year, we have now built a comprehensive portfolio for analyzing and enriching video, storing and protecting data, and managing it across its life cycle.

Our expanded portfolio further solidifies our leadership position in video and unstructured data solutions. And we are seeing the results materialize with our average deal sizes steadily increasing as we sell more solutions with more services wrapped around them. Some of the additional highlights from fiscal Q3 include 24% sequential product growth, driven by a combination of market recovery and contributions from our new products and initiatives. Our revenue contribution from new products was up significantly year over year and quarter over quarter.

And although starting from a small base, we are encouraged with how our expanded portfolio is resonating with customers and partners. We closed our first software subscription deals for the new products we introduced in November, and we had solid ActiveScale quarter after rebuilding the pipeline in the first part of this year. We are also pleased with the progress we've made transitioning from product to solution sales. Our average deal sizes have been increasing steadily over the past two years and increased 24% year over year.

We closed a record number of six and seven-figure deals in the quarter. We are deploying larger and more complex solutions and as a result, are increasing our footprint and relevance at key customers and partners. We are also doing a better job of attaching services, which further contributed to the robust size of these wins. Although our Hyperscale business is lower in the first nine months of our fiscal year than the same period last year, for the current quarter, Hyperscale revenues grew sequentially and year over year, we expect for the full year, the Hyperscale business will be nearly at the same level at last fiscal year.

As I've been discussing with you in the past, working with these important Hyperscale customers has enabled us to truly showcase the competitive advantages Quantum offers and the unrivaled expertise and unique customization that our engineering team is able to provide. These relationships not only help establish strong market credibility for Quantum, but it also enables us the opportunity to sell high-value solutions to meet their archiving storage needs. Providing archive solutions and infrastructure to the world's largest hyperscalers will continue to be a growth driver for us. And we are now extending our leadership position in that market and bringing it to web scale companies, as well as large enterprises.

Many of these organizations are also generating massive amounts of valuable unstructured data that must be kept indefinitely, and much of this will not reside in the public cloud. This will be a key initiative for us as we move forward and represents a larger opportunity to deploy Quantum software and services along with tape hardware. Lastly, as further validation of our vision and transformation strategy, over the past few months, we have continued to attract a very high level of top storage, software and services talent to Quantum. Most recently, Brian Pawlowski joined us as our chief development officer, bringing years of experience developing leading innovative storage solutions.

As chief architect of Pure Storage, Brian approved overall user experience for all-flash storage platforms. Previously, at NetApp, he was the 18th employee playing a key role in the company's expansion over nearly two decades. And early in his career, he served as co-architect of the network file system protocol at Sun Microsystems. We also appointed Rick Valentine as our SVP and customer service officer with deep expertise in building and leading services and as-a-service businesses including Silver Peak Systems, where his work in improving the overall customer experience contributed to its acquisition by Hewlett Packard Enterprise.

Rick also worked as chief customer office at Symantec, Veritas Software, leading customer success for the technical support software portfolio. We have also added key executive talent in international and channel sales with a specific focus on expanding our depth of expertise and advanced software solutions. Dave Clack, the former CEO of Square Box Systems, has been appointed general manager for our newly formed cloud software and analytics business unit. Prior to Square Box systems, Dave worked as head of technology, delivery and deputy chief technology Officer at LMAX, a diversified financial technology company.

In addition, Dave was director of engineering, project and program management at McAfee. This success in attracting key experienced industry talent is a testament of our business transformation strategy and will accelerate our transition to a software and services-led business. With that, I'll turn the call over to Mike Dodson, our CFO, to discuss the financials. Mike?

Mike Dodson -- Chief Financial Officer

Thank you, Jamie. Welcome to everyone, who has joined our call today. As Jamie mentioned in his opening comments, our third fiscal quarter 2021 demonstrated a continued sequential revenue growth for the second consecutive quarter from the COVID-related low reported in the March 2020 quarter. Revenue increased 14% sequentially to $98 million, exceeding our guidance of 91 million to 95 million, compared to 85.8 million in the previous fiscal quarter.

Revenue growth in the quarter was driven by sequential increases across the revenue categories on our primary and secondary storage systems, royalty, devices and media. This reflects a broad-based recovery across our traditional market verticals, combined with increasing contribution from our new products as our software strategy is resonating with customers. We are also encouraged by the early signs of a recovery in our media and entertainment business, keeping in mind that year-to-date revenue is running just over half of last year's level for the same period. This reflects the significant impact COVID has had on this end market segment.

Gross margin in the third fiscal quarter was 43.1% compared to 45.1% in the prior quarter and 45.6% last year. The sequential and year-over-year decline is primarily due to product mix, with product revenues up 24% sequentially and to a lesser extent, lower contribution from service and royalty revenues on a year-over-year basis. GAAP operating expenses in the third quarter increased 1 million to 36.2 million or 36.9% of revenue compared to 35.2 million or 41.1% of revenue in the prior quarter, and 35.4 million or 34.3% of revenue in the year-ago period. Non-GAAP operating expenses during the third fiscal quarter were 33.7 million, an increase of 2.6 million sequentially and 0.7 million on a year-over-year basis.

The sequential increase in operating expenses was primarily due to an increase in sales commissions due to the higher product revenues, as well as an increase in marketing efforts to support our new product releases and expansion of our leadership team. GAAP net loss in the third fiscal quarter was 2.7 million or a loss of $0.07 per share compared to a net loss of 4.6 million or a loss of $0.11 per share in the prior fiscal quarter and net income of 4.7 million or $0.10 per diluted share in the year-ago quarter. Excluding stock compensation, restructuring charges and nonrecurring charges, the non-GAAP adjusted net income in the third fiscal quarter was 10,000 or breakeven on a per share basis compared to an adjusted net loss of 212,000 or a loss of $0.01 per share in the prior quarter. Adjusted net income of 7.3 million or $0.16 per diluted share in the prior-year period.

The share count used to calculate GAAP loss per share was 40.3 million shares, whereas for non-GAAP to fully diluted share count used was 49.2 million shares due to the profit in the quarter. Adjusted EBITDA during the third fiscal quarter was 9.4 million, an increase from 8.9 million in the prior quarter, but down from the pre-COVID peak of 14.7 million in the third fiscal quarter of 2020. There is a full reconciliation of our non-GAAP results to the most directly comparable GAAP measure in both the press release and the Form 10-Q released today. Now turning to the balance sheet, liquidity and cash flows.

Cash and cash equivalents were 17.4 million at December 31, 2020, compared to 12.3 million at March 31, 2020. Both balances include 5 million in restricted cash required under the credit agreements, and 0.8 million of short-term restricted cash. Adjusted working capital increased by 6.8 million during the third fiscal quarter to 66.7 million from 59.9 million at the end of the prior fiscal quarter. This increase was primarily a result of the build of accounts receivables, reflective of the higher revenue levels for the quarter.

Outstanding debt at December 31, 2020, on a gross basis, was 201.2 million and on a net basis, was 180.2 million after netting 21 million in unamortized debt issuance costs. This compares to 195.2 million of outstanding debt at September 30, 2020, on a gross basis. And on a net basis, it was 172.4 million after netting 22.8 million in unamortized debt issuance costs. Related to the term back credit facilities, there's a holiday period for certain financial covenants through June 30, 2021.

During the third fiscal quarter, there was a small draw on the company's credit line in the amount of approximately 6 million, which was due primarily to the timing of cash receipts at the end of the quarter used to pay up the balance. This amount has been paid down during the fiscal fourth quarter. Since our analyst day back in August, we've outlined a strategy to address the overhang on our valuation created by the legacy high-cost term debt. As you may recall, we had negotiated a more favorable equity clawback provision that allows us to pay down up to 50% of the outstanding term debt at a reduced call premium of 5%.

This is available to us until the expensive make-whole call provision expires on June 27 of this year. As such, on November 25, we filed a master registration statement for 200 million, 50 million of which has been allocated to an at the market or ATM equity facility. We have not yet sold any shares under this facility since we've been in our quiet period related to our quarterly release of financial results. We plan to utilize this ATM facility opportunistically since it's not something we need to do, but rather it is a tool to take advantage of the equity clawback provision to help us reduce the debt over the next several months.

Excluding up to 3 million, representing the initial cash payment for the Square Box acquisition, all proceeds from this offering will be used to pay down the term debt. Following the expiration of the make-whole provision in June, the optionality to address our capital structure increases significantly. And we have stated previously, we will be considering a number of refinancing alternatives. Related to cash generating from operations for the first nine months of fiscal 2021.

Before the effect of changes in assets and liabilities, net of cash generated by operations was 4.4 million. The use of cash resulting from changes in working capital accounts represented 24.5 million consisting primarily increases in inventories and decreases in accounts payable and deferred revenue. Other uses of cash during the period included capital expenditures of 4.9 million and 2.6 million net for the initial cash payment for Square Box Systems. Other sources of cash during the first nine-month period of fiscal 2021 included net earnings of term debt of 19.4 million and borrowings of 10 million under the Payment Protection Program, which we expect to be forgiven in accordance with the terms of the loan agreement.

As our business approaches the pre-COVID levels and we address the significant interest payments on the current term debt, we expect free cash flows on an active basis to surpass, the 20 million modeled from fiscal year 2020, which represented a limited impact from COVID. Finally, turning to our financial outlook. As Jamie mentioned, we expect continued recovery across our market verticals and increasing contribution from our new software solutions resulting in our expectation of revenue for the fourth fiscal quarter to be 98 million, plus or minus 3 million, well over the current Street consensus and represents sequentially flat revenue in what is typically a seasonally weak quarter for the company. Non-GAAP adjusted net income/loss is expected to be breakeven, plus or minus 1 million, adjusted earnings per share/net loss per share of breakeven, plus or minus $0.02 per share, and adjusted EBITDA of 9 million, plus or minus 1 million.

With that, I'll turn the call back to Jamie for closing comments.

Jamie Lerner -- Chairman and Chief Executive Officer

Thanks, Mike. In summary, this was a very solid quarter for Quantum, the second consecutive quarter of growth and the second quarter of exceeding guidance. We demonstrated significant progress toward our transformational initiatives, grew our business sequentially, both in our core markets and outside of our core markets, and added key new products to our portfolio to drive software and recurring revenue growth. With that, we will now take any questions you may have.

Operator?

Questions & Answers:

Operator

[Operator instructions] Your first question from the phone lines is coming from Craig Ellis. Your line is live.

Craig Ellis -- B. Riley FBR -- Analyst

Thanks for taking the questions, and congratulations on the strong results and outlook, guys. Just a housekeeping item to start. Mike, versus the fiscal third quarter's $93 million guidance midpoint, where was the primary source of upside in the different businesses? And then I think, Jamie, mentioned -- you mentioned that the fiscal fourth quarter is typically seasonally weaker. So given that you're outperforming that, what are some of the gives and takes across either customer groups or different product groups?

Mike Dodson -- Chief Financial Officer

Yeah. Relative to our guidance, as we outlined in the script, we really saw an increase across all the products, all the verticals, everything was up, with the exception of service was plus or minus flat. So we really saw a broad-based recovery in our business, really explains, for large part, the $98 million for the quarter.

Craig Ellis -- B. Riley FBR -- Analyst

And then gives and takes in the fourth quarter, Mike?

Mike Dodson -- Chief Financial Officer

Yeah. We have given guidance of $98 million, staying flat. It's reflective, again, of a stronger business environment that -- than the typical seasonal decline. Again, we see strength in the hyperscaler business.

We expect media and entertainment to continue to recover. We're cautious there, but that should be stronger going forward. Those are the key drivers.

Craig Ellis -- B. Riley FBR -- Analyst

Got it. And maybe turning to some of the comments about the new products. So one segue into the question, noting that for the second consecutive quarter, product gross margins was 31%. So nice gross margin, I think, consistent with what you've suggested in the past, Jamie, that you wanted to drive the portfolio toward higher value.

So the gross margin question is this: One, is that 31% level in products really a level that is now sustainable, or would we expect there to be gives and takes with that? And with regard to Square Box and ActiveScale and some of the products that were refreshed and were launched in the calendar fourth quarter, what should our expectation be for their materiality as we go through calendar 2021? How substantially could those businesses grow and become?

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah. Strategically, I mean, our goal is to sell larger deals. Larger deals are a result of combining multiple products together into a solution versus a point product sale. And more and more, the glue that ties multiple products together is software, whether it be deployed on-premise or in the cloud.

And so, our goal is to be driving higher margins through a greater mix of software, greater mix of services, and a greater value by taking on more complex solutions than just an individual product sale. Now, exactly how to model that and how that's going to take place? From my point of view, we're in the very early days of that and simply don't have enough customer and sales data to be able to characterize speed in which that transition's going to take place. I mean, Mike, you may be able to give better detail than that. But we really just started putting these software products out in November.

And I just don't think we have enough data as to the speed in which we're going to make this transformation yet to be able to characterize a multi-quarter trend.

Mike Dodson -- Chief Financial Officer

Yeah. Yeah. Craig, what I would add to that is, it is very difficult for us to forecast the rate of the transition. I mean every quarter, as it builds more scale, we intend to provide more metrics and information related to the software business, the subscription business.

But at this point, it's just hard to tell. We've just started it. We just announced these products in November. So we're just starting down the path.

Craig Ellis -- B. Riley FBR -- Analyst

Fair enough, Mike and Jamie. Lastly, you guys, nice progress with the Hyperscale revenues within secondary. I'm wondering if you can just give us an update on just engagement with that customer set more broadly as we go through calendar '21, should we expect the number of customer engagements, the number of customers for which you can derive revenue to expand beyond the current 3? And if so, any color on geographic mix or other dynamics would be helpful.

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah. I mean I can speak to our strategy. I mean, clearly, we've got a tiered strategy. We put a lot of energy in our sales efforts with the top eight to 10 cloud and Hyperscale customers just because of -- just how massive their buying power is.

But we also put energy to the next 200-or-so accounts beneath that in the web-scale companies, maybe not at hyperscale, but they certainly are -- certainly and then the Global 2000, all of which have data they need to archive for decades, if not longer. And our strategy there is to increasingly solve archive problems with more software, cataloging software, data movement software, all the software that's needed to organize an archive that could have 100 million to several billion files in it. And that's our strategy. Obviously, we started at the top of the pyramid, but we're pressing down.

And the goal is we need much more diversity in our installed base, having one or two very large customers is great, but that comes with all the issues of having just a handful of customers. So we're broadening out that base much more widely and broadening it to customers that place more value on our software and more value on our services so that we can drive the margin more aggressively than you can with the top three or four players at the top of that pyramid.

Craig Ellis -- B. Riley FBR -- Analyst

That's helpful. Thanks, Jim. Thanks, Mike.

Jamie Lerner -- Chairman and Chief Executive Officer

Thanks, Craig.

Operator

Your next question is coming from Eric Martinuzzi. Your line is live.

Eric Martinuzzi -- Lake Street Capital Markets, LLC -- Analyst

Hey. I had a follow-up question regarding the media and entertainment vertical. Curious to know if the -- you've qualified the recovery by saying kind of initial recovery. Obviously, with the business -- with that vertical being off about 50% versus a year ago.

Is your qualifier to say then -- that we think -- things get better in December, and we think they get better in March, or is it just to say, hey, they got better, but it's all relative versus a year ago?

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah. I would say they got better this quarter, significantly better. And it's touch and go, right? We know that you cannot easily get filming permits in New York and Los Angeles that you once were able to do. We know that sports are still playing short or limited seasons.

Certainly, sports that rely on ticket sales are still under pressure. So it's an industry that's still significantly under pressure. Now, it's -- there was a point in time when it was an industry that stopped, right? I mean, movie, television and sports in the -- in our first fiscal quarter, I mean, they just stopped. I mean now it's moving again, but at a slower pace.

And it's my belief that it will continue to recover almost in alignment to the rollout of the vaccine. And we're cautious, though, because we've seen variance. We've seen slowdowns in vaccine rollout. And so, I'm optimistic about its recovery, but I'm also cautious that we don't exactly know at what speed, what rate, what new twist and turns lay in front of us.

So we're seeing improvement, but we're also -- we're not euphoric. We're cautious.

Eric Martinuzzi -- Lake Street Capital Markets, LLC -- Analyst

Yeah. So if you were to look at pipeline in media and entertainment now versus 90 days ago, how has that changed?

Jamie Lerner -- Chairman and Chief Executive Officer

I'd say it's building in strength, but I think people are still spending where they have to, and they're not leaning into projects. I think they're behaving with caution as well. They're not buying for one year, two years out, they're buying for very short-range projects. So I think there's a lot of pent-up demand, but there's a lot of caution there, too.

And I think it's going to recover in correlation to how quickly they can roll out a vaccine and how effective that vaccine is. I mean it's a business that's entirely characterized by humans assembling, right? Sports is about human assembly, making a movie, especially a feature film is 200 to 300 people assembled in close contact. It's entirely about our ability to come in close contact and assemble people. And to the extent that we can assemble people quickly with a vaccine, it will recover and the extent that it's drawn out, it will take longer.

So it's directly correlated to the vaccine and human assembly.

Eric Martinuzzi -- Lake Street Capital Markets, LLC -- Analyst

OK. And then, the progress with the hyperscalers. I think last quarter, you said you were going to add two new in the December quarter and then a fourth in the fourth quarter. Is that still on track?

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah. The business is on that trajectory. Again, they don't always share their plans with us, but yes, we're loading more hyperscalers. We're starting to load some web scale, some telco, some other businesses as well further down that pyramid, but I think you characterized the rollout accurately.

Eric Martinuzzi -- Lake Street Capital Markets, LLC -- Analyst

OK. And then, Mike, on the margin side, given though the revenue roughly equivalent at least at the midpoint for Q4 versus Q3 in -- I guess it's a two-part question that should we anticipate similar opex in Q4 and similar gross margin to get us to this EBITDA that's roughly equivalent to the -- at least at the midpoint versus Q3?

Mike Dodson -- Chief Financial Officer

Yeah. The gross margin should be relatively flat, product mix relatively flat between Q3 and Q4. We had a little bit of an unfavorable product mix in Q3 relative to Q2, and we saw that decrease in margin reflected. And then, when we -- your second part of the question was –

Eric Martinuzzi -- Lake Street Capital Markets, LLC -- Analyst

Yeah, the operating expense was a -- go ahead.

Mike Dodson -- Chief Financial Officer

Yeah, plus or minus, as we enter Q4, some of the operating expenses become under pressure as it relates to the annual audit and those types of things. But plus or minus, they're going to be in the same range.

Eric Martinuzzi -- Lake Street Capital Markets, LLC -- Analyst

OK. And then, lastly, certainly, you've been able to attract some quality talent, Jamie. The -- you've kind of got two lines in that kind. You do have sort of two lines of business inside of Quantum.

There's primary storage systems. You've got your secondary storage systems. You've been adding new products in both those areas. As you're attracting this new talent from a product perspective, what do you think is the appeal for what's attracting people to Quantum?

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah. I mean I would characterize we have four core lines of business, certainly, primary and secondary storage, but our cloud and analytics software is really where we're really expanding the business and differentiating. And then, our fourth line of business and our biggest business is our services business. And more and more of our products are going to be delivered as a service.

So as we press that out, there's really, I think, two things, maybe three, that are bringing the top industry insiders here. First is strategy. I think the strategy is resonating with a lot of people who've been at very large bold-to-bracket infrastructure and storage companies, I think they view the strategy as thought leadership, and they actually combine that with a culture that they feel, and I certainly feel, that allows us to not only have that strategy but to execute on it, make the acquisitions, build the products, make the moves we have to move to get it done. So I think it's a -- it's both a validation of the strategy and a validation of this is a culture where we can just get that work done.

I think those things were question marks two years ago. And now, with the amount of customers it's resonating with, with the top executives, I think people just view it as it's a good strategy and a culture where people can come and execute and be successful.

Eric Martinuzzi -- Lake Street Capital Markets, LLC -- Analyst

Thanks for taking my questions, and good luck on Q4.

Jamie Lerner -- Chairman and Chief Executive Officer

Thanks, Eric.

Operator

Your next question is coming from Chad Bennett. your line is live.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Great. So thanks for taking my questions. So a few questions just around the hyperscaler progress that you have made. And I think it was Jamie on last call, I think you indicated a fourth hyperscaler making production buys by the end of the fourth quarter.

Are we still on track for that?

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah, I think we're on track with them finishing their qualifications. Production buys, as many of you track this closely, there have been delays in the LTO-9 rollout. So a lot of the rollout that's happening with these three newcomers coming on around now, it's not coincidental that they correlate to the rollout of LTO-9. And LTO-9 has now been delayed at least till June.

So there may be some impact of these newer customers, particularly the fourth player, maybe holding out till LTO-9, and we'll have to see. But they're certainly coming to the end of their analysis, their trials, their testing, and they're coming down to their production rollout. And I think we'll just have to see how hard they hit the throttle on LTO-8 or if they wait a little longer for LTO-9. And we're just going to have to see how it plays out.

But I think the end result is the same. I just don't know how much they buy stuff when there's a whole new generation that's only 90 days or 90 days to 180 days away.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

No, I appreciate the color on that. And then, probably a different one of them. But you also mentioned, which I thought was pretty interesting, a new primary storage product into, I think it was one of your hyperscalers that you thought you'd be able to sell into in early fourth quarter. And then also on the software side, some management software around primary storage or maybe both primary and secondary that you thought you'd make headway in this quarter.

Can you address those? I assume those aren't really LTO-tied, right? So --

Jamie Lerner -- Chairman and Chief Executive Officer

Not necessarily. I mean, I think you're pointing at two trends. One is for the -- a cloud company has many different types of storage, fast storage, slow storage, cheap storage. They have tiers of storage capability.

And what we're seeing now, as we add more customers, is more of them are saying, we don't just want your hardware, we actually want your -- the software that allows us to write data to tape, retrieve data, organize data. So we're seeing a higher attach rate of software where some hyperscalers are like, we just want your hardware, nothing else, we'll take care of everything by ourselves. I'm seeing more so the trend being we want tape and the software that manages tape and the storage software and management software that allow us to build enormous archives on that tape. We're also seeing some of them saying, hey, there's some high speed -- we're not just interested in you for slow speed archive software and archive storage.

We're also interested in some of your high-speed products for other use cases, and you're seeing increasingly, we are rolling out our high-speed storage on the top three cloud players, and we'll be making more announcements about that. We're deploying on their edge storage. And there's other engagements where we're working with a variety of different hyperscalers on different tiers of storage. So yes, I think we're -- we went from just selling tape hardware to now selling tape hardware, tape management software, storage software and now some of our primary software and hardware.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Got it. And then, -- and maybe you addressed it a little bit. Just kind of now that we're -- now that the new software products are out there, and I understand it's still early, but you are seeing some early success in software and solution selling. And you're breaking into new use cases.

And the fact that your product revenue is held up, especially in the December quarter as much as it has in light of kind of a huge headwind on M&E., can you just give us a sense, Jamie, and I know it's early, kind of the use cases and the solutions you're selling now and kind of incrementally where you're playing in -- whether it's in primary storage or in software or in any type of management-level layer of the overall storage ecosystem relative to where you were a year ago? And kind of what the -- what are you replacing, or what potentially would be competitive to you today that wasn't a year ago, if that makes sense?

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah. I mean, I think there's a -- I think there's a technical question in there, and I think there's also a kind of vertical market's question. I would say two years ago, we sold predominantly to media and entertainment and enterprises wanting to do backup. If you fast forward to today, we now can offer to the traditional customers, both enterprise backup and media and entertainment, we just have more to sell them.

So there were tiers of storage we didn't use to have, right? We didn't used to have flash storage. We gave up those sales to other people. Now, we have that. We didn't have midrange storage.

We would give that up to someone like Isilon at EMC. Now we -- with the ATFS, we actually have that midrange. And so, we're filling out the tiers. So the existing customers where we had gaps we now can sell them the full range of storage they need instead of saying, you can buy some from Quantum, but you have to fill the gaps with other competitive vendors.

We can now do end-to-end sales. So for the customers who we've had for many years, we can just sell them more. Now, we're also gaining traction in new areas, genomics. I mean genomics is becoming really important, all right? Everyone who gets COVID-19 has their genome sequenced to understand the impact of vaccinations upon their genome, the impact of the illness on their genome.

And so, just as a society, we're collecting more genes, we're analyzing more genes, and a gene is kind of like a TV commercial in the sense that it eats up about that much data. And so, you have millions and millions of humans with lots of different genes and sequences of their genes and those repositories end up looking like gigantic repositories like you'd see at a news station. And more and more companies are coming to us saying, help me organize those genes. I want to keep metadata software.

So they're looking at things like ATFS and CatDV that allow you to -- if you have 40 million genes, you can't just give them a filename. You have to say, this file is from a mail, and this person is -- of this age. And this is their patient number, and you need to really build a lot of metadata around that file. And we've now built software, that we did never have before, to do that.

So I think in verticals, we are selling more into the existing verticals. We're expanding into genomics. We're expanding into medical imagery, MRI, X-ray, CAT scan, increasingly seeing just more deals in that area. Autonomous everything, again, where they're collecting a lot of video.

Video surveillance, we're making more and more inroads in our surveillance business. So we're selling more to the customers we've had historically, and we're branching into these new verticals. And when we branch into the new vertical, we just have -- instead of having a single product to sell them, we are now selling them multiple products, software products and then solutions, engineering to tie it all together and help them solve a business problem. And I think that's why in -- we are seeing recovery, but I think our good fortune this quarter and our strong guidance is a function of the compounding impact of recovery and successful traction on new products.

We're seeing the combined impact of both of those trends.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Got it. Great insight on the future and nice job on the quarter, guys.

Jamie Lerner -- Chairman and Chief Executive Officer

Thanks, Jeff.

Operator

Your next question is coming from Erik Suppiger. Your line is live.

Erik Suppiger -- JMP Securities -- Analyst

Yeah. Thanks for taking the question, and congrats on a solid quarter. Can you talk about your supply chain? And if there was any component constraints or anything like that, obviously, you were able to deliver. But can you just talk about kind of the state of supply chain and where you get your components from?

Mike Dodson -- Chief Financial Officer

Yeah. We really didn't see any constraints in the supply chain during the quarter. We subcontract out the majority of our manufacturing on the hardware side. We used one of the largest firms with the Mexico footprint.

So we really haven't seen any impact on that front.

Erik Suppiger -- JMP Securities -- Analyst

OK. Can you talk about any customer concentration issues? Any customers that were of size?

Mike Dodson -- Chief Financial Officer

Yeah. Historically, we happened to had any 10% customers with the exception of every now and then we'll have a distributor that really doesn't represent concentration per se in the classic customer concentration meaning. So we have very limited impact from that standpoint. Historically, our largest customer would have been our hyperscaler customer.

And that customer historically hasn't reached the 10% point. So really, not much of an issue from our standpoint, our business model standpoint.

Erik Suppiger -- JMP Securities -- Analyst

OK. And then, you talked a little bit about NVMe. In the NVMe environments, can you discuss how broadly NVMe has been adopted by the customers? Is it end to end, or how are they using that?

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah. I think the way they're using it is in a tiered model in that they put the data that needs to be processed, accessed, modified in very high speed, they put that data on flash, NVMe. And then, when they're done with it, they get it off of there. So if you're a wealthy organization, you could do end-to-end NVMe, but I just rarely see that.

What I typically see is a thin tier of NVMe than a broader tier of disk. And then, the biggest tier of object storage or tape archive storage. And they use our software which is -- there's a new very deeply developed technology that we launched in StorNext 7 that dynamically organizes that for you. It decides for you, when does your storage need to be on high-speed NVME? When should it be on disk? And when should it be archived? And they could do it based on policies or rules and the idea would be, if you're sequencing a gene or doing visual effects on a movie, you're going to be up in NVMe.

And then as soon as you're done doing that work, it can slide down to disk where it's still fast enough to watch that movie, review the movie, have editorial review, it could even play it out to movie theaters. And then, when that movie has kind of come and gone, it can then slide down to an object store for a deeper cold archive. And we have the software that organizes that, and that's the way we see it deployed. So -- and I'm seeing more and more customers buying all of those tiers from us.

And even when they tiered to cloud, they use our software to tier things to cloud and move it back from the cloud and use our policy engine to orchestrate all the movements of those files as they go through their workflows.

Erik Suppiger -- JMP Securities -- Analyst

OK. And then, a last one. The S3, I think you introduced an S3 solution to work with AWS. Any comment in terms of adoption there?

Jamie Lerner -- Chairman and Chief Executive Officer

I think what we talked about regarding S3 was that our object store ActiveScale has the most complete, most thorough S3 implementation in the object storage space. And we have had just very strong pickup of that product, in part because of the thoroughness of the S3 implementation, but also just how incredibly elegantly that product scales, how robust it is and easy to run. And we've recently added a lot of ransomware protection functions in it to make it not only very scalable, very easy to use, but really lock down your data so that it's near impossible to -- for someone from the outside to lock up your files or modify your files and lock you out of them and hold you for ransom.

Erik Suppiger -- JMP Securities -- Analyst

Very good. Thank you.

Jamie Lerner -- Chairman and Chief Executive Officer

Thanks, Erik.

Operator

Your next question is coming from David Duley. Your line is live.

David Duley -- Stifel Financial Corp. -- Analyst

Yeah. Thank you for taking my questions. most of them have already been asked, but I'll just have a couple of follow-ups. You mentioned the current quarter seasonality, the March quarter seasonality.

Typically, what is the seasonality for the March quarter on a historical basis?

Mike Dodson -- Chief Financial Officer

I'd say it ranged from the mid- to high-single-digits decrease quarter over quarter.

David Duley -- Stifel Financial Corp. -- Analyst

OK. And when you think about transitioning all of your hardware products to software or a lot of them, what percentage do you actually think will ultimately, let's say, over a three to five-year period transition to a software model. And why I ask it that way is -- I'm sure there are some pieces that won't -- that you know that won't transfer. So I'm just trying to get an idea over a three to five-year period, what you would expect to transfer to this software-oriented model.

Mike Dodson -- Chief Financial Officer

Yeah. On our analyst day, when we did our three to five-year model as we transition, what we characterized as recurring revenue would be 70% of our total revenue. Today, it's plus or minus 40% that is non-product. So we're really looking at the 60% that is product today, half of that will move to software, and half of it will remain, round numbers.

David Duley -- Stifel Financial Corp. -- Analyst

OK. And then, in your slide presentation, you have a pyramid slide there where you have the hyperscalers on top and then a couple of other incremental opportunities. I'm just wondering how much bigger do you view the web scale guys and the Fortune 2000? How much bigger are those markets than that top tier of the top 10 hyperscalers? So just trying to understand what sort of market opportunity you have here with these two big new pieces.

Jamie Lerner -- Chairman and Chief Executive Officer

I mean, I think I would characterize the difference between those tiers less in size and more in value. And what I mean by that is a hyperscaler by design wants to deliver all the technical value themselves and wants as little dependence on third parties as possible. And they -- I mean, that's their business model. But when you go to a web scale company or to an enterprise, they don't feel that way, they're happy to work with other technology companies, and they're happy to use your software, they're happy to use your services.

They're happy for you to help them and they don't view that as a problem in their business model. And so while the deals may be much, much smaller there, the percentage of software and the percentage of services is much higher. And so, the margins, the profitability of those two lower pieces is drastically larger. So it may be -- may not be any bigger dollar-wise to the company, but it could be over double the margins that we get from hyperscalers in those two lower tiers.

David Duley -- Stifel Financial Corp. -- Analyst

OK. Thank you.

Jamie Lerner -- Chairman and Chief Executive Officer

OK. Thanks, Dave.

Operator

There are no further questions at this time. I would now like to turn it back to Jamie for closing remarks.

Jamie Lerner -- Chairman and Chief Executive Officer

All right. Well, thanks, everyone. It was a great quarter. We're looking forward to more quarters, and we'll keep everyone updated on our transformation as we move as quickly as we can to transform ourselves into a more profitable, more earnings-rich company as we transition to software, services and subscriptions.

So thanks, everyone, and we'll be talking soon.

Operator

[Operator signoff]

Duration: 62 minutes

Call participants:

Leanne Sievers -- Investor Relations

Jamie Lerner -- Chairman and Chief Executive Officer

Mike Dodson -- Chief Financial Officer

Craig Ellis -- B. Riley FBR -- Analyst

Eric Martinuzzi -- Lake Street Capital Markets, LLC -- Analyst

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Erik Suppiger -- JMP Securities -- Analyst

David Duley -- Stifel Financial Corp. -- Analyst

All earnings call transcripts

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