惠普 (HPQ) 2002 Q4 法說會逐字稿

Good day everyone, and welcome to the Opsware fourth quarter 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 any objections, you may disconnect at this time.

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

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

During the course of this call, we will make forward-looking statements regarding future events or our future financial performance, which are subject to risks and uncertainties. Actual events and results my differ materially from these statements. Please review our form 10Q filed with SEC on December 16th, 2002, our press release issued earlier today for the discussions of important factors that may cause the events and results to differ.

By now, you should have received a copy of our press release that we distributed after the close of market today. If you have not, it is available by accessing the investor relation's section of our Web site at opsware.com. Now let me turn the call over to Ben.

Thanks, Ken. Today I am pleased to report that we are on track with our plan and slightly ahead in some areas. During Q4, we had excellent traction in the software business and completed most of the remaining items from the managed services business. We made great progress on the customer front, which I would like to share with you.

First, today I'm pleased to announce that Comcasts, the largest cable company in the United States, serving approximately 21 million cable subscribers, will use Opsware to automate their server operations at data centers located across the country. Buy using Opsware, Comcasts will speed service and (inaudible) times by 80 percent, and dramatically lower their operating costs.

Second, earlier this week we announced a major expansion of our relationship with MetLife. After their initial use of Opsware, MetLife determined that our software would save them thousands of man-hours and significantly reduce their operating costs. As a result, MetLife has increased their commitment to us by a factor of 4 and is implementing Opsware across their multiple data centers.

Third, we recently signed Gateway Computer Corporation as a new customer. Opsware will assist in the automation and reliability of their major Siebel implementation.

Fourth, we signed (NewBrief Corporation) as a customer. (NewBrief) provides supply chain and business critical logistics to companies, including Verizon, the U.S. Postal Service, and Siemens. (NewBred) will leverage Opsware to enhance operations of its IT infrastructure backbone and applications.

In addition, this quarter, Northrop Grumman selected Opsware as the automation platform for a large project with U.S. Department of Defense.

As we stated in our last call, our plan has been to sign a controlled number of significant customers as we gain experience with the software environments outside our managed services business. As you can see, we've made excellent progress on this front. Beyond that, we are encouraged by the size of the commitment these customers have made. Excluding EDS, our average software license based deal, has been greater than $500,000 which is a strong indicator of the market that Opsware squarely addresses.

On the partnership front, today I am pleased to announce that we have signed an agreement with BEA systems. Under the terms of the agreement, the two companies will further automate operations of BEA's market leading WebLogic server. More importantly, with this partnership, BEA gives us complete access to their entire based of enterprise customers which includes 100 percent of Fortune 500 Financial Services companies and telcos. Additionally, Opsware will be featured at next weeks BEA E-World conference as the solution to automate operations for WebLogic application environments. The BEA channel is a major sales opportunity and provides us significant visibility in the markets.

Further on partnering, Sun Microsystems selected Opsware as one of the key solutions to automate their new blade server product line that they unveiled on February 10th. As such we launched Opsware-Blade addition, specifically designed to lower the cost of managing blade server technology which I will discuss in a moment.

Encouragingly, the market is taking shape. During the quarter, we saw the very first multi-vendor analysis of our market space conducted by Forrester Research. In that analysis, Forrester evaluated solutions from 14 different vendors, including large system and software vendors, and ranked Opsware as the top solution for data center automation. Not only is this market being recognized as the new high growth category, but also recognition as Forester's is critical to our objective to be widely recognized as the number one provider of data center automation software.

Our partnership with EDS, continues to be strong and we had good success with them last quarter, first with the delivery of Opsware system 3.6, we satisfied all deliverables under their license agreement with us. Then, in January, we announced EDS's deployment of Opsware into two of their largest data centers. Opsware deployment in these data centers marks good progress in their aggressive global deployment plan. Currently, EDS is planning to deploy Opsware in 20 data centers in North America and more in Asia -Pacific and Europe by the end of this year.

This week, EDS also announced their new Opsware powered service offerings makes them the first and only service provider offering a 100 percent up time guarantee for web and enterprise applications. This guarantee give the EDS sales force a concrete incentive for selling Opsware based deals. We expect this development to further strengthen our position with EDS.

In product development, we shipped two new versions of Opsware. Opsware system 3.6 and a new product branded Opsware Blade edition. This first Opsware 3.6 added support for Hp's UNIX server line and extended Opsware support for IBM servers and Lynx systems. IDC reports that Lynx systems represent 13.7 percent of server shipments today and is expected to reach 25 percent by 2006.

Putting Lynx in the number two position behind Microsoft Windows. Given this strong and growing demand, we not only extended our support for automating Lynx systems but Opsware can now running on Lynx. Opsware system 3.6 also added other new server and automation and application and automation capabilities. The new capabilities primarily focus on the top two concerns of large enterprises, security, and disaster recovery.

The security and disaster re-recovery capabilities will allow enterprises to meet their new corporate in forced, stringent security policies and disaster preparedness plans.

In summary, the new capabilities of Opsware system 3.6, particularly security, disaster recovery and extended support for Linux, HP, and IBM systems, greatly expand our market opportunity and make Opsware the only automation solutions supporting all server platforms and 30 unique application products.

The second major release last quarter, the Opsware Blade edition, further extends our product line. This product automates management of the new Blade server technology that is a fast growing market that IDC projects will represent 4.5 billion of the 102 billion-dollar server market by 2005. Blade server technology is a core focus of IBM, HP, SUN, and Dell Server strategies.

Finally, with respect to the sale of the managed service business. In Q4 we paid most remaining residual liabilities and emerged with a very strong balance sheet with approximately $5 million more in cash than we forecast. With virtually no long-term debt, we have all the resources necessary to grow the Opsware business. We also reached agreement to settle or have settled most of our outstanding Litigation including (Fronterra) and a shareholder lawsuit. All on favorable terms to the company. We are pleased with progress that we made in first full quarter as Opsware.

Initial customer wins and deal sizes are exceptional. We are right on track with our financial plan and well positioned for good growth in the software business in year ahead. Now let me turn this call over to Sharlene to provide more detail on our financial position and outlook.

Thanks, Ben. Before getting into the detail of the financials, I would like to update you on the final resolution of the accounting treatment of the $52 million software license agreement with EDS, which was executed at the time of our sale of the managed service business.

There was some uncertainty regarding both the classification as well as the timing of recognition on the income statement of the EDS payments due to specific revenue recognition criteria. I'm pleased to tell you that together with our outside auditors, we've agreed on the appropriate treatments and that income from the this contract will be treated as subscription revenue over its three term. You will begin to see this flow through the income statement in Q1, since we have met our final delivery obligations under the contract. Now onto the P&L.

Given the transition of our business over the last four to five months, year over year comparisons are not relevant. Instead, I will focus on certain key financial highlights, including updates to items we've discussed in previous calls.

As anticipated and disclosed last quarter, recognized revenue was minimal as we began ramping up our software business. The recognized amounts are primarily for professional services.

Operating expenses, excluding amortization of stock compensation, totaled $7.7 million in the quarter, down from $10.7 million in the previous quarter, for surpassing our expense reduction expectations. We were successful in decreasing and aligning our expenses over one quarter instead of two as originally expected.

On the balance sheet, you will see that we ended the year, with approximately $67 million in cash. Almost half of the net cash utilization during the quarter was to retire excess real estate obligations from the managed service business.

As Ben mentioned, we've completed most of the items from manage service business. Some additional exit costs still remains, however, but is included in our guidance, which I will discuss in a moment.

Continuing down the balance sheet, you will see a line item, advances from customers. To make an apples to apples comparison, you should compare this to our deferred revenue line from last quarter. This line represents cash that we have already received from customers for software licenses, but for which we still have certain deliverables as of January 31st. Going forward as we ramp up the software business and develop more of a track record, I would expect these types of contracts to meet the criteria for inclusion in the deferred revenue line.

Turning to guidance, we are maintaining target cash flow break-even in Q2 of this year, with trough cash of $50 to $55 million. Additionally, we are re-iterating our full year revenue in the range of $20 to $30 million and expect that to substantially all of fiscal 2004 revenue will be recognized on a subscription basis. Given this, you should expect revenues to begin modestly in Q1 and grow throughout subsequent quarters. We now invite your questions.

Thank you. The question and answer session will 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 using a speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment.

We will proceed in the order that you signal us. And we will take as many questions as time permits. Once again, star one for questions. We will pause just a moment to gather our audience.

We will take our first question from Ryan Mikes with Shemano Group. Please go ahead.

Hi, guys. Congratulations on your quarter. It looks really good. I was wondering if you could provide a little bit more clarity on the BEA relationship and how you see that going forward and also just to highlight again - you did deliver on all the EDS requirements?

Yes. OK. So first on the BEA relationship. That's something that we are extremely excited about in that it really sets a good foundation for us to grow, especially towards the second half of the year.

In addition to introduction to - to essentially access their customer lists, which is a tremendous customer lists for us because it is right on top of the space that we want to be in. They are making introductions through their sales force where they are taking into each of the accounts that look like good targets for us and really helping us get started which is the biggest challenge for a new software company. So we are extremely excited about that. Also at their E-World Conference, we are the only vendors in the management solutions space that's presenting. So we are running that whole track and so we think there is great opportunity for us there.

We did, with Opsware 3.6, complete the last of the deliverables to EDS, so for those of you who follow the proxy statement that is indeed the last deliverable.

Wonderful. Also on the new customer wins that you announced, when do you expect some of their revenues to start hitting the top line? How quickly will that happen? And how quickly will it ramp?

Well, everything is going to be subscription and at first we have got to deploy them. So once the deployments are complete, then you will start to see the revenue hit. So that will be over the next couple of quarters. So that's included and anticipated in that $20 to $30 million.

OK. Wonderful. Thank you very much. Congratulations again.

OK. Thank you.

As reminder to the audience, star one for questions, or if you have a follow up to the previous question, star one.

It appears at this time there are no further questions.

Pardon me. We will take our next question from Mark Lamb with Shemano Group.

Good afternoon, guys. Great report. Glad to hear it. You guy really executing. You guys hear me OK?

You bet.

OK. Good. Looking at the deal size you mentioned, $500,000 commitment on average from your new software, you new clients, seems like a big number? Especially for a company in your stage. How does that compare to some of the other software companies out there?

Yes, we think - it is a big number. And we are really pleased, particularly since it is, you know, also just the initial deal size and we see a lot of growth in the accounts that we've signed. We already have picked up, you know, a big growth at MetLife for example. So we are really pleased with that number. We think it's also critical to the profitability of an enterprise software business to have the capability to do large deals. As the large deals tend to be much more profitable from a cost of sales standpoint than the smaller deals.

And I will pass it to Sharlene who has probably better experience that me on average deal sizes across the software industry.

This is - I mean just from my experience, these are very large deals for a company our stage. Usually we start out, you know, much smaller.

That's just what it seems to me. Is it going to be in the same model as the EDS model where you are getting paid basically on a server basis, number of servers?

Yes, the number of servers is generally going to be the case across the deals. EDS is a bit unique in that their license is a subscription license where they pay by the month. While we will probably see more perpetual licenses in the rest of the business.

Yes, normally, our terms will be net 30.

OK. Can you give me just a quick snapshot - for example on MetLife - I know you ran some testing with them. From start to today's date when you got the big contract, how long does that usually take? Is that a couple of months, six months, a year?

Yes, there is bunch of stages from sort of the initial, you know, the initial pilot up through the last order. You know, - from end to end it was probably close to 12 months. But from the new, sort of what we call the technology of new sales methodology that we developed which is done at the work shop where we do the - basically investment study where we look at their labor cost very precisely. The distance between that and the deal increase was closer to two months.

Wow. That's great. All right, thank you.

All right. Thanks very much Mark.

As a reminder to the audience, star one for questions. At this time, we have no further questions. I would like to turn the conference back over to Mr. Ken Tinsley for any additional or closing remarks.

OK. Thanks everyone for your participation today. As always, if you have any questions, please contact us at our headquarters in Sunnyvale.

This does conclude today's presentation. We thank everybody for their participation.