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Quantum Corp. (QTM - Snapshot Report) reported first quarter fiscal 2014 adjusted earnings per share of 3 cents, comprehensively beating the Zacks Consensus Estimate of 3 cents loss per share. The adjusted loss per share excludes amortization of intangible assets and restructuring charges but includes stock-based compensation expense.

Revenues

Total revenue for the first quarter was $148.0 million, up 5.1% on a year-over-year basis and above the Zacks Consensus Estimate of $138.0 million. The year-on-year growth was due to higher sales of disk system and software, a one-time royalty payment from Microsoft Corp. (MSFT - Analyst Report) and improved OEM and branded tape sales.

Year over year, Product revenues declined 8.3% to $86.0 million; Royalty revenues grew 1.1% to $36.5 million and Service revenues grew 132.3% to $25.5 million.

Operating Results

Reported gross margin in the quarter was 47.3%, up from 39.6% in the year-ago quarter due to better cost management.

Operating margin was 4.0% versus (9.9%) in the year-ago quarter. The company’s total operating expenses decreased 8.1% on a year-over-year basis. Research and development expenses decreased 10.0%, sales and marketing expenses dipped 12.4% and general administrative expenses also fell 12.4%.

Net income on a GAAP basis was $3.4 million or 1 cent per share compared with net loss of $16.7 million or 7 cents in the year-ago quarter. Excluding one-time items but including stock-based compensation expense, adjusted earnings for the first quarter were 3 cents per share compared with a loss of 5 cents per share in the year-ago quarter.

Balance Sheet & Cash Flow

Quantum generated $9.2 million in operating cash, down from $16.0 million in the prior quarter. Cash, cash equivalents and restricted cash were $79.8 million versus $72.0 million in the previous quarter. There was no long-term debt.

Outlook

Management affirmed that it will continue to introduce new products and focus more on increasing brand value.

For the second quarter of 2014, management expects revenues to be in the range of $135.0–$140.0 million. This apart, the company expects GAAP gross margin in the range of 41.0%–42.0% and non-GAAP gross margin in the range of 42.0%–43.0%. The company expects GAAP operating expenses to range between $63.0 million and $65.0 million. Non-GAAP operating expenses are likely to be in a range of $58.0 million to $60.0 million.

Our Take

Quantum’s first quarter was impressive with both the top and bottom lines surpassing the Zacks Consensus Estimate. Year-over-year comparisons were encouraging too. Quantum’s second quarter guidance was weak citing restricted spending by the federal government and delay in closing large deals. But solid momentum in disk systems and software revenues could turn the tables.

Also, we are encouraged by the new product launches during the quarter, which could become key drivers for growth, given the increasing need for data security and big data management.

The company is facing intense competition from EMC Corporation (EMC - Analyst Report), IBM Corporation (IBM - Analyst Report), and NetApp Inc. as they are slowly tightening their grip on the market. Though the company’s commentary on its product strategy is encouraging, persisting Euro concerns and a high debt burden make us a little apprehensive about the stock.

Currently, Quantum has a Zacks Rank #3 (Hold).

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