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Quantum tape, NAS recovery stalled by COVID-19, sports break

Quantum says, 'Let the games begin' after sports and entertainment pauses interrupt sales of tape and scale-out NAS storage; vendor also faces possible PPP problems.

The cancellation of sports and films due to the coronavirus interrupted the comeback plans of tape and scale-out storage vendor Quantum.

Quantum executives last week said the impact of COVID-19 cut short the vendor's revenue growth beginning in March. They expect its effects to linger for at least a few months, but hope to recover when sports leagues resume and entertainment companies ramp up production.

Quantum has another potential problem. It received $10 million from the U.S. government's Paycheck Protection Program (PPP) in April 2020 with the expectation of paying it back with low interest, or maybe not at all. Now Congress wants the $10 million back, saying as a public company Quantum did not meet the criteria for the program designed for small businesses.

Customers spent 20% less on Quantum products last quarter than a year ago, which Quantum CEO Jamie Lerner blamed on the shutdown of sports and entertainment. Overall revenue slipped to $88.2 million from $103.3 million, according to Quantum's earnings report last week.

Lerner said in an interview that Quantum revenue rose for most of the past year. He said since he joined the company in July 2018, he had renegotiated Quantum's debt, solved its Security and Exchange Commission (SEC) issues and gotten the company relisted on Nasdaq after it was relisted from New York Stock Exchange. He added that he removed $70 million of expenses over the past two years.

"As of December, we were flying. Then COVID came," Lerner said.

For Quantum's full fiscal year -- which ended March 31 -- the vendor's revenue of $402.9 million was a tad up from $402.7 million.

Quantum forecast revenue of $72 million to $74 million for this quarter, down both from last quarter and year-ago revenue of $106 million. Quantum expects to lose around $8 million this quarter, just more than twice as much as it lost last quarter.

Quantum waiting to hear 'Play Ball'

Video-intensive sports, television and movie industries are key targets for Quantum, particularly its StorNext scale-out file system.

Headshot of Jamie LernerJamie Lerner

Instead of NBA and NHL playoffs and the start of baseball season, pro sports shut down in mid-March and the major leagues haven't yet resumed. Lerner said the suspension caused teams and leagues to suspend projects, which cut into spending with Quantum. Suspension of movie and television production has caused those industries to also pause spending. Lerner said he expects Quantum to benefit when the sports and entertainment industries resume.

Lerner said he had been expanding Quantum's footprint in industries outside of media and entertainment even before the COVID-19 outbreak, which cushioned the blow when sporting events and filming operations for upcoming movies were canceled. He said media and entertainment still make up a large portion of Quantum's customer base, but its growth is being outstripped by other verticals such as healthcare, bioinformatics, life sciences and autonomous vehicles.

Lerner said more organizations are recognizing a need to build 20-year or 100-year archives, which aren't economically viable to achieve with cloud. He said the only medium that makes sense for these use cases is tape, and he claimed one of Quantum's greatest achievements over the past two years was making it easier for customers to incorporate tape into their data centers without needing to hire a tape expert.

"You can't pay someone a monthly bill for 100 years," Lerner said.

Lerner added that he's seen increased tape interest from hyperscalers. Quantum has several hyperscaler customers, but Lerner said only one of them is using tape. However, he said it is inevitable that all hyperscalers will turn to tape because their data stores will grow into exabytes over the next few years.

Lerner said despite the slowdown, Quantum was still in good financial shape and had "tightened its belt" with expense management. On the earnings call last week, CFO Mike Dodson reported a $21 million reduction in yearly operating expenses.

PPP payback

Dodson mentioned on the earnings call the PPP load helped stabilize Quantum's financial footing. The PPP loan has a fixed interest rate of 1% per year and can be deferred for up to 10 months, and companies using it can apply for loan forgiveness.

In May, the U.S. House of Representatives sent a letter to Quantum requesting the company return the PPP loan. The letter claimed that as a publicly traded entity, Quantum has access to alternative sources of capital and should not need the PPP loan. The letter also implied Quantum is not a "true" small business. Quantum has not returned the money, claiming it fulfilled the PPP's goal of preserving jobs.

Lerner would not comment on the PPP loan, but Quantum provided the following statement:

"The PPP loan kept Americans working at Quantum. We believe strongly that Quantum not only falls within the technical eligibility requirements of the PPP loan program, but also falls squarely within the spirit of what was intended by the CARES Act. 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."

Ryan O'Leary, senior research analyst at IDC's legal, risk and compliance research program, said the PPP loan has been controversial because many companies that wouldn't fall under a layman's definition of a small business have qualified for it. Because the loan's interest rate was low and it was easy to qualify, many businesses used the PPP for tax optimization, depleting the loan's reserves. O'Leary said this led to some high-profile public relations fallout for some organizations.

"These companies very often did not think of the optics and we've seen many businesses -- including the Los Angeles Lakers -- give the disbursement back," said O'Leary, who is also an attorney.

The Small Business Administration, the government agency that guarantees the PPP loan, defines small businesses as having fewer than 250 employees or fewer than 1,500 employees, depending on the industry. The PPP loan is based on 2.5 months of payroll of an organization's full-time employees making less than $100,000 in total compensation. The average PPP loan is $108,000, and 66% of loans are below $50,000.

Camberley Bates, managing director and analyst at Evaluator Group, said she believes Quantum isn't acting inappropriately. She said Quantum is still in a state of turnaround after its financial troubles from before Lerner was hired as CEO. The uncertainty of the current economy could undo Lerner's progress and put Quantum back on shaky financial ground, which the PPP loan is supposed to help prevent.

"My personal belief is that [Quantum is] not cheating the system as implied by the letter," Bates said.

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