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Article by DailyStocks_admin    (11-14-12 01:54 AM)

Description

Filed with the SEC from Nov 01 to Nov 07:

Quantum (QTM)
Starboard Value disclosed that it now owns 26,128,823 shares (15.9%) after it bought 12,270,000 in the span from Sept. 4 through Oct. 25 at prices ranging from $1.27 to $1.65 each. Starboard also disclosed owning shares underlying certain convertible senior subordinated notes.
BUSINESS OVERVIEW

Business Description

Quantum Corporation (“Quantum”, the “Company”, “us” or “we”), founded in 1980, is a global expert in data protection and big data management. We provide solutions for storing and protecting information in physical, virtual, cloud and big data environments that are designed to help customers be certain they are maximizing the value of their data over its entire lifecycle. With our solutions, customers can better adapt in a world of continuing change by keeping and protecting more data for a longer period of time while reducing costs and increasing return on investment. We work closely with a broad network of distributors, value-added resellers (“VARs”), direct marketing resellers (“DMRs”), original equipment manufacturers (“OEMs”) and other suppliers to meet customers’ evolving data protection and big data management needs. Our stock is traded on the New York Stock Exchange under the symbol QTM.

Our data protection solutions include DXi ® deduplication systems and Scalar ® automated tape libraries that optimize backup and recovery, simplify management and lower cost and our vmPRO TM virtual server backup and disaster recovery offerings that protect virtual environments while minimizing the impact to servers and storage. For big data environments, we provide StorNext ® tiered storage and wide area storage solutions designed to help maximize revenue and results by enabling customers to extract the full value from their digital assets. In addition, we also offer software for cloud backup and disaster recovery of physical and virtual servers. We have a full range of services and the global scale and scope to support our worldwide customer base.

We are a member of the consortium that develops and has licensed LTO ® media technology to tape media manufacturing companies. We receive royalty payments for both LTO and DLT ® media technology sold under licensing agreements. We have also entered into various licensing agreements with respect to our technology, patents and similar intellectual property which provide licensing revenues in certain cases and may expand the market for products and solutions using these technologies.

In recent years we have transformed Quantum through acquisitions and organic growth into a systems and solutions company. Our strategy is to grow the independent channel for Quantum branded solutions by offering products with superior performance and value. We plan to continue to expand and improve our product and solution offerings, with emphasis on branded disk systems, software solutions, virtual offerings and cloud solutions.

Industry Background

Information Technology (“IT”) departments face an environment of change. There is increasing focus on the economics of data as these departments not only address continued data growth but also identify solutions to store more data for longer periods of time as data becomes more valuable. With new ways to analyze and reuse data for additional revenue streams, new ideas and operational breakthroughs, IT managers are looking to ensure the organization can take full advantage of the information and knowledge from that data. For these reasons, data protection and big data management are important to businesses and organizations and consistently are reflected as top priorities in end user research studies.

Another change that has occurred over the last several years is the emergence of new architectures and technologies that reduce costs and increase efficiency. These include data deduplication, scale-out storage, virtualization and cloud storage. The challenge is that these technologies can also introduce disruption for IT, so it takes careful planning and smart solutions to enable organizations to move forward.

In the face of these changes, IT departments also confront continued constraints. Resources and budgets remain tight, which is one of the main reasons reducing data acquisition costs and ongoing operational costs is a top priority. In addition, even as they look to capitalize on new technologies and solutions, many IT managers still have to support legacy environments and applications. Finally, there is often built-in inertia or risk aversion when it comes to changing architectures or existing vendors. As a result, there is significant opportunity for storage specialists such as Quantum to assist organizations through transition.

Products

Big Data Management and Archive

With new digital technologies creating larger data files that can generate greater business value, there is a growing need to retain data for progressively longer periods while maintaining visibility and access to it. IT departments are increasingly focused on managing this big data. Generally, big data refers to relatively new data types that produce large files, often measured in petabytes, such as video, imaging and audio. Big data also refers to large collections of small data, such as retail purchasing information, underwater photos of the ocean floor and feeds from traffic cameras that when combined, create meaning and increasingly, competitive advantage. In addition, in managing big data, organizations are increasingly recognizing that they need efficient and cost-effective ways to archive it. We offer StorNext software and appliance-based solutions to address this growing need for managing and archiving big data.

StorNext Software

Designed for data-intensive environments, our StorNext software reduces the time and total cost of managing data for end users with large data sets and challenging distributed environments. The StorNext File System software provides high-performance shared access to data across different networks, operating systems and storage platforms. In addition, our StorNext Storage Manager TM software automatically copies and migrates data between different tiers of storage based on user-defined policies. The result is a highly scalable, high-performance data management solution designed to optimize the use of storage while enabling the long-term protection and recoverability of data.

Our StorNext software helps businesses with big data to benefit from workflow efficiencies, automated tiered storage and policy-based archive management. Designed for open system data-intensive environments, StorNext software products allow multiple users to rapidly access a single data set, increasing productivity and storage utilization. They also transparently move data, reducing storage costs while simultaneously providing embedded data protection. For several years, organizations within rich media production and broadcasting, the federal government, life sciences and other disciplines have utilized our data management software to derive more value from their data while controlling costs. Many of these customers now rely on our software as a key technology enabler for their business processes and workflow.

StorNext Appliances

Our StorNext appliances leverage the power of StorNext software and market-leading hardware to offer predictable high-performance file sharing and archiving in purpose-built configurations of metadata controllers, expansion appliances and disk, and archive enabled libraries. They are simple to deploy and architected to deliver scalable, industry-leading performance, drive lower operational costs and provide a flexible open system for enabling third party applications. These appliances also work seamlessly with traditional StorNext software and partner hardware offerings to provide additional options for building a shared storage area network (“SAN”) and scale out network-attached storage (“NAS”) environment. They are intended to serve a wide range of markets, such as film editing, seismic processing or genome sequencing and balance the highest performance with the lowest long-term cost for sharing big data files in data intensive operations.

Data Protection

DXi Disk Systems

Our DXi disk-based backup systems meet the needs of a broad range of customers, from small businesses and remote offices to large distributed enterprise data center environments, seeking high speed recovery and extreme reliability beyond what a tape-only environment can deliver. These solutions offer functionality normally reserved for enterprise class data centers, such as data deduplication, virtual tape, snapshot, data recovery and replication capabilities. Our disk-based backup appliances are designed for easy implementation and integration into existing environments and provide industry-leading performance, capacity and price-performance.

Our DXi disk systems use deduplication technology to expand the amount of backup data users can retain on traditional disk systems. The result is a cost-effective means for IT departments to store backup data on disk for months instead of days, providing high-speed restores, increasing available data recovery points and reducing media management. For disaster recovery in distributed environments, the DXi-Series TM also makes wide area network (“WAN”) replication practical because of the greatly reduced bandwidth required with data deduplication. By greatly increasing effective disk capacity, data deduplication enables users to retain backup data on fast recovery disk much longer than possible using conventional disk and significantly reduces the bandwidth needed to move data between sites. We hold a key patent in one of the most efficient methods of data deduplication, known as variable-length data deduplication.

Our DXi-Series systems provide a combination of high performance and advanced functionality. In addition to data deduplication, the core set of advanced features of the DXi-Series includes a high performance embedded file system, support for high speed data compression, asynchronous replication, direct tape creation and built-in monitoring and diagnostic tools.

vmPRO For Virtual Environments

Our virtual environment offerings include vmPRO software and vmPRO appliances. Our vmPRO software provides virtualization data protection software with advanced utilities designed to dramatically improve and simplify virtual data protection in midrange and larger data centers. It works with our DXi family of deduplication products to accelerate backup, restore and disaster recovery protection in data center virtual environments while reducing IT costs. We also offer vmPRO appliances that provide an integrated data protection solution designed to simplify backups in virtual environments. These appliances include both backup software and integrated storage with deduplication in a single solution for small to medium-size businesses and remote offices. The vmPRO appliances optimize virtual machines and accelerate performance by filtering out unassigned, expired and inactive data to reduce overhead on servers, networks and storage.

Scalar Tape Automation Systems

We are the leading named supplier of tape automation shipments and we continue to expand features and capabilities of our tape library offerings to increase storage capacity and improve performance. Our Scalar tape automation portfolio includes a range of products, from autoloaders with one tape drive and up to sixteen cartridges to large enterprise-class libraries which can hold hundreds of drives and thousands of cartridges. Our tape libraries intelligently manage and protect business critical data in workgroup, medium size business and enterprise data center environments. With an emphasis on ease of use, management features and investment optimization, Scalar tape libraries are designed to grow with business needs. These products integrate tape drives into a system with automation technology, advanced connectivity and sophisticated management tools, including integrated media integrity analysis in tape drives and library diagnostic systems. We also offer the SuperLoader ® 3 autoloader designed to maximize data density and performance.

Tying our libraries together from entry-level to enterprise is a common, integrated software called iLayer TM , which provides monitoring, alerts and proactive diagnostics, thereby reducing service calls, shortening issue resolution time and decreasing the time users spend managing their tape automation solutions. In addition, we believe the growth in archiving of unstructured data represents a substantial opportunity for tape automation systems. To capitalize on this trend and the changing role of tape automation systems in data protection, we have invested in our enterprise Scalar i6000 and midrange Scalar i500 platforms to provide increased redundancy capabilities. These platforms can be implemented on their own or in an appliance configuration with our StorNext archiving software.

Devices and Media

Our device and media products include removable disk drives and libraries, NAS appliances and tape drives and media. Our RDX ® removable and ruggedized disk backup devices combine attributes of disk and tape, with deduplication technology offered in our RDX disk libraries. Our NAS appliance has built-in backup software and deduplication technology, designed to enable businesses to significantly reduce storage requirements and network traffic.

We offer tape drives and media based on the LTO format. The latest generation LTO tape drive technology is capable of storing nearly twice the capacity of the previous generation, while consuming less power. Our LTO family of devices is designed to deliver outstanding performance, capacity and reliability, combining the advantages of linear multi-channel, bidirectional formats with enhancements in servo technology, data compression, track layout and error correction. These LTO tape drives are designed to provide midrange and enterprise customers with disaster recovery and cost-effective backup solutions.

We also sell a full range of storage media offerings to complement each tape drive technology and satisfy a variety of specific media requirements. Our media includes DLTtape ® , LTO Ultrium ® , DAT and DDS data cartridges. Our media is compatible with our drives, autoloaders and libraries as well as other industry products.

Cloud Solutions

We offer a software platform to help customers take advantage of cloud-based data protection through a highly optimized, flexible approach designed to overcome the limitations of other cloud offerings. This platform is centered on our vmPRO technology and our virtual deduplication appliance, the DXi V1000 TM . Our cloud-based data protection platform leverages our expertise in data protection to deliver a highly efficient, cost-effective foundation for cloud-based backup, restore and data recovery that helps customers transition easily and practically to the cloud on their terms and timeframe. Our approach is based on knowledge that most customers continue to use both disk and tape for data protection on a mix of physical and virtual servers and are more comfortable with a hybrid cloud strategy. This focus on flexibility is reflected in the benefits provided by our cloud-optimized software platform, including fast restores; cost-effective disaster recovery and business continuity; secure, multi-tenant cloud support; significant data reduction and WAN-optimized replication.

Global Services and Warranty

Our global services strategy is an integral component of our total customer solution. Service is typically a significant purchase factor for customers considering either big data management or data protection and storage solutions, and our ability to provide comprehensive service and support can present us with a noteworthy competitive advantage to attract new customers and retain existing customers. In addition, we believe that our ability to retain long-term customer relationships and secure repeat business is frequently tied directly to our service capabilities and performance.

Our extensive use of technology and innovative, built-in product intelligence allows us to scale our global services operations to meet the needs of our expanding installed base. We are currently able to provide service to customers in more than 100 countries, supported by 24-hour, multi-language technical support centers located in North America, Europe and Asia. We provide our customers with warranty coverage on all of our products. Customers with high availability requirements may also purchase additional service to extend the warranty period, obtain faster response times, or both, on our disk systems, tape automation and software products. We offer this additional support coverage at a variety of response levels up to 24-hours a day, seven-days-a-week, 365-days-a-year, for customers with stringent high-availability needs. We provide support ranging from repair and replacement to 24-hour rapid exchange to on-site service support for our midrange and enterprise-class products.

We generally warrant our hardware products against defects for periods ranging from one to three years from the date of sale. We provide warranty and non-warranty services from our Colorado Springs, Colorado facility and, for certain products, through third party service providers. In addition, we utilize various other third party service providers throughout the world to perform repair and warranty services for us to reach additional geographic areas and industries in order to provide quality services in a cost-effective manner.

Research and Development

We compete in an industry characterized by rapid technological change and evolving customer requirements. Our success depends, in part, on our ability to introduce new products and features to meet end user needs. Our research and development teams are working on the next generation disk, tape automation, data deduplication, virtual systems, cloud solutions and big data technologies as well as software solutions to advance these technologies for the big data and archive and the data protection markets to meet changing customer requirements. We continue to focus our efforts on software solutions and integrated software and hardware solutions that offer improvements in the efficiency and cost of storing, moving, managing and protecting large amounts of data and closely integrating our products to provide compelling solutions for our customers.

We continue to invest in research and development to improve and expand our product lines and introduce new product lines, striving to provide superior data protection, including cloud environments, and big data and archive solutions. Research and development costs were $74.3 million, $73.0 million and $69.9 million for fiscal 2012, 2011 and 2010, respectively.

Sales and Distribution Channels

Quantum Branded Sales Channels

For Quantum-branded products, we utilize distributors, VARs and direct marketing resellers. Our integrated Quantum Alliance™ Reseller Program provides our channel partners the option of purchasing products directly or through distribution and provides them access to a more comprehensive product line. Additionally, we sell directly to a select number of large corporate entities and government agencies.

OEM Relationships

We sell our products to several OEM customers that resell our hardware products under their own brand names and typically assume responsibility for product sales, end user service and support. We also license software to certain OEM customers that include this software in their own brand name products. These OEM relationships enable us to reach end users not served by our branded distribution channels or our direct sales force. They also allow us to sell to select geographic or vertical markets where specific OEMs have exceptional strength.

Customers

Our sales are concentrated with several key customers because under our business model, as is typical for our industry, we sell to OEMs, distributors, VARs and DMRs to reach end user customers. Sales to our top five customers represented 34% of revenue in fiscal 2012, 33% of revenue in fiscal 2011 and 37% of revenue in fiscal 2010. In fiscal 2011 and fiscal 2010, sales to Dell comprised 10% and 13% of revenue, respectively. Through our Quantum Alliance Reseller Program and our emphasis on growing our branded business, including increasing the independent channel, we are expanding our customer base and continue to distribute our products and services across a larger number of customers.

CEO BACKGROUND

Mr. Paul R. Auvil III has served as Chief Financial Officer of Proofpoint, Inc., a provider of messaging security solutions, since March 2007. Before Proofpoint, Mr. Auvil was an entrepreneur-in-residence for six months with Benchmark Capital, a venture capital firm, from October 2006 to March 2007. From August 2002 to July 2006, Mr. Auvil was Chief Financial Officer of VMware, Inc. Prior to joining VMware, Mr. Auvil served four years as Chief Financial Officer at Vitria Technology. Earlier in his career, he spent ten years at VLSI Technology, ultimately becoming vice president and general manager of the Internet and Secure Products Division. Mr. Auvil also serves on the board of Marin Software. Mr. Auvil is the Board’s lead independent director and is a member of the Company’s Corporate Governance and Nominating Committee and the Audit Committee. We believe that Mr. Auvil possesses specific attributes that qualify him to serve as a member of the Board, including his executive experience and his financial and accounting expertise.

Mr. Michael A. Brown served as Chief Executive Officer of Quantum from September 1995 to September 2002 and as Chairman of Quantum’s Board from May 1998 to July 2003. From 1993 to September 1995, he was President of the Company’s desktop group, from 1992 to 1993 he was Chief Operating Officer responsible for the Company’s hard disk drive business, and from 1984 to 1992 he held various marketing position with the Company. Mr. Brown also serves as Chairman of the board of directors of Line 6, Inc. and is on the boards of Symantec Corporation, Mozes, Inc., a privately-held mobile marketing company and Echo Nest, a privately-held music intelligence platform company. He previously served on the boards of Nektar Therapeutics from September 2002 to December 2009 and of Digital Impact from 1999 to April 2005. Mr. Brown is the Chair of the Company’s Corporate Governance and Nominating Committee. We believe that Mr. Brown possesses specific attributes that qualify him to serve as a member of the Board, including the perspective and experience he brings as our former Chief Executive Officer, which brings historic knowledge, operational expertise and continuity to the Board, and his experience with joint ventures, manufacturing partnerships, marketing partnerships and managing customer relationships.

Mr. Thomas S. Buchsbaum has been an independent consultant since March 2005. From March 1997 to March 2005, Mr. Buchsbaum served as vice president of the U.S. Federal Business Segment, as well as Vice President and General Manager of the K12 and Higher Education customer segments of Dell, Inc. Before Dell, Mr. Buchsbaum spent ten years at Zenith Data Systems, a computer manufacturing company, until February 1997, where he was General Manager for the federal systems business unit and General Manager of the state and local government and education segments. From 1989 to 2004, Mr. Buchsbaum served on the board of directors and the compensation committee of Group 1 Software, Inc., an application software provider. Mr. Buchsbaum also serves as an advisor to the board of Dick Blick Holdings and is a member of the Advisory Board of Augmentix Corp., a wholly owned unit of Entorian Technologies, Inc. Mr. Buchsbaum is a member of the Company’s Corporate Governance and Nominating Committee and the Audit Committee. We believe that Mr. Buchsbaum possesses specific attributes that qualify him to serve as a member of the Board, including his management experience in relevant industries and his general strategic and operational experience.

Ms. Elizabeth A. Fetter has served as President and Chief Executive Officer of NxGen Modular, a provider of modular data centers and components since April 2011. Previously, in 2007 she served as President and Chief Executive Officer and a director of Jacent Technologies, Inc., an order automation company for the restaurant industry. From October 2001 to November 2004, she served as President and Chief Executive Officer, and a director, of QRS Corp., a retail supply chain software and services company. Prior to joining QRS, from March 1999 to April 2001, Ms. Fetter was President, Chief Executive Officer, and a director, of NorthPoint Communications, a broadband services company, and from January 1998 to March 1999 was Vice President and General Manager of the Consumer Services Group at US West (now Qwest), a telecommunications company. Before US West, she was an officer at SBC/Pacific Bell, where she held a number of senior leadership positions. Ms. Fetter also serves on the board of directors of Symmetricom, Inc. and several non-profit organizations. Previously, Ms. Fetter also served on the board of Ikanos Communications, Inc. from June 2008 to August 2009. Ms. Fetter is the Chair of the Company’s Leadership and Compensation Committee. We believe that Ms. Fetter possesses specific attributes that qualify her to serve as a member of the Board, including her management experience in relevant industries and her general strategic and operational experience.

Mr. Jon W. Gacek became President and Chief Executive Officer and was also appointed to the Board of Directors in April 2011. He was President and Chief Operating Officer from January 2011 through March 2011. He joined Quantum as Executive Vice President and Chief Financial Officer in August 2006, upon Quantum’s acquisition of Advanced Digital Information Corporation (“ADIC”) and was promoted to Executive Vice President, Chief Financial Officer and Chief Operating Officer in June 2009. Previously, he served as the Chief Financial Officer at ADIC from 1999 to 2006 and also led Operations during his last three years at ADIC. Prior to ADIC, Mr. Gacek was an audit partner at PricewaterhouseCoopers LLP and led the Technology Practice in the firm’s Seattle office. While at PricewaterhouseCoopers LLP, he assisted several private equity investment firms with a number of mergers, acquisitions, leveraged buyouts and other transactions. Mr. Gacek serves on the board of directors for Market Leader, Inc. and Power-One, Inc. We believe that Mr. Gacek possesses specific attributes that qualify him to serve as a member of the Board, including the perspective and experience he brings as our Chief Executive Officer, which brings operational expertise to the Board, and his financial and accounting expertise.

Mr. David Krall has served as a strategic advisor to Roku, Inc., a leading manufacturer of media players for streaming entertainment since December 2010, and Universal Audio, Inc., a manufacturer of audio hardware and software plug-ins since August 2011. From February 2010 through November 2010, he served as President and Chief Operating Officer of Roku. Prior to that, Mr. Krall spent two years as President and Chief Executive Officer of QSecure, Inc., a developer of secure credit cards based on micro-electro-mechanical- system technology from July 2008 until January 2010. From 1995 to July 2007, he held a variety of positions at Avid Technology, Inc., a leading provider of digital media creation tools for the media and entertainment industry. This included seven years as President and CEO. Earlier in his career, Mr. Krall worked in engineering and project management at several companies. He also currently serves on the board of directors for QSecure, Audinate Pty Ltd., and Progress Software Corp. Mr. Krall is a member of the Company’s Leadership and Compensation Committee. We believe that Mr. Krall possesses specific attributes that qualify him to serve as a member of the Board, including his executive experience and his general strategic and operational experience.

Mr. Joseph A. Marengi was employed as a venture partner for Austin Ventures, a venture capital firm from August 2007 to March 2012. His focus was on the hardware and software industry. Prior to joining Austin Ventures, he worked for Dell, Inc. from June 1997 to March 2007, serving as Senior Vice President of the Corporate Business Group for four years before becoming Senior Vice President of Dell Americas and later Senior Vice President of the Commercial Business Group. Previously, Mr. Marengi served in various executive leadership roles at Novell Systems, Inc., most recently as President and Chief Operating Officer of Channels. Prior to Novell, Mr. Marengi held various executive, sales and information management positions in the technology and defense industries. Mr. Marengi also serves on the board of directors of Hovnanian Enterprises, Inc. and of Entorian Technologies, Inc. Mr. Marengi is a member of the Company’s Leadership and Compensation Committee. We believe that Mr. Marengi possesses specific attributes that qualify him to serve as a member of the Board, including his years of business and industry experience, particularly in sales management and his experience in the venture capital industry.

Mr. David E. Roberson served as Senior Vice President within the Enterprise Servers, Storage and Networking Group for HP from May 2007 to May 2011, where he also was General Manager of the StorageWorks Division from May 2007 to October 2010. Prior to that, Mr. Roberson spent 26 years at Hitachi Data Systems, starting as corporate counsel and rising through the company to become President and CEO, a position he held from 2006 to May 2007. He also served as President and Chief Operating Officer from 2002 to 2006 and Chief Operating Officer from 2000 to 2002. Mr. Roberson began his technology career at Amdahl Corporation in 1980, following posts as adjunct professor at Golden Gate University School of Law and research director at Hastings College of Law. He also serves on the boards of International Game Technology, TransLattice, Inc. and RagingWire Enterprise Solutions, Inc. Mr. Roberson is the Chair of the Company’s Audit Committee. We believe that Mr. Roberson possesses specific attributes that qualify him to serve as a member of the Board, including his industry knowledge and executive experience.

MANAGEMENT DISCUSSION FROM LATEST 10K

OVERVIEW

Quantum Corporation (“Quantum”, the “Company”, “us” or “we”), founded in 1980, is a global expert in data protection and big data management. We provide solutions for storing and protecting information in physical, virtual, cloud and big data environments that are designed to help customers be certain they are maximizing the value of their data over its entire lifecycle. With our solutions, customers can better adapt in a world of continuing change by keeping and protecting more data for a longer period of time while reducing costs and increasing return on investment. We work closely with a broad network of distributors, value-added resellers (“VARs”), direct marketing resellers (“DMRs”), original equipment manufacturers (“OEMs”) and other suppliers to meet customers’ evolving data protection and big data management needs. Our stock is traded on the New York Stock Exchange under the symbol QTM.

We offer a comprehensive range of solutions for data protection and big data management challenges providing performance and value to end user customers of all sizes, from small businesses to multinational enterprises. We believe our combination of expertise, innovation and platform independence allows us to solve data protection and big data management issues more easily, cost-effectively and securely. Our open systems solutions are designed to provide significant storage efficiencies, scalability and cost savings while protecting customers’ prior investments. They include DXi ® deduplication systems for high speed recovery and reliability, Scalar ® tape automation products for disaster recovery and long-term data retention, StorNext ® data management software and appliances for high-performance big data file sharing and archiving and vmPRO ™ solutions for protecting virtual machine data. We also offer cloud solutions for cloud-based backup, fast restore, data recovery and business continuity. In addition, we have the global scale and scope to support our worldwide customer base.

Business

We earn our revenue from the sale of products, systems and services through an array of channel partners and our sales force to reach end user customers of all sizes. Our products are sold under both the Quantum brand name and the names of various OEM customers. We have a broad portfolio of disk systems, software solutions, tape automation systems, tape drives and other devices and media. Our data management software provides technology for shared workflow applications and multi-tiered archiving in high-performance, large-scale storage environments. We also offer vmPRO software, a virtualization data protection software with advanced utilities designed to dramatically improve and simplify virtual data protection in midrange and larger data centers. We have introduced a cloud-based data protection technology platform for public and private clouds. The majority of our disk systems and tape automation systems include software features that provide disk and tape integration capabilities with our core deduplication and replication technologies. In addition, our service offerings include a broad range of coverage options to provide the level of support for the widest possible range of information technology (“IT”) environments.

We have been transforming the company into a systems and solutions provider over the past few years, introducing offerings in the significant growth markets of disk and software data protection and big data and archive and introducing strategic enhancements and offerings in the tape automation market while continuing to provide service and support to new and existing customers. We have implemented a number of initiatives in an effort to drive branded revenue growth. One key initiative for fiscal 2012 was to grow the independent channel for Quantum branded products. Another key area of focus for fiscal 2012 was continuing to expand and improve our products and solutions, with emphasis on branded disk systems and software solutions, including introducing and ramping sales of the StorNext appliance family and virtual offerings.

Our efforts in fiscal 2012 were reflected in increased total branded revenue and record revenue in disk systems and software solutions in fiscal 2012. Total branded revenue increased for the second consecutive fiscal year and revenue from disk systems and software solutions increased 8% from fiscal 2011. In addition, branded disk systems revenue and branded software solutions revenue were both records, increasing 19% and 15%, respectively, compared to the prior year. Growth of the independent channel contributed to this revenue growth. We added a significant number of new disk systems and software solutions customers, and in the mature tape automation market, we added a considerable number of new customers for midrange and enterprise tape automation products. This past fiscal year we implemented initiatives that improved our sales team, our channel team and our technical sales team. In addition, we improved the training and alignment with our top channel partners on our products and solutions.

We continued our technology and product innovation in fiscal 2012. We enhanced our DXi product line, introduced a new family of StorNext appliances and added new management, security and availability features to our Scalar tape libraries. Following the acquisition of Pancetera Software, Inc. (“Pancetera”) in June 2011, we integrated the technology into our portfolio with the launch of the vmPRO virtual server protection solutions and laid the groundwork for our cloud-based data protection platform. The strength, value and quality of our products were recognized with several industry awards and honors, notably for the DXi6700 and vmPRO 4000, in addition to our enterprise and midrange tape automation libraries.

We offer products and solutions in several high growth markets, namely the markets for disk-based back up, big data, virtual data protection and cloud based solutions. Our opportunity and goal in these markets is to increase our product and solution offerings and to significantly grow revenue from sales of our disk systems and software solutions to increase total revenue. We project total revenue in the tape automation market will be essentially the same over the next few years with growth in demand for tape automation products used as a storage tier in the big data and archive market offset by declines in demand for tape automation products in the data protection market. Our opportunity and goal for tape automation systems is to grow our market share with our innovative products.

Our goal for fiscal 2013 is to grow total revenue, driven primarily by increased revenue from our disk systems and software solutions, with minimal expected growth in branded tape automation revenue. We expect this revenue growth to be tempered by declines in tape automation revenue from OEM customers and a decline in royalty revenue.

Results

In fiscal 2012, we saw improved revenue momentum with our partners, especially for midrange disk systems, and our continued efforts to increase revenue from disk systems and software solutions resulted in an 8% increase in disk systems and software solutions revenue. We invested significantly in our product portfolio in fiscal 2012, introducing a number of new products, including our StorNext software appliances and virtual systems software and data protection solutions. In fiscal 2012, we also continued to develop new technologies that will be the framework for future new product introductions.

We had total revenue of $652.4 million in fiscal 2012, a 3% decrease from fiscal 2011 primarily due to expected reductions in OEM sales, including OEM deduplication software revenue and royalty revenue. Our product revenue from OEM customers decreased 14% while revenue from branded products increased 3% from fiscal 2011 primarily due to increased disk systems and software solutions revenue. Service revenue decreased primarily due to lower hardware service contract revenues from certain legacy branded tape automation products that reached end of service life. Our focus on growing the branded business during the fiscal year is reflected in the greater proportion of non-royalty revenue from our branded business, at 81% in fiscal 2012, compared to 79% in fiscal 2011 and 74% in fiscal 2010. Royalty revenue decreased 12% primarily due to declining royalties from older DLT media and, to a lesser extent, from lower LTO royalties.

Our gross margin percentage decreased 10 basis points from fiscal 2011 to 42.0% largely due to a shift in our sales mix that was comprised of less high margin OEM deduplication software revenue and royalty revenue than the prior year, mostly offset by decreased intangible amortization.

Operating expenses increased $11.9 million, or 5%, primarily due to increased sales and marketing expenses, largely due to growing our branded sales force to increase branded revenue and expand our position with existing and new channel partners to drive future growth. We had $5.2 million in income from operations in fiscal 2012, down from $24.7 million in fiscal 2011.

Interest expense decreased in fiscal 2012 largely due to a decrease in average interest rates from refinancing subordinated term debt in fiscal 2011. In addition during fiscal 2012, we refinanced our senior secured term debt with a revolving credit facility with terms that are financially more beneficial and provide additional flexibility to run our business. During fiscal 2012, we paid $104.3 million in principal to fully repay the senior secured term debt and borrowed $49.5 million on a new revolving credit line. We continued to generate cash from operating activities, with $45.7 million in fiscal 2012 compared to $52.3 million in fiscal 2011.

Fiscal 2012 Compared to Fiscal 2011

Our product revenue, which includes sales of our hardware and software products sold through both our Quantum branded and OEM channels, decreased slightly from fiscal 2011, primarily due to decreased sales of tape automation systems and devices and media, mostly offset by increased revenue from disk systems and software solutions. Revenue from sales of branded products increased 3% in fiscal 2012 compared to fiscal 2011 primarily due to increased sales of disk systems and software solutions.

A primary goal for fiscal 2012 was to grow revenue from disk systems and software solutions. We introduced new disk products, a new product line of StorNext appliances and released upgrades to both disk systems and to software solutions in fiscal 2012, all of which contributed to fiscal 2012 revenue. We continued our efforts to expand engagement with our channel partners to increase sales of disk systems and software solutions. Revenue from disk systems and software solutions increased 8% to $119.0 million in fiscal 2012 compared to fiscal 2011, primarily due to increased midrange disk product sales followed by the addition of StorNext appliances. Midrange disk systems revenue increases were primarily due to the addition of revenue from our DXi6701 and DXi6702 products. Tempering these increases was an expected decrease in OEM deduplication software revenue due to our primary OEM deduplication software customer becoming a competitor in fiscal 2010 and revenue recognized in accordance with contractual requirements in fiscal 2011 that was not repeated.

Tape automation systems sales decreased $9.1 million, or 4%, in fiscal 2012 compared to fiscal 2011. This decrease was primarily due to expected declines in OEM revenue, followed by decreased branded enterprise and entry-level tape automation systems revenue.

Product revenue from devices, including tape drives and removable hard drives, and non-royalty media sales decreased 5% to $87.3 million primarily due to anticipated decreases in sales of older branded and OEM device technologies that reached, or are nearing, end of life. Largely offsetting the decrease was an increase in branded media revenue primarily due to the events in Japan in March 2011 and resulting concern of shortages and supply disruption in the market. We continue to be strategic with media sales and have chosen to not pursue opportunities that do not provide sufficient margins.

Fiscal 2011 Compared to Fiscal 2010

Product revenue in fiscal 2011 increased slightly from fiscal 2010, primarily due to increased sales of disk systems and software solutions, mostly offset by anticipated decreases in devices and media and tape automation systems. Revenue from sales of branded products increased 7% in fiscal 2011 compared to fiscal 2010 also primarily due to increased sales of disk systems and software solutions.

A primary goal for fiscal 2011 was to grow revenue from disk systems and software solutions. We introduced new disk products and upgrades to both disk systems and to software solutions in fiscal 2011, and we also worked to expand engagement with our channel partners to increase sales of disk systems and software solutions. Revenue from disk systems and software solutions increased 33% to $110.7 million in fiscal 2011 compared to fiscal 2010, primarily due to increased midrange disk product sales. Midrange disk systems revenue nearly tripled from fiscal 2010 primarily due to the addition of revenue from our DXi6700 product family and increased sales of the DXi6500 product family. In addition, StorNext software revenue also continued to increase compared to prior years. As a result of these revenue increases, disk systems and software solutions comprised a greater proportion of both product revenue and total revenue in fiscal 2011 compared to fiscal 2010.

Tape automation systems sales decreased $9.8 million, or 4%, in fiscal 2011 compared to fiscal 2010. This decrease was primarily due to expected declines in OEM revenues from our decision to exit portions of this market in prior years as well as declining demand in the overall tape automation market. We had a smaller decrease in branded tape automation systems revenue due to declines in enterprise and midrange product sales mostly offset by increased entry-level product sales from the addition of the Scalar i40 and i80 products.

Product revenue from devices and non-royalty media sales decreased 15% to $92.1 million primarily due to anticipated decreases in sales of older OEM device technologies that reached, or are nearing, end of life. We continued to be strategic with media sales in fiscal 2011 and chose to not pursue opportunities that would not provide sufficient margins. Media revenues were approximately the same as fiscal 2010.

Service Revenue

Service revenue includes revenue from sales of hardware service contracts, product repair, installation and professional services. Hardware service contracts are typically purchased by our customers to extend the warranty or to provide faster service response time, or both. Service revenue decreased 4% to $144.4 million in fiscal 2012 compared to fiscal 2011 primarily due to lower hardware service contract revenues from end of service life on higher revenue service contracts for certain legacy branded tape automation products and to a lesser extent from decreased OEM product repair services. Service contracts on certain newer technology branded products provide lower revenue than service contracts on older technology branded products nearing end of service life. OEM service revenue decreases are primarily due to a number of our device products that reached end of service life in fiscal 2011 and fiscal 2012.

Service revenue decreased 3% to $151.1 million in fiscal 2011 compared to fiscal 2010 primarily due to planned decreases in OEM product repair services and, to a lesser extent, reduced hardware service contracts from our OEM customers. OEM service revenue decreases are due to many of our device products that reached, or are nearing, end of service life. Service revenue from our branded products was approximately the same as fiscal 2010.

Fiscal 2011 Compared to Fiscal 2010

The 100 basis point increase in gross margin percentage in fiscal 2011 compared to fiscal 2010 was largely due to lower intangible amortization from certain intangibles becoming fully amortized in the first half of fiscal 2011. In addition, gross margin was favorably impacted by the continued shift in sales mix toward higher margin products and services. Product sales through our branded channels comprised a higher percentage of non-royalty revenue in fiscal 2011 than fiscal 2010. Branded sales comprised 79% of non-royalty revenue in fiscal 2011, compared to 74% for fiscal 2010. Sales of branded products typically generate higher gross margins than sales to our OEM customers; however, as noted above, OEM deduplication software revenue provides one of our highest product margins. Contributing to the change in our revenue mix in fiscal 2011 was our emphasis on sales growth of our disk systems and software solutions which increased to 17% of revenue in fiscal 2011 compared to 12% of revenue in the prior year. The gross margin percentage increase was tempered by the $4.6 million decrease in royalty revenue.

Product Gross Margin

Fiscal 2012 Compared to Fiscal 2011

Product gross margin dollars decreased 1% in fiscal 2012 compared to fiscal 2011 primarily due to the 1% decrease in product revenue. However, product gross margin percentage improved slightly from fiscal 2011. The product gross margin increase was primarily due to a $7.1 million decrease in intangible amortization in fiscal 2012, mostly offset by the decrease in high margin OEM deduplication software revenue compared to fiscal 2011.

Fiscal 2011 Compared to Fiscal 2010

Product gross margin dollars increased $7.0 million, or 5%, and product gross margin percentage improved approximately 150 basis points from fiscal 2010 although product revenue was approximately the same in fiscal 2011 compared to fiscal 2010. These margin increases were primarily due to a $7.4 million decrease in intangible amortization in fiscal 2011. Product gross margin was also favorably impacted by the change in our product revenue mix compared to fiscal 2010. Revenue from branded product sales increased 7% in fiscal 2011. In addition, revenue from disk systems and software solutions increased to 24% of product revenue in fiscal 2011, compared to 18% of product revenue in fiscal 2010. Offsetting the change in product revenue mix was increased warranty expense due to warranty benefits in fiscal 2010 compared to warranty expense in fiscal 2011. Warranty benefits in the prior year were attributable to decreasing overall service and repair costs, a declining number of in-warranty units repaired and numerous products reaching the end of their warranty coverage.

Service Gross Margin

Fiscal 2012 Compared to Fiscal 2011

Service gross margin dollars decreased $0.9 million, or approximately 2%, in fiscal 2012 compared to fiscal 2011. Our service gross margin percentage increased 110 basis points to 38.7% in fiscal 2012, largely due to decreased external provider expenses and inventory allowance expense. External service provider expense decreased due to a combination of bringing repair of additional product lines in-house and negotiating lower rates on the renewals of contracts with certain service providers in fiscal 2012. We had higher inventory allowance expense in fiscal 2011 due to end of service life plans for several products. In addition, we had a change in the mix of services for OEM repairs and for our branded products under contract. Our service activities for fiscal 2012 reflected a greater proportion of revenue from branded products under contract, which have relatively higher margins than margins for OEM repair services.

Fiscal 2011 Compared to Fiscal 2010

Service gross margin dollars increased $1.1 million, or approximately 2%, despite a 3% reduction in service revenue in fiscal 2011 compared to the prior year. Additionally, our service gross margin percentage increased 200 basis points to 37.6% in fiscal 2011 from 35.6% in fiscal 2010, primarily due to expense reductions in our service delivery model. In addition, branded service revenue comprised a larger proportion of service revenue in fiscal 2011 than in fiscal 2010 primarily due to declines in repairs for OEM customers. We reduced expense in our service delivery model by repairing certain product lines in our facilities at a lower cost in fiscal 2011 than we incurred with external service providers in prior years.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

OVERVIEW

Quantum Corporation (“Quantum”, the “Company”, “us” or “we”), founded in 1980, is a global expert in data protection and big data management. We provide solutions for storing and protecting information in physical, virtual, cloud and big data environments that are designed to help customers be certain they are maximizing the value of their data over its entire lifecycle. With our solutions, customers can better adapt in a world of continuing change by keeping and protecting more data for a longer period of time while reducing costs and increasing return on investment. We work closely with a broad network of distributors, value-added resellers (“VARs”), direct marketing resellers (“DMRs”), original equipment manufacturers (“OEMs”) and other suppliers to meet customers’ evolving data protection and big data management needs. Our stock is traded on the New York Stock Exchange under the symbol QTM.

We offer a comprehensive range of solutions for data protection and big data management challenges that provide performance and value to end user customers of all sizes, from small businesses to multinational enterprises. We believe our combination of expertise, innovation and platform independence enables us to solve data protection and big data management issues more easily, cost-effectively and securely. We earn our revenue from the sale of products, systems and services through an array of channel partners and our sales force to reach end user customers of all sizes. Our products are sold under both the Quantum brand name and the names of various OEM customers. They include DXi ® deduplication systems for high speed recovery and reliability, Scalar ® tape automation products for disaster recovery and long-term data retention, StorNext ® data management software and appliances for high-performance big data file sharing and archiving and vmPRO ™ solutions for protecting virtual machine data. We also offer cloud solutions for cloud-based backup, fast restore, data recovery and business continuity. In addition, we have the global scale and scope to support our worldwide customer base.

For the second quarter of fiscal 2013, we believe our focus on closing transactions earlier in the quarter, qualifying orders earlier in the process and making contact with senior level decision makers at end users helped us improve our revenue results for disk systems and software solutions. We continued to acquire new customers which we believe was due in part to increased end user awareness as a result of our recent marketing and advertising campaigns. In addition, we introduced several new products during the second quarter of fiscal 2013, including our Q-Cloud backup and disaster recovery subscription service and StorNext 4.3. During the quarter, we also continued to expand our partnerships and routes to market.

During the second quarter of fiscal 2013, we believe there was weakness and reduced demand in the market for tape automation products. In addition, we believe there were some customers that delayed making tape library and tape drive purchases in the second quarter of fiscal 2013, and to a lesser extent in prior quarters, due to the anticipated release of LTO-6 tape drives and tape automation libraries in the upcoming quarter. Historically, we have seen declines in our tape automation systems revenue prior to the release of new technology due to customers delaying purchases until the new technology becomes available. Global economic conditions also continued to be volatile and uncertain, especially in Europe, and companies continued to be cautious with their purchasing decisions.

In an effort to return to generating positive cash flow from operations, we plan to implement various cost controls and spending reductions. We continue to be focused on building the long-term growth areas of the business and supporting our strategic initiatives. In addition, between October 31 and November 6, 2012, we issued $70 million of convertible senior subordinated notes due November 15, 2017 to improve our capital structure, strengthen our balance sheet and provide greater flexibility in our business operations. These initiatives are intended to improve profitability and increase shareholder value.

Results

We had total revenue of $147.3 million in the second quarter of fiscal 2013, an 11% decrease from the second quarter of fiscal 2012. Revenue was lower than expected for tape automation systems and tape devices, and royalty revenue decreased as expected. Our product revenue from OEM customers decreased 19% and revenue from branded products decreased 11% both primarily due to lower than expected tape automation systems revenue. As noted above, we believe tape automation systems revenue decreases reflected reduced market demand. Our continued efforts to increase revenue from disk systems and software solutions resulted in record quarterly revenue and a 14% increase in this revenue category. Service revenue was slightly lower than the second quarter of fiscal 2012. Our continued focus on growing our branded business is reflected in the greater proportion of non-royalty revenue from branded business, at 84% in the second quarter of fiscal 2013, compared to 82% in the second quarter of fiscal 2012.

Our gross margin percentage decreased 320 basis points from the second quarter of fiscal 2012 to 40.2% primarily due to the decrease in product revenue in addition to a decrease in high-margin royalty revenue. Operating expenses increased $3.0 million, or 5% from the second quarter of fiscal 2012, primarily from increased sales and marketing expenses, largely due to growing our sales force and marketing team. We also continued our expanded marketing programs in the second quarter of fiscal 2013 to generate greater awareness and future demand for Quantum products and services. We had a $10.0 million loss from operations in the second quarter of fiscal 2013 compared to operating income of $6.9 million in the second quarter of fiscal 2012.

Service Revenue

Service revenue includes revenue from sales of hardware service contracts, product repair, installation and professional services. Sales of hardware service contracts are typically purchased by our customers to extend the warranty or to provide faster service response time, or both. Service revenue decreased 1% from both the second quarter and first six months of fiscal 2012 primarily due to a decreased volume of OEM product repair services, mostly offset by growth in revenue from branded service contracts associated with our StorNext appliances.

Royalty Revenue

Tape media royalties decreased 18% and 21% from the second quarter and first six months of fiscal 2012 due to lower media unit sales sold by media licensees. The decrease was primarily due to higher than typical media sales during the second quarter and first six months of fiscal 2012 due to inventories being increased in the second quarter and first half of fiscal 2012 in response to concerns of supply disruptions following the March 2011 earthquake and tsunami in Japan.

Product Margin

Product gross margin dollars decreased $10.6 million, or 25%, compared to the second quarter of fiscal 2012, and our product gross margin rate decreased 500 basis points primarily due to a 13% decrease in product revenue. For the first six months of fiscal 2013, product gross margin decreased $15.3 million, or 20%, and our product gross margin rate decreased 360 basis points primarily due to an 11% decrease in product revenue. Some of our product costs of goods sold are relatively fixed in the short term; therefore, product revenue increases or decreases impact the product gross margin rate. The change in the mix of products sold also contributed to decreased product margins in the second quarter and first six months of fiscal 2013. In addition, we had an increase in the inventory allowance in the second quarter and first six months of fiscal 2013 compared to the prior year periods largely due to more products nearing end of life than in the second quarter and first six months of fiscal 2012. Partially offsetting this decrease was lower intangible amortization in both the second quarter and first six months of fiscal 2013 due to certain intangible assets becoming fully amortized in fiscal 2012 and the second quarter of fiscal 2013.

Service Margin

Service gross margin dollars increased $0.7 million, or 5%, compared to the second quarter of fiscal 2012, and service gross margin percentage increased 220 basis points despite a decrease in service revenue of $0.2 million. For the first six months of fiscal 2013 service gross margin dollars increased $1.8 million, or 6%, and service gross margin percentage increased 300 basis points despite a decrease in service revenue of $0.8 million compared to the first half of fiscal 2012. These service margin increases were primarily due to reduced costs across our service delivery model in part due to bringing repair of certain product lines in-house and from a decreased volume of repairs. In addition, our service activities continue to reflect a larger proportion of branded products under contract, which have relatively higher margins than margins for OEM repair services.

The more significant cost decreases in the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012 were for external service providers and third party warehouse expenses. For the first six months of fiscal 2013, the more significant cost decreases compared to the prior year period were for third party warehouse, external service providers and service materials. Third party warehouse expenses decreased due to reduced usage as a result of bringing repair of certain product lines in-house. External service provider expense decreased due to a combination of bringing repair of certain product lines in-house and negotiating lower rates on the renewals of contracts with certain service providers. Service material decreases were primarily due to decreased volumes of repairs compared to the prior year.

Six Months Ended September 30, 2012

The $15.2 million difference between reported net loss and cash used in operating activities during the six months ended September 30, 2012 was primarily due to $28.0 million in non-cash items, the largest of which were amortization, depreciation, share-based compensation and service parts lower of cost or market adjustment. In addition, we had an $11.3 million decrease in accounts receivable primarily due to decreased sales in the second quarter of fiscal 2013 compared to the fourth quarter of fiscal 2012. These were partially offset by cash uses from a $13.3 million decrease in accounts payable and an $11.1 million decrease in deferred revenue. Accounts payable decreased due to decreased purchases in addition to the timing of payments. The decrease in deferred revenue was largely due to a typical seasonal decline in service contract volumes. The majority of our service contracts renew in our third and fourth fiscal quarters.

Cash used in investing activities was primarily due to $6.7 million of property and equipment purchases and $2.2 million used to purchase other investments. Equipment purchases were primarily for engineering equipment and testing hardware to support product development activities, and we made leasehold improvements to a facility in the first quarter of fiscal 2013. Other investments were from investments we made in private technology companies with products or features complementary to Quantum products.

Six Months Ended September 30, 2011

The $18.7 million difference between reported net loss and cash provided by operating activities during the six months ended September 30, 2011 was primarily due to $28.4 million in non-cash items, the largest of which were amortization, depreciation, share-based compensation and service parts lower of cost or market adjustment. In addition, we had a $6.3 million decrease in accounts receivable primarily due to the timing of billings. These were partially offset by cash uses from a $6.0 million increase in manufacturing inventories, a $5.6 million decrease in deferred revenue and a $4.5 million decrease in accrued compensation. The increase in manufacturing inventories was the net result of lower inventory allowances, increased finished goods and decreased raw materials. The decrease in deferred revenue was largely due to a typical seasonal decline in service contract volumes. Accrued compensation decreased primarily due to the timing of payroll payments.

Cash used in investing activities reflects $8.2 million of cash paid, net of cash acquired, for our acquisition of Pancetera and $6.0 million of equipment purchases during the first six months of fiscal 2012. Equipment purchases were primarily for engineering equipment and testing hardware to support product development activities.

Cash used in financing activities during the first six months of fiscal 2012 was primarily due to $35.5 million of principal payments on the senior term debt, partially offset by $7.0 million in proceeds received from the exercise of stock options and issuance of shares under the employee stock purchase plan.

Capital Resources and Financial Condition

We continue to focus on improving our operating performance, including increasing revenue in higher margin areas of the business and continuing efforts to improve margins, return to consistent profitability and to generate positive cash flows from operating activities. We believe that our existing cash and capital resources will be sufficient to meet all currently planned expenditures, debt service, contractual obligations and sustain operations for at least the next 12 months. This belief is dependent upon our ability to achieve revenue and gross margin projections and to control operating expenses in order to provide positive cash flow from operating activities. Should any of the above assumptions prove incorrect, either in combination or individually, it would likely have a material negative effect on our cash balances and capital resources.

The following is a description of our existing capital resources including outstanding balances, funds available to borrow, and primary repayment terms including interest rates.

We have $135 million aggregate principal amount outstanding of 3.50% convertible subordinated notes due November 15, 2015. Semi-annual interest payments are required on these notes.

On October 31, 2012, we issued $60.0 million aggregate principal amount of 4.50% convertible senior subordinated notes due November 15, 2017, and on November 6, 2012 we issued an additional $10.0 million aggregate principal amount of 4.50% convertible senior subordinated notes due November 15, 2017 pursuant to an over-allotment provision (“4.50% notes”). These notes are convertible into shares of our common stock at a conversion rate of 607.1645 shares per $1,000 principal amount, a conversion price of approximately $1.65 per share. We may not redeem the notes prior to their maturity date although investors may convert the 4.50% notes into Quantum common stock until November 14, 2017 at their option. In addition, since purchasers are qualified institutional investors, as defined in Rule 144A under the Securities Act of 1933 (“Securities Act”), the 4.50% notes have not been registered under the Securities Act. We will pay 4.50% interest per annum on the principal amount of the 4.50% notes semi-annually on May 15 and November 15 of each year beginning in May 2013. Interest began to accrue on October 31, 2012. The terms of the 4.50% notes are governed by an agreement dated October 31, 2012 between Quantum and U.S. Bank National Association. The 4.50% notes are subordinated to any existing indebtedness and other liabilities.

Under the Wells Fargo credit agreement (“WF credit agreement”), we have the ability to borrow up to $75 million under a senior secured revolving credit facility. The maximum principal amount that may be borrowed is the lesser of $75 million, reduced by $1.0 million per quarter commencing July 1, 2012, or the amount of the monthly borrowing base. The WF credit agreement matures March 29, 2017, or on August 16, 2015 if our 3.50% convertible subordinated notes remain outstanding on that date.

Our outstanding borrowings under the WF credit agreement were $49.5 million at September 30, 2012, at an interest rate of 2.46%, which was subsequently reset to 2.61% on October 1, 2012. In addition, we have letters of credit totaling $0.3 million, reducing the amount available to borrow on the revolver to $24.2 million at September 30, 2012. Quarterly, we are required to pay a 0.375% commitment fee on undrawn amounts under the revolving credit facility. There is a blanket lien on all of our assets under the WF credit agreement in addition to certain financial and reporting covenants. On October 31, 2012, we repaid all outstanding borrowings under the WF credit agreement with $49.5 million of the proceeds from the 4.50% notes.

On June 28, 2012, the WF credit agreement was amended in order to allow the assignment of $25 million of the total revolver commitment to Silicon Valley Bank. This amendment also made certain other conforming and related modifications, including changes to the average liquidity requirements. The average liquidity covenant requirement was amended to be at least $15 million for the most recently completed month through December 31, 2012, increasing to $20 million on January 1, 2013. The average liquidity requirement to avoid triggering mandatory field audits was amended to be at least $20 million through March 31, 2013, increasing to $25 million on April 1, 2013. As of September 30, 2012, we were in compliance with all debt covenants.

CONF CALL

Shawn D. Hall - Senior Vice President, General Counsel and Secretary

Thanks. And good afternoon, and welcome. Here with me today are Jon Gacek, our CEO; and Linda Breard, our CFO. The webcast for this call, our earnings release and a quantitative reconciliation of any GAAP and non-GAAP financial measures discussed today can be accessed at the Investor Relations section of our website at www.quantum.com and will be archived for 1 year.

During the course of today's discussion, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements regarding our business strategy, opportunity and priorities, anticipated product launches and plans, and future financial performance. We'd like to caution you that our statements are based on current expectations and involve risks and uncertainties that could cause actual results to differ materially. We refer you to the risk factors and cautionary language contained in today's press release, as well as to our reports filed with the Securities and Exchange Commission from time to time, including our most recent 10-K filed on June 14, 2012, and 10-Q filed on August 9, 2012. These risk factors are incorporated by reference into today's discussion, and we undertake no obligation to update them in the future.

With that, I'll turn the call over to Jon Gacek.
Jonathan W. Gacek - Chief Executive Officer, President and Director

Thanks, Shawn. Welcome to our fiscal 2013 Q2 earnings call. Today, we reported revenue of $147.3 million and non-GAAP loss per share of $0.02. While total revenue was slightly below the guidance we provided due mainly to lower than expected OEM and branded tape automation revenue, we had record disk and software revenue and met EPS consensus. I'm going to address the key elements of the quarter's results. Linda will give more detail on the results, and I will come back to address our second half fiscal 2013 plans.

The clear highlight in Q2 was our disk and software revenue of $42.4 million, up 18% year-over-year and 38% sequentially, and the result of record quarters for both DXi and StorNext. The record DXi revenue was driven by our DXi8500 enterprise product family, which increased 30% year-over-year and 129% sequentially. Our win rates against the reference competitor increased to 55% as well.

What we see when we compete and win is the customer sees that we have a better product from a performance, ease of use and a value perspective. We also provide a better solution for the customer if they are using tape in their architecture, which most customers still do. We are happy to have customers try and use our products and compare them to the competition. Generally, when we lose a deal, it's when the reference competitor is successful in selling their size and scale, market share position, financial condition and broader overall storage portfolio. In particular, they focus on our size, our market share and our financial statements and not really on our products. We have been much more proactive in competitive deals, making sure that we sell the value of Quantum DXi solutions and proactively addressing the competitors' selling tactics. We are also seeing success because of our increase in end-user awareness about our DXi solutions.

We will never be as big or as broad as EMC, but we believe our DXi solutions are better than theirs, expect our market share will grow and we don't mind competing. In addition, we will be opportunistic in reviewing and improving our capital structure, making their use of our financials as a competitive tool a non-issue.

Our success in Q2 reflected on our focus on getting deals closed early in the quarter, qualifying deals early, making end-user contact at senior levels to tell our story and making sure that they understand it -- understood, sorry, our key product features and price differentiation. Finally, we have a lot of new salespeople who've come on board over the past 6 months, and we saw the impact of them becoming more productive as well. The market for purpose-built backup appliances is expected to reach $5.3 billion in 2015, more than doubling from 2011, and we think we are well-positioned to increase our share of this growing market. We also believe we offer end users the best overall solution including performance, manageability and value. Our win rates continue to improve and our funnels continue to grow.

Turning to StorNext. The record revenue result was due to solid sales of standalone StorNext software and record appliance quarter, and the first sale of our new wide area storage solution, which leverages the next-generation object storage technology and our StorNext expertise. We launched our first StorNext appliance a little over a year ago. And through today, we have introduced 9 StorNext appliances in total, including the M330 and M660 metadata appliances, the Q series disk storage appliances, and archive-enabled libraries or AEL appliances.

We continue to hear from our StorNext end-user customers that they want to buy more from Quantum. They like the appliance strategy as it makes it more cost effective and easier to procure. They also like having a single vendor to call on to provide overall solution support. In other words, Quantum can provide better support and better overall experience when customers buy appliances versus buying software from Quantum and hardware separately from other vendors.

Finally, the unique and differentiated attributes of StorNext are what the customers' buying, and the server and storage hardware is really just a commodity. So an integrated appliance solution is the best overall customer solution. We will continue to add appliances to our big data management and archive portfolio over the balance of this year and next.

We're very excited about the momentum in our disk and software business. We expect sequential growth in the Q3 quarter or the December quarter, and we believe we have a shot at exceeding $50 million in this category in Q3. There is no question that growing the disk and software business is key to driving higher revenue and profitability for Quantum. We intend to grow it and we will continue to invest in it.

Offsetting our strong disk and software performance in the areas that challenged us in Q2 were OEM tape, standalone tape drives and branded tape automation. OEM and branded tape automation were both off the same percentage on a year-over-year basis. We believe this was likely due to customers holding off on purchases as they wait to see LTO-6 drives and library, which will enter the market this quarter. Linda will discuss this in more detail. But before I turn the call over to her, I want to address several other business highlights from Q2.

First, we launched our own Q-Cloud backup and disaster recovery subscription service, which brings together our DXi and vmPRO technology to provide business class data protection at customer cloud storage price, as little as $0.01 per gigabyte per month. Multisite enterprises using Q-Cloud can economically replicate directly from remote sites to the cloud, eliminating the use of primary resources for backup NDR, while single-site enterprises can enjoy the benefits of a second site for a new lower cost approach to backup and disaster recovery. In addition, with an on-premise DXi appliance, Q-Cloud customers can enjoy the speed and convenience of local recovery with the security of cloud-based backup. Our solution contrasts with many cloud services that typically require customers to buy additional expensive hardware as data grows or abandon prior investments as part of a rip and replace cloud-only approach.

Second, as I briefly mentioned above, we sold our first wide area storage solution this quarter to a major government customer that chose to adopt prior to general availability. We will have more to say about this solution and our product lines in coming weeks, but the underlying storage hardware incorporates next-generation object storage technology from our OEM agreement with Amplidata. We believe the attributes of the technology, which integrated with StorNext or into systems managed by StorNext, provide a very unique solution for addressing customers' evolving big data needs in a way the alternatives cannot.

Third, as we broaden our solution set and capabilities with StorNext, leading organizations increasingly look to us to help meet their business needs. In September, a NASCAR video project in which StorNext played a central role won a prestigious innovation award at the IBC Conference, last month actually. In fact, of the 3 project finalists for the award in content management category, StorNext was a key enabling technology in 2 of them, the other being a Turner Sports project. This recognition continues to speak to the power of the Quantum technology in high-profile accounts.

Fourth, we continue to expand our partnerships and routes to market. In August, we announced that Teradata had selected our Scalar tape library and Scalar Key Management encryption software as standard elements in its enterprise solution offerings for data analytics and warehousing customers. We also announced an extension of our partnership with Qwest, which was recently acquired by Dell to provide joint data protection solutions for virtual environments. Our DXi V1000 virtual deduplication appliance became the latest product in the DXi portfolio to be certified with Qwest's vRanger Pro software.

Finally, our aggressive product releases continued in Q2. We launched StorNext 4.3, which brings new intelligent features, greater performance and increased scale to managing big data, including support for up to 1 billion files and dozens of petabytes of tier storage. We also announced enhancements to DXi8500 including 3-terabyte drives which enabled us to provide the industry's highest storage density and power efficiency for enterprise disk backup and deduplication. We were the first in the market to incorporate 3-terabyte drives in backup and deduplication solutions.

Finally, we began shipping vmPRO 3.0, the only backup application for virtual environments that backs up data in native format, enabling drag and drop, restore file or entire VMs from any location.

With that, I'd like to turn the call over to Linda to provide more detail and color on the results and then I will come back and address our plans and guidance.
Linda M. Breard - Chief Financial Officer, Chief Accounting Officer and Senior Vice President of Finance, IT & Facilities

Thanks, Jon. Before I walk through our results, I would like to refer everyone to the financial statements and supporting schedules included in the press release and on our website. It will be helpful to reference those documents as I comment.

Revenue for our second quarter ended September 30 was $147.3 million compared to $165 million a year ago. The primary driver of the year-over-year decline was in branded and OEM tape automation revenue, which was down $13.6 million. Devices and media revenue also declined $5.8 million. And as expected, royalties declined $2.5 million over the same quarter in the prior year. Offsetting these declines, we grew total disk and software revenue, including related maintenance, by $6.6 million to $42.4 million, an all-time record. Royalty revenue was $11.6 million for Q2 compared to $14 million in the same quarter a year ago. Expected reductions in both DLT and LTO royalties contributed almost equally to the decline.

For the quarter, non-royalty revenue totaled $135.8 million, of which 84% was branded and 16% was OEM. That compares to non-royalty revenue of $151 million a year ago, of which 82% was branded and 18% was OEM.

Looking further at various revenue classifications, devices and media totaled $15.5 million compared to $21.3 million in Q2 of the prior year. In absolute dollars, branded media and devices each contributed to approximately half of the decline. We expected year-over-year declines in media due to the events of the prior year, which caused higher-than-usual purchases of media. The decline in devices was driven by overall market declines and to some extent, continued softness in Europe.

Tape automation systems revenue was $48.8 million compared to $52.4 million in Q2 of fiscal '12. On a percentage basis, both branded and OEM were down approximately 20%. Branded automation contributed to approximately 2/3 of the decline, with OEM accounting for the other 1/3.

In both our branded and OEM automation business, enterprise, midrange and entry revenue were all down year-over-year. Enterprise and entry automation product revenue declined at a lesser rate on a branded versus OEM basis, while branded midrange product revenues declined at a higher rate.

As Jon mentioned, we think our tape automation results in Q2 and the past couple of quarters before that may have been partly impacted by the anticipated introduction of LTO-6 tape drives and libraries which will take place later this quarter. Historically, we have seen declines in our tape automation business prior to release of new technology as customers hold off on purchases. Also contributing to our lower-than-expected branded tape automation revenue was a 50% decline in such revenue from the federal sector over the same quarter last year. On the positive side, we acquired approximately 140 new midrange and enterprise tape customers in Q2, which we believe is an indicator of our continued market share gain in this category.

Disk systems software and related maintenance revenue, which includes our DXi, vmPRO appliance and vmPRO software data protection offerings, as well as our StorNext software and appliances for big data management and archive, including wide-area store solutions, was $42.4 million in Q2. This was up 18% from $35.9 million in the prior year. This is a record for the category and a key milestone as we surpassed $40 million in a quarter. Disk and software revenue from new products, defined as products released in the past 12 months, contributed $15 million in revenue for Q2.

Looking more specifically at disk systems revenue, it was up 14% year-over-year to a new record. In addition, we added 120 new disk customers during the quarter and our overall DXi win rate was 55%. Strong results in our enterprise business, which was up 30% over the prior year was the primary driver of our overall disk systems revenue growth. Big deals, which are defined as deals over 200,000, drove the growth in enterprise business. As we have mentioned in the past, big deals coming in and falling out of a quarter can make the wide revenue swings in our disk systems business.

Midrange disk revenue was down 6% year-over-year due to more big deals in the same period last year. In addition, we have now shipped more than 1,000 DXi6701 and 6702 units in just over a year since their introduction into the market. Designed to eliminate the trade-offs customers have to make with other deduplication solutions, the DXi 6701 and 6702 has received several Product of the Year honors and other industry recognition.

Entry-level disk revenue increased modestly over Q2 of fiscal '12, and we saw notable shifts from single unit standalone sales to multiunit sales that are part of a larger midrange and enterprise disk deal. In fact, the number of entry level DXi sales attached to such deals nearly quadrupled in Q2 and demonstrates the advantages of our comprehensive portfolio.

And turning to StorNext software and appliances. Revenue increased nearly 30% year-over-year and was also a new record. We added approximately 65 new StorNext customers in Q2, and announced that we have surpassed 70,000 shipments of the StorNext file system, representing an increase of almost 20% in less than 9 months. Standalone StorNext software continues to contribute in this category, along with the strength we continue to exhibit in our appliances. Our StorNext archive-enabled libraries, M330 and 660, and G301 and 302 appliances, along with our Q series disks, all contributed to the strong results this quarter.

As Jon mentioned earlier, we also sold our first pre GA wide-area storage solution. We expect to make the product generally available in the next few months. And as Jon said, we'll have more to say about our product plans in the coming weeks.

Moving to service revenue. It was $35.7 million in Q2, down slightly from $35.9 million in the same quarter of the prior year. Branded service revenue increased, primarily driven by growth in service contracts associated with our StorNext appliances but partially offset by a decline in OEM out-of-warranty repair compared to the same period in the prior year. The OEM repair decline was related to both timing of repair requests and business we exited in the prior year.

And turning to gross margins. Non-GAAP gross margin in Q2 was 41.4% compared to 45% in the prior-year period. On a year-over-year basis, the decrease in non-GAAP gross margin was primarily due to the decline in product revenue. As we have mentioned in the past, our business is leveraged, and an increase or decrease in revenue will have a material impact to gross margin. In addition, the year-over-year decline of $2.5 million in royalty revenue, which contributes 100% gross margin, impacted the results.

Looking at expenses. Non-GAAP operating expense totaled $63.6 million in Q2 compared to $58.7 million in the prior year. Year-over-year, we increased our investment in sales and marketing by $4 million. The primary driver of this increase relates to incremental salaries and benefits from additional investments we made in the team throughout the past year. In addition, we have increased our marketing program spend to drive greater awareness and demand. Research and development spend increased approximately $600,000 over the same quarter last year due to an increased investment in headcount primarily associated with our StorNext big data strategy.

Non-GAAP operating loss for the quarter was $2.6 million compared to operating profit of $17.1 million in the same quarter a year earlier. The largest contributors to the decline in operating profit on a quarterly basis were the overall revenue decrease, including lower royalty revenues and incremental sales and marketing spend. Interest expense for the quarter was $1.8 million compared to $2.9 million a year earlier. This included cash interest expense of $1.5 million and amortization of debt issue costs of $300,000. The current coupon interest rate for our revolving line of credit, $49.5 million at September 30, is 2.61%, and the average interest rate for our total debt will be approximately 3.33% for the quarter ending December 31.

For the second quarter, we had other expense of $100,000, primarily due to net foreign currency losses. We recognized tax expense of $400,000, primarily related to foreign and state taxes.

Summing that up. For Q2, we had a non-GAAP net loss of $4.9 million, which is a non-GAAP loss per share of $0.02, compared to non-GAAP net income of $13.7 million and $0.06 in the same quarter a year earlier.

Focusing on cash flow for the quarter and the balance sheet at September 30, I would like to highlight several key points. Cash flows used in operations for the quarter were $13.4 million. At quarter end, the composition of our debt was $49.5 million of revolver, and $135 million of convertible debt. We ended the quarter with $33 million in cash. We are in compliance with all debt covenants at September 30, and we expect to be in compliance with our debt covenants during the next 12 months. EBITDA for the last 12 months was $32.9 million. On a sequential basis, manufacturing inventory decreased $8.8 million. Accounts receivable increased $12.7 million, and we had an accelerated payment of $7.3 million from one customer. CapEx was $2.7 million.

Over the past year, we have invested in multiple areas of the business, specifically sales and marketing to expand our penetration of Tier 2, SMB and expansion markets. We have also increased our investment in big data and marketing and awareness campaign. Our product portfolio is solid, and improving our distribution and reach is key to growth. However, due to the headwinds in revenue we have faced in the first half of the year, we are reevaluating our overall investment in several areas with a critical view. In addition, we will also be opportunistic in reviewing and improving our capital structure, given the number of options available on the market. Through both of these, we expect to return the company to generating cash from operations and strengthening the balance sheet.

Now let me turn the call back over to Jon.
Jonathan W. Gacek - Chief Executive Officer, President and Director

Thanks, Linda. As we stated at the beginning of the fiscal year, it's our intention to grow the company. We believe we are in the right markets with big data, virtual data protection, cloud and deduplication. However, as we said in our Q1 earnings call, we need to be in more deals, have more channels to market and have more end-user and channel awareness. At that time, we talked about what we would do to address this. So let me review some of these key points and context of what we did in Q2 and what we must do moving forward to grow and meet our financial objectives.

First, we must drive hard on our unique value proposition with end users and channel partners specifically, enabling customers to maximize the value of their data by protecting and preserving it over its entire life cycle, in any environment and at any scale. The includes offering performance, ease of use and tight integration of Quantum solutions at a price point that provides more value than competitors. We think Q-Cloud and our wide area storage solutions are just 2 examples of how we are integrating different technologies to provide unique solutions to customers. I would also point to our recently announced investment in Nerve Technologies, which provides extremely fast, highly scalable and automated video indexing and search capabilities and offers tremendous benefits in combination with our StorNext software.

Second, we must be more aggressive in building our pipelines and doing so earlier through a combination of targeted marketing and broader awareness activities directed at both install base customers and new prospects, as well as the channel. As I said, we have added some key new solutions that provide unique value to end users. And we need to make sure they are aware of and interested in these solutions, so that our channel partners see end-user demand. This is why end-user awareness is so important and why we continued to make progress on this front in Q2. For example, we had a significantly larger presence at VMworld in August, that generated a 70% increase in sales leads over the prior year. In addition, we have increased our traffic to our website by more than 50% in the first half of the year and created more than 100 million online impressions through our Be Certain marketing campaign.

Third, we must continue to broaden our routes to market, including aligning more deeply with our partners, adding additional partners and pursuing additional strategic or OEM partners for our tape, disk and software products. The new partnership with Teradata and the expanded DXi relationship with Dell Qwest speak to this point. And we are working on additional partnership activities related to StorNext and cloud data protection, and we expect to move forward in the next few months.

Fourth, we must continue to inspect big deals more closely and try to get them closed earlier in the quarter, as well as get closer to the end-user financial decision-makers to better understand the deal dynamics. We did a better job of this during Q2, as evidenced by our record disk systems and software revenue and particularly enterprise DXi8500 results. As this illustrates, when we get to senior levels inside of an end user and tell our story, our success rates improve.

Finally, as we begin the second half of fiscal '13, we must adjust our spending to be more in line with revenues that we are delivering. We are still focused on building the growth business and creating long-term shareholder value. But we have to be smart about our spending and capital structure, given the economic environment, as well as balanced in our decisions and spending for growth and the need to make money. With this in mind, we will reduce our spending over the next 2 quarters, specifically in areas where we are not getting the return on investment or have changing business requirements that allow us to pull back on spending and still support our strategic initiatives. We are targeting reductions of approximately $1 million and $6 million in Q3 and Q4 respectively.

So now, let me turn to guidance. For Q3, we expect revenue of $160 million, non-GAAP gross margin of 42%, non-GAAP operating expenses of $60 million to $64 million, interest expense of $2 million and income tax of $500,000. For the fiscal year, we expect revenue of $600 million, non-GAAP gross margin of 42% and non-GAAP operating expenses of approximately $250 million.

Now I'll turn the call over to the operator for questions. Operator?

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