Earnings Transcript for ANY - Q3 Fiscal Year 2015

Executives: Lauren Sloane - Investor Relations Eric Kelly - Chairman and Chief Executive Officer Peter Tassiopoulos - Vice Chairman and President Kurt L. Kalbfleisch - Chief Financial Officer

Analysts: Krishna Shankar - Roth Capital Hubert Mak - Cormark Securities

Operator: Good morning. My name is Pat [ph] and I will be your conference operator today. At this time, I would like to welcome everyone to Sphere 3D's Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Lauren [ph], you may begin your conference.

Lauren Sloane: Thank you, operator and good morning everyone and thank you for joining me on Sphere 3D's earnings conference call for the third quarter of 2015. With me on the call today are Eric Kelly, Chairman and Chief Executive Officer; Kurt Kalbfleisch, our Chief Financial Officer; and Peter Tassiopoulos, our Vice Chairman and President. Prior to the call we released our Q3 2015 earnings release over the wire posted on our website at investors.sphere3d.com and filed with the SEC on Form 6-K. This call is also available as a webcast and a replay is available on the Investor Relations website of our website for 30 days. Before we begin, I would also like to note that management during the course of our discussion today including the Q&A section of this call, will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Management may discuss future plans and prospects for revenue, product introductions, market conditions, competitive conditions, gross profit margins, spending levels, other financial metrics and our relationships with third parties. We caution you that forward-looking statements related to these and other subjects we may discuss involve risks, uncertainties and information that are difficult to predict and are not guaranties of performance and the company's actual results could differ materially from those contained in such statements. There are many factures that could cause or contribute to such differences. We refer you to the risk factors and cautionary language contained in today's press release announcing Sphere 3D's results as well as the company's financial filings with the securities and exchange commission including the risk factors, management's discussion and announcements of other sections of the company's periodical report currently on file with the SEC. We remind you that the company's forward-looking statements are based on current expectations and speak only as of this date. Sphere 3D undertakes no obligation to publicly update any forward-looking statements to refer to new information, events or circumstances after the date of this release and conference call. And with that, I will turn the call over to Sphere 3D's CEO, Eric Kelly. Please go ahead, Eric.

Eric Kelly: Thank you, Lauren and good morning everyone and thank you for joining us today. During this call, I am excited to share with you the industry trends and the thesis why and how we got here, our vision and business strategy, our key partnerships and the progress we have made towards our key initiatives and milestones. First, let me start by saying what we are focused on achieving and what drives us on a daily basis. There are hundreds of billions of dollars spent on shrink wrapped software every year that will be migrating to the cloud and needs to maintain access to the data that makes the software usable. We assembled the technology stack from end-to-end to accomplish that. It is driven in the front end by our Glassware Container technology. This new and innovative approach to application delivery makes cloud migration for software truly attainable. On the back end we have our own operating systems for storage which came from the acquisition of Overland and has allowed us to create a pure, virtual storage solution in our cloud that innovates [ph] with our container technology. We are initially focused on Microsoft bundled applications from the last 20 years, primarily because there are significant opportunities to address that the shortcomings of our competitor technologies cannot. They can't either support desktop applications or can't provide them economically. I'd add that these applications make up approximately 90% of the total end user application market. A simple exercise of validating the demand can be found by taking a look at Microsoft Azure's results. They are adding over 90,000 Azure customers per month, most of them are taking some of their on-premise software and moving it to the cloud. Lastly, to create greater value and flexibility for us customers we partner with Microsoft to offer the complete solutions with no upfront investment, no recoding of applications and with a conception based usage model that comes out to a penny per user per hour per application as well as a pay as you grow storage option. We believe we are entering the market at an inflection point and the market opportunity is enormous. Although companies like Microsoft and Amazon are seeing huge success as evidenced by combined $10 billion in cloud revenue and phenomenal growth rates analysts estimate that only 2% to 5% of compute workloads in large enterprises are now done in the public cloud infrastructure today. So just think about the value of the market if we could see only 40% to 50% of workload shift to the cloud. Let me just cover what drove us to get here. There were a few industry trends we saw developing when Sphere 3D was founded five years ago. Server based computing was going to revolutionize the way we do business by empowering the cloud. BYOD or Bring Your Own Device will be the way companies and people will do business in the future. Today there are over seven billion mobile devices around the world. Over 400 billion a year is spent in packet software with an estimated 430 billion this year. That would one day need to move to the cloud. The technology that was being asked to deliver all this was ill equipped to complete the task and would create significant opportunity for us. With that as a backdrop, our vision is to become simply the most flexible solutions for cloud migration and the application and data delivery platform for any device that will ultimately deliver the next cloud. Specifically what does the next cloud need to deliver? Full products [ph] and applications to ANY device in their native form regardless of the operating system, vendors, non-vendors, legacy or web applications, a virtualized storage architecture that will allow people to store information in the cloud or on-premise with the ability to centrally manage that information or data, an exceptional user experience that can only be achieved through a guaranteed quality of service when utilizing current network infrastructures. And last a secure means to accomplish this. As it pertains to our business strategy, I am pleased to see this especially [ph] unfold and the execution by our team as we continue to make the pivot that we highlighted during our earnings call in May. In addition, to moving away from non-core product segments, we have introduced for the first time a number of new offerings that are aimed towards the expansion of our model to include both cloud and user license reoccurring revenue models. Although Kurt give additional details, a few quick highlights on the numbers. Despite some headwinds from an OEM and a $1 million reduction in revenues as part of overall strategy to eliminate non-core product line. Our revenues increased from $18.4 million to $18.8 million for the quarter. At the same time we were able to reduce our operating expenses during this period. Again Kurt will provide the details a little later. As part of our overall strategy, our partners are important to us. We continue to develop and expand strategic partnerships with industry leaders such as Microsoft and VMware as well as expanding our OEM partners with companies such as Dell. Some of our partners are organically grown and others have come from way of acquisitions. We have maintained since late 2013 that acquisitions will play a key role in reaching our overall objectives. To that end, over the last 18 months we have executed to that plan. We made three strategic acquisitions, V3 Systems to provide virtual desktop workloads and cloud desktop management software, V3 ability to access hardware directly such as local storage and manage hardware resources on-the-fly as a direct use with and broader compute environments. Overland Storage to provide a full suite of storage and backup solutions complete with their own operating systems. There are only a handful of storage operating systems existing now and it is unusual for a company archive to own their own hardened operating system for data management and storage. We also benefit from a customer base which includes tier-1 OEMs such as HP, Hitachi, Lenovo and NEC to name a few and with over one million systems shipped around the world to everyone from Fortune X companies to small and medium businesses which represent a significant installed base and provides us an enormous opportunity for additional monetization through the introduction of our virtualization solutions. Lastly, just a few months ago we acquired the Imation's RDX backup solution business to allow us to consolidate and give us control of the IP for RDX, providing us with 100% ownership of the industry’s leading removal backup appliance offerings, gain access to tens of thousands of additional customers to further monetize and provide us with the flexibility to control the road map moving forward for the entire product line. These acquisitions coupled with our development of Glassware SnapCLOUD has put us in a unique position of being what we believe is the first company to own the entire technology stack, needed to move your complete workload to and from the cloud, including your software or applications, the data associated with them and the management software needed to make it simple to migrate and manage. This unique position was validated earlier this year when we began our relationship with Microsoft. They accelerated the well and large plan between the two organizations quite frankly required a significant shift of our key resources to meet the needs of one of our key strategic partner initiatives. We expanded the technology so we can have a global application in data delivery platform and the Microsoft as a cloud. Our Glassware 2.0, Exosphere with enterprise is commercially available in Azure has several new features such as a multicarrier protocol that provides network quality service by dynamically switching from one carrier to another depending on which one provides the best performance and the G-series for the Microsoft marketplace for small and medium businesses will be available the week of November 23. Today, we are the only company that can deliver current or legacy Windows, Non-Windows applications and robust virtual storage architecture from the Azure market share as a cloud a good opportunity for a company our size to address the market of this magnitude with a partner like Microsoft. With that, I would like to turn the call over to Kurt, our Chief Financial Officer to comment on Sphere 3D’s 2015 third quarter financial results. Kurt?

Kurt L. Kalbfleisch: Thank you Eric, good morning everyone. Let me provide some detail on our financial results for the third quarter. Please note, the following financial highlights reflect the addition of the Overland business and operations for the full three months as well as the addition of the RDX products acquired August 10 for the partial quarter. Total revenue for the third quarter of 2015 was $18.8 million up from $18.4 million in the second quarter 2015 and $1.5 million in the same quarter of 2014. OEM revenue for the quarter was $3 million up from $2.7 million in the preceding quarter with branded product revenue of $13.1 million up from $12.9 million in the second quarter. Work-in-service revenue was $2.7million in the third quarter compared to $2.8 million in the second quarter 2015 and $0.2 million in same quarter of 2014. Regionally the branded product revenue was 14% in APAC, 27% in the Americas and 59% in EMEA. As Eric mentioned in his remarks, there was a continued reduction OEM shipments during the third quarter from our historically largest OEM which we believe was due primarily to their ongoing company transitions of splitting their business into two separate entities. This reduction in shipments during the third quarter was $1.3 million or 69% lower when compared to the second quarter. While we expected reduced revenue from the this OEM customer in the third quarter the amount of the reduction was larger than forecast. We have however, already seen recovery in the fourth quarter and as of today bookings for this customer in Q4 are well ahead of the same point in Q3. We expect to see this OEM customer’s volume increase during Q4 and move back towards their historical run-rate in the first half of 2016. This shortfall was offset during the quarter by the RDX product acquisition completed in Q3. Total product revenue for the third quarter were $16.1 million up from $15.6 million in the preceding quarter and up from $1.3 million in the prior year. Product revenue details are as follows

Peter Tassiopoulos: Thank you, Kurt. Good morning everyone. For those of you that have either participated in our call from the past or reviewed some of the transcripts from previous quarterly calls, you know that I spend a fair bit of time covering our technology accomplishment on these calls. Today, I’m going to touch a little less on that and instead try to give you an idea of some of the opportunities that we're working on and how this tech is actually creating opportunities for the company. So first off our technology starts upwards of the opportunity work with some of the stalwarts of IT. For example, let's take a look at some of the progress we have made from the collaboration with Microsoft. I’d like to take a minute to convey the significant milestones we have achieved with our first cloud partner. First off we launched our enterprise version of Glassware 2.0 which we branded as Exosphere as well as our cloud based network attached story technology called SnapCLOUD. As Eric alluded to earlier in the call, another innovation of Glassware available through Azure’s marketplace will be up sometime next week, I believe the week of the 23. By moving to Azure, first we benefit from a product that has invested many billions of dollars to create their data centers, but what’s even more important, Microsoft is the leader in software applications, everything from office suite to databases and we are the only partner with applications containerization technology that can deliver this packet when those software and Non-Windows applications as well as enterprise feature virtual storage from Microsoft Azure cloud today. We are leveraging their cloud infrastructure, their sales force and marketing power to drive our business. We can now provide multi-tenanted applications on a consumption basis globally and with the scalability of the cloud. And as some of you have asked this before, let me say we have long term plans to add additional partners with similar scale to help us to achieve our goal of becoming a leader in delivering this next cloud. I’d like to take a moment to highlight some of our milestone just in the last 30 days as it relates to the cloud initiatives. On October 15, we announced the availability of Glassware 2.0 container technology in Microsoft Azure cloud platform in the form of Exosphere. And just to be very clear, what I’m saying guys, Glassware is available today from Azure to deliver applications and scale the tens of thousands of users and beyond. We’re engaged with multiple opportunities on Exosphere now. On the same day we hosted with Microsoft a worldwide webinar to introduce Exosphere, G series and SnapCLOUD offerings. Attendees included Microsoft partners, sales people, end user customers and from what I understand some of you on this call we probably on that call as well. The actual complete webinar is available on our website under the video tab for any of you who would like to go back and review it. The following day we held a more in-depth overview of the offering and delivered that to the enterprise for the field sales team from Microsoft and again and how our Azure offerings are able to increase their revenues as well as ours with the goal of increasing awareness of our solutions, identifying opportunities we can certainly pursue. Now several of these prospects have come from the training session and we are jointly pursuing those as we speak. Last week as part of the monetization strategy Eric referred to earlier on the call, we kicked off and integrated telemarketing and telesales campaigns to promote SnapCLOUD virtual storage on Azure to targeted with the SnapServer users to U.S. and we'll follow that up with other geographies when we're done. We have hundreds of thousands deployments to drop on for these campaigns. First campaign should run through about mid December. We expect to produce some strong traction and it’s predictive of our longer term end user adoption expected as we move to consumption model for so many of our products. Also recently we announced that Microsoft accepted us into their enterprise product lines as a follow on to Glassware 2.0 and SnapCLOUD being available on Azure. Today there are about 200 independent software vendors worldwide and is no cost and by invitation only program. There are numerous other initiatives that we're worked on and we were planning to accelerate the marketing efforts to build on additional momentum. Now I’d like to take a little bit of time and talk about why we are able to disrupt some of these application virtualization paradigms. Many ISPs have designed package software that is not multi-tenanted. To go back to the drawing board and start from scratch is not a viable option for many of them. Between the cost and time needed and the sheer complexity of rewriting millions of lines of quote. There needs to be an alternative. On the other side are the organizations that have purchased the software. They cannot contribute to the solution as they’re bound by the vendor to use the software in its executable form. In the server world, the multi-tenant approach to server virtualization is what enabled the software define data center. The enhancements of a hypervisor turned the cottage industry of virtualization into the multibillion dollar virtual servers industry we have today. In order to move the existing applications to the cloud, you must be able to provide that same multi-tenant for applications without altering in many cases even meeting to see the underlying scope [ph]. We’ve actually solved this problem. For years you've probably heard that adding VDI solutions can solve the problem as well, if we don’t see this as a viable pontification process using these approaches, why not? Again, I said I wouldn’t get technical, what I’ll say as we started the hypervisor becomes the de facto operating system once deployed on a server and it’s just not a click to manage the application workloads. Today’s solutions utilize this operating systems, but once you do that you can’t safely, efficiently mix the applications on a server. Imagine not being able to guaranty the usability of an application because of the other apps that are running. So what happens when you need multiple operating dependences for your work flow. Some my apps run on Windows 10, some run XP, some run Windows 7 others run Linux all at the same time. We solved that problem as well. And when all else is dealt with we always come back to scale in talks [ph] There is nothing that scales like a container whether it is stalker or containers for Linux or Glassware for Windows applications. The virtual machine just cannot compete. There is no shortage studies you can find online that will compare container performance to bare metal and rightfully so. Our scale versus traditional virtualization can translate anywhere from two to ten times greater performance. And lastly what I’ll say there is a significant VDI licensing paradigm that will often render the finished product either unaffordable for everyone from ISVs to small businesses or difficult to manage and navigate. As we mentioned earlier and for those that are familiar with us in fact we don’t use the guest operating system in Glassware and therefore we don’t require users to absorb the class of that and their business model. This gives us an enormous price performance benefit when we compare to traditional approaches, therefore solving the cost performance problem as well. So what do all these problem solving solutions mean from a customer perspective well, let’s have a look at some of the things we are doing. We are working with a potential customer and multiple customers that include ISVs that want to move their package software to a cloud delivered SaaS model without needing to rewrite the code. In one specific case, the addition of the guest OS license alone just flat all prices them out of the market making us the only alternative. Our Exosphere offering is designed to deliver applications from the cloud at scale unlike anything in the market today and licensing scheme makes that the most economical solution out there. We’re engaged with another partner who has applications that are designed to access specific hardware and took tens of millions of dollars and many years just to certify for their mission critical use case, let alone the costs associated with developing it to begin with. Our emulation technology which forms part of the Glassware stack and for which I’m happy to say we coincidently were issued a patent just ten days ago allows us to fork with newer to newer X86 servers and zero changes to the architecture and code that avoids to the recertification process and again makes us the only option here. In another case some of you may have seen we just deployed solutions that delivers both traditional applications like Microsoft Office as well as applications that were designed specifically for that customer. Things like SQL Manager Studio, Linux base as well as Microsoft can be mixed we are again one of the only that can handle these mixed used cases. And lastly, with no guest operating system we have a small exploitable surface when it comes to security vulnerabilities. This feature has its engage with customers in the financial industry and some of the healthcare initiatives that you’ve already heard about. I am sure over time as this unique security profile become more readily known it will give us a tremendous leg up in verticals that are customs to handling, highly sensitive information. With all this talk about the application, virtualization aspect of our portfolio. I don’t want you to think that we’re trying to say that the virtual desktop is dead, far from it. There are many instances where they’re managed where the actual desktop is a requirement. And in those instances we felt that the VDI approach is today still needed some additional significant improvements. So we did that, to help manage the cost and performance complexities of VDI we enhance our Desktop Cloud Orchestrator technology to create greater market opportunity to sell into. When deploying VDI, the utilize hypervisors we are now able to provide Glassware like resource allocation in a highly distributed capability. For example, we are dealing with a large scale that we won’t be able to allow its users to have access to the virtual desktop capabilities that match their needs in real time by having the ability to move users from a virtual desktop to virtual desktop as resources demand we can provide the best user experience in VDI at the lowest overall cost. You longer need a one size fits all approach. Imagine if you will that you’re working on your physical laptop and decide you are going to go start following up on your email? Today you’re going to do that in multi task so you are going to watch a hi-def movie at the same time. But your movie starts to slowdown your laptop wouldn’t it be nice so somebody could just tap you on the shoulder and hand a you more powerful laptop for new user – that’s exactly what we do with our virtual desktop management software. This allows organizations to move to VDI without over provisioning, greatly reducing the cost per user without sacrificing any of the performance. With these the more revolutionary for this product is the customers can get access to the more powerful virtual desktops from any of the V3 servers in their entire network including those located at other locations, it gives them more resources to drop from. When we started with this product we looked at it as a hyper convert solution. We’ve since moved to talking what’s in the V3 box as the hyper convert solutions to something that actually plays in the datacenter. If you think about it, the datacenter is simply a much bigger box than a server is. Lastly I want to talk a just a little bit about SnapCLOUD. It's quickly becoming our go to for adding storage to all our virtualization solutions. SnapCLOUD can be deployed in the same server Glassware or V3all these three or another existing commodity servers or in the CLOUD, it’s allows you to get all the benefits of full mass storage and you can average the unlimited capacity that you have in your background. With the availability of snapCLOUD on Azure customers can now even benefit from the page of roll model allowing us to Azure in a consumption model for this storage portfolio as well. I can go on through hours, but our add work excited about the direction we have taken and I believe we have solid proof point to demonstrate where Sphere 3D is heading. From the IPro cut through to the Texas, ESC6 partnership is the point financial institutions like the one we announce last week these few announced agreements alone that equate to tens of millions of net new business over coming two to three years. But, now with the global scalability and reach dropped by the launch of SnapCloud and Glassware and next week Glassware in the marketplace we believe the foundation even stronger for our future. When I look towards the next quarter, I expect the following

Operator: [Operator Instructions] Your first question comes from Krishna Shankar from Roth Capital. Your line is open.

Krishna Shankar: Yes, can you give us some sense for how these design wins are going to transmit to revenues over the next few quarters, especially they could mean both your healthcare and the Texas education design win and some of the other wins that you have at Microsoft Azure, can you give us some sense for the cadence of all revenues are going ramp for the next few quarters.

Eric Kelly: Hey, Krishna. This is Eric, good morning.

Krishna Shankar: Hi Eric, how are you.

Eric Kelly: Great, thanks for getting up so earlier this morning. Yes, so if you looked kind of the and Peter said kind of briefly, if you look at the wins that we have got with let's say ESC6 or iPro, iPro, is a three-year deal where they have over 300 healthcare facilities. They have decided to put that our product, our virtualization product in 200 of their facilities to start and that represents a little over $13 million win for us over three years. One of the things that we are looking at is how do we accelerate that just by adjusting them by going from location to location. The other one which we are excited about Krishna, is that ESC6, one with the school region in Texas where they have about 1.1 million students and we signed an agreement with them, not only are they are deploying it within their region, but they are now we have a partnership with them where they are actually developing at throughout Texas where they have a little over 5 million students. Again, just a 20% adoption rate with that one Krishna, represents over $20 million over the next three years. So, again, as you look at where we are deploying our resources really making sure we support them and try to accelerate that from three years to less than three-year implementation. So, when I look at it over, kind of product a timeframe it is easy for me to pencil in quarter-by-quarter. Depends on how quickly we can move through the installation. So, the great news is we already have the contracts, now the execution and implementation by our services and support team. I don’t know if that…

Krishna Shankar: Yes, that's helpful and then, Peter you have talked about the other wins at ISVs, can you talk about how some of the new ISVs and software companies that you are looking at when will those translate to revenues in terms of SaaS models?

Peter Tassiopoulos: Yes, absolutely Krishna, as you know, I mean the beautiful thing about the cloud from a user perspective is the consumption model. With any consumption model it is not front-end loaded right, so it’s takes time to build. We have been working with a couple of ISV's. I mean one of which from back I guess a year ago has gone out and looked that every cloud provider and when they looked at our literally pennies per user per hour, I mean there is nothing that can go near it. And so, we believe that that will start to contribute if not later this quarter definitely in the first quarter of 2016, in the sense of building it when again with the recurring revenue model as it build it is the business you want to be in but it does take a little bit of time if it is not front end loaded. And we do have a number of customers that are hybrid based which will see EMEA [ph] revenue impact when they buy the appliance for the local side and then again continue to see build up as they take the consumption side of the cloud and marry the two together.

Krishna Shankar: And have you gotten the revenues for the SnapCLOUD initiative already, is SnapCLOUD starting to get revenues now?

Eric Kelly: Yes, Krishna yes it has. The good thing about the SnapCLOUD is we're really leveraging the SnapServer installed base and we launched that a couple of weeks ago. And I can tell you that the adoption rate is exceeding our internal expectations in terms of customers that already have our SnapServers on-premise looking for a way to either have it, that recovery or a backup solution in the Microsoft Azure cloud. So it's working just as we had anticipated hoped. The other thing just to add what Peter was saying to help accelerate some of the programs we have, we just launched a leasing program with NEC for North America. So now allows the large deal that we put together to have them - have a different financial structure, so they actually can do implementations a lot faster. So I mean, the combination of that, the combination of the SnapCLOUD and the traction we are getting we are pretty getting excited about. As Peter said, as a consumption model that is a brick by brick revenue stream. So yes, so that’s thanks for the question, I appreciate it.

Krishna Shankar: Okay and then Kurt, given that you expect this large customer OEM after the restructuring to come back you've seen a pickup of others, would expect their revenues to grow sequentially and for Sphere 3D as a whole would you expect sequential growth in the revenues in the December quarter?

Kurt L. Kalbfleisch: Yes, Krishna, I think the large OEM that we referenced obviously that $1.3 million reduction was significant in the quarter. But as I stated we’ve already seen recovery this quarter, so yes I do expect them to start coming back sequentially and we do expect to see benefit this quarter from that, so we do expect to see some growth.

Krishna Shankar: And then gross margins were kind of depressed in the September quarter, what will be the trajectory of gross margins for December?

Kurt L. Kalbfleisch: We do expect to see some recovering gross margins. The impact to gross margins was primarily associated with the acquired RDX business and warehousing costs associated with that during the quarter.

Krishna Shankar: Okay and any significant changes to OpEx relative to Q3?

Kurt L. Kalbfleisch: Not relative to Q3. During the Q2 call we laid out some targets that we felt we'd reach by Q4. We actually reach those in Q3 and I do not expect significant changes to the OpEx number in Q4.

Krishna Shankar: Okay and then can you talk about the cash burn, what do you expect in Q4 and both the line of credit and the debt when that is due and just give us an update on the balance sheet.

Kurt L. Kalbfleisch: Yes, in regards to the cash burn we were better this quarter in regards to the cash that we used in operation significantly better than prior quarter. I think we will be in that range in Q4 with continued improvement going forward from there. As far as the debt currently, we have $10.3 million on our current debt that’s split with $5 million on the one revolver and $5.3 million with Silicon Valley Bank. As you will recall, that, that revolver is actually $10 million revolver that we have $5 million drawn on with FBC.

Krishna Shankar: Okay and the convert note?

Kurt L. Kalbfleisch: I’m sorry what?

Krishna Shankar: You also have the convert note right?

Kurt L. Kalbfleisch: Yes, the convert note is still out there, it is due at the end of March in 2018.

Krishna Shankar: March 2018, okay. Got it. Thank you.

Operator: Your next question comes from the line of Hubert Mak, Cormark. Your line is open.

Hubert Mak: Hi, guys, yes, what I think I guess this I a bit challenging in terms of just regarding I saw your sales pipeline, where you revenue is just going to grow next year and also as we enter into Q4. So is there any way like you can quantify sort of sales pipeline for us whether or how many deals or how many deals or how many deals are close to signing that you think are over the next sort of six to 12 months and maybe you can quantify you are here to kind of give us a sense of how things are progressing as you guys roll out these integrated technologies here? And then secondly, just a follow-up on that as well as in terms of the revenue that impact on OEM, what was the cumulative impact on a quarterly basis that you would expect to be picked up? I guess I’m just trying to just figure out what is sort of the one-time quarterly pick up that we think we get to?

Eric Kelly: So Kurt, why don’t you just take the lead and I'll follow-up I guess?

Kurt L. Kalbfleisch: Yes related to the OEM revenue as we stated there were two primary things on the revenue side, we specifically stated that we’re going to exit some of the low margin non-core businesses, the number on that was $1 million in reduction on our non-core business with the majority of that being related to tech media [ph] which is low margin to which we’re making a strategic decision to exit. In regards to the OEM customers I'd say we expect to see pickup this quarter and back to expected run rate in 2016, but I don’t want to specifically quantify how much of that $1.3 million we'll get back, but I do expect to see progress with that building back up. In specifics to areas you can see the 17% growth quarter-over-quarter in disk systems and that’s where we expect to see the growth going forward is related to that disk systems offerings.

Hubert Mak: Sorry, I just want to jump in there, so you talked about $1.3 million reduction this quarter and I think you guys also had a Q2 impact as well. So like was it minimal in Q2 or is that similar sort of magnitude?

Kurt L. Kalbfleisch: It wasn’t of that magnitude. I don’t think we disclosed the specifics, but it was about 30% of that reduction in Q2 and so Q3 was the significant reduction, but like I said we are already seeing that recover and we expect to see some recovery in this quarter and back to historical run rates in the first half of 2016.

Hubert Mak: And I just want to jump in one more time in this non-core revenue is that complete, like do you see any more, you guys will be shedding?

Kurt L. Kalbfleisch: There may be some shedding on a quarter-to-quarter basis, for the most part tape automation and some of those higher margin products on those will remain steady, we expected to remain steady but we do expect to continue to shed of the lower margin businesses as appropriate as the other areas of the business continue to grow.

Hubert Mak: Okay. And I guess on the sales pipeline, I think Peter I’m not sure we are going to talk about that.

Eric Kelly: Hi this is Eric, hi Hubert how are you doing?

Hubert Mak: Okay good.

Eric Kelly: So we don’t really forecast our sales pipeline, but I can’t kind of give you put some context to the pipeline. I mean what we’re seeing now is much larger deals because we’re selling solution versus disk [ph] products. We’re seeing with the partners over at Microsoft clearly build that we probably wouldn’t foresee ourselves, the partnership is working extremely well. So it’s growing and the key areas that we’re focused on are virtualization products, our storage products and you kind of see in that reflected in the numbers but we don’t really give guidance on pipelines, but hopefully that answers your question Hubert.

Hubert Mak: Yes and maybe just – maybe another way of asking, you announced two deals in that $13 million to $20 million range or couple of years, are those types of deals, are these larger deals or these are be in size, I'm just trying to get what type of deals are they.

Peter Tassiopoulos: Hubert it is Peter. I mean it’s all over the map. We’ve seen everything from deals that have been locations to companies who spent 1 or 200 locations to companies who spent $300 million on just building their app that are looking for a way to get to the cloud or we see everything in between. So it’s pretty hard to quantify the key is though we didn’t see these six months or eight months ago. We didn’t see this range that’s sort of new to us because these deals are big and quite frankly we’ve added some new skill over the last quarter to manage that kind of business. So we’re pretty excited to answer your question directly, the one way of seeing that we’ve announced those are now turning into the midrange, whereas originally we are looking at those, that the large ones that are actually now in the middle of the path.

Hubert Mak: And based on these deals are growing in size and sounds like you've got more solutions from a technology standpoint I know either there always comes in improvements in R&D, but always you guys have companies combined together a resort of close like pretty much complete in terms of the technology stock or you it’s kind of go and sell one solutions with all different products?

Eric Kelly: Yes, so I think a follow up from Kurt from last quarter you have mentioned that R&D we see some reduction from the synergies between the two companies, so which we did from last quarter and this quarter. So, from an R&D perspective it’s not as exploratory as it was. The lot of the R&D is actually specific to customer requests now. And so the product is pretty backed as we have mentioned Glassware in market place is staged, certified and so it’s ready to go. Exosphere is already up and so, it’s fully baked. The appliances are up Hubert, I don’t know if know, but we did an install where we actually taped that wire so short simple it is. So, it’s there – it’s backed, of course we're - is always going to be improving it. As SnapCLOUD and also our SnapScale products we are always going to be improving, but for the most part I mean we have got some solid products there already to be in the field which took a little longer than they would like, but they are gone.

Hubert Mak: Okay, just two more questions just on the Microsoft, are you looking with an idea how much resources they are putting behind your partnership, just so that we can get feel of how aggressive they are?

Eric Kelly: Well thank you, I mean trials yes the Microsoft executive team all the way through their sales and marketing teams, they have put in a tremendous amount of resources behind what we are doing basically as a strategic move for them in terms of enable their customers to migrate from on premise to the cloud. But a good example of that Hubert is just what we did 30 days ago. When we did the October 15th announcement that has their worldwide sales team and their key partners being introduced to the products, being trained other products we are follow on these after that, we are - our sales teams, their marketing teams, their executive team are working hand-in-hand to just drive the business. So, their – I couldn't add pretty more resources that they are providing us. So, I am extremely pleased with that kind of partnership that we have.

Peter Tassiopoulos: And I would like to add to that Hubert we have multiple levels of engaging with them. Right, when their part of inline side, we have even a better relationship we have the Azure place. So, this multiple agreements we are working with so many different profits so that I think it’s really important that everybody understand this is not intact in the iTunes App store whatever that’s not what we do. I mean we are really are putting our tech into the Microsoft tech for everybody to actually able to be utilize. So, it’s pretty in that.

Hubert Mak: Okay, great and then just on the OpEx guys want to clarify one thing here in terms of you are talking about $4 million in cost savings for 2016 and that sounds like that you've picked up some Q3 was the full amount realized in the Q3 or is there still some directory in Q4.

Kurt L. Kalbfleisch: We are very close to realizing the target and I think we have stayed in between 8% and 12% and we have actually achieved a little over 13%, almost 14% in that reduction. Obviously, there is a little bit of flux quarter-to-quarter but for the most part we have – we have been able to hit that target. Having said that, we are reviewing and looking at our spending to make sure that we are spending the dollars in the best possible way and monitoring that spending.

Hubert Mak: So, there is still more flexibility on the OpEx?

Eric Kelly: I think we are continuing monitoring it, and I don’t want to put another target out there at this time for additional reduction. And I think we have over achieved the one that we had put out there with your coupled where it is right now was your coupled where is right put out there we are feel comfortable where it is right now.

Hubert Mak: Okay, great. Thanks.

Operator: Your next question comes from the line of Scott Shafer [ph] Private Investor. Your line is open.

Unidentified Analyst: Hey, guys can you elaborate a bit on the different between Exosphere and Glassware in market place like who, what each product is for, who each we marketed too and by whom.

Peter Tassiopoulos: Yeah, sure Scott it’s Peter. Thank you, great questions. So, let me start off by just what Exosphere is. Exosphere is actually how we started. We sort of code named it internally as routing [ph], but Exosphere is how we started. It is a highly distributed solution where there is a number of components to it. So you have different size virtual machines inside of Azure running different parts of the overall workflow within your solution. And you can even have connections to others like Rackspace or Amazon. So you can actually fire up other data centers to work along with your core data center. And it is really designed for large deployments. Right? We were able to stand up an infrastructure for 10,000 users in two weeks and which is not heard of, but it does require certain technical sophistication to do it. It is not something - it is not pushing a button. Glassware coming in at the marketplace, that's pushing a button. All those little micro small virtual servers that are located and spread out in Exosphere, they are shrunk down into one package so that you can go online, go into their store, pull the image, go download your client from one of the app stores whoever it is, put in the address for your virtual machine and connect to that virtual machine in Azure. So it is more geared towards, and I wouldn’t say necessarily it is small medium businesses because that is not the only target, because it can't do thousands of users, it is actually geared towards a more simple approach, less distributed, but can also cater for somebody who just needs access. I mean if you needed access to Microsoft Office for the weekend, you could literally turnaround and fire up for a weekend. And in terms of Glassware remove everything and in about half an hour into the cloud and then come back and turn it off on Monday. Right? So it is two different sort of market use cases and the bigger difference between the two is really scale and flexibility as well as the amount of specification you need to actually run.

Unidentified Analyst: Okay, who or how it will be marketed and by whom? How the product will be marketed and by whom?

Peter Tassiopoulos: Well absolutely, so both products are done jointly between us and Microsoft. And so this is again to be very, very clear and I've heard these questions from a couple of other shareholders, I'll be as clear as I can, they are out marketing this think in many cases without us and they are patrolling leads over the fence saying, hey guys here is what I have come across, can you help, et cetera, et cetera, et cetera. So their sales force is working this. Understand this is an Azure and I cannot speak to this, but from outside looking in if you look at all the push they've put on Azure, this is a major initiative for them, their cloud and that's why they grew I think 130% quarter-over-quarter last quarter. So they are definitely incentivized to go out there and this gives them a huge advantage over whomever else is out there right now when it comes to applications. I mean where we can deliver stuff no one else can and their sales folks know it, so they are in the front line.

Eric Kelly: They took the just to add to that, I mean I wouldn’t look at it, when I know their sales teams are compensated. Compensation plans are in line with our compensation plans and I know that they are focused.

Unidentified Analyst: Okay, so can you give me an example of how just something that's simple like we are perfect, how will it be used in marketplace, I would like to know that, if I want to use Exosphere, using Exosphere that way.

Peter Tassiopoulos: So well, I mean, I'll put it this way, if you were Corel [ph] or if you were a large employer with 20,000 or 50,000 or 80,000 workers you would probably deploy Word Perfect in Exosphere. And if you were the bank that we installed last week, you'd go to marketplace. And that would be the biggest difference, because Exosphere is network aware. Right? So Exosphere will literally switch from carrier to carrier. It will fire up backup instances without you getting involved. It is designed to literally deliver the world's software from the cloud. I mean it is a very unique application delivery platform.

Unidentified Analyst: Okay, how does that compared as far as the pennies per hour, what's the difference?

Eric Kelly: The cost efficiencies in both, that's a great questions Scott. They actually both perform when it comes to reducing the costs. We say penny per hour, it is penny per hour for Exosphere, pennies per hour for Azure marketplace [ph].

Unidentified Analyst: Okay, one last question, GPU we've been hearing about this for six weeks now. We are due to hear something formal about this. One is this, which we…?

Eric Kelly: So we do have a small GPU sitting in the GW2000. We do have a version which actually is in the field with is based on Dell hardware, the whole GPU access. So that's in the market and in the market and is available for sale today. We will support GPUs in the Azure cloud as soon as Microsoft releases that which I believe is Q1 2016. I think it is in pre-release today, no one quote me on that, but whenever it is available, it is available for us in the interim Exosphere can access GPU from appliances in other data centers so that you can actually deploy it today. In case of any hiccups with Azure it won't affect our ability to land GPU requirements from customers.

Unidentified Analyst: Okay, so with Exosphere you could actually virtualize the GPU application today?

Eric Kelly: No problem.

Unidentified Analyst: Okay.

Eric Kelly: Now, I believe we have to finish before the markets open, so I think we got like a minute.

Unidentified Analyst: Okay, thank you.

Eric Kelly: Thank you, Scott.

Operator: We have time for one more question from the line of Chris Wilson [ph], a Private Investor. Your line is open.

Unidentified Analyst: Hi guys, just real quick since you don’t have much time, I'm interested in with all the stable of products that you have brought to market or are bringing to market may revolutionary, many state-of-the-art, how does that relate to the 16,000 authorized resellers that you've got in your channel right now? Is there, are they aware of these products and if so, at what point are they going to start putting some numbers up?

Eric Kelly: So Chris, we've done it in stages, I mean, those are huge channels, but at the same time they are not actually all skilled or even interested to move to the virtualization portfolio. So we do have a number of that obviously are and so we started the process of training and introducing it. We've got a few, as always we've got a few great customers or partners that have signed up for it and we will continue to do that, but we expect putting up some numbers on the board for us, right. We did start in North America first. We'll work our way from there into Europe and then the rest of the world after that. So we'll do it in stages right? I mean we've got a great new skill set again supporting them all and we've got to do this little by little. We can't do them all at once.

Unidentified Analyst: Okay, thank you.

Eric Kelly: Thank you, Chris. And with that, operator I think we will have to wrap up the call.

Operator: Well, turning the call back to management for closing remarks.

Eric Kelly: First, I would like to thank everyone for joining the call today. I think you can hopefully hear from us our assignment that we are very pleased with the execution that we've been achieving and becoming the premier cloud infrastructure company. The partnership that we have we've talked a lot about Microsoft and we have other partnerships with companies like VMware, I mean our channel partnerships, our key partners Tech Data, et cetera are all being brought up to speed and supporting our vision and delivering our cloud infrastructure, specifically our virtualization and storage platforms. So with that, I look forward to updating everyone on our progress in the future and operator I'd like to conclude the call.

Operator: This concludes today's conference call. You may now disconnect. Thank you.