Description

Today, Quantum announced that it will not be able to get its 10k out on time due to the investigation into its accounting by the SEC.  Two weeks ago, the CEO and interim CFO left the company. The stock is down 50% from the start of the year. Value or value trap.

The market cap is now just $100 million which represents a compelling value.

Brief Business Description

The important thing to note about Quantum is that its entire business revolves around products derived around tape storage technology.  Storage on tape is the oldest method for storing data and it has been getting replaced by storage technologies that can retrieve data quicker.  Tape is primarily used to store cold data which is data that does not need to be accessed frequently. Cold data usually comprises data that was created 3 months ago or longer.  

Please refer to the company’s website to learn more about their products.

“Tape is Not Dead”

This has been said a few times over the past few years, and the statement is very true, although it would be accurate to say that tape has been dying a slow death.  That being said, Tape is seeing a new resurgence today. With the continued growth in data driven by (video, communications, hyper computing etc.), the demand for low cost storage for massive data has never been larger.  LTO carries the lowest cost of any other method for storing cold data at scale.

In addition, tape is the most secure way to keep data away from security threats due the “air gap” of holding tape storage offline.  So companies who want to protect against malware and ransomware are now turning to tape storage to protect their data.  

These forces are actually starting to drive growth in the tape market today.  See below:

https://www.lto.org/2018/03/record-breaking-amount-in-total-tape-capacity-shipments-announced-by-the-lto-program/

5 Years Ago to Today

QTM was previously written up 5 years ago when revenues were $550 million and the market cap was $300mm.  The write up was well done and should be referred to. Today the market cap is just $100 million with sales of approximately $500mm.  In contrasting Quantum then to Quantum today, the biggest issues that hurt the company is the the storage market went through a challenging period as the growth in cloud changed the storage landscape causing buying to shift.  Tape, being an old storage medium, continued to not generate the sales hoped for. Because of this Quantum was not aggressive enough in cutting costs in the business. We believe that the methods of storing mass data continue to evolve and Tape is an essential part of the solution.  

The last 6 months for Quantum

Quantum shareholders have gone through a seesaw chain of events over the past 6 months.  After reporting a soft quarter in the Fall due to sales slippage, the company finally announced a massive cost cutting program that will save $35 million in cost saving for fiscal year end 2019.  The company brought in a temporary CEO and CFO to start the cost cutting process while the company looked to hire new management. In January, they hired Patrick Dennis, who was a longtime EMC executive and recently led Guidance Software to the sale of the company.  He joined Quantum with a lot of excitement, and a compensation package with strong share price objectives. Then in February, the company announced that the SEC had questioned their accounting and will be undergoing an internal investigation. Despite that news, Patrick Dennis continued to stay on as CEO.  Then in late May the company extended an offer to Mike Dodson for the CFO role, but before they made the announcement Patrick Dennis had to resign due to personal reasons. This led to the headline, CEO resigns, temp CFO leaves, and new CFO and interim CEO hired.

Activists

While not successful yet, activists have been involved with Quantum.  First there was Starboard, and now Viex. Both entities have focused on bringing in new board and management as well as optimizing cost structure.  We view the activist presence is valuable in driving value for shareholders. The cost restructuring announced last fall was an example of this as well as the recent quality management hires.

Financial Model

Due to the delinquency of the financials and the issues surrounding a possible restatement of financials, the financials are a bit of a swag.  However, driving my analysis of the company's earning power is the company's announced cost annualized savings of $35 million, and the belief that the company's royalty fee revenue stream of $35-40mm per year should have very little cost associated with it, and that the rest of the business should operate profitably. 

Earnings Power

Debt 127

Market Cap 100

NOL $300mm

Risks

Accounting investigation triggers major restatements and fraud.

Unable to find a quality CEO

Unable to execute cost saving initiative.

Catalyst

New CEO

Accounting cleared up with SEC

Clean Quarter