惠普 (HPQ) 2002 Q3 法說會逐字稿

Good day and welcome everyone to Opsware 2003 earnings conference call. All participants will be in a listen-only mode until the question-and-answer portion of the call. As a reminder, today's call is being recorded. If anyone has an objection, you may disconnect at this time.

I would now like to turn the call over to Ken Tinsley, Opsware's Director of Investor Relations. Please go ahead, sir.

Thank you, Allison, and good afternoon, everybody. With me today at our headquarters in Sunnyvale, are Mark Andreessen, Chairman, Ben Horowitz, and Sharlene Abrams, CFO.

During the course of this conference call, we will make forward-looking statements regarding future events of our - for our future financial performance which are subject to risks and uncertainties. Actual events and results may differ materially from these statements. Please review our Form 10-Q filed with the SEC on September 13th, 2002, our Form 10-K filed on May 1st, 2002 as amended on June 20th and November 25th, 2002. And our press release issued earlier today for discussions of important factors that may cause the actual events and results to differ.

By now, you all should have received a copy of our press release that was distributed after the market closed today. If you have not, it is available by accessing the investor relations section of our Web site at Opsware.com. Now I'd like to turn the call over to Mark.

Great. Thanks, Ken. Today, we'll be talking about our successful transition for a managed services provider to a software company and the progress we've made in the new software business. Before Ben and Sharlene discuss those topics, thought, I'd like to talk about the broader trends we're seeing in the technology industry that are fueling demand for Opsware and what I'm hearing from customers.

Over the last several years, the nature of enterprise IP systems has changed radically in the following ways. First, a very large number of new applications have been brought online over the last seven to eight years. Those applications are generally Web based, and run across a large number of computers and software systems, in some cases 50 to 100 servers per application or even more. This has caused the cost of maintaining an application to sky rocket, even if the number of applications has increased.

Second, a major shift away from large, very expensive UNIX based services, to much cheaper install base services under way. Rather than spending $300,000 in a big iron multi processor server 10, $3,000 smaller boxes can actually provide in many cases better performance and reliability. You can save 10X on hardware, but you have 10 times the number of boxes to deal with. And you know, you can't hire 10 times as many people to maintain them.

Modern IT environments, therefore, are characterized by a very larger number of complex applications with corresponding huge investments with servers, software and storage systems and huge and growing numbers of people devoted to maintain that system.

In the current economic environment, the biggest requirement of enterprises is cutting cost which is no surprise. And since the biggest component of IT cost is now labor, the biggest challenge is to cut IT labor costs, but without eliminating applications or sacrificing quality of service, an impossible task without automation. Opsware is a software that accomplishes this.

My conversations with our customers and prospects confirm these trends. And people are putting a huge amount of effort into cracking the code on this problem. This is making it possible for us to go into customers and show them in hard numbers how adopting automation can help them solve their cross problem and why Opsware is the best software to use for that.

What are the future trends? Lots of cheap servers. Linux and other open source software, further penetration by Microsoft into the enterprise, much cheaper storage in bandwidth. These all lead to a continuing decrease in the cost of the physical components of an IT environment, but a simultaneous increase in the number of components very quickly, leading in turn to the need for more and more people and less automation applied furthering the need for Opsware.

With all of the trends in the environment, our automated approach for managing the complexities of large scale diverse IT systems makes Opsware, we believe, the best way to solve these problems, which is validated by the progress we've been making with high profile customers and prospects.

Now here's Ben to talk more about the progress in the quarter.

Thanks, Mark. We are extremely pleased with our progress in Q3. During the quarter, we closed the EDS deal, completed our management team, restructured the company into a software firm, and made excellent progress in the first two-and-a-half months in the software business. The sale of the managed services business to EDS closed on August 15th, and we received cash of $63.5 million. All post closing reviews have been completed. And no further adjustments to the purchase price are possible.

Following the transaction, we have more cash than we originally forecasted, leaving us with an extremely strong balance sheet consisting of more than $84 million in cash and no debt. Our focus with EDS in upcoming quarters is primarily to deploy Opsware across their data centers worldwide. We're all ready in four of EDS's data centers and are pleased with the progress we're making on their aggressive deployment plan. This is significant given that we are an additional license fees for deployment beyond a prescribed minimum.

In the short term - time we've operated as Opsware Inc, we've had good success with new customers. Today, I'm pleased to announce that Northrop Grumman has selected Opsware as the data center automation platform for a large project with the U.S. Department of Defense.

Second, one of our Opsware, our existing Opsware customers has dramatically expanded their commitment to Opsware, and is deploying our software broadly across four production data centers. In addition, we are now engaged with a major PC vendor, on a strategic architectural assessment and pilot project to automate high availability of their Siebel implementation and online presence.

Over the past several weeks, our prospects have implemented on site, Opsware efficiency studies and have reported remarkable results. During a two day study, companies compare up to 35 key operational tasks both with and without Opsware. In the studies we have run to date, the companies concluded that by using Opsware to automate functions they evaluated, they would save between 80 and 90 percent on total cost of labor. Even in today's rugged financial climate, that's a proposition worth buying.

In product development, we shipped a new version of Opsware which expands our enterprise leads. Opsware system 3.5 can automatically assimilate existing hardware and software systems and configurations into the Opsware framework making it much easier to automate an existing IT environment. System 3.5 also includes disaster recovery capabilities that dramatically speed up recovery of a data center environment.

The U.S. Department of Energy is using this capability in their current implementation of version 3.5. In addition to Window, Opsware 3.5 adds support for IBM, AIX, HPUX, and new versions of Solaris and Linux further extending our reach across all major platforms. We also unveiled Opsware Blade edition enabling enterprises to remotely automate Blade server environments.

As companies like to cut overall IT costs, many are turning to cheaper Blade servers, and Opsware is the key software component that brings the previously exorbitant management costs in line with the now radically lower hardware cost.

We have completed the leadership team to execute on our plan, with the addition of Sharlene Abrams as CFO. Sharlene comes to us from Mercury Interactive where she was CFO from 1993 to 2001. In addition to adding Sharlene, we restructured our expense base, and as a result are on track to reach cash flow break even in Q2 of next fiscal year. We are pleased with the progress we made in our first quarter as Opsware and are well positioned for growth in the year ahead.

Now let me turn the call over to Sharlene to provide more detail on our financial position and outlook.

Thanks, Ben. Before getting into the details of the financials, I'll give an update of the EDS transaction. As Ben mentioned, we sold our managed service business to EDS for $63-and-a-half million and have all ready received the cash. In addition, EDS completed its post closing review of the balance sheet, and released our $4 million letter of credit held for any potential adjustment of the purchase price.

As a result of the receipt of cash and removal of any contingencies regarding the final price, our auditors Ernst & Yong, removed their growing concern qualification to our financial statements.

Now on to the P&L. During the quarter, the company transitioned from a managed service business to a software company. So quarter-to-quarter or a year-over-year comparisons of the financials are meaningful or relevant to our ongoing business. So instead of walking line-by-line to the P&L, I'd like to highlight just a few items.

First, the $2.6 million in revenue relates to our managed service business prior to the closing date of the sale of that business to EDS. The sale of the managed service business resulted in a gain of about $49.2 million after all costs and expenses of the transaction.

In conjunction with the transaction, we right sized the company to be inline with the new software business model. And as we told you last quarter, we wrote off excess real estate and other equipment of about $12.7 million as a restructuring charge.

Finally, the $18.3 million credit for amortization of deferred stock compensation comes as a result of the reversal of charges taken in previous quarters resulting to staff productions also related to our transition to a software company.

Operating expenses of $10.7 million excluding restructuring and amortization of stock compensation were down 70 percent from the $35.3 million last quarter and down 75 percent from the 44-and-a-half million in the same quarter last year, consistent with our transition to a software model. We expect to continue to decrease operating expenses over the next few quarters, by about one to $1-and-a-half million per quarter.

And one final item, last week, we settled our litigation with (Fontera). And we agreed that we would not purchase the company or issue them any stock. We made a small cash payment to them approximately equal to our anticipated legal fees in the matter.

Turning to guidance, for our next fiscal year ending January 31st, 2004, we're maintaining our target cash flow break even in Q2. We're projecting full year revenue in the range of 20 to $30 million reflecting our plan to recognize a substantial portion of our revenue as subscriptions. This has not effect on our business forecast or timing of cash flow break even. And assumes that revenue recognized from the 52 million three year license agreement with EDS will be in the $15 million range. And as we said last quarter, revenue in Q4 would be minimal.

We ended the third quarter with over $84 million in cash. And it's important to note that we're still in the process of paying down certain liabilities from the managed service business. At cash flow break even, we expect to have between 50 to $55 million.

We now invite your questions.

Today's question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone. If you are on a speakerphone, please be sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and we'll take as many questions as time permits. Once again, please press star one on your touch-tone phone to ask a question.

We'll take our first question from Thomas Berquist with Goldman Sachs. Please go ahead.

Thanks. Hey, Ben, nice work getting the transaction taken care. And congratulations on Northrop Grumman.

Thank you.

Can you talk a little bit, I mean before we had talked about the strategy, you were still a little unclear on some of the sort of deal metrics we could come to expect as you look at these deals going forward. Is there any sort of experience you can give us now with some of the - you know, you had mentioned that you had scaled up one of the customers all ready and you obviously sold a new one. Is there any information you can give us yet?

Yes, I mean we're slightly early in terms of giving out specific deal metrics. And it's just as a matter of, you know, we're learning what things are good predictors of the business going forward. And we want to make sure that we give information on models that make sense.

But we - what you will see from us really is a continued focus over the next two to three quarters on a relatively small number of large size deals culminating with cash flow break even in the second quarter. At which point we'll have basically the support and software maturity to yield much higher volumes in terms of numbers of deals. So everything is tracking rather well versus what we've planned for and we're feeling very, very good about the plan.

But we're not quite ready for deeper metrics, yet, just because we're a little concerned that they may still be misleading.

OK. That's fair. In terms of the configuration content repository that you have are you continuing to add to that. Can you talk a little bit more about sort of the size and scope of that repository.

Yes, I mean significantly this quarter as I said earlier, we've added support for AIX and HPUX, as well as we've added new versions of Solaris, Linux and a variety of other technologies.

The technology base that we've had, you know, has been doing, you know, pretty well in our initial turn in the markets. So we're going to be pretty demand driven as we go beyond that but, you know, because we have the complete IBM stack we have, you know, BEA, Oracle, Veritas, all of the sort of major technologies out there in the space we're looking at we're doing pretty well.

So we do anticipate expanding that, but we're also pretty pleased with the coverage that we have in the existing 60, now 70 technologies we support.

OK. Great. Thank you.

Once again, that is stare one if you would like to ask a question.

We'll take our next question from Pat McBaine with Gruber and McBaine. Please go ahead.

Mark or Ben, just to bet a better sense of the competitive dynamics out there, using either Northrop which you've announced today, or I noticed SBC (Picturiva, Guriva) Op Force, what is the competitive environment out there? Did you compete with (Guriva) for instance in both of these pieces of business, win one and now win the other, just walk us through what you're seeing out there in the competitive landscape?

Sure, well on the - in the Northrop deal that was actually a rather large deal and there were - (Guriva) wasn't in competition on that one. But - and we tend to see different competitors in almost every deal we're in. And we see very little competition from young companies in deals of larger sizes. So anything that's in the, you know, sort of plus $500,000 range we won't see a (Guriva). They don't have that sort of kind of breadth as a company.

Now on the SBC deal, and we did see the press release, but we also noticed that SBC wasn't quoted. And we did call SBC. And we called - we know quite a few people there including the CIO, and they were actually unaware of the purchase. So I don't think it was a broad purchase. I also spoke to Tier One Research who didn't have a lot of insight into the breadth of that deal. So I'm not, you know, we are in SBC and we're competing with business. That (Guriva) hasn't seemed to impacted us at all just because some people we're working with are unaware of the deal.

And like I said, since there's no quote from SBC in the deal, which is rather unusual in a customer press release, there's no way for us to sort of track back and find out where that came from.

OK. Thanks.

Thanks, Pat.

We'll go next to Brian Mikes with Shemano Group. Please go ahead.

Sharlene, could you address where your expense structure starts to bottom out? And at what point in your revenue growth you need to start expanding your infrastructure again?

Well I believe that, all right, we both talked about that, you know, we're managing to cash flow break even. And our cash would probably bottom out, you know, some where between the 50 and $55 million range.

And as far as expenses, you saw them at 10.7, I expect that like I said to go down like a million to $1-and-a-half million. It probably will get down to the six to $7 million range, you know, over the next few quarters.

With that kind of expense level, how - what kind of revenues can the company handle internally without needing to expand significantly?

Yes, this is Ben. Recall that we have a, you know, a guaranteed payment of $4 million per quarter from EDS kicking in starting in Q2 of next year. And so the incremental revenue of, you know, two to three required to be at cash flow break even is certainly sustainable on the current cost structure. We think we can actually go a little higher than that with this cost structure. And I think that that should make intuitive sense, you know, approximately a 105 person company supporting, you know, two to three million in new sales, plus the EDS contract.

But, you know, once we cross over the cash flow positive line, of course, we'll look at opportunities for expansion an growth.

Thank you.

Once again, that is star one to ask a question. There are no further questions at this time.

OK. Thanks everyone for attending today. And if you have any questions please contact us at our headquarters in Sunnyvale.

This does conclude today's conference call. We thank you for your participation. You may disconnect at this time.