Following an unprecedented multiple-year decline in server unit sales – the most closely correlated market indicator for Quantum’s storage sales – Quantum is improving its cost structure to achieve its goal of becoming profitable by the end of the current fiscal year.
“Quantum has recently completed the most aggressive series of new product launches in the company’s history, which has allowed us to secure a number of major OEM wins, and strengthen our channel business … However, the current market environment and our current expense structure make it necessary to take the restructuring actions … this will enable us to capitalize fully on our recent progress and long-term opportunities with a more competitive business model that provides sustainable growth and profitability,” Rick Belluzzo, CEO of Quantum explained.
The company expects the restructing actions to reduce its pro forma operating expenses, excluding amortization of good will and restructuring expenses, by approximately
20 percent by the end of its fiscal year in March 2003, from the US$82 million level it reported at the end of June.
The actions, which will take place in two phases over the next two quarters, involve outsourcing manufacturing, consolidating development teams and sites, and right-sizing the company’s infrastructure for a lower level of revenue.
Phase 1 of the restructuring affects both of Quantum’s business groups – its DLTtape Group and Storage Solutions Group – as well as its corporate functions. The restructuring covers actions that Quantum announced last week related to the acquisition of Benchmark Storage Innovations and the outsourcing agreement with Jabil Circuit.
In addition, Phase 1 restructuring includes outsourcing sub-assembly manufacturing of Quantum’s P-Series enterprise tape libraries, consolidating the number of development sites for disk-based backup and tape automation, and centralizing support functions. Overall, Phase 1 restructuring will eliminate approximately 1,100 positions, 80 per cent of which are related to the outsourcing agreement with Jabil.
The total of special charges for both phases of the restructuring is expected to be approximately US$100 million, with slightly less than half being cash charges. Phase 1 charges are expected to be in a range of US$60-75 million – mostly from write downs of goodwill and Intangibles – and will be reflected in Quantum’s fiscal second quarter results. Phase 2 charges are still being finalized, will be announced within the next 90 days, and are expected to be included in the company’s fiscal third quarter results.
The US$40-50 million in total cash charges related to the restructuring will be largely offset by two sources of cash inflows: US$11 million from the recent sale of the Quantum Technology Ventures portfolio and approximately US$30 million from Jabil’s purchase of Quantum’s production equipment and inventory, that Jabil will use to manufacture tape drives and tape automation products in Penang.
In addition to reducing operating expenses, the restructuring actions-combined with the Benchmark acquisition and outsourcing to Jabil-are expected to improve Quantum’s overall gross margins over the next several quarters.
Quantum ended its last fiscal quarter with US$305 million on its balance sheet.