Investing to Wealth

Quantum Corporation (NYSE: QTM)

Quantum Corporation (QTM) operates as a storage company that provides backup, recovery and archive solutions. The Company offers a range of disk, tape and software solutions for information technology departments in various organizations to protect, retain and access their digital assets. Its products include tape automation systems, such as autoloaders and entry-level, and mid-range and enterprise libraries; disk-based backup appliances, and virtual tape library for mid-range enterprises; and data management software designed for open system computing environments. This includes the DXi(TM)-Series, the first disk backup solutions to extend the power of data deduplication and replication across the distributed enterprise. QTM also provides device and media products, such as removable disk devices, and a range of tape drives and media representing various tape technology formats, including LTO, DLT and DAT/DDS.

It sells its products through value added resellers, direct marketing resellers, branded channels, distributors and original equipment manufacturers primarily to small businesses, government agencies, and multinational corporations.

The Company was founded in 1980 and is headquartered in San Jose, California

Source: Reuters.com, SEC Filings. Fiscal year ending March 31.

Financial Summary

The Company’s revenue for fiscal second quarter 2010, ended September 30, 2009, was $175 million. This represented a 19% decline from the same period last year, primarily due to the significantly weaker economy, a continued sales mix shift toward higher margin opportunities, and lower royalties. Despite the year-over-year decline, revenue grew 9% on a sequential basis. In addition, the Company increased its GAAP gross margin rate to 43.8% and GAAP operating income margin to 8.5% - up from 38.5% and 2.6%, respectively, in Q2 of fiscal 2009. In both cases, this was the highest level achieved in more than eight years. QTM also reported its second consecutive quarter of GAAP profits, with $11 million in net income, or basic earnings per share of six cents. This compared to a GAAP net loss of $3 million in second quarter of fiscal 2009 and represented the Company’s best performance in nearly five years.

QTM generated $31 million in cash from operations for the quarter and ended the quarter with $85 million in cash and cash equivalents. As of July 1, 2009, QTM has completed a capital structure solution which addresses the requirement that at least $135.0 million of convertible subordinated debt must be refinanced by February 2010 under the Company’s senior secured credit agreement with Credit Suisse. Over the course of 14 weeks, QTM has reduced its outstanding debt by 19%, or $76.7 million.

For the third quarter of 2010, QTM expects revenue of $175 to $185 million and non-GAAP operating income to be essentially flat or similar to what reported in the second quarter of 2010. According to Reuters Estimates, analysts on an average are expecting the Company to report revenue of $164 million for the third quarter of 2010 and $676 million for FY2010.

Source: Yahoo! Finance, SEC Filings.

Two years ago, the stock was trading above $4, but due to the global recession the stock hit its historical bottom of $0.09 in November 2008. Now, after a few changes in business plan and some improvements in the global economy, the stock goes for $2 a share. Recently, QTM’s quote jumped 23% after the Company announced it swung to a fiscal second-quarter profit $11.4 million. The Company’s stock has ranged from $0.09 to $2.64 over the past year.

Analyst Consensus

One analyst polled by Thomson Reuters recommends QTM as an “Outperform.”

Source: http://markets.ft.com/tearsheets/analysis.asp?s=qtm

Investment Highlights

The Company’s solutions are designed to provide information technology departments in a variety of organizations with tools for protecting, retaining and accessing their digital assets. QTM sells its products via its branded channels and through original equipment manufacturers, such as Dell Inc., EMC Corp., Hewlett-Packard Company, International Business Machines Corp., and Sun Microsystems Inc. Looking beyond the recently ended second quarter of fiscal 2010, QTM expects to build on its branded revenue momentum in disk systems and software with recent announcement of the Company’s new DXi6500 family, a set of preconfigured disk backup and deduplication appliances targeted at the midrange NAS market and optimized for sale through independent channel partners.

Industry data suggests the market for target based deduplication systems is growing substantially despite the challenging economic environment. In the past two months, QTM has introduced new products and enhancements to build out itsr edge-to-core product and solutions portfolio including the DXi2500-D, Quantum Vision 3.0, the esXpress^TM backup software module and qualified the DXi7500 with Symantec OpenStorage direct-to-tape capability. Recently, analyst firm Enterprise Strategy Group (ESG) has validated that the integration of Quantum DXi(TM)-Series disk-based backup and deduplication appliances with Symantec NetBackup OpenStorage API provides a comprehensive data protection solution for multi-site environments. Thus, ESG has now validated the industry-first capability provided by combining the direct tape creation functions of QTM’s DXi-Series with NetBackup OpenStorage API interface to protect data via a single point of management. The evaluation also demonstrated the value of the latest Quantum Vision(TM) 3.0 software.

In late October, the Company unveiled a new family of NAS backup appliances that provides an unparalleled combination of simplicity and value for midrange users looking to deploy a data deduplication solution. The DXi6500 family offers a turnkey approach that delivers all the benefits of advanced data deduplication technology while maximizing return on investment, in part by bundling all licensed software features. The DXi6500 family addresses these issues with five preconfigured appliance models designed to protect midrange environments with 3 to 30 TB of primary data. Every DXi6500 model also includes Quantum esXpress(TM) software, which offers optimized backup for VMware environments. The price for the new DXi6500 family bundled with all licensed software features - including deduplication, replication and Symantec NetBackup OpenStorage - starts at $64,000 MSRP for the smallest model.

By September 2000, more than 50,000 StorNext File System licenses had been sold, with the majority of these shipments occurring in the last three years. StorNext enable high-speed, resilient data sharing and multi-tier data management in open systems environments. Originally deployed primarily by governmental agencies and companies performing large-scale data collection for purposes such as intelligence and oil and gas exploration, StorNext has been broadly adopted in recent years across the Media and Entertainment industry as it shifted to a digital-dominated creation process. Over the last year, StorNext’s capabilities and customer benefits have enabled the Company to further extend its reach into new markets, most notably Life Sciences.

In July, EMC, one of the Company’s largest resellers, purchased deduplication technology leader Data Domain Inc. For QTM, the deal implied the question of a big source of revenue. The Company anticipates quarterly EMC software license revenue to begin decline in the first quarter of fiscal 2011. The recent acquisition of Data Domain by EMC Corporation and the bidding surrounding its acquisition has emphasized the significance of the deduplication market and competitive strengths and weaknesses of the various storage companies. This market consolidation changed portions of QTM’s strategy. The Company’s intention is to move more into the midrange with a new platform and enhanced software and better NAS functionality. QTM’s big focus has been on building its disk systems and software business. According to its management, the Company is very much focused toward this transition over the next several quarters as it moves forward.

It’s been a tough year for the data storage industry, global IT spending falling 10% in the first half of this year. Total disk storage systems capacity shipped reach 2,460 petabytes, growing only 27.3% year over year, about half the rate of the industry’s pace in recent years. According to a report published earlier this year by IDC, the storage market, which includes technologies such as device management, replication, data protection, backup, and archiving, shrunk 5.2% over the year after 21 consecutive years of growth. EMC remained the market leader with 22% market share followed by Symantec with 19% and NetApp with 8%. However, analysts have reported hopeful signs for the sector in recent months, as North America sales contacts related to data storage has started, with deal closure rates improving. The global storage market is currently a $45 billion a year industry and it is anticipated to grow to $50 billion a year by 2010 with archived storage forecast to increase from $9 billion in 2007 to $23 billion in 2010.Market research firm iSuppli expects global cloud storage system revenue to rise to $5 billion in 2013, up from $1.6 billion in 2009.

Technical Analysis

Source: http://stockcharts.com/h-sc/ui

QTM is trading above its 13-day moving average. This is considered to be the sign of a bullish trend. There is added weight to this indication because the moving average is rising and suggests that there has been buying interest in this stock.

The MACD for the Company currently indicates a strong bullish signal for two reasons. First, the MACD is above the signal line, a 9-day moving average. Second, the MACD is above 0 which implies that the underlying moving averages are trending higher.

QTM’s recent volatility has been greater than normal. This is evidenced by the increased distance between the upper and lower Bollinger Bands. These bands measure volatility using standard deviation and a large width is due to high volatility. Additionally, QTM is trading near its upper Bollinger Band. This suggests that the stock price is high relative to its recent price action.

Comparative Analysis

Despite the continuing impact of the economic downturn and changes in the deduplication landscape, QTM delivered some of its best results in many years during the last quarter. These results have been well reflected in the stock’s price, which gained more than 30% during the last sessions. QTM has developed a new strategy a couple years ago. Currently, it is behind plan in building that business given the fact that its relationship with EMC has changed. However, the Company’s forward momentum of becoming a more systems focused company, improving and optimizing its core tape business and building a growth platform in data deduplication and replication should continues to advance, and it is well positioned to capitalize on this. In conclusion, the Company looks quite undervalued as although to its performances, it is traded with significant discount to peer P/E and P/S multiples.

As of late October, the Data Storage Stocks Index is one of 100 worst-performing Indexes over the last month, down by -5%. Imation and Hutchinson Technology, two of QTM’s small-cap peers, have erased earlier gains to turn negative. EMC, Western Digital and Seagate Technology are all trading lower since reporting their earnings last week. Xyratex is also slipping. In this crowd, only the solid-state drive player STEC seems to match somehow QTM’s jump.

Source: Thomson Financial, Yahoo! Finance, Analyst estimates.

Insider Trading Activity

Net Share Purchase Activity

Report Disclaimer

DO NOT BASE ANY INVESTMENT DECISION UPON ANY MATERIALS FOUND ON THIS REPORT. We are not registered as a securities broker-dealer or an investment adviser either with the U.S. Securities and Exchange Commission (the “SEC”) or with any state securities regulatory authority. We are neither licensed nor qualified to provide investment advice.

The information contained in our report should be viewed as commercial advertisement and is not intended to be investment advice. The report is not provided to any particular individual with a view toward their individual circumstances. The information contained in our report is not an offer to buy or sell securities. We distribute opinions, comments and information free of charge exclusively to individuals who wish to receive them.

Our newsletter and website have been prepared for informational purposes only and are not intended to be used as a complete source of information on any particular company. An individual should never invest in the securities of any of the companies profiled based solely on information contained in our report. Individuals should assume that all information contained in the report about profiled companies is not trustworthy unless verified by their own independent research.

Any individual who chooses to invest in any securities should do so with caution. Investing in securities is speculative and carries a high degree of risk; you may lose some or all of the money that is invested. Always research your own investments and consult with a registered investment advisor or licensed stock broker before investing.

Information contained in our report will contain “forward looking statements” as defined under Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. Subscribers are cautioned not to place undue reliance upon these forward looking statements. These forward looking statements are subject to a number of known and unknown risks and uncertainties outside of our control that could cause actual operations or results to differ materially from those anticipated. Factors that could affect performance include, but are not limited to, those factors that are discussed in each profiled company’s most recent reports or registration statements filed with the SEC. You should consider these factors in evaluating the forward looking statements included in the report and not place undue reliance upon such statements.

We are committed to providing factual information on the companies that are profiled. However, we do not provide any assurance as to the accuracy or completeness of the information provided, including information regarding a profiled company’s plans or ability to effect any planned or proposed actions. We have no first-hand knowledge of any profiled company’s operations and therefore cannot comment on their capabilities, intent, resources, nor experience and we make no attempt to do so. Statistical information, dollar amounts, and market size data was provided by the subject company and related sources which we believe to be reliable.

To the fullest extent of the law, we will not be liable to any person or entity for the quality, accuracy, completeness, reliability, or timeliness of the information provided in the report, or for any direct, indirect, consequential, incidental, special or punitive damages that may arise out of the use of information we provide to any person or entity (including, but not limited to, lost profits, loss of opportunities, trading losses, and damages that may result from any inaccuracy or incompleteness of this information).

We encourage you to invest carefully and read investment information available at the websites of the SEC at http://www.sec.gov and FINRA at http://www.finra.org.