惠普 (HPQ) 2003 Q4 法說會逐字稿

Good day everyone and welcome to the Opsware, Inc. fourth quarter 2004 conference call. (OPERATOR INSTRUCTIONS). Today's call is being recorded. If anyone has an objection, you may disconnect at this time. At this time I will now turn the call over to Mr. Ken Tinsley for opening remarks. Please go ahead.

Good afternoon. With me today at our headquarters in Sunnyvale our CEO, Ben Horowitz; CFO, Sharlene Abrams, and Chairman, Marc Andreessen. During the course of today's call we will make forward-looking statements regarding future events or our future financial performance all of which are 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 1, 2003 and our reports on Form 10-Q and Form 8-K filed with the SEC for a discussion of important factors that may cause the actual events and results to differ.

The term pro forma operating cash flow used in today's discussions exclude payments made in connection with certain liabilities related to our former Managed Services Business. The term pro forma net loss used in today's discussion excludes the effect of a non-recurring income tax benefit related to our Managed Services Business. Reconciliation to these items to GAAP are provided on the Investor Relations section of our website at opsware.com.

By now you should have 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. In addition we are currently webcasting this call, and an audio replay will be available on our website following the conclusion of the call. Now let me turn it over to Ben.

Today I'm pleased to announce a strong fourth quarter to conclude our first full fiscal year as a software company. Before I discuss the drivers behind our projected high growth this year, I will detail the financial highlights of Q4.

During the quarter we reported $6.2 million of revenue which exceeded our guidance. We generated positive cash flow from operations of $1.5 million, our third straight quarter of generating cash from the software business. Finally, we announced full year revenue guidance of 35 million to $37 million in the current fiscal year, which represents 100 percent growth year-over-year. Significantly, more than 85 percent of this revenue will come from deals that we signed last year.

During the quarter we saw more signs that our market continues to develop well. According to IDC worldwide server shipments are expected to surpass 5 million units in 2004, up tenfold from 1995. IDC further estimates that the total number of servers in production worldwide will double over the next five years. As a result, demand for Opsware is growing.

Since our last earnings call we have won significant deals, including a multimillion dollar licensing deal with NTT, the largest Telco in the world. With Opsware NTT will automate its hosting business across North America, Japan and Europe. This will allow them to deliver the highest quality and most secure service with a substantial competitive cost advantage.

Second, Allmerica Financial. This Fortune 500 financial services company will utilize Opsware to migrate to and standardize on a single Web based platform which will yield increased quality and service levels to its operating unit.

Third, Metavante, a subsidiary of Marshall and Ilsley Corporation. Metavante will utilize Opsware to automate many of the manual and time intensive functions in their multiple data centers. Fourth, a major new contract with an agency of the U.S. defense -- Department of Defense. And fifth, Guardian, also a Fortune 500 company and the fourth-largest mutual life insurance provider in the U.S. Combined with our recent wins at MetLife, Allmerica and The Hartford, Guardian gives us excellent momentum in the insurance sector.

Excluding EDS, our average deal size for all deals signed by Opsware remains over $600,000. Our deal size is unique among our competitors and enables us to quickly build a profitable business.

On the product development front, we launched the preview release of Opsware System 4 for Linux. This product runs on the Linux platform and automates heterogeneous data center environments. With the rapid growth of Linux servers in corporations this is an important product as it allows customers to further reduce IT cost. Hewlett-Packard is the first reseller of Opsware System 4 for Linux and is offering this product as part of their utility data center solution.

We also released our first product for international markets, Opsware System 4 Japanese Edition. This product automates Japanese versions of operating systems, software infrastructure and applications. NEC is the first reseller of this product and also provides local support.

The DCML standard we launched in Q3 continues to gain momentum. The number of companies endorsing DCML has more than doubled to 60 since its launch in October. The spiraling number of technologies and complexities in data centers are driving the need for a standard like DCML. As authors of DCML, we are driving the technology architecture in this big new market.

Our relationships with Hewlett-Packard, NEC and EDS are progressing well. We expect the reselling efforts would NEC and HP to contribute new customer acquisitions this year. Significantly EDS introduced us to NTT and facilitated that deal.

On the acquisition of Tangram I'm pleased to report that we closed the transaction on February the 20th. Total consideration was approximately 1.1 million Opsware shares. And for this, we acquired important discovery and tracking capabilities for over 30,000 technologies. This represents a significant product advantage and expands our market opportunity.

In summary, I'm extremely pleased with the quarter. With three quarters of positive cash flow from the software business, our financial model is proving out. The massive shift from client/server to Web based computing has created a series of serious problems for NIT. These problems create the opportunity to build a large software company. As the number one company among analysts with over 200 customers and 100 percent revenue growth, Opsware is poised to become that company.

Now here's Sharlene to provide more detail on our financial results and outlook.

As we forecasted we generated another quarter of positive cash flow. For the fourth quarter ended January 31st, 2004, we generated $1.5 million in cash flow from operations on a GAAP basis. This is the third consecutive quarter in which we generated positive operating cash flow from the software business. Over that period of time we generated over $3.6 million in pro forma operating cash flow on a revenue base of $15.5 million. These results demonstrate good leverage in our financial model.

Turning to the P&L net revenue was $6.2 million compared to $5 million last quarter. As in prior quarters, the majority of opur revenue came from our $52 million contract with EDS. In the fiscal year just ended, EDS accounted for 83 percent of total revenue. However, they accounted for only 65 percent of cash collected during the same period, reflecting the lagging nature of our non-EDS revenue. We expect EDS revenue to decline to 55 to 65 percent in the current year as we expand our customer base.

Our gross margin grew to 78 percent. Although we reported GAAP net income of approximately $600,000 in the quarter, we took a non-recurring income tax benefit related to the Managed Service business of $1.5 million. Excluding this item, we had pro forma net loss of approximately $800,000 or 1 cent per share.

On revenue recognition, for conservatism and until we establish vendor specific objective evidence, we recognize all revenue ratably over the term of the maintenance contract, and only after we have satisfied all deliverables under the contract.

To reiterate 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 completed all deliverables under the contract, the amounts are recorded as deferred revenue except for the amounts recognized in the current period revenue. This is true whether or not we have received cash.

Second, if we sign a contract and have received cash but have not completed all deliverables, the amounts received are included in advances from customers. Or third, if we sign a contract, have not received any cash and have not completed all deliverables, the contract is not reflected anywhere in the financial statement. For example, we signed NTT late in the quarter so it falls into this category. As such, this contract is invisible anywhere on the balance sheet or P&L. We experienced significant growth in this category during the quarter.

Deferred revenue and advances totaled $10.2 million which was comparable to the previous quarter. When combined with signed contracts not yet reflected on the balance sheet, we achieved strong quarter over quarter growth.

Now turning to guidance. We're projecting full year revenue of 35 to $37 million in the fiscal year which began February 1, 2004. More than 85 percent of this revenue will come from contracts we have already signed. In Q1 we anticipate revenue of 7 to $7.5 million and expect to continue generating positive cash flow from the software business. We now invite your questions.

(OPERATOR INSTRUCTIONS). Donovan Gow with American Tech Research.

Hi, guys. Nice quarter. Can you comment a little bit on the EDS rollout, how that is progressing? Where they are in their rollout? And when you anticipate them being fully deployed on the 18,000 servers on the initial contract? And then secondly, can you comment on the hiring front looking for the new sales VP?

On EDS, EDS is progressing extremely well. In fact they just started to use use some of the platform capabilities of Opsware. They did a recent automation of a pretty simple function for them. It took them about two days to write and they saved $1 million in labor costs in the first year in doing that. So that has been going really well. In general they're quite pleased with how things are going.

Although they do not allow us to forecast where they are in deployment and what they're doing, that is going well and meeting our expectations. In general we're quite pleased with the progress of EDS and think that is going great.

On the sales front just so you understand, I'm currently managing three sales Vice Presidents, one in Europe, one North America commercial and one North America federal. And I think that is a relatively stable situation. For we do have a search under way but we're not in a rush to close it and there is no additional pressure to do that. We do look to increase our bench strength on the sales front. And we will probably be doing that sometime in the next 90 days or so.

Can you give us any feel for the pipeline or any deal wins with HP or NEC?

We're not forecasting pipeline right now. I think HP is a bit ahead of NEC, so you would be likely to see something come out of HP before NEC. And in general where we have been pleased particularly with the recent activity pickup from HP. But nothing to report there in terms of new deals that have come all the way through.

(OPERATOR INSTRUCTIONS). Mark Lamb with Shemano Group.

Congratulations on another good quarter. You guys keep humping it out. Keep it going. A quick question for Marc. You had been in the media quite a bit, Marc, and I think that is great. See you quite a bit more lately. Can you talk about offshoring and how that is going to affect Opsware, and how you guys all fit in that picture?

Yes. We think offshoring is a very positive trend. We actually think it is a very positive trend for the American economy and also for American jobs, contrary to what is in a lot of the press. And that is what I've been talking to some of the press about. But also it is a very positive trend for our Company.

So for example, Opsware plays a really valuable role in that we make it very easy for companies to put their servers in one country and put the people who run those servers in another country. So if you want to keep all your servers in the U.S. but put the jobs for the people who were managing those servers in another country like Brazil or Eastern Europe or India, you can do that.

And then of course our customers can take the cost savings that they get from doing that and they can plow that money into hiring more Americans for software design and development and architecture and creating new Web sites and doing all the new things that they're doing. We think it is a real win-win situation.

We're seeing pretty strong demand from our customer base. You know, not all of our customers are doing that, but a number of them are, including some of our larger ones. And we're seeing a lot of demand in the pipeline for that kind of thing. We think as it continues to pickup, it is going to be big deal. And you should expect to continue to see me in the press on this topic.

On Tangram, and anyone can answer this. They had at least a decent revenue stream over the last 12 months. Is there some talk that that can be accelerated by sharing clients? And how do you guys plan to take on the clients that they currently have? How are you going to integrate them into Opsware itself?

There a few things on that. First thing to understand is the forecast, the revenue forecast, is not dependent on Tangram revenue. And let me tell you why that is so. From an accounting perspective we can only take revenue on new deals from Tangram. And in particular we're not -- just if you look at their business, it wasn't a super high-growth business, which is why we were able to acquire them at the cost that we were able to do that. They do have a nice maintenance revenue stream, which we will be incorporating in, and you will see that in terms of cash flow and in increased R&D investment from us in particular. And, yes, there are some great opportunities in their customer base. And we've got some great upsell opportunities too with the Fillotsore (ph) systems that we're working on right now.

You would only be able to recognize from February 1st forward, their revenue?

February 20th forward.

Mark Pulser (ph) with Redstone.

Just to follow up on that. Will you be able to recognize the maintenance revenue from previous deals or just 100 percent new revenue?

Because of purchase accounting rules any deferred revenue that was on their balance sheet just falls into purchase accounting. So we will only be able to recognize new maintenance that we book after February 20th.

In terms of vendor specific objective evidence, do you make any assumptions in your guidance in terms of getting that any time later in the year?

That is not built into the forecast for 35 to $37 million this year.

Any thoughts on when that might reasonably happen?

We expect to achieve VSOE by the end of year, but it won't impact revenue for this year, it would impact the following year. And we would still have a significant portion of our revenue be ratable after that.

Based on the older deals that you still have to do ratable or new deals which still have to be ratable?

Yes, both.

The other question, G&A was down pretty significantly sequentially. Do Do you expect that to be at a similar level going forward or go back to the old level?

Last quarter included about $1 million of non-cash compensation charges and this quarter included significantly less. From a cash standpoint, it is really -- it will be closer to the level from last quarter excluding the $1 million.

Sounds good. And just the last question. It went fast when you were talking about the NTT deal that it is not on the financial yet, but you would expect -- do you expect in this quarter to get a cash payment of some sort and be able to put that at least in the advances line?

Yes, absolutely. We will get a cash payment from NTT this quarter.

(OPERATOR INSTRUCTIONS). Andy Schroepfer of Tier 1 Research.

Congratulations everybody. I jumped on the call late today, so I am going to have to re-listen before I ask too many me questions that I'm sure you already gave out. But if you gave out a customer count number that is one I just wanted to see if you gave out?

We talked about five customers on the call, and then we talked about the overall customer count, including the acquisition being over 200.

Excellent. In terms of competition, there is one of your competitors on the private side that has announced a couple of Fortune 500 wins in the quarter, and has been referring to the fact that they have been competitive wins. Any comments on the competitive landscape maybe relative to the private company still out there? And maybe how many competitors are usually in the deals that you are bidding on?

The competitive landscape has been, I would say, pretty uneven, but by far we compete most often with IBM. And that is probably in about 20 percent of the accounts. Significantly in I guess Allmerica this quarter we competed with IBM, but we haven't seen a lot of consistency.

And then maybe one other question. On the rest of the services organization, even like an IBM Services or a HP Services, or just all the services companies collectively, Extensa, CFP, are you seeing the appetites starting to grow in terms of those sales reps and those account reps seeing opportunities to bring you in as a solution that they bring, even though it may not be a formal partnership? How is that advancing along?

I think we are by far furthest along with HP. And then as far as other services organizations go it is really just starting out, but you will probably see some activity from us on that front in the coming months. But HP for now is the main large services organization that we are working with.

Final question, you made a comment on VSOE still looking for it this year. Has anything changed in terms of whether you would expect it sooner or later, or should we interpret your comment to just mean everything is progressing as planned?

Progressing as planned.

(OPERATOR INSTRUCTIONS). Andrew Schopick with Nutmeg Securities.

A clarification on a couple of things. I wondered whether or not the Company still has any cash payment liabilities for the Managed Services Business, or whether that has all been done?

There is still some left.

How much is still left?

I'm not saying specifically, but it is --.

I think at one time you indicated that about 10 million last year, I think it was?

We paid about a little over $11 million a couple of quarters ago. So it is not material what is left.

Alright fine that's all I wanted (multiple speakers). With respect to signed contracts that are not on the balance sheet, if you will, do you ever reveal, or are you going to reveal in a general sense what they amount to at this time?

We're not disclosing what is not on the balance sheet at this point other than I had mentioned that we're happy with the growth in all three categories put together.

With respect to EDS, can you give us some general guidance on what -- based any existing relationship what revenues you expect to be included in 2004's guidance from EDS?

I mentioned in the call that EDS revenue would be about 55 to 65 percent in the current year.

Mark Allen with Grotsky Associates.

Congratulations on your execution, very well done. First question is for Marc. Can you comment at all on the Department of Defense deal, and maybe give us an idea of how big it is or what type of magnitude or impact it could have on the revenue base?

And also, you mentioned that came from the EDS part of the business, or referred from EDS. Did we get any leads, did we increase our pipeline or strengthen it from some of the meetings you had back in Washington D.C. in December?

The good news/bad news on the Department of Defense deals, the good news is this is a very strong sector for us and we're doing quite well there. The bad news is the main way we can screw that up is by talking about it too much. Because they are, as you know, those agencies are very sensitive to any sort of public discussion. So in general they ask us not to really say anything. So that really limits what we can do.

As I have said on previous calls there is a very large amount of investment going on right now in that sector in general. There is very -- the defense intelligence agencies are investing aggressively in information technology, building new networks, building new systems. A lot it has to do with the war on terror, but also have to do with the modernization of military. And it is systematic. It is across all the agencies. And we have an extensive network there from past lives. A really good team on the ground there. And I'm out there a lot myself, so we're doing very well there.

In terms of EDS, I just do want to clarify one quick thing. The deal we announced with a joint deal with EDS. The referral from EDS was actually the NTT deal, our big Japan deal this quarter. And that is a great example of how we're able to work with EDS. And we certainly see a lot of opportunity there. They had other deals in the past that we've done jointly with EDS where there is both software revenue for us and services revenue for EDS. And this is another one of those. And we think there will be more of those in future.

Would it be safe to assume the deal you had with the Department of Defense is larger than our average size deal or the range?

In general the federal deals as a group in general are larger. They are -- the agencies are very large and they are aggressive. So in general those deals are larger than a lot of the commercial deals.

The next question is there any progress coming out of Europe?

Yes. (multiple speakers) Yes, the pipeline is forming up nicely. I have been over there a fair amount. Ben has been over there a fair amount. We have a really good, small but really good team on the ground there right now, very senior people. And dealing with some very high-quality companies, some of the real name brand companies over there that you'll recognize. And again they had very ambitious efforts underway. We think there is some pretty significant opportunity there.

Great. And the last question is for Sharlene. I think Andrews just asked this. You couldn't comment on numbers on the deferred revenues, but you did mention significant growth. Can you give us any ideas, any range, or what do you categorize significant?

I mentioned how much was in deferred and advances together was 10.2 million. And that we did also mention that in the amount that is not on the balance sheet that NTT was included in there. And when we announced that we said that was into the millions of dollars.

So looking forward over next quarter, because it was 10.2 versus 10.2 quarter over quarter. Looking over to next quarter we should see something pretty sizable as far as deferred revenue gains?

You'll see the amount from NTT should move into advances.

Okay, great. Good job, guys. Thank you.

Ladies and gentlemen, this does conclude today's question-and-answer session. At this time I would like to turn the conference back to Mr. Tinsley for any additional or closing remarks.

Thanks everyone for your participation today. As a reminder, we will be presenting at the Lehman Brothers and Deutsche Bank conferences next week. And as always if you have any questions, please contact us here in Sunnyvale.

Ladies and gentlemen, this does conclude today's discussion. You may connect at this time. And we thank everybody for their participation.