Quantum Corporation (QMCO) Q4 2021 Earnings Call Transcript

Quantum Corporation (QMCO -1.75%)
Q4 2021 Earnings Call
May 26, 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 fourth quarter and full-year results for the fiscal year 2021. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation.  [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 Contact Officer

Good afternoon, and thank you for joining today's conference call to discuss Quantum's fourth-quarter and full-year 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, 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 webcast 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. 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.

For those of you unable to listen to the entire 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 results for our fourth quarter and fiscal year 2021 with both adjusted net income and earnings per share exceeding our guidance. Strong demand led to our third consecutive quarter of increasing customer orders, allowing us to finish the year with a material increase in bookings while demonstrating early traction on our software and subscription contracts. As we announced in our earnings press release, the industrywide supply chain shortages impacted our ability to fulfill all customer orders.

Without these challenges late in the quarter, we would have been able to exceed our prior revenue guidance. Given this dynamic, we are entering the first fiscal quarter with a significant backlog. We expect customer demand to remain strong and we are working closely with our suppliers to manage through these temporary shortages. The fiscal year 2021 posed numerous challenges for companies around the globe due to the pandemic, yet we made significant progress in transforming Quantum.

We made notable progress on our transition from selling point products to solving business challenges with a broader set of solutions and services. During fiscal 2021, we closed a record number of 500,000-plus deals and saw new customers buy more services versus the prior year. In addition, we introduced subscription licensing for many of our products in November and now, have over 120 customers on the recurring revenues subscription. Also, in early February we completed an accretive of one $100 million secondary offerings using the proceeds to reduce our senior secured term loan by 50% and materially strengthening our balance sheet and cash position while reducing our interest expense.

Over the past year, we have also made tremendous progress architecturally, proving that StorNext 7 is the fastest file system for video workloads verified through independent testing. During the quarter, we introduced our software-defined architecture enabling StorNext software to run on standardized hardware or any cloud infrastructure.We are entering the fiscal year with more momentum in our Hyperscale business. As of today, we have multiple engagements across many of the world's major Hyperscale customers and are in various stages of evaluation with others. Our engagement is deeper than just serving point product or software solution needs as Quantum engineering teams have become integrated partners to these Hyperscale customers, allowing us to develop new technologies and solutions in tandem with the largest global consumers of data.

Quantum has set the standard for architectural leadership in Hyperscale, deep archive, and cold storage. And we are years ahead of the competition in this space. Our Hyperscale customers are demonstrating this with an increased volume of orders, as well as working with us to provide better visibility into their out-quarter demand as we work through industrywide supply chain constraints. We see our engagement with leading Hyperscale customers as an advantage to constantly push Quantum to accelerate the innovation of technology, which allows us to not only expand our architectural leadership but create exciting new solutions and software that can be replicated for leading webscale and Fortune 500 enterprise customers facing the same exabytes scale data challenges.

As the economy moves into a post-pandemic era, customer demand for video is accelerating. Movies, television, and sports have begun to return and are driving big investments in technology as content delivery shifts from television and theaters to streaming services. Video has expanded as a communication platform in the enterprise overtaking email; and corporate video recording, editing, and communications are in expansion mode. Genomic research driven by the dynamics of requiring effective COVID-19 vaccines and therapeutics development is in strong-growth mode along with life sciences and bioinformatics.

Space exploration, satellite, and advanced satellite tech are also driving massive growth in large-sized data storage requirements. Finally, as the world moves toward a more autonomous everything, not just driving, but delivery, forklifts, farming, mining warehouses, these technologies are driving significant data growth used to develop complex machine learning models. As we all experience on an everyday basis, the world is generating enormous amounts of data and video content that must be managed, protected, and analyzed. Quantum portfolio is ideally suited to address these challenges.

Our solutions enable organizations to manage and store the increased flow of data both on-premise and in the cloud. We're helping to protect valuable digital assets, not just for years but decades and centuries while enabling organizations to unlock the untapped potential and business value in this data through our storage and data analytics solutions. As we look to the coming quarters, we remain focused on driving our transformational initiatives forward and growing our recurring revenue and services revenue. Our products and software solutions are helping global customers solve their most challenging needs for long-term data storage and analytics.

While supply shortages have limited ability to fulfill all the demand we are seeing in the near term, we expect this revenue to flow into the coming quarters as the supply chain normalizes and component manufacturing is able to catch up to the demand. I remain encouraged by the progress we've made over the past year and look forward to further accelerating our transformation throughout fiscal 2022. With that, I'd like to 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's joined our call today. As Jamie mentioned in his opening comments, our fourth fiscal quarter 2021 demonstrated very strong customer demand representing the third consecutive increase in bookings with customer demand returning to pre-COVID levels. However, the industrywide supply chain shortages that materialized late in the quarter restricted our ability to fulfill all orders.

As a result of these supply chain constraints, revenue was $92.4 million for the fourth fiscal quarter of 2021. These supply shortages had the most prominent impact on our secondary storage system customers. Despite this lower revenue level, all product segments grew sequentially with the exception of our primary storage systems, which declined sequentially predominantly due to seasonality in the government business. For the full year of the fiscal year 2021, revenues were $349.6 million down 13.2% year over year primarily reflecting the COVID-related headwinds impacting all geographies and product lines.

And a vertical view year over year, the government business increased by 32% while the media and the entertainment business declined by 36%, with all other verticals declining to a lesser extent. Gross margin in the fourth fiscal quarter was 42.1%, compared to 43.1% in the prior quarter. The sequential decline is primarily due to lower government business revenues, which carry higher gross margins. Year-over-year gross margin improved slightly to 43.1%, compared to 42.8% in the prior year.

GAAP operating expenses in the fourth quarter were $36.6 million, compared to $36.2 million in the prior quarter. Non-GAAP operating expenses during the fourth fiscal quarter were $32 million, a decrease of $1.7 million sequentially. The sequential decrease in non-GAAP operating expenses was primarily due to higher R&D expenses more than offset by lower G&A expenses. The increase in research and development spending was due to increased headcount primarily related to business acquisition and professional services costs related to new product development.

The decrease in general and administrative expense spending was primarily reduced compensation costs and other discretionary cost savings. On a year-over-year basis, GAAP operating expenses were $142.4 million, compared to $151.3 million in the prior year. The non-GAAP operating expenses of $127.3 million in the fiscal year 2021 was a $3.8 million decrease versus the prior year at 131.1. The year-over-year changes in non-GAAP operating expenses represent additional investment levels in research and development more than offset by decreases in sales and marketing and general and administrative costs.

The decrease in sales and marketing costs is primarily due to lower compensation as a result of lower sales levels and a decrease in marketing programs and related professional services costs. The decrease in general and administrative costs is primarily due to expense reduction actions in which we moved certain back-office functions in higher-cost regions to a lower-cost region and reduced facilities expenses as we consolidate our physical footprint, partially offset by increases to software expense as we modernize our existing IT infrastructure. GAAP net loss in the fourth fiscal quarter was $17.5 million, or a loss of $0.35 per share, compared to a net loss of $2.7 million, or a loss of $0.07 per share in the prior fiscal quarter. Our fourth quarter GAAP results included a debt extinguishment charge of $14.8 million related to the retirement of 50% of our senior secured term loan.

Excluding stock compensation, restructuring charges, and non-recurring charges, non-GAAP adjusted net income in the fourth fiscal quarter was $2.1 million, or $0.03 per share, compared to adjusted net income of 10,000 or breakeven in the prior quarter. Adjusted EBITDA during the fourth fiscal quarter was $8.3 million and decrease on a sequential basis from $9.4 million primarily due to lower revenue. There is a full reconciliation of our non-GAAP results for the most directly comparable GAAP measure in both the press release and the Form 10-K released today. Now turning to the balance sheet, liquidity, and cash flows.

Cash and cash equivalents were $33.1 million as of March 31, 2021, compared to $12.7 million on December 31, 2020. These balances include five million in restricted cash under the credit agreements. Adjusted working capital excluding deferred revenue balances decreased by $10.9 million during the fourth fiscal quarter to $55.8 million from $66.7 million at the end of the prior fiscal quarter. This decrease was primarily the result of a build of accounts receivable despite lower revenues due to a more back-end loaded shipping schedule for the quarter, more than offset by reduced inventory balances from moving certain product manufacturing to a new manufacturing partner that carries that related inventory and an increase in accounts payable.

Outstanding term debt as of March 31, 2021, on a gross basis, was $102.5 million, and on a net basis was $90.9 million after netting $90.7 million in unamortized debt issuance costs, and $1.9 million in the current portion of long-term debt. This compares to $167.8 million of outstanding debt as of December 31, 2020, on a gross basis. And on a net basis, it was $146.8 million after netting $13.7 million in unamortized debt issuance costs, and $7.3 million in the current portion of long-term debt. Related to the long-term debt credit facilities, there remains a holiday period for certain financial covenants through June 30, 2021.

Following the expiration of the expensive may call repayment term of the debt agreement, at the end of the first fiscal quarter of 2022, we expect to refinance the remaining balance of our senior secured term loan early in the second fiscal quarter at much more favorable rates compared to the 12% paid today. This should further reduce our annualized interest expense by as much as 50% once completed. In the fourth fiscal quarter, there were no funds drawn on the company's credit line compared to $6 million at the end of the prior quarter. During the fourth quarter, before the effect of changes in assets and liabilities, cash used was $1.4 million offset by $20.9 million of cash generated by changes in working capital accounts.

Other uses of cash during the fourth quarter included $92.8 million to pay down half of our senior secured term loan, as well as $2.3 million for capital expenditures. Cash flows generated from operations for the fiscal year 2021 before the effect of changes in assets and liabilities was $2.9 million. Net cash from operating activities in the fiscal year 2021 includes the use of cash equal to $0.8 million as working capital was impacted by a decrease in inventories and an increase in accounts payable, partially offset by an increase in accounts receivable. Other notable uses of cash in fiscal 2021 were $6.9 million in capital expenditures, in the paydown of our senior secured term loan as previously noted.

Finally, turning to our financial outlook. As we disclosed in today's press release, we've experienced three quarters of increasing broad-based customer demand. And we expect continued strengthened demand and related customer orders at or above pre-COVID levels in the first fiscal quarter of 2022. Given the widespread supply chain shortages in the fourth quarter, we enter the first fiscal quarter of 2022 with a sizable backlog.

We continue to manage these supply chain constraints by working closely with our key suppliers and extending supply commitments as we address these short-term challenges. As a result, we are guiding revenue for the first fiscal quarter of 2022 to be in the range of $92 million, plus or minus $3 million. Non-GAAP adjusted net loss is expected to be $1 million, plus or minus $1 million, with adjusted net loss per share of $0.01 per share, plus or minus $0.01, and adjusted EBITDA of $5 million, plus or minus $1 million. Despite these near-term supply chain constraints, we expect strong demand to continue throughout the coming fiscal year, further supported by an expanding pipeline of opportunities across our business.

Although we remain cautious regarding the timing as to the normalization of the supply chain, we continue to work closely with our key suppliers, as I previously mentioned. As such, we expect revenue for the full fiscal year 2022 to be in a range of $380 million to $420 million determined by the timing of supply chain improvements. With that, I'll turn the call back to Jamie for closing comments. Jamie?

Jamie Lerner -- Chairman and Chief Executive Officer

Thanks, Mike. As I reflect on the last year, I'm very proud of the Quantum team for how far we've come. We have demonstrated exceptional resilience during this global pandemic. And I want to acknowledge our employees and their families, many of whom have faced incredible challenges during the last year.

It has been a unique year for everyone including Quantum. But even in the face of these challenges brought on from the pandemic, we're still making substantial progress on our transformation initiatives throughout the year. In addition, during fiscal 2021, we made significant improvements on our capital structure which enabled us to reduce debt, strengthen our cash position, and improve our operating flexibility to support our growth initiatives both organically and inorganically. We are starting the new fiscal year with strong product bookings and increasing momentum in subscription and software contracts.

We're working closely with our suppliers to address these supply constraints but remain pleased with the increased level of demand we are seeing in a post-pandemic world. With an expanded portfolio of solutions and a solid balance sheet, we are in a much better position than in previous years to withstand these short-term supply chain disruptions and we are poised for a return to growth with increasing demand and orders across our business. With that, we will now take any questions you may have. Operator?

Questions & Answers:

Operator

Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator instructions] Your first question is coming from Craig Ellis. Your line is live.

Craig Ellis -- B. Riley Securities -- Analyst

Yeah. Thanks for taking the question, guys, and congratulations on the demand profile back at pre-COVID levels. Mike, I wanted to start off just by understanding the nature of the component issues that you and Jamie spoke to. So one, you identified that they started to emerge late quarter.

Can you provide some color on what components they were? We've seen tightness in HDDs and SSDs but I think you said, there was more of an impact on the secondary business and that doesn't sound like HDD or SSD. So if you could just give some more color on what's at play there and the extent to which those issues are either stabilizing and starting to get better or maybe intensifying further, that would help as well as a start on that issue?

Mike Dodson -- Chief Financial Officer

Sure, Craig. Well, it was like we mentioned on the call, there was in the secondary area, which is our tape business, right? And you know, we don't like to get into a lot of specifics as far as the suppliers, but it's really specialized silicon that is really -- for us, it's a pretty short lead time. So it really surprised us at the end of the quarter from that standpoint. It's something we expect, you know, will work its way out, hopefully, in the next one or two quarters, but really it's difficult to tell at this time.

Craig Ellis -- B. Riley Securities -- Analyst

OK. And then, that really relates to the second question. So nice to get the color on how you're looking at fiscal '22 with that range of 380 to 400 and 20 million. Off of the guidance for the first fiscal quarter, at the low end, I think that could imply something like 96 million a quarter at the high end as much as 109 million a quarter.

How quickly do you think you can get things resolved? It seems like the business has a demand profile that's at least 105 million to 106 million. But how quickly can the supply chain respond to the demand that you have and can you provide any color on how that nice high-level backlog is shaking out either among the primary business, the secondary business, or for maybe services?

Mike Dodson -- Chief Financial Officer

Yeah, I think, it'd be fair to characterize it in a way that when we start to get the supply back, it will come back very quickly. It is a matter of we've got the demand, we get the component, and we'll catch up very quickly. It is, you know, it's of that nature.

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah. Hey, Greg, it's Jamie. You know, the way Mike and I have been thinking about it is we -- when we think about the range of 380 to 420 for the year, we're confident we have the demand to meet the 420 or above. We will have signed contracts, purchase orders at the 420 or above level.

And the determining factor of where we land between the 380 and the 420 is not a function of demand or sales performance, it is purely a function of material availability. So if materials are available, we're at the high end of that range. If materials are not available, we're at the lower end of the range. And if these industrywide supply issues resolve themselves, which many people are thinking will resolve within 12 months, which is within our fiscal year, then I think all of the backlogs flows through.

We've never given backlog guidance because the company is -- usually, when we sell something, we ship it within two weeks. So we've never really had a backlog of any sizable nature, and now we're seeing backlogs that are, you know, 10% to 15 % of our quarter is going into the backlog. And you know, really it's now becoming a function of the ability for that backlog to flow through and will it flow through in the year and will the supply chain constraints resolve within the year yeah.

Craig Ellis -- B. Riley Securities -- Analyst

Yeah. That's really helpful, Jamie. And if I could ask one more before jumping back in the queue. You mentioned you have, I think it was 120 customers, that have signed up for subscription services.

And I just wanted to use that as a segue to get some feedback on how the latest version of StorNext 7 is doing? What are you hearing back, now that you've got the CatDV product that's out there that more customers can have access to under the Quantum umbrella and any of the other new or recently refreshed product developments? How are they resonating with clients?

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah. You know, we have basically an entirely refreshed portfolio. Every product we have has a new version out. So with StorNext 7, we've made it drastically easier to use.

We now have it virtualized and containerized on H4000. So it's effectively a cloud architecture, so it can now run on Amazon and other clouds. It's available on subscription. It's monitorable and manageable from the cloud.

And we set the worldwide speed record for reading and writing video files. And that coupled with the return of media and entertainment, the strength in genomic research, autonomous vehicles, the products doing really well. And it brings with it or other products because increasingly, we're selling the products as a suite where for many years Quantum sold point products, you bought a tape product, you bought a backup product. Now, we're sitting with someone and saying -- sitting with our customers and saying, we want to help you solve all of your storage problems, whether they be surveillance-related, backup-related, high-performance analytics related, and we're really competing with our suite more than the point products.

And I really think that's how we're going to move our company to a totally different class of competition over the next several years where we really bring our whole storage portfolio forward. So that's, you know, CatDV just strengthens that, right? We have a high attach rate from StorNext to CatDV. We have a high attach rate from StorNext to tape and StorNext to backup products. And we're increasingly selling and designing our products to sell them as a suite of products or a combination of products versus single point products.

Craig Ellis -- B. Riley Securities -- Analyst

That's really helpful. Thanks, guys. I'll hop back in the queue.

Operator

Your next question is coming from George Iwanyc. Your line is live.

George Iwanyc -- Oppenheimer & Co. Inc.-- Analyst

Hi, thank you for taking my question. Jamie, maybe just following up on your previous comments about the sales motion. Can you give us a sense of, you know, how far along are you with that shift from product selling to solution selling? And you know, you are -- I've already seen a nice step up in average selling price, I think it was 21 % year over year. Do you feel like there's a lot of room to continue to grow both large deals and then the overall breadth of the customer base?

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah. I feel there's a large amount of headroom for us. And really, what we're doing is we're increasingly shipping our products as solution combinations. So a good example is, well, we have a forthcoming product that is a combination of CatDV and StorNext, that they're bundled together in a virtualized fashion.

We have upcoming products that will be object storage using cold storage technologies. So you know, combining multiple products together to solve a business problem. So we'll be doing many more solutions of that kind. Think of it as a genomics solution, a genomic sequencing infrastructure, a movie-making infrastructure, and an autonomous vehicle development infrastructure versus how many terabytes of storage do you want? So we're doing more solutions.

We're doing more surveillance-related solutions as well. And I think that allows us to increase the average selling price, it allows us to compete more effectively. Many of our competitors just have a point product and we come forward with a full solution. We just have a much stronger position.

So I think we're getting much more competitive. I think we're getting more relevant with our customers. And I think the solutions we sell are much stickier than the point products we previously sold. And that's why we're, in this situation where the sales team sold well above the range we gave last quarter, they were -- they are in accelerators, they are selling above our guidance levels.

And really we're throttled by material availability, which as we all know, it eventually clears up and flows through. But what I'm most encouraged by is the sales team, beating plan, selling above our guidance range, and building the meaningful backlog. And I think that's happening. Some of that is COVID recovery but I think we all know that Europe isn't fully recovered, Asia isn't fully recovered, a lot of us at being add or above pre-COVID levels is the increased relevance of the products and the larger average selling size of our solution approach.

George Iwanyc -- Oppenheimer & Co. Inc.-- Analyst

Thank you for that. Maybe pivoting a little bit and just focusing on the primary storage, you know, what type of attach rates are you seeing there and how big do you think that business can get over the, let's say, the next 12 months? Is that within your annual guidance? You know, how much of a positive lever is that?

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah, I mean, a lot of our success or forward success in primary storage is becoming relevant outside of our traditional core strength. I think StorNext is considered to be the industry standard for post-production in movies and television and we have a lot of that market, certainly the high end of that market. So for us to expand, we have to become relevant elsewhere. That would be genomic sequencing, medical imaging, autonomous vehicle development, enterprise and corporate use cases, corporate video, but other forms of unstructured data.

And that does take us into some new competitors. But I think that's really where we see our growth is can we begin to take our primary products, which are really StorNext and ATFS, and begin to sell them into use cases outside of media and entertainment. And we've -- we're seeing a lot of positive traction there but we have a long way to go and I think our roadmaps are getting us there in terms of making the product easier, making the products have different sizes, particularly as we get more software-defined and get more cloud-enabled, it'll bring us into more use cases than we've traditionally served in media and entertainment. So it's really about can we be relevant in new vertical markets?

George Iwanyc -- Oppenheimer & Co. Inc.-- Analyst

And, Mike, just a quick question for you on the gross margin side, it sounds like mix had the biggest impact on the quarter, but with the supply chain constraints, can you give us a kind of a sense for the risk-reward outlook for gross margin over the next couple quarters?

Mike Dodson -- Chief Financial Officer

Yeah, I think when we look at our gross margins, the mix is important. So when we get into quarters, for example, where the government is strong, which is our Q3 and Q2, that will be beneficial. As we move to the software subscription, you know, obviously, that's a better margin. So the transformation we will -- we do expect to see the margin move north as we move forward, but it's going to be gradual.

And the supply shortages that we see, we don't see that having a significant impact on our gross margins from that standpoint.

George Iwanyc -- Oppenheimer & Co. Inc.-- Analyst

Thank you.

Mike Dodson -- Chief Financial Officer

OK.

Operator

Your next question is coming from Nehal Chokshi. Your line is live.

Nehal Chokshi -- Northland Securities -- Analyst

Thank you, and congrats on seeing an order book consistent with pre-COVID levels, and for the order book to continue to increase. That's great. And I do actually see a strong free cash flow generation at the quarter and a drawdown in inventory in the quarter. And so the explanation that you saw, components orders definitely make sense.

However, one little bridge that I want to clarify here, your day's inventory heading into March queue set had about 90 days. And was $13 million above year-ago levels. So it seems like you guys would have had some buffer inventory for at least this quarter. Can you just explain, what's the missing link here?

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah, I think there are offsetting factors versus what we have talked about it on the call. We have moved inventory off the balance sheet to a contract manufacturer. So that reduced our inventory. Offsetting that was with these shortages because it's a component shortage.

We have essentially full units manufactured waiting for these components to be added, right? So that there were offsetting factors.

Nehal Chokshi -- Northland Securities -- Analyst

And the inventory that was moved to the contract manufacturer, was that finished goods or was that components then?

Jamie Lerner -- Chairman and Chief Executive Officer

It would have been finished goods.

Nehal Chokshi -- Northland Securities -- Analyst

It was finished goods. OK. Got it.

Jamie Lerner -- Chairman and Chief Executive Officer

I guess I would like it to automobile makers who are building full cars but can't ship them because they're missing some chips. We're building full tape arrays and the components we need, just the last small chips we need didn't arrive. 

Nehal Chokshi -- Northland Securities -- Analyst

OK.

Jamie Lerner -- Chairman and Chief Executive Officer

So that's waiting for those components to ship them. So it may be counterintuitive to be supply constrained but building up inventory and that's -- we're building full units to ship but they're waiting on a final component to be able to ship them.

Nehal Chokshi -- Northland Securities -- Analyst

And are these basically the basics or the controllers behind the takeaways or is it something else?

Jamie Lerner -- Chairman and Chief Executive Officer

I'd rather not, you know, get into which suppliers and suppliers of what, but they are chips that are integral to the operation of the predominately the tape system. So that's why we're seeing this maybe before other folks are seeing it because it's very tape specific and it's a very short-term product. So it hits the supply chain and comes to us in a very short cycle.

Nehal Chokshi -- Northland Securities -- Analyst

Got you. Understood. Yep. By the way, is backlog typically recorded in your 10-K?

Jamie Lerner -- Chairman and Chief Executive Officer

No. We've always -- like I said, we sell and ship a week or two later so we've never really run backlog or had a backlog that was significant. And now for the first time, we have significant backlogs, and again, if it continues, we'll probably provide more and more clarity. But I would go to this point, we gave guidance for this quarter of 98 plus or minus three.

So the high end of the range was --

Mike Dodson -- Chief Financial Officer

One hundred one.

Jamie Lerner -- Chairman and Chief Executive Officer

One hundred one. We were, you know, millions of dollars above that in our sales execution. So we are beating our range in sales achievement. And that's what I'm most encouraged about, right? We're executing, we're getting our deals done, and the products are resonating, and we've got to deal with this.

What I hope is a short-term supply constraint in some of these specialized chips for tape systems.

Nehal Chokshi -- Northland Securities -- Analyst

OK, great. And it sounds like you would expect, given the guidance that you are providing and the commentary that you expect demand to be above pre-COVID levels, then that you would expect the backlog to increase into June quarter as well?

Mike Dodson -- Chief Financial Officer

Yes, slightly. Yeah.

Jamie Lerner -- Chairman and Chief Executive Officer

Yes. If supply doesn't clear, which it probably won't, we'll be building backlog.

Mike Dodson -- Chief Financial Officer

Yeah.

Nehal Chokshi -- Northland Securities -- Analyst

Yep. OK, great. And then, nice little metric that you've given on the software subscription customers in the quarter. Can you give some context on how that compares to a prior quarter? And then maybe a percent of customer's transactions were made overall, and maybe also presented the overall customer base that this now represents?

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah. I mean, we have over 18,000, 19,000 customers, so 120 as a percentage, you know, it's still not meaningful, but it's growing incredibly fast, right? I mean, in December, we had zero, near zero. So, we are over a pretty short period of time moving in this direction quickly. I think it'll continue to increase at this pace and we'll be moving more of our products to this model.

So we did our first wave, but all of our new product introductions, everything going forward is moving more to a subscription or entire service-based model. And our new comp plan this year is waiting that even more for our sellers to push that there. And the economics to our end customers are incentivizing them increasingly to go to service or recurring model. So I expected to accelerate.

We went from zero to 120 in four or four and a half months, and I think that'll just continue to go up. I hope to exit the year at well over 1,000.

Nehal Chokshi -- Northland Securities -- Analyst

Fantastic. Thank you very much.

Jamie Lerner -- Chairman and Chief Executive Officer

Yep.

Operator

Your next question is coming from Nick Mattiacci. Your line is live.

Nick Mattiacci -- Craig-Hallum Capital Group -- Analyst

Hi, this is Nick Mattiacci on for Chad Bennett. Thanks for taking our questions. I just had a question about the royalty business. I'm curious about what your perspective is on the timeline for the rollout of LTO-9.

And I guess, are you seeing any pent-up demand for this new generation or if demand is still strong for the prior generations? And then maybe, if you could just talk about expectations for royalty revenue this year as relative to the past year?

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah, I'll talk to the roadmap and Mike can cover the kind of how we've modeled the royalty. I do expect a surge in demand up when LTO-9 is available. I think there are people running LTO-7 in an M8 format that doesn't have a lot of incentive to upgrade to LTO-8 but have a lot of incentive to go to LTO-9. So right now, that is supposed to be and I haven't heard otherwise.

That is an early fall release. And I would expect a lot of customers to either refresh, upgrade, or move to that architecture. So I would expect that to increase demand and, obviously, the newer generations drive royalty as well. So -- and I -- we do have customers that are giving us demand signal now that they are waiting for that and are going to be drawing heavily on that.

You could imagine hyperscalers, they really -- they want the greatest density that they can possibly achieve. So you can imagine a lot of people are going to be moving to that as quickly as possible. So I think it's positive for the library business, I think it's positive for refreshes and upgrades, and I think it's positive for the royalty. You know, it is running late but everything I've heard is it's now settling in on a September, October release timeframe.

Mike Dodson -- Chief Financial Officer

Yeah. And as far as our expectation, I mean, our run rate is running between four and five right now per quarter. And it's a little bit lower than it was the previous year. And we would expect that to remain pretty constant in this coming year.

So that's where you should be coming out.

Nick Mattiacci -- Craig-Hallum Capital Group -- Analyst

Got it. Thank you.

Mike Dodson -- Chief Financial Officer

Thanks.

Operator

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

Eric Martinuzzi -- Lake Street Capital Markets -- Analyst

I had a question on the supply chain issues, just things that you've changed from a management perspective, you know, typically when you get to a disruption in the normal course of things, they wind up being an extra level of scrutiny or report that you got once a week, you're now checking out once a day. Did anything change there as far as a tighter grip on the problem?

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah. First of all, we know exactly where the problem is. We do talk to that supplier daily. Our supply chains are deeply integrated and have been deeply integrated for over 20 years.

So we're pretty intimate with it. There -- because of this -- we're not talking about servers here, we're not talking about commodity equipment. This is a specialized chipset for a very specialized item that only several of us in the world make. So there aren't lots of alternative suppliers.

And it's not like you can make this chip or -- in another foundry very quickly. So we are -- I mean, we are beating the bushes in all alternative methods. We are open to buying allocation, if it's possible, we're looking at gray market allocation, buying allocation from other vendors. I mean, we are grinding this one as hard as we can.

And I think in terms of putting experts on it, actually flying people to sit at the suppliers, we have people actually sitting in certain fabs and factories to see how we can help. So we're swimming up and down this one, I think in just about every way that is helpful. I think we understand this problem deeply and completely. This has been our wheelhouse for 20 years.

So this is one we really understand but I don't think it's a scenario where we could just buy the chip from someone else. This is one we have to work through the supply chain and, you know, I don't and I have not seen issues like this last longer than 6 to 12 months. And I do not believe this will last longer than 6 to 12 months, and I think it will resolve within this year.

Eric Martinuzzi -- Lake Street Capital Markets -- Analyst

And then as far as, as you do get access to these components to turn them into finish -- to turn your units into finished goods. Are you satisfying orders in the order in which they are received or are you prioritizing certain customers?

Jamie Lerner -- Chairman and Chief Executive Officer

We're managing our allocation based on economics.

Eric Martinuzzi -- Lake Street Capital Markets -- Analyst

OK.

Jamie Lerner -- Chairman and Chief Executive Officer

Right, highest-margin customers get allocation first. And solid orders with the best economics are going to receive allocation first.

Eric Martinuzzi -- Lake Street Capital Markets -- Analyst

I understand the logic there. And then as far as, you know, you did talk on the hyperscalers, you know, this was plural, we've got orders from hyperscalers, we're working with more hyperscalers in the design phase. Any issues here or your customers who had orders in place on the hyperscaler side? I mean, sympathetic to the supply chain issues, do we have any reputation or brand damage here with the supply issue?

Jamie Lerner -- Chairman and Chief Executive Officer

No. I think they have full visibility as to the source of the shortage. And I think they recognize that isn't a -- it isn't a Quantum-related item. It's from a downstream supplier and they understand that.

So I think they're sympathetic, they're frustrated because our hyperscaler customers are cranking their orders up. I think almost every hyperscaler we have has increased their demand signal with us. They're buying more from us. They're almost saying they're running out of cloud and they need to buy more and this, you know, it affects them.

And so they're concerned. I don't think there's brand damage or anything along those lines because it's -- these aren't things that -- they're not commodity components. But we meet with them regularly, we're giving them -- we're asking them for a very clear demand signal, we're providing them very clear allocation expectations. And it's allowing us in some cases to reset the table in terms of margins.

Eric Martinuzzi -- Lake Street Capital Markets -- Analyst

OK. And then the last question for me has to do with, you mentioned, media and entertainment. It sounds like there is a little bit of a comeback, I don't know whether that's kind of a reopening of the ability to -- for them to conduct their business, or reopening of them demanding product from Quantum. Could you address this media and entertainment kind of compared to -- versus January this year?

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah. There's just -- there's more demand for movies. Now, people can see opening a theatrical, there's more streaming, the content wars are heated back up. And it's game on for sports, it's game on for television production, it's game on for movie making.

So, I think we're returning to pre-COVID levels there. You know, to get our StorNext business above pre-COVID levels, we need to go start moving to other markets. I think we recovered there and we're getting a lot more attached rate with CatDV. But to really grow that business, we're probably not going to grow a lot more in media and entertainment, we're going to start branching into bigger markets that are less niche markets.

Eric Martinuzzi -- Lake Street Capital Markets -- Analyst

OK. All right, thanks for taking my questions. And good luck in Q1.

Jamie Lerner -- Chairman and Chief Executive Officer

Thank you.

Mike Dodson -- Chief Financial Officer

Thank you, Eric.

Operator

Your next question is coming from Ananda Baruah. Your line is live.

Ananda Baruah -- Loop Capital Markets -- Analyst

Hey. Thanks, guys. Appreciate you taking the question. Jamie, a little bit of a bigger picture one here.

How would you describe sort of the most important growth drivers for this year? And what are some of the things do you feel like you need to do to go after them and generate the sort of bookings that you want from them? And then I have a quick follow-up as well. Thanks.

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah, I think the big new motions, both technical and technical architecture motions, as well as selling motions, are all about solutions. We've refreshed our whole product portfolio. So our point products, StorNext, DXi, our Scalar tape products, the ATFS product, the CatDV product, every one of those is in a brand new refresh. But now what we're doing -- and we did that last year.

Now, what we're doing this year is combining them into solutions, specific solutions for genomic sequencers, for autonomous vehicle makers, for movie makers. And it's that architectural bundling of products, and the selling motion of a solution and a suite of products is really what we're working to execute on this year, and moving more and more of those suites of products to operate both on-premise and in the cloud. And those are the two big moves, selling solutions, and those solutions being hybrid in nature, and that they work on-premise and in the cloud. And as we do that, I just think the company continues to accelerate.

Ananda Baruah -- Loop Capital Markets -- Analyst

That's super helpful. And what -- the technical action, are you going to take them from point products into bundles? Are those sophisticated or they pretty straightforward?

Jamie Lerner -- Chairman and Chief Executive Officer

Well, I think there are two items that we have to achieve. The first is a cultural item. It's very easy for a product company to organize itself by product. But when you begin to build solutions, those siloed teams have to work together and communicate.

So it's -- a lot of it is how we run our business that our product teams now think about solving business problems, working together, and combine products. So it's a different way of working, is step one. And step two is the technical issues, how do we combine our products that the combination is greater than some other parts. And a lot of that is a much deeper understanding of the problem we're solving, right? We're not just building a storage system, we're helping a genomic sequencer.

We're not just creating storage features, we're helping someone make a movie, or helping NASA go to Mars, right? So it really changes how we, as leaders, lead the team and how we organize our team, and that they're organized to collaborate. And they think about solving a business problem versus adding lots of technical features. So it's all really an approach about how we build and sell. And it really starts with a with leadership and kind of what our goals are.

And our goals are becoming less technical feature goals and more working with our customers to solve business problems. And it's a big mindset change for us.

Ananda Baruah -- Loop Capital Markets -- Analyst

That's helpful. Yeah, I know, that's really helpful. I appreciate the detail. Thanks for that.

And just quick follow-up here. On the supply constraints, given the specificity of the componentry, do you feel like you have a handle on how bad -- how constraint it could become? And what's the visibility there? Appreciate it. Thanks.

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah. I mean, we have minimum volumes we've been given so I think we know what the low mark is. And we've been given strong commitments that it will not go lower than certain levels, and we've packed that into our guide. So I think we understand the low mark, and so far, our suppliers are meeting that or a bit above that.

So I think we're in a mode where it can only improve, but we can feel pretty comfortable about that. We basically receive these materials weekly, and it's -- we're getting what they committed to us, that's not what we want, it isn't unstable. I think it's stable at a lower level. And they've committed that it won't go any lower.

So to that extent, I don't think it's volatile. It's just consistently low.

Ananda Baruah -- Loop Capital Markets -- Analyst

Got it. That's helpful. That really helps. Thanks so much.

Jamie Lerner -- Chairman and Chief Executive Officer

Thanks.

Operator

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

David Duley -- Steelhead Securities -- Analyst

Yes, thanks. Thanks for taking my question. Just a clarification. I think you mentioned without supply constraints that you would have shipped or you would have had revenue with much higher levels in the current quarter.

I can't -- my phone had some technical difficulties, did you say that you would have hit the 98 million or you would hit the pre-COVID levels of like 105 million?

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah, I would say more in the pre-COVID levels. We were above -- I mean, sales execution for this quarter, we said 98 plus or minus three. So 101 in the high end of the range. Sales executed above that range, back at those pre-COVID numbers.

David Duley -- Steelhead Securities -- Analyst

Yeah, so without supply constraints, it would have been doing 105 million both in the March and the June quarter, or something greater than that?

Jamie Lerner -- Chairman and Chief Executive Officer

Maybe not that high, but we were above 101.

David Duley -- Steelhead Securities -- Analyst

OK. Thank you for the clarification. Now, given the supply constraints that you're seeing, is this like -- are your large enterprise and Hyperscale customers essentially getting you longer visibility and bringing you closer into their planning so that they don't get surprised in the future from constraints from your sales?

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah. I mean, one thing, I think we feel good, we're not seeing is people playing -- placing abnormally large orders just to try and to get supply. So we're not seeing like double orders or abnormally large orders. But we are seeing people giving us a greater view into multiple quarters.

For a long time, you gave us an order and you received it in two weeks. So people weren't really conditioned to give us a whole lot of visibility now because not only are we supply constrained but it's pretty industrywide. I think we're getting much better behavior where our customers, particularly our larger customers, are giving us some of them several quarters, and our bigger customers are giving us a full year, full 12 months demand signal. And some of them are giving us 12 months demand signal and the purchase orders behind it in an attempt to get in the queue.

So, we are seeing better visibility, you know, people are not just giving a signal but they're backing up the signal with POs, and I think the POs they're putting on us are reasonable POs and not just large numbers to try and hold down supply. So we are getting better demand planning.

David Duley -- Steelhead Securities -- Analyst

Right? So, for an assortment of reasons, right, you have new products and large customers want your products. But you know, the fact is the current environment is basically forcing them to lay down their cards and give you much longer visibility than you've ever had before.

Jamie Lerner -- Chairman and Chief Executive Officer

I think that's a fair statement.

David Duley -- Steelhead Securities -- Analyst

OK, thank you.

Jamie Lerner -- Chairman and Chief Executive Officer

All right. Thank you.

Operator

Your next question is coming from Craig Ellis. Your line is live.

Craig Ellis -- B. Riley Securities -- Analyst

Thanks for taking -- yep, thanks for taking the follow-up. Just a couple of quick ones. If I went back to the last call, I think we were thinking that, at the time, we were shipping to three hyperscalers with the potential to go to four, either in the fiscal fourth or fiscal first quarter, but given the comments around the next-gen of LTO coming up maybe in the September, October timeframe, does that mean that the fourth hyperscaler would be closer to that timeframe? Or would we be potentially shipping inside of fiscal Q1?

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah. I mean, we're loading up. I mean, the business is now at a point where we're just not listing out each customer. We are doing business now with more than four hyperscalers, they're at different levels of volumes.

They're purchasing more than just tape products. And we're starting to work with groups that are somewhere between a webscaler and a hyperscaler, right? So we're starting to sell now to businesses that are much larger than an enterprise, maybe smaller than the top three or four hyperscalers, but they're still enormous in nature. So we're just -- we're hitting with more customers. I think if you remember that pyramid slide, we used to just work with the top two or three hyperscalers in the world.

Now, we're dealing with large telcos, we're dealing with large -- different types of service providers, webscalers. So I think the business is becoming a little more diversified. And what -- the biggest movement that I'm encouraged by is more and more of these large-scale customers want our software as much as our hardware. And to the solution discussion, some of them are buying multiple products, you know, certain hyperscalers also make movies and television, and they're starting to buy our primary products.

They're starting to buy our media asset management and CatDV products. So you know, we started as a big hardware sale, now we have multiple lines of business. It's just becoming a healthier and more diversified business.

Craig Ellis -- B. Riley Securities -- Analyst

That's helpful, Jamie. And by the way, thanks for all the comments. Through the call, it's clear that you guys are using a tough situation to advance on some of the longer-term objectives of the company. You mentioned leadership a couple of times, so I just wanted to follow up on a recent appointment.

Brian Cabrera, look like a real important add to the broader team, and I believe you did add some video surveillance, Asia sales experts. So the question is from where you've got the organization set now, where are we relative to having that optimal organization that you would envision and driving the business forward? Still more appointments to make or are we meaningfully there?

Jamie Lerner -- Chairman and Chief Executive Officer

Yeah. I mean, when it comes to leadership, I'm not sure you're ever there, right? You're constantly evaluating, you're constantly improving. And the situation is our company is in a very different place than it was even two years ago, even one year ago, right? I mean, we're growing in size, we're growing in relevance. And so I think I'm constantly looking to put the very best leadership that we can find into the company.

So I think we have an amazing leadership team, I think it's a stronger leadership team than you would normally see at a $500 million company because we don't see ourselves as building a $500 million company. We see ourselves as building a $5 billion company. And we put in that kind of a leadership team, and I'm going to continue to overhire. I mean, Brian was the GC at Nvidia.

Brian Pawlowski hired before him was the CTO at NetApp. And we're hiring the absolute best executives in this industry because our goal is to be a heck of a lot more than a $500 million company. And three years ago, I wasn't sure we could do it, you know, but we have done so much in the last three years. When we pick this company up and you remember the state it was in, and we've effectively 10x the market cap from our low point.

And we think we're going to 10x it again. But to do that, we're going to need really strong leadership, we're going to need to be able to drive through all these choppy waters, and we just need the most seasoned people we can find and I'm not going to stop. If we keep finding better talent, I'm going to upgrade, bring on more leaders every time I have that opportunity. Because I do think it's leadership that makes the difference.

Craig Ellis -- B. Riley Securities -- Analyst

That's a great color. Thanks, Jamie.

Operator

We have no further questions from the lines at this time.

Jamie Lerner -- Chairman and Chief Executive Officer

All right. Well, I'd like to thank everyone for joining us today. Mike and I will be having calls with many of you. We always like to make ourselves available and just want to thank everyone and be safe.

And hopefully, we'll all be meeting again in person very soon. Thank you so much.

Operator

[Operator signoff]

Duration: 68 minutes

Call participants:

Leanne Sievers -- Investor Relations Contact Officer

Jamie Lerner -- Chairman and Chief Executive Officer

Mike Dodson -- Chief Financial Officer

Craig Ellis -- B. Riley Securities -- Analyst

George Iwanyc -- Oppenheimer & Co. Inc.-- Analyst

Nehal Chokshi -- Northland Securities -- Analyst

Nick Mattiacci -- Craig-Hallum Capital Group -- Analyst

Eric Martinuzzi -- Lake Street Capital Markets -- Analyst

Ananda Baruah -- Loop Capital Markets -- Analyst

David Duley -- Steelhead Securities -- Analyst

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