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Edited Transcript of QMCO.OQ earnings conference call or presentation 24-Jun-20 8:30pm GMT

Q4 2020 Quantum Corp Earnings Call

SAN JOSE Jun 24, 2020 (Thomson StreetEvents) -- Edited Transcript of Quantum Corp earnings conference call or presentation Wednesday, June 24, 2020 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James J. Lerner

Quantum Corporation - Chairman, President & CEO

* James Michael Dodson

Quantum Corporation - Senior VP, CFO & Secretary

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Conference Call Participants

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* Chad Michael Bennett

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Craig Andrew Ellis

B. Riley FBR, Inc., Research Division - Senior MD & Director of Research

* David Duley

Steelhead Securities LLC - Managing Principal

* Eric Martinuzzi

Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst

* Rob Fink

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Presentation

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Operator [1]

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Hello, everyone, and thank you for joining today's Quantum Fiscal Fourth Quarter and Year Ending March 31, 2020, Earnings Conference Call. (Operator Instructions) For opening remarks and introductions, I am pleased to yield the floor to Mr. Rob Fink with FNK IR. Welcome, Rob.

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Rob Fink, [2]

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Thank you, operator. I'd like to welcome everyone to the call. Hosting the call today remotely are Quantum's Chairman and CEO, Jamie Lerner; and CFO, Mike Dodson.

Please be aware that some of the comments made during today's call may include forward-looking statements. All statements other than statements of historical facts are statements that could be deemed forward looking. Quantum advises cautions in reliance on forward-looking statements.

Forward-looking statements include, without limitation, any projections of revenue, margin, expenses, adjusted EBITDA adjusted net income, cash flows or other financial items as well as anticipated impact of the COVID-19 pandemic on Quantum's financial results. Any statements concerning the expected development, performance, market share or competitive performance relating to products or service and the expected timing of relisting of our shares, which has already happened. All forward-looking statements are based on information available to Quantum on the date 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 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 filings with the SEC, including, but not limited to, those risks and uncertainties listed in the section entitled Risk Factors in Quantum's quarterly report on 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 law.

Also, please note that on this call, the company will be discussing non-GAAP financial information. CEO and CFO are providing this information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States, or GAAP. You can find reconciliation of these metrics to the reported GAAP results in the reconciliation table provided in the company's earnings release.

I would like to remind everyone that this call is available for replay on Quantum's website for at least 90 days. A link to the website replay of this call was provided in the earnings release, which is also on the company's website at investors.quantum.com.

With all that said, I'd like to turn the call over to Jamie. Jamie, the call is yours.

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James J. Lerner, Quantum Corporation - Chairman, President & CEO [3]

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Thanks, Rob. And thank you all for joining us on today's call. When I first joined the company a little over 18 months ago, we were a company in crisis. We were in the midst of a multiyear financial restatement process, we were subsequently delisted from a major national exchange, we hadn't released a new product in over 10 years, and the business had been in a long secular decline for many years without a clear business or architectural vision. Putting key new leadership in place, we built a transformation strategy. And fiscal 2020 was a year in which we delivered on the first phase of our turnaround, with a focus on stabilizing the company and setting it up for growth. To that end, I'd like to highlight some major accomplishments we achieved over the last year.

We launched the StorNext F-Series NVMe storage line based on our own storage and software-defined block strategy. This new product line was a major contributor to the growth in our primary storage business that we saw in FY '20. We established the top market position for tape and hyperscaler cloud environments. We continue to innovate in that area and view this segment as a growth driver for the business going forward. We completed the acquisition of the ActiveScale Object Storage business from Western Digital in March, our first acquisition in many years, and the reception from customers and partners has been extremely positive. This acquisition was almost immediately accretive to our operating results. We continue to recruit and promote top executive talent to lead our transformation. This included Regan Macpherson as our new Chief Legal Officer; James Mundle, as the new Global Channel Chief; and as a part of moving to a GM organizational structure, Ed Fiore as our new GM for our Primary Storage Business; and Bruno Hald, who has been promoted to serve as GM of Secondary Storage.

From a financial standpoint, these and other factors led to significantly improved financial results. Annual revenues were flat year-over-year in spite of a very challenging business (inaudible) that we faced in March. Year-over-year, we delivered a $25 million improvement in income from operations, a $37 million narrowing of our net loss, positive adjusted net income of $15.4 million and adjusted EBITDA of nearly $46 million. In summary, over the last year, Quantum has been transformed. We completed the multiyear financial restatements, and the related lawsuits and SEC investigation are now behind us. We have listed our stock on the NASDAQ, eliminated a significant amount of fixed costs, reinvigorated our product line and rebuilt the earnings power of the company. Our relationship with our lenders, as evidenced by the recently announced amendments, is stronger. And we're making progress in our efforts to address our access to liquidity and ultimately reduce our leverage.

Now as we look ahead to the start of fiscal year 2021, poised for growth, we are confronted with COVID-19, a new crisis with a new set of challenges. Our team has faced this challenge head on. With the safety of our employees, our customers and our community as the top priority, we transitioned to a remote working model almost overnight. We've been able to continue to service and support our customers around the world. We continue to develop and release new products, closed our first acquisition in years and we've been able to maintain our global supply chain. We worked with our bankers and lenders to secure an additional $20 million in incremental liquidity, along with more flexible loan terms and conditions as was announced last week. We are now starting to open up our offices gradually and safely based on new processes and working models we put in place around the globe. Increasingly, our technology is critical and core to our customers' business processes. This is note -- there is no doubt that many of our customers have faced unprecedented challenges, and the sales cycle has become unpredictable. But we view these challenges as temporary. Professional sports will return and movie production will resume, and Quantum is well positioned. My optimism has not waned. I believe it was Winston Churchill that said, "Never let a good crisis go to waste." This global pandemic is affecting us all. But through the steps we've taken, the more stable financial position we are in and the perseverance, resiliency and leadership we've repeatedly demonstrated in times of the crisis, we will emerge in a stronger position for long-term growth.

This crisis has already presented a number of opportunities for tuck-in acquisitions that we are analyzing and considering. These can help bolster our technology portfolio and inject innovative talent into the company to accelerate our growth trajectory as we look forward. As an example, in late March, we acquired the source code for Atavium software, which includes key technologies for data classification, data management and next-gen file storage. As part of that acquisition, Ed Fiore joined Quantum as VP and General Manager of our Primary Storage business. Ed brings substantial industry experience and leadership, and this acquisition has helped to accelerate our StorNext road map towards a software-defined hybrid and multi-cloud architecture. And although we expect financial pressures to continue in the short term, we remain focused on these 5 growth opportunities and drivers.

The first is growth in video and unstructured data. It is no coincidence that the world is using video for communications more -- now more than ever. This pandemic will drive more organizations in all industries to create more video data for marketing, for training, for internal communications. Many colleges have already announced full video-based online learning curriculums. Remote health care will result in more video. We expect this pandemic will spur investment in all forms of virtual and augmented reality, some of which are currently being developed on our StorNext NVMe storage today. In addition, use cases such as scientific and medical research, machine learning and AI and IoT devices are generating vast amounts of unstructured data that must be processed, analyzed, protected and archived for many years.

The second is expansion into new markets. The market for surveillance recording and analytics is expected to grow even faster as a result of COVID, with recent investments in body temperature sensing cameras just one example. In March, we announced an expanded portfolio focused on video surveillance and analytics, including a new line of network video recording servers, appliances for video analytics, and new software for hosting multiple physical security workloads on a hyper-converged cluster. We view ActiveScale object storage as a key technology for surveillance archives. We also see tremendous potential in the storage, analysis, protection and archiving of genomic sequencing, MRI images and other forms of medical images and video. We recently upgraded some large environments for customers using genomics data to study COVID-19. And one of our customers in this segment is upgrading their StorNext medical image archive to include NVMe to support GPU-based analytics and object storage for an online image archive.

The third is market and margin expansion by transitioning to software-defined architectures and business models. This -- the next major release of our StorNext file system software is expected for the end of the calendar year. Moving to a software-defined architecture will enable the transition from an appliance sales model to subscription models. And this is a key step towards supporting hybrid and multi-cloud deployments. In addition, we'll be able to simplify and converge our product offerings, expanding the use cases we can address to include edge environments in small and post animation houses.

The fourth is the use of tape and object storage for enormous archives in hyperscale, enterprises, government and service providers. Our experience in the last few years in building the largest archive in the world has informed our product road map and new architectures. We have new technology that is based on those learnings and this increases our odds of winning additional hyperscaler footprint, both technically and economically. Further, we're now seeing that this same architecture is interesting for very large archives at other service providers, large enterprises and government agencies. We believe it is the best architecture for any one archiving large amounts of data.

The fifth is via inorganic growth. As evidenced by our recent acquisitions of the ActiveScale Object Storage business and the Atavium source code, we are going to continue to be acquisitive. We have the vision, strategy and leadership team in place, and we've proven that we can quickly integrate technologies into our business in a way that is accretive to our customers and shareholders. Our goal is to leverage our leadership position in these dynamic markets to accelerate our strategy.

In closing, although we expect short-term financial pressure from COVID, the work we've done to stabilize and transform the company, our expanded technology portfolio and most importantly, the resiliency of our people and culture will ensure we emerge as a stronger company as we head into the next phase of our transformation. We have accomplished a lot during fiscal 2020, and today, Quantum is a healthy, cost-efficient innovator focused on higher-value and higher-margin solutions. The pandemic will subside or at least be contained, and our customers in sports and entertainment will return. Quantum is clearly positioned as a leader in the industry with differentiated solutions that meet a large and growing need: The management of video and video-like data. With a leaner operating structure, we've rebuilt our earnings power of Quantum. This quarter was a challenge and our first fiscal quarter will reflect the full impact of the global situation. But I am increasingly optimistic as the volatility of the macroeconomic environment eases Quantum, will be well positioned to continue its transformation and advance our efforts to achieve sustainable and profitable growth.

With that, I'd like to turn the call over to Mike Dodson, our CFO, to discuss the financials. Mike?

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James Michael Dodson, Quantum Corporation - Senior VP, CFO & Secretary [4]

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Thank you, Jamie. Welcome to everyone who has joined our call today. First, I'd like to echo a few of Jamie's comments regarding our progress this past year, which has enabled Quantum to better weather the challenges of the COVID-19 pandemic. In addition to being more strategically focused, we are operating at a more appropriate cost level and capital structure provides us the flexibility to see us through until our customer activity levels return to more normalized levels.

Let's first review the full year financial highlights. Revenue for fiscal 2020 was essentially flat at $402.9 million despite a late March slowdown driven by COVID-19. The flat year-over-year performance was driven by a 3% increase in product revenue, with growth in primary storage and medium devices, partially offset by a decline in secondary storage systems. This modest increase in product revenue was offset by a similar decline in services, primarily due to reduced support renewals from the legacy backup customers combined with declines in the royalty driven by lower unit volumes as the primary use of tape transitions from backup to archive implementations.

Year-over-year, gross margins expanded 120 basis points to 42.8%. Our progress reflects reductions in cost of service across a wide range of products, and the sales mix weighted towards more profitable product lines. We remain focused on selling value rather than selling on price, while avoiding low-margin commoditized revenue. I will address the sequential quarterly decline in our gross margins as well as our near-term outlook later in the call when discussing the quarterly results.

We improved our profitability across all key metrics due to careful expense management. We significantly reduced operating expenses. As a part of our aggressive efforts to rebuild the earnings power of Quantum, we eliminated over $21 million year-over-year to $151.3 million or 38% of revenue compared to $172.4 million or 43% of revenue in fiscal year in 2019. The year-over-year reduction of $21 million in operating expenses was largely split between a reduction in restructuring and restatement costs of approximately $11 million and a net reduction in operating cost of approximately $10 million. General and administrative expenses decreased by a total of $10.8 million to $54.5 million or nearly a 17% reduction. While $6.8 million of the decrease was due to lower costs related to the financial restatement and related activities, there was $7.3 million of cost reductions that will be part of our ongoing lower operating run rate. These reductions were primarily due to lower software expenses as we streamline our processes and related applications, and decreased facility expenses as we continue to consolidate our physical footprint. These decreases in general and administrative expenses were partially offset by a $3.3 million increase in stock-based compensation expense.

Another area of expense reduction was sales and marketing, where expenses declined nearly $10 million to $59.5 million, a 14% reduction. This decline was primarily driven by lower head count due to improved sales and marketing efficiencies. Importantly, these savings allow further investment in research and development in order to continue to innovate our product lines to meet our customers' expanding demands. For fiscal year 2020, research and development expenses increased $4.2 million or 13% to $36.3 million compared to $32.1 million last year.

The net result for improvements to the bottom line across both GAAP and non-GAAP metrics. Net loss was $5.2 million or $0.14 per diluted share compared to a net loss of $42.8 million or $1.20 per diluted share last year. Excluding nonrecurring charges, stock compensation and restructuring charges, adjusted net income was $15.4 million or $0.34 per diluted share compared to $4.8 million or $0.12 per diluted share last year. And adjusted EBITDA increased $13.3 million to $45.9 million compared to $32.5 million last year.

Now let us review the fourth quarter performance. Revenue was $88.2 million in the fourth quarter compared to $103.3 million last year and in line with the revised guidance we provided in early April. The decline was driven by a 20% decrease in product revenue, primarily due to reduced demand late in the quarter for secondary storage systems as a result of COVID-19 and lower hyperscale business levels. Service revenue was down slightly and we experienced additional declines in royalty revenue due to overall declines in market unit volumes.

More specifically, product revenue declined primarily as a result of a $15.7 million decrease in secondary storage system sales. These declines were partially offset by a $3.6 million increase in primary storage systems revenue. Our product revenue in the fourth quarter included incremental contribution from the acquisition of ActiveScale Object Storage business, which closed on March 17, 2020. Important to note, prior to the acquisition, Quantum has been a reseller of ActiveScale so there's a certain level of contribution from ActiveScale included in our historical financials.

Royalty revenue of $5 million for the fourth quarter continued to be relatively large compared to historical periods. The adoption of LTO-8 has lagged expectations primarily due to attractive pricing for LTO-7, and customer anticipation of the next-generation LTO-9 that is expected to be launched in the next 6 months.

Gross margin in the fourth quarter was 40.9% compared to 41.3% last year. Gross margins contracted modestly primarily due to lower royalty revenue and fixed overhead costs spread across lower revenue levels, partially offset by a favorable mix of a higher percentage of higher-margins service revenue. On a sequential basis, our gross margins decreased 470 basis points to 45.6% in the third quarter. As we outlined on our call last quarter, the increase in the third quarter gross profit was primarily driven by higher product gross margin of nearly 700 basis points from the prior quarter, which was due primarily to a sales mix weighted towards more profitable product lines as well as cost reductions across a wide range of product offerings. The third quarter enjoyed a benefit of a significant increase in high-margin federal business and lower levels of lower-margin hyperscale business. The implied gross margin for the fourth quarter, based on the financial guidance provided last quarter, included gross margins in the range of 43% to 44% and a revenue midpoint of $95 million.

As discussed in today's press release, with a revenue outlook at a midpoint of $73 million next quarter, we would expect continued pressure on our gross margins as the fixed overhead costs are being spread over a lower revenue base. Therefore, we would expect our gross margins in Q1 to stay in the range we reported in Q4.

In total, operating expenses levels [recorded] (inaudible) 22% to $33.5 million or 38% of revenue compared to $43.2 million or 42% of revenue last year. This $9.7 million decline in expenses was driven by a 41% decline in general and administrative expenses and a 19% decline in sales and marketing expenses. The $7.5 million decrease in general and administrative expenses was driven by $5.4 million in decreased costs related to financial restatement and restructuring as well as lower software expenses as we streamline our processes and related applications and decreased facility expenses will continue to consolidate our physical footprint. The decrease in sales and marketing expenses was driven by an overall decrease in head count, reduced compensation on lower overall revenue and a decrease in marketing programs.

Research and development expenses were $9.2 million in the fourth quarter, up 14% compared to $8.1 million in the year ago quarter.

GAAP net income in the fourth quarter -- excuse me, GAAP net loss in the fourth quarter was $3.8 million or $0.10 per diluted share compared to a net loss of $9.4 million or $0.26 per diluted share in the year ago quarter. Excluding nonrecurring charges, stock compensation and restructuring charges, adjusted net loss in the fourth quarter was $2.4 million or $0.06 per diluted share compared to adjusted net income of $2.3 million or $0.06 per diluted income -- per share, in the year ago quarter.

Adjusted EBITDA in the fourth quarter decreased $5.7 million to $5.4 million compared to $11.1 million last year. There's a full reconciliation of our non-GAAP results to the most directly comparable GAAP measure in both the press release and the Form 10-K released today.

Now looking at the balance sheet and cash flows. Cash and cash equivalents were $6.4 million at March 31, 2020, compared to $10.8 million as of March 31, 2019. The current balance excludes $5 million in restricted cash required in the company's credit agreements, and $800,000 of short-term restricted cash. Outstanding debt, as of March 31, 2020, was $167.8 million before netting $13.7 million in unamortized debt issuance costs and adding $7.3 million in current portion of long-term debt. This compares to $164.6 million of outstanding debt as of March 31, 2019, before netting $17.3 million in unamortized debt issuance costs and adding $1.7 million in current portioning of long-term debt. The increase in debt from March 31, 2019, was primarily due to borrowings of $2.6 million at March 31, 2020, from the revolving credit facility to meet short-term working capital requirements and paid in interest of $1.9 million.

Included in the debt at March 31 was $2.6 million drawn down on the $45 million revolving credit facility compared to $7 million drawn down at the end of the prior quarter. Net cash used in operating activities was $1.2 million for fiscal year 2020, an improvement of nearly $15.7 million from the prior year, mainly reflecting the strength in the cash generated by operations, excluding working capital changes of $19.8 million in fiscal year 2020 or $23.9 million better than the $4.1 million cash used by operations excluding working capital changes in the prior year.

In summary, the total net cash used in fiscal year 2020 of $4.6 million represents the sum of capital expenditures of $2.6 million, plus the $2 million acquisition price for the ActiveScale transaction.

Now I'd like to talk about the actions we have completed to strengthen our balance sheet and improve liquidity as we manage our capital structure to see us through the impact of the pandemic. First, on April 13, 2020, and we received a $10 million loan from the Paycheck Protection Program guaranteed by the SBA. The PPP loan bears interest at a fixed rate of 1% per year, with interest deferred up to a maximum of 10 months, has an initial term of 2 years and is unsecured. Under the terms of the PPP loan, we may apply for forgiveness to the amount due (inaudible) We have utilized the proceeds from the PPP loan for qualifying expenses and intend to apply for forgiveness of the PPP loan in accordance with the terms of the loan agreement. At this time, we cannot be assured that the PPP loan will be forgiven, partially or in full.

Second, last week, we announced that we agreed to amend our revolving and term-loan credit facilities, securing an additional $20 million in incremental liquidity and negotiate more flexible loan terms and conditions. These credit facilities expire on December 27, 2023, and can be used to finance working capital and other general corporate purposes. Among other terms, the amended credit facilities provide a holiday period for certain financial covenants through March 31, 2021, and the term loan credit facility contains a more favorable equity clawback feature. The terms of the 2020 term loan credit agreement as amended, are substantially similar to the terms of the existing term loan including in relation to maturity, security and pricing. As of May 31, 2020, borrowings outstanding under the amended term loan were $165.2 million and $9.5 million under the amended revolving credit facility.

In addition to the customary closing and amendment fees, we issued 3.4 million warrants with a strike price of $3 to our term loan lenders. These agreements underscore confidence from our lenders and provide us with increased access to capital and incremental flexibility to manage our balance sheet in a manner that is strategically aligned with the ongoing rationalization of our business and changing macro environment conditions. With the support of our lenders, we now have the necessary flexibility with our financial covenants as we continue to rationalize our cost structure and shift our focus to higher-value, higher-margin sales opportunities aligned with our customers' needs.

Finally, I'd like to comment on our financial outlook. The continuing uncertainty in the overall accounting as a result of the COVID pandemic limits our visibility. And we, therefore, have decided not to provide full year guidance at this time. However, as discussed on this call, we expect the customer delays and disruptions experienced in the last 2 weeks of the fourth quarter to have a more pronounced impact on our first fiscal quarter of 2021.

Our outlook for the first quarter includes: revenues of $73 million, plus or minus $1 million; adjusted net loss to be $8 million, plus or minus $500,000; adjusted net loss per share to be $0.17 per share, plus or minus $0.01 per share; and adjusted EBITDA to be 0, plus or minus $1 million.

With that, let me turn the call back over to Jamie for closing comments.

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James J. Lerner, Quantum Corporation - Chairman, President & CEO [5]

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Thanks, Mike. We've come a long way in a very short period of time. The earnings power of Quantum is evident, though the short-term reaction to COVID will impact our results for the first half of our fiscal year. We're increasingly optimistic about the longer-term opportunities before us, and believe the second half of this fiscal year will reflect the improvements we've made.

We'll now be happy to answer any questions you may have. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions)

We'll take our first question from Craig Ellis at B. Riley FBR.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [2]

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And guys, thanks for all the detail on both the quarter and year. Mike, I just wanted to start with a few financial clarifications as it relates to some of the comments around guidance first. With regard to the COVID-19 issue, is there any impact to supply? Or is -- are the things that you're seeing, with respect to the crisis of demands related in the $73 million revenue guidance.

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James Michael Dodson, Quantum Corporation - Senior VP, CFO & Secretary [3]

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Yes. I would say that the supply chain has been challenged. We have been able to address many of the challenges but it hasn't -- I mean, definitely, the impact is more on the top line in our customers' demand than challenges from supply chain.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [4]

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Got it. And then nice to see ActiveScale off to a very strong start. Can you quantify the amount of revenue that was recorded in the fiscal fourth quarter. And while we're in a macro environment here, how should we think about what a normalized revenue level would be for ActiveScale.

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James Michael Dodson, Quantum Corporation - Senior VP, CFO & Secretary [5]

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We don't break out separately product revenue or revenues related to acquisitions. I mean, as we had outlined on the call, we did recognize revenue right out of the chute so there was a little bit of pent-up demand there. It's a business that we know very well. We have OEM-ed that equipment for years. We know the technology very well. So it's something that inherently was in our run rates historically. So the incremental addition is muted to a certain extent, I believe we were the largest OEM for Western Digital for that product. But I think it's fair to say it's not going to move our numbers as it relates to that product, per se. I think some of the synergy that we're going to see out of that acquisition will be on the technology side and what we do with other products in conjunction.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [6]

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Got it. And then moving maybe to some of the more strategic items and customer items. Jamie, if I could flip to you. Can you just help us understand the tone of business in some of your different customer groups as we've moved through the calendar first quarter. Where were we when we started the quarter? Where are we now in areas like media, entertainment, in areas like government, health care, et cetera.

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James J. Lerner, Quantum Corporation - Chairman, President & CEO [7]

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Yes. I would say the broader enterprise and probably, to a greater extent, in media and entertainment, there is a marked change in behavior. And the behavior started with just a drastic slamming on the brakes of all spending. And then the first thing that opened up was, what I would say is monies for continuing operations. So -- but new projects. So I would say in March, we saw just people hitting the brakes. April, May, as things -- COVID begun to normalize, we saw spending. And if you see much of the spending that we're anticipating this quarter is related to maintaining operations. And that's not just paying maintenance. That's also keeping systems running. So that would be buying more capacity, replacing older equipment to keep the system running. So people are spending with us, particularly the installed base to keep all their systems that they bought from us running, keep them healthy, keep them -- have capacity. Mainly, the behavior that we've seen that is the shortfall is stopping of new projects, new projects for a new movie, or new projects for the start of a sports season, or enterprises looking to begin new projects in and around analyzing unstructured data. It's that new projects that really, I would say in April and May, we just didn't see activity on. I would say, in the last 3 weeks, we're beginning to see a return to activity of the large projects. I haven't seen us lose them -- that haven't gone to the cloud or gone somewhere else. I've seen them put on hold. I've seen people have checked in with us and say they -- we expect to resume as soon as their operations resume. But we did start seeing signs of life in the last couple of weeks. We're seeing various television -- movie companies are calling us again to say, "Hey, we're -- we want to start talking about projects." Sports franchises have been reaching in saying, "Hey, we're looking at starting our seasons in limited ways, and we want to pick up projects," as well as enterprises. There have been 3 groups that have been moving somewhat unaffected during this time, and that's been government, not just the U.S. government but governments around the world have continued spending on both civilian and military projects. And the U.S. government has continued, a little slower in their procurement, but for the most part, they are taking on big new projects and big capital expenditures and moving forward. I would also say health care, including not just hospital but bioinformatics, genomics, drug development and life sciences, that whole segment has continued mostly unaffected during this. And finally, I would say the cloud operators and cloud providers have continued their programs with us and evaluations on schedule and undelayed. But I would say of the 2 forces, it's obvious from our projections that the people slowing down have outweighed the people -- or the smaller amount of people who've carried on unaffected.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [8]

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That's extremely helpful color. And if I could follow up just on one of the points, I think investors and the company have been looking for some hyperscale, some cloud customer expansion either late this year or next year. How does the company feel about the potential to broaden its customer base in that narrow but quite large vertical?

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James J. Lerner, Quantum Corporation - Chairman, President & CEO [9]

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Well, I would say a number of things have developed. The first is our large hyperscaler had really told us they would -- were needing to slow down. They were having trouble digesting the equipment, finding places for it. That has [some picking] up, and we now have better line of sight into that, and that is rebounding. We have also had several new hyperscalers reach out to us and would like to begin advanced dialogue. One of them actually is taking equipment in an accelerated way to accelerate their trials. The trials that we have ongoing have moved to advanced stages where they actually have equipment, new equipment, and they are testing it pretty vigorously. So we're moving to -- moving off of the paper trial to actually physical equipment, on-premise, being tested and integration work happening. And finally, we're starting to see more customers reaching out to us and saying, "I'd like you to build for us what you build for the cloud guys." We think we have and are amassing enough data where we need our own internal cloud, the very large automakers, large branches of the national laboratories and the government agencies, large genomic and health care and life sciences archive, we're just seeing a number of people saying, "We think the data we have is big enough where we can [cost to buy] our own." So our hyperscaler business is actually starting to expand into very large telco, very large enterprise. They need a slightly different product but not radically different. So that business, I would say, is becoming more robust. It also has a long sales cycle. But I think that long sales cycle is justified because once a customer makes a commitment like that, it's probably a 7- to 10-year commitment, minimum. So the longer the -- the bigger the plane, the longer the runway.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [10]

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Yes. That's interesting and sounds encouraging for the business. Mike, if I could just ask you a final question before getting back in the queue. Following the announcement on the updated covenants that the company was able to achieve with its [1%] in the clawback, elements and improvements in terms of the amount that can be clawed back into reduced penalty. A question is, are there any restrictions on what you could do there? Is it possible to execute on that with an equity offering and with a debt element? Or does it have to be just equity? Any color on how you might be able to utilize that clawback. [Any color there] would be helpful.

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James Michael Dodson, Quantum Corporation - Senior VP, CFO & Secretary [11]

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Yes. I mean it's an equity claw back structure, so the thought is to issue equity. We can do up to 50%. And it was 25%, so we were able to double how much we can pay off with equity from that standpoint. Plus, we reduced the penalty. The penalty was 12% to use that equity clawback, now it's 5%. So we were able to double the amount that we could claw back and at a much lower penalty rate. So we felt really good about that -- those changes in the amendments.

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Operator [12]

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Next, we'll hear from Eric Martinuzzi with Lake Street.

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Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [13]

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Yes. I want to pick up on the credit facility amendment, the term loan amendments there as well. You originally -- with the prelim results in early April, you were talking about mid-May. Was it these changes to the debt facility that caused things to kind of run out a little bit longer? Or was it more, hey, let's get a better feel for our business is, where our FY '21 -- is what FY '21 is going to look like that drove the delay more?

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James Michael Dodson, Quantum Corporation - Senior VP, CFO & Secretary [14]

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Well, I think it was a combination of both, Eric. We initially -- when we realized that COVID-19 was going to have a direct impact on our revenues late March, we wanted to get ahead of the game. We got waivers on the covenants so that we could put a stake in the ground at that point. And then we wanted to get more visibility on what we believe next year would look like. We wanted to only do one set of amendments with both the term loan lender and the revolver lender. So it's orchestrating those 2 parties, getting better -- a little better visibility, at least, so that we could set the covenants because we set them all the way through. And the other good news out of doing that was we're able to negotiate basically a holiday on all the covenants with the exception of an availability covenant. So we've got quite a bit of flexibility for a year as it relates to the covenant coverage. But it really was -- it's just a lot to go through, and it always takes more time than you think it will take but we're very pleased on the final outcome.

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Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [15]

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Okay. I wanted to dive into the Q1 guidance and figure out what I can learn. The Q4 royalty revenue, I assume that was kind of at $5 million even. There wasn't -- that, to my mind, I think that generates debt throughout the quarter, and there's less of a big slog towards quarter end, correct me if I'm wrong there. But what should we be thinking about FY '21, not just Q1, but royalty in general because we do still have the need to, as you say in the press release, the short-term impact of the pandemic is not from growth of video.

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James Michael Dodson, Quantum Corporation - Senior VP, CFO & Secretary [16]

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Right. And I would expect there's going to be continued pressure on that line item. So that will be -- that won't escape the impact of COVID-19, and it'll be impacted just as everything else is initially. We'd expect it to come back. There's bigger factors that are at play. It's -- as the use of tape moves from backup to archive, we're in that transition right now. I think that's -- some of the pressure we see there as well as moving between generations is always a little difficult period to predict but always puts pressure on it as well. So really, we've got 2 factors from a business standpoint that are impacting royalties on top of the COVID-19 backdrop.

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Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [17]

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Okay. And then, Jamie, big picture here. We have this kind of seismic shift with the arrival of the pandemic. Are there any -- it's pretty easy to focus on the negative, right? We've got a real pretty substantial down negative on the product. But have any doors been opened or any new markets? Have any of the verticals? Have you been surprised just in your pipeline analysis over the last, call it, 60 days since the [prelim] results came out.

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James J. Lerner, Quantum Corporation - Chairman, President & CEO [18]

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Yes. I think -- I mean, there's a lot that I'm pretty encouraged by. One is our U.S. Federal team is killing it. We are just becoming more relevant in unstructured data in the government, and that's everything from the national labs to anything else -- space programs with NASA. We want to go to Mars with NASA. There's going to be a lot of imagery there. There's a huge amount of work, whether it's disease modeling, war fighter modeling. There's just a huge amount of work happening in the national laboratories. And every single thing that we do in our military is video attached. So I just think that is a big growth area for us. I think the cloud is realizing that they are growing. They're growing in the pandemic. They're generating more unstructured data, predominantly video and photographs. And I'm seeing those guys not only stay on but in cases, accelerating the evaluation and the onboarding of our tech. I've also seen our -- what makes our storage fast is not the storage in all cases, it's the network, right? We allow data to go get to our storage faster than our competitors. It's not just that we can store it faster but we can move it from where -- move the data to our storage faster. So I've seen a lot of acceleration where people are working remotely or working from home, and they're using our technology to accelerate data transfer from at home or remote facilities. And so that use case is becoming more prevalent, and we're becoming more relevant. The other thing I've seen is we had talked about wanting to get -- to do more than media and entertainment, right? Okay, we're really good in movies. We're really good in television and sports, but we've got to be relevant in other use cases. And I have seen a large uptick in the conversations, the people coming to our briefing center and having virtual briefings with us about life sciences data, medical imagery, cat scan data analytics of medical images, of archive on analytics of genomic data, of bioinformatic data. I've just seen that -- I think we're just becoming much more relevant than we thought or planned in the whole life sciences segment. And our video surveillance work, which has been predominantly engineering, right, building the products that we need. We're now turning that corner and we've built the sales relationships, the distribution relationships, and I'm seeing our surveillance business to pick up quite quickly as well. So I think all of our strategy is playing out. And the way we look at things is, as the disease is contained or subsides or we learn to have a viable containment that we can live with, I think we're well positioned to come out of this with a lot of speed. And I mean, and we've tightened our belt. We thought we'd tightened our belt as much as we could tighten it. Now we've tightened it more. And it's a pretty lean, innovative organization. And we're seeing all the proof points of our strategy laying out. And now we just need a healthier economy to fertilize the business. And I think that's -- I'm feeling pretty encouraged that we're going to come speeding up out of this. And we're starting to see a lot more inbound activity. We certainly got a lot of publicity recently, and maybe that helped as well. But I've just seen more inbound activity than I've ever seen before.

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Operator [19]

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We'll hear next from Chad Bennett with Craig-Hallum.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [20]

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Mike, can you just speak to how you're thinking about cash flow relative to the $8 million loss for the quarter?

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James Michael Dodson, Quantum Corporation - Senior VP, CFO & Secretary [21]

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Yes, I mean -- as I highlighted in our comments, from operations, we basically met it out. And when we looked at the total use of cash over the whole year, you really could boil it down to our CapEx and our acquisition of ActiveScale. When we look forward, our cash flow breakeven is plus or minus $85 million. So we're still in a position where we'd expect to burn a little bit of cash next quarter. But that's why -- we've been able to get amendments to our credit agreements, have access to additional liquidity as well as we've always had our $45 million line that helps cover the ebbs and flows, in particular, of working capital. So it's something that we feel very good where we are today. We think we're positioned well. We can address any cash requirements that we see. And we can also fund as we climb out of this, the working capital requirements to support growth. So we think we're positioned very well.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [22]

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So the excess $20 million of liquidity, was that on the revolver side, I assume? Or was that term?

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James Michael Dodson, Quantum Corporation - Senior VP, CFO & Secretary [23]

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No, that's term.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [24]

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Okay. So where is -- can you give us a snapshot of where the debt is today?

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James Michael Dodson, Quantum Corporation - Senior VP, CFO & Secretary [25]

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Well, it is $20 million higher, right, than it was before the amendment. All right. And you've got our balance sheet. So...

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [26]

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Okay. All right. And then just in terms -- obviously, we're in a pretty unique environment to say the least. But considering your guys' commentary on starting to see a pickup in the last couple of weeks on the enterprise side. And obviously, Fed seems to be doing very well. And just -- and I think you spoke about your hyperscaler, your existing customer starting to get back on track. Just -- again, I know it's a tough environment to speak to this, but if we look at the September quarter, considering where June is going to be, would you expect better seasonality than normal for that quarter? Or is it too early to tell?

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James Michael Dodson, Quantum Corporation - Senior VP, CFO & Secretary [27]

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I think -- Jamie, why don't you let me make a first crack, and then I'll let you follow-up? But I mean the visibility is very difficult, so it's hard for us to look forward. We do believe, as Jamie has been articulating, that when we do figure this out, we believe there is a pent-up demand. So you would think that you've got more business coming because of this pent-up demand at that point. But when is that point reached is obviously the big question.

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Operator [28]

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Next, we'll hear from David Duley with Steelhead Securities.

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David Duley, Steelhead Securities LLC - Managing Principal [29]

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It sounds like when you talk about the trends in your business that things are getting better across some of your major categories. And so is it safe to assume that June will be the bottom or the low point in revenue in this little cycle?

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James J. Lerner, Quantum Corporation - Chairman, President & CEO [30]

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I mean none of us have a crystal ball, but with the data in front of me today, I would say the bottom is behind us. And I would expect, at current course and speed, the September quarter will be better than the June.

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David Duley, Steelhead Securities LLC - Managing Principal [31]

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Okay. And as far as the lead times go, what are your lead times for your secondary storage systems currently?

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James J. Lerner, Quantum Corporation - Chairman, President & CEO [32]

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It depends -- there's a bunch of different products in that mix: DXi, tape, and ActiveScale. So it depends what products. Our enterprise products, from when we get a purchase order to when we ship, is 2 to 4 weeks. The longer lead time products are specialized, very large-scale systems predominantly for hyperscalers. Those have more of a 8- to 12-week manufacturing lead time.

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James Michael Dodson, Quantum Corporation - Senior VP, CFO & Secretary [33]

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Yes. Yes.

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David Duley, Steelhead Securities LLC - Managing Principal [34]

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Okay. So your hyperscalers had the long lead times and so you probably have some sort of indication from them (inaudible)

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James J. Lerner, Quantum Corporation - Chairman, President & CEO [35]

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They give us demand [things]...

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David Duley, Steelhead Securities LLC - Managing Principal [36]

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(inaudible) that things are getting better in that particular business, you have to have some sort of indication from them since the lead times are so long that.

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James J. Lerner, Quantum Corporation - Chairman, President & CEO [37]

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Right.

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David Duley, Steelhead Securities LLC - Managing Principal [38]

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Okay. So this is not based on your gut feeling, it's based on what your customers are actually doing.

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James J. Lerner, Quantum Corporation - Chairman, President & CEO [39]

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Yes. We had written demand schedules and manufacturing schedules going months into the future.

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David Duley, Steelhead Securities LLC - Managing Principal [40]

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Now, is it just me but some of these guys is -- the big hyperscale customers, their revenue was up like 40% or 50% year-over-year on $6 billion and $10 billion numbers. I know that they're in digestion mode, but wouldn't you think that, that sort of increase in business would drive your key customer to be back at the table in a significant way here soon?

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James J. Lerner, Quantum Corporation - Chairman, President & CEO [41]

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Yes.

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Operator [42]

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Mr. Dodson, Mr. Lerner, thank you for your information that you shared with us today. We have no further questions from the audience. I'd like to turn it back to our leadership team for any additional or closing remarks that you have.

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James J. Lerner, Quantum Corporation - Chairman, President & CEO [43]

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Well, I just want to thank everyone for today's call. And I hope you and your families are safe during these unprecedented times. And look forward to speaking to you guys this quarter, and then we'll be back on the phone in 90 days. So thanks, everyone.

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Operator [44]

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Ladies and gentlemen, this does conclude today's teleconference, and we do thank you all for your participation. You may now disconnect your lines, and we hope that you enjoy the rest of your evening.