惠普 (HPQ) 2003 Q2 法說會逐字稿

Good day and welcome, everyone, to the Opsware second-quarter 2004 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. [OPERATOR INSTRUCTIONS]. I would now like to turn the call over to Mr. Ken Tinsley, (indiscernible) Director of Investor Relations. Please go ahead, sir.

Good afternoon, everyone. 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 the future of event or future financial performance which is subject to risks and uncertainties. Actual events and results may differ materially from these statements. Please review our form 10-K filed with the SEC on May 1st, 2003, and the reports on form 10-Q and form 8-K filed with the SEC for discussions of important factors that may cause the actual events and results to differ.

By now, you should've received a copy of our press release that was distributed after the market closed today. If you have not, it is available on the investor relations section of our website at Opsware.com. In addition, an audio transcript of the call will be posted our website following the call. Now let me turn it over to Ben.

Thanks, Ken. Today I'm pleased to report a strong second-quarter. As we forecasted, business is cash flow positive in the quarter. We generated cash flow from operations of approximately $1 million and increased our cash balances by more than $3 million and ended the quarter with approximately $65 million in cash. Generating positive cash flow in our third-quarter of selling software demonstrates the profitability in the deal and the underlying strength of the business.

We continue to forecast positive cash flow from the software business for the remainder of the fiscal year.

During the quarter, we saw more indicators that our market is growing quickly. In the U.S. alone, [indiscernible] estimates there are 4 million servers in production today. They further estimate that new server shipments in the U.S. will total more than 8 million over the next three years. The explosion in server counts is largely attributable to two major trends.

First, the continued migration from client/server to Web-based architectures makes it radically easier to develop and deploy application. Additionally, Web-based architecture [indiscernible] all the processing power from the client to the server.

Second, enterprises are rapidly adopting Linux and Windows Intel-based (ph) servers. These systems replace a smaller number of large proprietary servers. Over the last eight years, these trends have led to a 100-fold increase in the number of servers in the average enterprise with no change in management processes for software.

The result of this unmanaged server explosion - a series of crises and securities, qualities, and labor cost within IT. We have built Opsware to uniquely address these issues. As a result, we have made excellent progress since transitioning to the software business.

Since our last call, we have continued to win significant deals, among them a top insurance company -- our second major win in this vertical.

Next intelligent decisions. The prime contractor for Department of Defense Intelligence Agency has selected Opsware to manage their IT environment in multiple locations worldwide. U.S. defense and intelligence continues to be a (indiscernible) sector for us.

Next -- inflow. We will use Ops for their (indiscernible) managed service business significantly reduced operational costs and gain efficiencies.

Finally HP Entria (ph), a Toronto-based managed services unit of Hewlett-Packard serving CIBC and other clients in the financial services section. Our average deal size -- excluding EDS -- continues to be greater than $500,000, leading to a well-constructed cash flow positive business.

On the partner front, our relationship with EDS continues to progress nicely on the deployment front. In addition, EDS has introduced us to several new opportunities features [indiscernible] case study demonstrating the savings they are achieving with Opsware.

Additionally, EDS is participating in an advertising campaign with us, saving their [indiscernible] to save $100 million using Opsware.

With respect to Hewlett-Packard, we are encouraged by the early traction. Since signing the agreement in June we have closed our first deal -- HP Entria (ph) with help from this channel.

During the quarter, we added several new members to the Opsware authorized partner program. We call this program the [indiscernible] third parties to resell Opsware and provide deployment and implementation services.

During the quarter, [indiscernible] and Fortuna signed on and joined existing members HP and EDS.

We also announced the Opsware Solution partner program which enables companies with complementary products to partner with us, and showcase their technologies integrated with Opsware. Additional partners under this program include VEA, Crystal Decisions (ph) and [indiscernible] Technology.

Also during the quarter, we expanded our address (indiscernible) market with the opening of our United Kingdom office. Our present -- our previous success with the UK government when we were in the managed services business has translated into significant demand for Opsware.

We're able to address this demand earlier than originally planned, due to our operational successes in the US.

On the product front, I'm pleased to report that the next version of Opsware System 4 is on track for shipment in September. This is the most significant release of Opsware ever and dramatically expands our sales opportunity. The major new incapabilities include industry leading Windows support.

This will help enterprises improve security and minimize the time required to deploy the Windows servers. As Windows commands almost 60 percent market share our capabilities in this area strengthen our overall lead. Datacenter Intelligence. This feature provides high visibility into IT organizations and enables large enterprises to improve the management of assets and labor allocation.

This is a critical capability for consolidation and migration.

Web services API. This enables rapid easy integration with existing monitoring, trouble ticketing, billing and virtualization technology.

HP is integrating Opsware with their utility data center product via the Opsware Web services API. Automated script execution. This provides greater ad hoc control in central administration of thousands of servers in multiple locations.

Intelligence software module developer kit. This enables companies to rapidly incorporate and manage technology for many vendors. [indiscernible] Lab has evaluated Opsware System 4 and describes it as "comprehensive server and application lifecycle management solution, capability rich and easy to use." Further they said, "Opsware provides a centerpoint for automating the many different operations required to manage heterogeneous enterprise IT environment."

In summary, I'm pleased with the progress we've made in the business this quarter. Achieving positive cash flow from operations is an important milestone for us and provides a platform for the next phase of growth. Our market is substantial and continues to grow. Our unparalleled product capabilities and market leading partnerships with EDS and Hewlett Packard uniquely positioned us to be the number one provider with data in our automation software.

Finally, as we announced yesterday, we have added two new independent members to our Board of Directors. First Mike Volpi, head of Cisco's routing division which owns 70 percent of the enterprise routing market. In his ten years at Cisco, Mike has developed relationships with majority of the Fortune 2000 CIOs. Second, Mike Homer, CEO of Kontiki and board member of several technology companies including AOL (ph). Mike has a great track record growing companies into industry leaders. These are two great additions to our already exceptional Board of Directors.

Now I'll turn the call over to Sharlene to provide more detail on our financial results and outlook.

Thanks, Ben. As we previously forecast we generated positive cash flow this quarter. In the earnings release, we included a stand-alone statement of cash flows for Q2 to highlight this. You can see that net cash provided by operations was nearly $1 million.

We also received approximately $42.5 million in cash from the exercise of expiring stock options, primarily held by former employees transferred to EDS last year. We ended the quarter with total cash of approximately $65 million -- an increase of $3.2 million from last quarter.

As we stated before, we expect to pay approximately $10 to $12 million in the second half of this year for liabilities from the managed service business.

Turning to the P&L, net revenue was $4.3 million compared to $2.5 million last quarter. The bulk of our revenue comes from the EDS (ph) $52 million contract. For conservativism and until we establish the DSOE we will recognize all revenue [indiscernible].

Also revenue recognition is dependent on the timing of customer deployment as well as fulfilling all our obligations under each customer contract. As a result, much of our bookings activity is not reflected on the P&L. On the balance sheet at July 31, advances from customers and deferred revenue totaled $7.8 million, up over $3.5 million from last quarter.

To clarify how we treat and record customer contracts, there are three categories other than revenue into which a customer contract can fall.

First, if we sign a contract and have met the criteria for revenue recognition, the amount is recorded as deferred revenue, except for the amounts recognized in current period revenue. This is true, whether or not we have received cash.

Second, if we sign a contract and receive cash but have not met the criteria for revenue recognition, the amounts received are included in advances from customers.

Or, third, if we invoice a customer, have not yet received cash and have not met the criteria for revenue recognition, the amounts are not reflected anywhere in the financial statement.

Now turning to guidance. As we stated, we're managing the business to cash. We reaffirm our expectation to generate positive cash flow from the software business for the remainder of the year. We reiterate our total anticipated cash collections of $22 to $25 million and total revenue of $17.5 to $20 million for the full year.

For Q3, we expect revenue in the $4.5 to $5 million range. We now invite your questions.

[Operator Instructions] Tim Klasso (ph) with Thomas Weisel Partners.

Congratulations on a fine quarter. Of the new products, primarily Data Center Intelligence and the Windows product, can you give us an idea of how you plan on pricing these and are they designed to sell into your installed base or do you think they going to be used to track your customers?

Thanks for the question. Thanks for your comment. Data Center Intelligence will be priced separately as a separate module and it's basically on a per [indiscernible] core basis which is generally a per data center basis. The Windows support will be incorporated into the base product and be priced in server with the rest of it. With regard to new customers versus existing customers, both of them -- I would say really significantly expand our ability to go in and sell new deals and as they fit into -- they help us fit into more environments. So it makes us much more compelling in the Windows arena for things, major initiatives such as the forced migration from NT to Windows 2000 and Windows 2003. It brings on the Data Center Intelligence side very, very broad and (indiscernible) visibility into what's been historically a very black box for IT which is what are our operation personnel doing and what are they doing in the past and who made the change that led to the break in the system? What exactly did they do? These kind of things for all my servers and so it really makes a product more attractive to a much broader set of customers.

As you know we move the product out of originally one customer which was Loudcloud and now we've added quite a few more than that and this enables us to really increase by another order of magnitude the number of customers we're able to go out and capture.

Okay, great. And then, Sharlene, you mentioned how you recognize the revenue and how if she had a category in what I'd call off balance sheet backlog. How would you quantify or qualify how your off balance sheet backlog did this quarter relative to last quarter?

We won't disclose that information, Tim.

Can you give me sort of a directional feel?

We are just not going to disclose that. We don't want to get into disclosing exact booking information. We're giving guidance on cash collections.

Okay. Thank you very much.

Andy Shofer (ph) with Tier One Research.

Congrats on the quarter, everybody. Can you give out how many customers you have today?

I don't believe -- we have announced 12. We can't give out the total number just because some of them are, again, intelligence agencies and we keep those [indiscernible] announced 12.

Is it radically higher than that? Double?

Not radically higher but higher than 12, but 12 announced.

All right. I had a bunch of ways to ask that question but will pass on those.

We appreciate that.

You want to give an update on just the status of VSLE (ph) and when you are expecting that to have another milestone on when you might be closer?

I think we said that it would be sometime probably next year -- maybe by the second half of the year. We want to have enough deals under our belt within the narrow band that the accounting rules allow.

Sure, and what percent of revenues would you [indiscernible] quarter?

That was the bulk of the revenue. More than 90 percent, again.

How many employees did you have at the end of the quarter?

We have about 105.

Any change in terms of opportunities? I assume with the new features coming out, your deal opportunities are looking larger, are they more than one department now on average? Or any changes in just the way you're entering the customer accounts?

The newer product is quite a step up. And if you've seen -- (indiscernible) pretty good report on it but it's a really really significant upgrade over the last one and it enables us to go in with a much more straight forward valued opposition. People can really see how it can help them so it has enabled us to do both, shorter sales in some cases and then broader sales in other cases. It's helping on both fronts. We have been selling in many cases across the [indiscernible] for example at MetLife and our Northrop ,Grumman (ph) deal these are covering multiple IT functions which is where you have the technology play best because it does coordinate across those departments, which is why we're able to command relatively high or large scale sizes vs. the rest of the industry.

Could you give more explanation around the HP deal you helped close?

Yes this is with HP managed services. A branch of that is called HP Entria and that is their outsourcing business. And it is on the CIBC account so it is -- our previous bill with HP of course is a reseller deal with the product group. This, we think is significant in that with EDS and HP -- those are two of the top three service providers in the world. It is not as significant as the EDS deal. It's not on that order of magnitude, yet, but it's certainly the first step along those lines.

Last question. When does the advertising campaign with EDS begin?

First ads come out next month on that in Sierra Magazine.

Great. Congratulations.

Thank you.

Mark Lamb (ph), The Shemano Group.

Good afternoon, great quarter, congratulations, outstanding to have a young company like this already cash flow positive. So -- nice job.

Thanks, Mark.

This is directed to Marc -- we haven't heard from Marc yet, so we will get him involved. Server shipments as we're seeing and you guys touched on -- a huge problem seems to be getting out of control with an addressable market as gigantic as it is and seems to be growing every day.

One. What's causing it and how are you guys positioned to capture that business?

We just think it's interesting -- we're at a phase in the industry where the conventional wisdom is there's not a lot of new applications (indiscernible) deployed and things like that but we're just seeing a tremendous amount of organic activity in a lot of businesses where they are doing all kinds of things ranging from systems migrations to Linux, or to Microsoft based servers, doing consolidations, doing -- they're scaling Internet base sites because more and more customers are online every day. Putting in place new disaster recovery sites, wake of the power blackout and all the virus attacks and everything that's been going on recently, doing all kinds of things on that. So and then in general there's just been a technology shift where you can get a tremendous amount of bang out of a $3000 server and people are just able to buy a lot of them much more much higher unit volume than they were them to a few years ago in much more price point. So there is proliferation everywhere from that standpoint. And this is just the problems that we -- Ben talked about are compounding very quickly which technology [indiscernible] promise, you can do a lot with it, you can fill a lot of applications, you can scale systems way up, (indiscernible) [indiscernible] customers online (indiscernible) very exciting things but it is a whole new sort of order of magnitude and complexity you are dealing with and we think you need a new generation of software to address that and that's what we've been hearing from the customers.

That's great. That's -- congratulations again. Thank you.

Thanks, Mark.

Steve Lee, private investor.

Hi. You guys had good numbers. I got a question here. Did you address the relationship with DoD for one, 2, is that there is, I guess a contract coming up in September with $800--$900 million that they are going to expand their IT into a broadband system.

Could you tell me whether you are going to be participating in that?

Yes. So one thing that -- I don't know how familiar you are with Department of Defense and U.S. intelligence organizations and how they purchase things, but they're very sensitive to us disclosing anything about what we're doing there, what we're bidding on or any of our activity because these systems are a matter in some cases national security and whatnot so we will not be commenting on our opportunities or what we're doing there just in fairness to our partners.

Are you directly in a working relationship with DoD?

Yes. We've done business there in the past but that's all we can say on it.

Well, thank you for everything.

Thank you.

Brett Grigg (ph) with The Shemano Group.

Congratulations, again, on a fantastic quarter. I heard you mention that the marketplace in the U.S. was 4 million servers growing to 8 million. Could you put that estimation in dollars?

Yes, well, it's -- if you think about our business currently, we're in a -- you look at our pricing of deals that are out there where a safe number is sort of $12 to $1500 a server if you think of it that way than that's the range market opportunity it looks like for us. So from a market side standpoint we think that somewhere between 60 and 80 percent of those servers are addressable. So 60 and 80 percent addressable and those are -- as you've seen the DDS (ph) proxy and other evidence of our pricing that's where pricing comes in than all [indiscernible] .

Thank you very much.

And that does conclude our question-and-answer session. I would like to turn the conference back over to Mr. Tinsley for any additional or closing remarks.

Thanks, Sharon, for your help today and thanks, everyone, for your participation. As always, if you have any questions, feel free to contact us at our headquarters in Sunnyvale. Good afternoon.

That does conclude today's Opsware second-quarter 2004 earnings conference call. You may disconnect at this time. We do appreciate your participation.