QUANTUM CORP /DE/ - Quarter Report: 2012 December (Form 10-Q)

Form 10-Q

QUANTUM CORPORATION

Incorporated Pursuant to the Laws of the State of Delaware

IRS Employer Identification Number 94-2665054

1650 Technology Drive, Suite 800, San Jose, California 95110

(408) 944-4000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x   No ¨

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x   No ¨

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨       Accelerated filer x       Non-accelerated filer ¨       Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ¨   No x

QUANTUM CORPORATION

INDEX

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

QUANTUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)

See accompanying notes to Condensed Consolidated Financial Statements.

1

QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

See accompanying notes to Condensed Consolidated Financial Statements.

2

QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)

See accompanying notes to Condensed Consolidated Financial Statements.

3

QUANTUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

See accompanying Notes to Condensed Consolidated Financial Statements.

4

QUANTUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1: BASIS OF PRESENTATION

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.

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Quantum and our wholly-owned subsidiaries. On June 13, 2011, we acquired Pancetera Software, Inc. (“Pancetera”), and Pancetera’s results of operations are included in our Condensed Consolidated Statements of Operations from that date. All intercompany balances and transactions have been eliminated. The interim financial statements reflect all adjustments, consisting of normal recurring adjustments that, in the opinion of management, are necessary for a fair statement of the results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year. The Condensed Consolidated Balance Sheet as of March 31, 2012 has been derived from the audited financial statements at that date. However, it does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying financial statements should be read in conjunction with the audited Consolidated Financial Statements for the fiscal year ended March 31, 2012 included in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on June 14, 2012.

Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2012-02, Intangibles — Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). ASU 2012-02 provides entities the option to perform a qualitative assessment to determine whether it is more likely than not an indefinite-lived asset is impaired, similar to the goodwill impairment testing guidance. If an entity determines the fair value of the indefinite-lived asset is not more likely than not impaired, then no additional testing is required. ASU 2012-02 also provides examples of changes in events and circumstances that an entity should consider for impairment indicators in interim periods. ASU 2012-02 is effective for fiscal years, and interim periods within those years, beginning after September 15, 2012 and may be early adopted. We plan to early adopt in the fourth quarter of fiscal 2013 and do not anticipate adoption will impact our statements of financial position or results of operations.

NOTE 2: FAIR VALUE

The assets measured and recorded at fair value on a recurring basis consist of money market funds which are valued using quoted market prices (level 1 fair value measurements) at the respective balance sheet dates (in thousands):

We did not record impairments to any non-financial assets in the third quarter and first nine months of fiscal 2013 or 2012. We do not have any non-financial liabilities measured and recorded at fair value on a non-recurring basis.

We had $205.0 million of convertible subordinated debt at December 31, 2012, and the estimated fair value of our convertible subordinated debt was approximately $193.4 million, based on quoted market prices (level 1 fair value measurements).

5

NOTE 3: INVENTORIES

Manufacturing inventories and service parts inventories consisted of the following (in thousands):

NOTE 4: INTANGIBLE ASSETS AND GOODWILL

Intangible assets are evaluated for impairment whenever indicators of impairment are present. During the third quarter of fiscal 2013 and 2012, we considered whether there were any indicators of impairment for both our goodwill and our long-lived assets, including amortizable and indefinite-lived intangible assets, and determined there were none. During the third quarter of fiscal 2013, we completed development on $0.2 million of in-process research and development, transferring it to purchased technology intangibles, and we began amortizing it over its useful life.

The following provides a summary of the carrying value of amortizable intangible assets (in thousands):

Total intangible amortization expense was $2.8 million and $11.1 million for the three and nine months ended December 31, 2012, respectively, and was $4.7 million and $16.1 million for the three and nine months ended December 31, 2011, respectively.

We evaluate goodwill for impairment annually during the fourth quarter of our fiscal year, or more frequently when indicators of impairment are present. There were no changes to goodwill balances during the third quarter of fiscal 2013. The following table provides a summary of the goodwill balance at both December 31, 2012 and March 31, 2012 (in thousands):

6

NOTE 5: ACCRUED WARRANTY

The quarterly and year-to-date changes in the accrued warranty balance were (in thousands):

We generally warrant our products against defects for 1 to 3 years. A provision for estimated future costs and estimated returns for credit relating to warranty is recorded when products are shipped and revenue recognized. Our estimate of future costs to satisfy warranty obligations is primarily based on historical trends and, if believed to be significantly different from historical trends, estimates of future failure rates and future costs of repair including materials consumed in the repair and labor and overhead amounts necessary to perform the repair. If future actual failure rates differ from our estimates, we record the impact in subsequent periods. If future actual costs to repair were to differ significantly from our estimates, we record the impact of these unforeseen cost differences in subsequent periods.

NOTE 6: LONG-TERM DEBT

On October 31, 2012, we issued $60 million aggregate principal amount of 4.50% convertible subordinated notes due November 15, 2017, and on November 6, 2012 we issued an additional $10 million aggregate principal amount of 4.50% convertible 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. We incurred and capitalized $2.3 million of loan fees for the 4.50% notes which are included in other long-term assets in our Condensed Consolidated Balance Sheets. These fees are amortized to interest expense over the loan term.

On October 31, 2012, we repaid all outstanding borrowings under the Wells Fargo credit agreement (“WF credit agreement”) with $49.5 million of the proceeds from the 4.50% notes. We have letters of credit totaling $1.1 million, reducing the amount available to borrow under the WF credit agreement to $71.9 million at December 31, 2012. As of December 31, 2012, we had no borrowings outstanding and were in compliance with all covenants.

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 $15 million through December 31, 2012, increasing to $20 million on January 1, 2013.

7

NOTE 7: RESTRUCTURING CHARGES

In fiscal 2012 and 2013, restructuring actions to consolidate operations supporting the business were the result of strategic management decisions. The types of restructuring expense for the three and nine months ended December 31, 2012 and December 31, 2011 were (in thousands):

During the third quarter and first nine months of fiscal 2013, we accrued severance charges for various positions eliminated worldwide across most functions of the business to align spending with revenue expectations and accrued the remaining lease obligation for a vacant facility in the U.S. Severance and benefits accrued during the first nine of months of fiscal 2012 were for various positions eliminated worldwide. Facility restructuring charges for the first nine months of fiscal 2012 were due to estimated charges for a facility in India that we vacated in fiscal 2012. The other restructuring reversal for the first nine months of fiscal 2012 was due to actual payments lower than estimated on a supplier relationship.

Accrued Restructuring

The following tables show the activity and the estimated timing of future payouts for accrued restructuring (in thousands):

8

NOTE 8: STOCK INCENTIVE PLANS AND SHARE-BASED COMPENSATION

Overview

Our stock incentive plans (“Plans”) are broad-based, long-term retention programs that are intended to attract and retain talented employees and align stockholder and employee interests. The Plans provide for the issuance of stock options, stock appreciation rights, stock purchase rights and long-term performance awards to our employees, officers and affiliates. We also have an employee stock purchase plan (“Purchase Plan”) that allows for the purchase of stock at a 15% discount to fair market value at the date of grant or the exercise date, whichever value is less.

The Black-Scholes option pricing model is used to estimate the fair value of options granted under our Plans and rights to acquire stock granted under our Purchase Plan.

Share-Based Compensation

The following table summarizes share-based compensation (in thousands):

Stock Options

No stock options were granted in the third quarter or in the first nine months of fiscal 2013, or the third quarter of fiscal 2012; however, stock options were granted in the first nine months of fiscal 2012. The weighted-average grant date fair values of employee stock option grants, as well as the weighted-average assumptions used in calculating these values for the first nine months of fiscal 2012 were based on estimates at the date of grant as follows:

9

Restricted Stock

The fair value of the restricted stock units granted is the intrinsic value as of the respective grant date since the restricted stock units are granted at no cost to the employees. The weighted-average grant date fair values of restricted stock units granted during the third quarter and first nine months of fiscal 2013 were $1.44 and $1.99, respectively. The weighted-average grant date fair values of restricted stock units granted during the third quarter and first nine months of fiscal 2012 were $2.27 and $3.15, respectively.

Stock Purchase Plan

Under the Stock Purchase Plan, rights to purchase shares are typically granted during the second and fourth quarter of each fiscal year. The value of rights to purchase shares granted in the first nine months of fiscal 2013 and fiscal 2012, respectively, was estimated at the date of the grant. The weighted-average grant date fair values and the assumptions used in calculating fair values for the nine month periods ended December 31, 2012 and 2011 are as follows:

Stock Activity

Stock Options

A summary of activity relating to our stock options follows (options and aggregate intrinsic value in thousands):

Restricted Stock

A summary of activity relating to our restricted stock follows (shares in thousands):

NOTE 9: INCOME TAXES

Income tax provisions for the third quarter and first nine months of fiscal 2013 were $0.3 million and $1.2 million, respectively, and were $0.5 million and $1.4 million for the third quarter and first nine months of fiscal 2012, respectively. Income tax provisions for each of these periods reflect expenses for foreign income taxes and state taxes.

We have provided a full valuation allowance against our U.S. net deferred tax assets due to our history of net losses, difficulty in predicting future results and our conclusion that we cannot rely on projections of future taxable income to realize the deferred tax assets. Significant management judgment is required in determining our deferred tax assets and liabilities and valuation allowances for purposes of assessing our ability to realize any future benefit from our net deferred tax assets. We intend to maintain this valuation allowance until sufficient positive evidence exists to support a reversal or decrease in this allowance. Future income tax expense will be reduced to the extent that we have sufficient positive evidence to support a reversal of, or decrease in, our valuation allowance.

10

NOTE 10: NET INCOME (LOSS) PER SHARE

The following is our computation of basic and diluted net income (loss) per share (in thousands, except per share data):

The computations of diluted net income (loss) per share for the periods presented exclude the following because the effect would have been anti-dilutive:

• For the third quarter and first nine months of fiscal 2013 and fiscal 2012, 31.2 million weighted equivalent shares of the 3.50% notes were excluded. In addition, for the third quarter and first nine months of fiscal 2013, 28.5 million and 9.4 million weighted equivalent shares, respectively, of the 4.50% notes were excluded.
  
 
• For the third quarter and first nine months of fiscal 2013, options to purchase 16.4 million and 17.7 million weighted average shares, respectively, were excluded. For the third quarter and first nine months of fiscal 2012, options to purchase 9.2 million and 9.5 million weighted average shares, respectively, were excluded.
  
 
• Unvested restricted stock and restricted stock units of 10.7 million and 10.1 million weighted average shares for the third quarter and first nine months of fiscal 2013, respectively, were excluded. Unvested restricted stock and restricted stock units for 5.3 million and 3.7 million weighted average shares for the third quarter and first nine months of fiscal 2012, respectively, were excluded.

NOTE 11: LEGAL PROCEEDINGS

On June 28, 2012, Overland Storage, Inc. (“Overland”) filed a patent infringement lawsuit against Quantum in the U.S. District Court for the Southern District of California, alleging that certain of its automated tape libraries fall within the scope of patents 6,328,766 and 6,353,581. Overland is seeking injunctive relief, as well as the recovery of unspecified monetary damages, including treble damages for willful infringement. We do not believe we infringe the Overland patents and we will defend ourselves vigorously. Due to the inherent uncertainty of litigation, we cannot identify probable or estimable damages related to the lawsuit at this time.

On August 28, 2012, we filed a lawsuit against Overland in the U.S. District Court for the Southern District of California, for patent infringements of our patents 6,542,787; 6,498,771; 5,925,119 and 5,491,812 by the products in Overland’s NEO tape library and SnapServer product lines. We are seeking injunctive relief and the recovery of monetary damages.

On September 12, 2011, Compression Technology Solutions LLC (“CTS”) filed a patent infringement lawsuit against a group of companies, consisting of Quantum, CA., Inc., EMC Corporation, Hewlett-Packard Company, International Business Machines Corp., NetApp, Inc. and Quest Software, Inc., in the U.S. District Court for the Eastern District of Missouri, alleging that certain unspecified products of the defendants, characterized as “deduplication software systems,” and, in the case of Quantum, including Quantum’s “DXi Series Deduplication software,” fall within the scope of patent 5,414,650. CTS is seeking injunctive relief, as well as the recovery of monetary damages, including treble damages for willful infringement. We do not believe we infringe the CTS patent; we believe that the CTS patent is invalid, and we intend to defend ourselves vigorously. In April 2012, our motion to transfer venue was granted and the lawsuit was transferred to the U.S. District Court for the Northern District of California. Due to the inherent uncertainty of litigation, we cannot identify probable or estimable damages related to the lawsuit at this time.

11

NOTE 12: SUBSEQUENT EVENT

With the completion of the convertible debt offering in the third quarter of fiscal 2013, we requested an amendment to our WF credit agreement to decrease the line of credit and modify certain covenants. An amendment was completed on January 31, 2013. The maximum borrowing amount decreased to the lesser of $55 million or the amount of the monthly borrowing base and will remain at this level for the remaining term of the credit agreement. The average liquidity covenant was eliminated. The fixed charge coverage ratio covenant is applicable only in fiscal quarters in which liquidity is below $16.5 million and decreased from 1.2 to 1.1 for the 12 month period ending on the last day of a fiscal quarter. The liquidity requirement to avoid triggering mandatory field audits decreased from $20 million to $18.5 million commencing January 31, 2013 and will remain at this level for the remaining term of the credit agreement. Both the fixed charge coverage ratio and liquidity are defined in the WF credit agreement and the January 31, 2013 amendment. In addition, compliance certificates must be filed monthly if borrowings exceed $15 million, otherwise they are to be filed quarterly.

12

FORWARD-LOOKING STATEMENT

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements in this report usually contain the words “will,” “estimate,” “anticipate,” “expect,” “believe,” “project” or similar expressions and variations or negatives of these words. All such forward-looking statements including, but not limited to, (1) our goals for future operating performance, including increasing revenue in higher margin areas of our business; (2) our expectation that we will continue to derive a substantial portion of our revenue from products based on tape technology; (3) our belief that our existing cash and capital resources will be sufficient to meet all currently planned expenditures, debt service and sustain our operations for at least the next 12 months; (4) our expectations regarding our ongoing efforts to control our cost structure and our plans to reduce spending; and (5) our business goals, objectives, key focuses, opportunities and prospects which are inherently uncertain as they are based on management’s expectations and assumptions concerning future events, and they are subject to numerous known and unknown risks and uncertainties. Readers are cautioned not to place undue reliance on these forward-looking statements, about which we speak only as of the date hereof. As a result, our actual results may differ materially from the forward-looking statements contained herein. Factors that could cause actual results to differ materially from those described herein include, but are not limited to: (1) the amount of orders received in future periods; (2) our ability to timely ship our products; (3) uncertainty regarding information technology spending and the corresponding uncertainty in the demand for our products and services; (4) our ability to maintain supplier relationships; (5) general economic, political and fiscal conditions in the U.S. and internationally; (6) our ability to successfully introduce new products; (7) our ability to capitalize on market demand; (8) our ability to achieve anticipated gross margin levels; and (9) those factors discussed under “Risk Factors” in Part II, Item 1A. Our forward-looking statements are not guarantees of future performance. We disclaim any obligation to update information in any forward-looking statement.

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.

We started fiscal 2013 with the objectives of increasing total revenue, having operating profit and generating cash from operations. These objectives assumed the market for tape automation systems and tape drives would be approximately the same as fiscal 2012 and the market for disk systems and software solutions would grow compared to fiscal 2012. Market analysts have estimated the overall demand in tape market decreased approximately 20% in the first half of fiscal 2013, and during that period we had a 17% decline in our tape automation systems revenue which caused a significant negative impact to both total revenue and operating profit. In addition, our disk systems and software revenue decreased in the first quarter of fiscal 2013 as a result of economic weakness in Europe, and large orders decreased due to customer caution from economic uncertainty. During the third quarter of fiscal 2013, we believe there was continued weakness in the data protection and big data markets as a result of economic uncertainty regarding the fiscal cliff in the U.S., and companies continued to be cautious with their purchasing decisions.

13

In the second quarter of fiscal 2013, we met our objective of increasing revenue for disk systems and software revenue for the quarter, achieving record revenue in this category. This revenue growth continued in the third quarter of fiscal 2013, increasing disk systems and software solutions revenue from both the third quarter and first nine months of fiscal 2012. We believe this revenue increase reflects the market opportunity, the strength of our DXi and StorNext product portfolios and continued innovation in these product families in addition to achieving better sales traction in the channel and improved sales productivity.

We expected and experienced sequential improvement in tape automation systems revenue from year-end IT budget spending and the release of LTO-6 technology in the third quarter of fiscal 2013. We introduced LTO-6 tape drives and tape automation systems in certain of our products in December 2012, which contributed to increased tape automation revenue from the second quarter of fiscal 2013. Overall, we believe our branded tape business has been outperforming the market due to smaller percentage decreases in branded tape automation systems revenue, devices and media revenue and royalty revenue than the estimated decrease in overall market demand.

We continued our focus on training our sales team and engaging with channel partners to take advantage of sales opportunities across our portfolio. We had strong new customer acquisition in the third quarter of fiscal 2013 which we believe was due in part to increased end user and channel partner awareness as a result of our marketing focus and awareness campaign in the first half of fiscal 2013. In addition, we introduced several new products during the third quarter of fiscal 2013, including Lattus^™ X, the first product in our wide area storage family for big data environments, and version 3.0 of our vmPRO virtual machine backup software.

Given the tape revenue decrease in the first half of fiscal 2013 compared to the first half of fiscal 2012, its impact on operating profit and the use of cash in operations, we recognized the need for and implemented cost controls and spending reductions in the third quarter of fiscal 2013. As a result, our financial performance in the third quarter of fiscal 2013 improved from the second quarter of fiscal 2013, contributing to decreased operating loss and generating cash from operations. The improvement in our financial results from the second quarter of fiscal 2013 also reflects the leverage in our business model where revenue growth quickly leads to improved operating results.

We continue to be focused on building the long-term growth areas of the business and supporting our strategic initiatives. We believe our product portfolio and installed base of customers are a competitive strength and provide us with the opportunity to gain market share in a declining tape market. We continue to be opportunistic in improving our capital structure and issued $70 million of convertible subordinated notes due November 15, 2017 in the third quarter of fiscal 2013 to strengthen our balance sheet and provide greater flexibility in our business operations. With the completion of this convertible debt offering, we requested an amendment to our Well Fargo credit agreement to decrease the line of credit and modify certain covenants. An amendment was completed on January 31, 2013. We also continue to introduce new products and features to help customers meet their evolving data protection and big data management requirements. These initiatives are intended to improve profitability and generate cash from operations.

Results

We had total revenue of $159.4 million in the third quarter of fiscal 2013, an 8% decrease from the third quarter of fiscal 2012. Product revenue from OEM customers decreased 16% and revenue from branded products decreased 7% both primarily due to expected declines in tape automation systems revenue for the third quarter of fiscal 2013. Our continued efforts to increase revenue from disk systems and software solutions resulted in record quarterly revenue for disk systems and a 6% increase in this revenue category from the third quarter of fiscal 2012. Service revenue was the same as the third quarter of fiscal 2012, while royalty revenue decreased 18% from the third quarter of fiscal 2012 as expected. Our continued focus on growing our branded business is reflected in the greater proportion of non-royalty revenue from branded business, at 83% in the third quarter of fiscal 2013, compared to 81% in the third quarter of fiscal 2012.

Our gross margin percentage increased 20 basis points from the third quarter of fiscal 2012 to 42.7% despite a $14.1 million decrease in revenue primarily due to increased service gross margins as a result of reduced costs across our service delivery model and a mix shift toward branded service contract activity and reduced OEM repair activity. Operating expenses increased $6.9 million, or 10% from the third quarter of fiscal 2012, primarily from restructuring charges for severance and benefits to right-size our workforce in order to align spending with revenue expectations. We had a $5.6 million loss from operations in the third quarter of fiscal 2013 compared to operating income of $7.0 million in the third quarter of fiscal 2012.

Interest expense decreased 9% to $2.2 million primarily due to decreased debt amortization expense as a result of debt refinancings in calendar 2012. We generated $6.4 million in cash from operating activities in the third quarter of fiscal 2013 compared to $16.1 million in the third quarter of fiscal 2012.

14

RESULTS OF OPERATIONS

Revenue

Total revenue decreased in the third quarter of fiscal 2013, largely due to a decline in the tape automation market and economic weakness due to uncertainty regarding the fiscal cliff in the U.S. Companies of all sizes were cautious with their purchasing decisions in the third quarter of fiscal 2013. Total revenue in the first nine months of fiscal 2013 decreased from the first nine months of fiscal 2012, reflecting a decline in the tape automation market, economic uncertainty and, a decrease in large orders, or orders over $200,000. Revenue from branded data protection products and services decreased $6.5 million, or 6% from the third quarter of fiscal 2012 and decreased 9% from the first nine months of fiscal 2012. Data protection products include our tape automation systems, disk systems and devices and media offerings. Revenue from branded big data and archive products and services was the same as the third quarter of fiscal 2012 and increased 21% from the first nine months of fiscal 2012. Big data and archive products include StorNext software, StorNext and Q-Series appliances and Lattus wide area storage solutions. In addition, OEM product and service revenue decreased $5.1 million and $14.3 million, respectively, from the third quarter and first nine months of fiscal 2012. Royalty revenue decreased $2.5 million and $8.6 million, respectively, from the third quarter and first nine months of fiscal 2012.

Product Revenue

Our product revenue, which includes sales of our hardware and software products sold through both our Quantum branded and OEM channels, decreased $11.6 million and $35.1 million in the third quarter and first nine months of fiscal 2013, respectively, compared to the prior year periods primarily due to decreased revenue from sales of tape automation systems from entry level to enterprise systems. These decreases were partially offset by increased disk systems revenue and the addition of revenue from our new StorNext appliances that resulted in increased disk systems and software solutions revenue for both the third quarter and first nine months of fiscal 2013. Revenue from sales of branded products decreased 7% and 9%, respectively, in the third quarter and first nine months of fiscal 2013 and sales of products to our OEM customers decreased 16% in both the third quarter and first nine months of fiscal 2013 compared to the prior year periods.

15

Our disk systems and software solutions revenue increased 6% from the third quarter of fiscal 2012 primarily due to increased revenue from our enterprise and midrange disk systems resulting in record quarterly revenue for disk systems. Enterprise disk systems revenue increased 60% from the third quarter of fiscal 2012 mainly due to increased large orders, or orders over $200,000, and midrange disk systems revenue increased 13% from the third quarter of fiscal 2012. For the first nine months of fiscal 2013, disk systems and software solutions revenue increased 9% primarily due to the addition of revenue from our StorNext appliances and Q-Series disk. The first StorNext appliance was introduced in the second quarter of fiscal 2012.

The decrease in tape automation systems revenue in the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012 was primarily due to decreased OEM tape automation system sales and, to a lesser extent, from decreased branded tape automation system sales. OEM tape automation system revenue decreases were primarily due to decreased midrange system sales followed by decreased entry level product sales. Branded tape automation system decreases were primarily due to decreased enterprise systems followed by entry level products. Sales of branded enterprise tape automation units increased from the third quarter of fiscal 2012; however, revenue from these systems declined due to lower system upgrade revenue. LTO-6 tape technology became available in our Scalar products and contributed to revenue in the third quarter of fiscal 2013. The decrease in tape automation systems revenue from the first nine months of fiscal 2012 was primarily due to decreased branded tape automation system sales and, to a lesser extent, from decreased OEM tape automation system sales. For the first nine months of fiscal 2013, enterprise and midrange tape automation systems had the largest decreases compared to the prior year period.

Product revenue from devices and media, which includes tape drives, removable hard drives and non-royalty media, decreased from the third quarter and first nine months of fiscal 2012 largely due to decreased media sales in addition to lower revenue from devices. The third quarter and first nine months of fiscal 2012 had higher than usual media sales due to customers increasing their media inventories in response to concerns of supply disruptions following the March 2011 earthquake and tsunami in Japan. Revenue from devices decreased primarily due to overall market declines.

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 was unchanged from the third quarter of fiscal 2012. For the first nine months of fiscal 2013, service revenue decreased 1% compared to the first nine 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 and midrange disk systems.

Royalty Revenue

Tape media royalties decreased 18% and 20% from the third quarter and first nine 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 third quarter and first nine months of fiscal 2012 due to inventories being increased in the third quarter and first nine months of fiscal 2012 in response to concerns of supply disruptions following the March 2011 earthquake and tsunami in Japan.

16

Gross Margin

*Gross margin for the nine months ended December 31, 2011 includes $0.3 million of restructuring benefit related to cost of revenue.

The 20 basis point increase in gross margin percentage compared to the third quarter of fiscal 2012 was primarily due to offsetting factors, with increased service gross margins offsetting lower product gross margin and a $2.5 million decrease in royalty revenue. For the first nine months of fiscal 2013, our gross margin percentage decreased 150 basis points from the first nine months of fiscal 2012 primarily due to decreased product revenue and a corresponding lower product gross margin as well as an $8.6 million decrease in royalty revenue, partially offset by increased service gross margin. Some of our costs of goods sold are relatively fixed in the short term; therefore, revenue increases or decreases can have a material impact on the gross margin rate.

Product Margin

Product gross margin dollars decreased $6.3 million, or 14%, compared to the third quarter of fiscal 2012, and our product gross margin rate decreased 180 basis points primarily due to a 9% decrease in product revenue. For the first nine months of fiscal 2013, product gross margin decreased $21.7 million, or 18%, and our product gross margin rate decreased 290 basis points primarily due to a 10% decrease in product revenue. As noted above, 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 third quarter and first nine months of fiscal 2013. We had an increase in salaries and benefits in the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012 largely due to merit increases and investments in our software support team. In addition, we had an increase in the manufacturing inventory allowance in the first nine months of fiscal 2013 compared to the prior year period largely due to more products nearing end of life than in the first nine months of fiscal 2012. Partially offsetting these factors was lower intangible amortization in both the third quarter and first nine 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 $3.2 million, or 25%, compared to the third quarter of fiscal 2012, and service gross margin percentage increased 890 basis points while service revenue was unchanged. For the first nine months of fiscal 2013 service gross margin dollars increased $5.0 million, or 12%, and service gross margin percentage increased 500 basis points despite a decrease in service revenue of $0.8 million compared to the first nine months 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.

17

The more significant cost decreases in the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012 were service parts inventory allowance, compensation and benefits, external service providers and third party warehouse expense. For the first nine months of fiscal 2013, the more significant cost decreases compared to the prior year period were for third party warehouse, external service providers, compensation and benefits and service materials. Service parts inventory allowance expense decreased primarily due to increased service parts usage and lower overall service parts inventory. Compensation and benefits decreased due to reduced staffing levels. 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 lower repair volumes compared to the prior year.

Research and Development Expenses

The increase in research and development expenses compared to the third quarter and first nine months of fiscal 2012 was largely due to a $0.4 million and $0.9 million increase, respectively, in use of external service providers, primarily for next generation LTO product development. In addition, we had a $0.4 million increase in compensation and benefits expense in the third quarter of fiscal 2013 primarily due to merit increases. For the third quarter and first nine months of fiscal 2013, we also had a $0.3 million and a $0.7 million increase, respectively, in depreciation expense due to laboratory testing equipment purchases.

Sales and Marketing Expenses

The increase in sales and marketing expense for the third quarter of fiscal 2013 was primarily due to a $1.5 million increase in compensation and benefits from growing our branded sales force and marketing team in the first half of fiscal 2013 and latter part of fiscal 2012, offset by a $1.4 million decrease in intangible amortization due to certain intangibles becoming fully amortized in the second quarter of fiscal 2013. The increase in sales and marketing expense for the first nine months of fiscal 2013 was primarily due to a $5.7 million increase in compensation and benefits from growing our branded sales force and marketing team. In addition, we had a $2.3 million increase in marketing and advertising expenses due to our awareness campaign and expanded marketing programs in the first half of fiscal 2013 intended to increase future demand for our products and services. As noted above, these efforts contributed to our new customer acquisition. We also had an increase of $0.8 million for external service providers, offset by a $2.2 million decrease in intangible amortization due to certain intangibles becoming fully amortized in the second quarter of fiscal 2013.

18

General and Administrative Expenses

The decrease in general and administrative expenses for the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012 was due to a $0.4 million decrease in compensation and benefits and a number of expense reductions between $50,000 and $100,000 including telephone and data expenses, external service providers, depreciation, sales and use tax, software maintenance and legal expenses.

Restructuring Charges

The increase in restructuring charges for the third quarter and first nine months of fiscal 2013 was primarily due to severance and benefits expense from eliminating positions in both the U.S. and internationally across most functions of the business to align spending with revenue expectations.

Gain on Sale of Patents

In the second quarter of fiscal 2012, we had a $1.5 million gain on the sale of certain patents. Under the patent sale agreement, we retain a royalty-free license for these patents. We may enter into similar transactions in the future.

19

Interest Expense

Interest expense decreased from the third quarter of fiscal 2012 primarily due to decreased debt amortization expense as a result of debt refinancings in calendar 2012. For the first nine months of fiscal 2013, interest expense decreased primarily due to refinancing our senior debt in March 2012 which decreased interest rates and debt amortization expense compared to the prior credit agreement. In addition, principal payments in the prior fiscal year reduced the outstanding balance of senior debt, decreasing interest expense compared to the first nine months of fiscal 2012.

Income Taxes

The income tax provision for the third quarter and first nine months of fiscal 2013 and 2012 reflects expenses for foreign income taxes and state taxes. We have provided a full valuation allowance against our U.S. net deferred tax assets due to our history of net losses, difficulty in predicting future results and our conclusion that we cannot rely on projections of future taxable income to realize the deferred tax assets.

Significant management judgment is required in determining our deferred tax assets and liabilities and valuation allowances for purposes of assessing our ability to realize any future benefit from our net deferred tax assets. We intend to maintain this valuation allowance until sufficient positive evidence exists to support a reversal or decrease in this allowance. Future income tax expense will be reduced to the extent that we have sufficient positive evidence to support a reversal of, or decrease in, our valuation allowance.

Amortization of Intangible Assets

The following tables detail intangible asset amortization expense within our Condensed Consolidated Statements of Operations (in thousands):

20

The decrease in intangible amortization expense in the third quarter and first nine months of fiscal 2013 compared to the third quarter and first nine months of fiscal 2012 was primarily due to certain intangibles becoming fully amortized during fiscal 2012 and during the second quarter of fiscal 2013. For further information regarding amortizable intangible assets, refer to Note 4: “Intangible Assets and Goodwill.”

Share-based Compensation

The following table summarizes share-based compensation within our Condensed Consolidated Statements of Operations (in thousands):

The increase in share-based compensation from the third quarter and first nine months of fiscal 2012 was primarily due to $0.6 million and $2.2 million, respectively, of incremental RSU expense as a result of merit awards granted in the second quarter of fiscal 2013. This increase was partially offset by a $0.3 million and $0.7 million decrease in option expense from the third quarter and first nine months of fiscal 2012, respectively, due to a reduced number of unvested options as a result of no option grants in fiscal 2013 and existing options completing vesting.

LIQUIDITY AND CAPITAL RESOURCES

Following is a summary of cash flows from operating, investing and financing activities (in thousands):

21

Nine Months Ended December 31, 2012

The $29.8 million difference between reported net loss and cash used in operating activities during the nine months ended December 31, 2012 was primarily due to $40.3 million in non-cash items, the largest of which were amortization, depreciation, share-based compensation and service parts lower of cost or market adjustment. This was partially offset by a $9.7 million decrease in accounts payable primarily due to decreased purchases and the timing of payments.

Cash used in investing activities was primarily due to $9.4 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 location we started leasing 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.

Cash provided by financing activities during the first nine months of fiscal 2013 was primarily due to $18.2 million in net borrowings from issuing convertible subordinated debt and repaying our line of credit balance from a portion of the convertible debt proceeds. In addition, we received $2.6 million from the exercise of stock options and issuance of shares under the employee stock purchase plan, largely offset by $1.9 million paid for taxes due upon vesting of restricted stock.

Nine Months Ended December 31, 2011

The $30.8 million difference between reported net income and cash provided by operating activities during the nine months ended December 31, 2011 was primarily due to $43.6 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 $7.1 million increase in accounts payable primarily due to the timing of payments and increased purchases. These were partially offset by a $17.5 million increase in manufacturing inventories primarily due to purchasing materials to meet projected third quarter fiscal 2012 product sales and from securing a sufficient supply of hard disk drives for forecast needs into early fiscal 2013 due to supply constraints from flooding in Thailand.

Cash used in investing activities reflected $8.5 million of equipment purchases during the first nine months of fiscal 2012 and $8.2 million of cash paid, net of cash acquired, for our acquisition of Pancetera. Equipment purchases were primarily for engineering equipment and testing hardware to support product development activities.

Cash used in financing activities during the first nine months of fiscal 2012 was primarily due to $35.7 million of principal payments on senior term debt, partially offset by $7.5 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 efforts to increase 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 $205 million of convertible subordinated debt in addition to a line of credit under the Wells Fargo Credit agreement (“WF credit agreement”). The $135 million aggregate principal amount outstanding of 3.50% convertible subordinated notes is due November 15, 2015 and semi-annual interest payments are required on these notes.

We issued $70 million aggregate principal amount of convertible subordinated notes during the third quarter of fiscal 2013. This was comprised of $60 million aggregate principal amount of 4.50% convertible subordinated notes due November 15, 2017 issued on October 31, 2012, and an additional $10 million aggregate principal amount of 4.50% convertible subordinated notes due November 15, 2017 issued on November 6, 2012 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. We incurred and capitalized $2.3 million of loan fees for the 4.50% notes which are included in other long-term assets in our Condensed Consolidated Balance Sheets. The fees are amortized to interest expense over the loan term.

22

Under the WF credit agreement, we had the ability to borrow up to $75 million under a senior secured revolving credit facility. The maximum principal amount that may be borrowed was the lesser of $75 million, reduced by $1 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.

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 requirements were amended to be at $15 million through December 31, 2012, increasing to $20 million on January 1, 2013.

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. We have letters of credit totaling $1.1 million, reducing the amount available to borrow to $71.9 million at December 31, 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. As of December 31, 2012, we were in compliance with all covenants and had no borrowings on the line of credit.

With the completion of the $70 million convertible debt offering, we requested an amendment to our WF credit agreement to decrease the line of credit and modify certain covenants. An amendment was completed on January 31, 2013. The maximum borrowing amount decreased to the lesser of $55 million or the amount of the monthly borrowing base and will remain at this level for the remaining term of the credit agreement. The average liquidity covenant was eliminated. The fixed charge coverage ratio covenant is applicable only in fiscal quarters in which liquidity is below $16.5 million and decreased from 1.2 to 1.1 for the 12 month period ending on the last day of a fiscal quarter. The liquidity requirement to avoid triggering mandatory field audits decreased from $20 million to $18.5 million commencing January 31, 2013 and will remain at this level for the remaining term of the credit agreement. Both the fixed charge coverage ratio and liquidity are defined in the WF credit agreement and the January 31, 2013 amendment. In addition, compliance certificates must be filed monthly if borrowings exceed $15 million, otherwise they are to be filed quarterly.

Generation of positive cash flow from operating activities has historically been, and will continue to be, an important source of cash to fund operating needs and meet our current and long-term obligations. We have taken many actions in recent years to offset the negative impact of the recession and slow economic recovery and their impact on the data protection and big data and archive markets. We implemented cost reduction initiatives in the third quarter of fiscal 2013 in an effort to better align spending with revenue expectations. We cannot provide assurance that the actions we are currently undertaking, have taken in the past or any actions we may take in the future will ensure a consistent, sustainable and sufficient level of net income and positive cash flow from operating activities to fund, sustain or grow our business. Certain events that are beyond our control, including prevailing economic, competitive and industry conditions, as well as various legal and other disputes, may prevent us from achieving these financial objectives. Any inability to achieve consistent and sustainable net income and cash flow could result in:

23

Any of the above mentioned items, individually or in combination, could have a material and adverse effect on our results of operations, available cash and cash flows, financial condition, access to capital and liquidity.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

Our discussion and analysis of the financial condition and results of operations is based on the accompanying unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these statements requires us to make significant estimates and judgments about future uncertainties that affect reported assets, liabilities, revenues and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. In the event that estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. The accounting estimates requiring our most difficult, subjective or complex judgments because these matters are inherently uncertain are unchanged. These critical accounting estimates and policies have been disclosed in our Annual Report on Form 10-K for the year ended March 31, 2012 filed with the Securities and Exchange Commission on June 14, 2012.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Changes in interest rates affect interest income earned on our cash equivalents and interest expense on our borrowings under the Wells Fargo credit agreement. Our outstanding convertible subordinated notes have fixed interest rates, thus a hypothetical 100 basis point increase in interest rates would not impact interest expense on these borrowings.

Our cash equivalents consisted solely of money market funds during the nine months ended December 31, 2012. During the first nine months of fiscal 2013, interest rates on these funds were under 1.0% and we earned negligible amounts in interest income. We did not have any outstanding borrowings under the Wells Fargo credit agreement at December 31, 2012.

ITEM 4. CONTROLS AND PROCEDURES