惠普 (HPQ) 2004 Q2 法說會逐字稿

Good day everyone and welcome everyone to the Opsware Incorporated second quarter fiscal year 2005 conference call. All participants will be in a listen-only mode until the question and answer portion of the call. Incorporated second quarter fiscal year 2005 conference call. All participants will be in a listen-only mode until the question and answer portion of the call. Today's call is being recorded. If anyone has an objection you may disconnect at this time. And now I'd like to turn the conference over to the Treasurer and IR director, Mr. Ken Tinsley.

Thank you Chris and good afternoon. With me today at our headquarters in Sunnyvale our President and CEO, Ben Horowitz; our CFO, Sharlene Abrams and our 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 April 15th 2004 and our reports on forms 10-Q and 8-K filed with the SEC for discussions of important factors that may cause the actual events and result to differ from these forward-looking statements.

The term pro forma operating cash flow use in today's discussion excludes payments made in connection with certain liabilities related to our former managed services business. Reconciliations of these items to GAAP are provided in our earnings press release and on the investor relations section of our website at opsware.com.

By now, you should have receive add copy of our press release, which was distributed after the market closed today. If you have you 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 call.

Now let me turn it over to Ben.

Thanks, Ken.

Today I am pleased to report an outstanding second quarter. Revenue was $8.6 million, up more than 100% from Q2 of last year. We generated operating and cash flow of $1.2 million from the software business. We signed a new $50 million contract with EDS.

Our second quarter results indicate the strength of the market and the growing need for IT automation. In July, IDC published its first report on the market and they estimated that customers and government agencies will spend $95 billion in 2004 to manage their installed server base. As server counts increase, IT operational costs will be strained even further.

IDC validated that automated server management will be a $5 billion market by 2008. As a result, demand for Opsware products has been strong. We signed a record number of new deals this quarter, with customers including [INAUDIBLE] Comcast, Computer Sciences Corporation, Helix, Infow and J.P. Morgan Chase. Morgan chase. Additionally, we signed a new $50 million order with EDS extending their commitment through March 2008. This is significant in multiple ways.

First, in just two years of using the product, EDS realized such substantial value that they committed an additional $50 million to Opsware. Second, for other customers and prospects, this serves as compelling validation of the return available with our software.

We also signed the New York Times, one of the world's largest media companies, who selected Opsware to automate the management of their multiple data centers. Significantly, this deal came through our HP channel.

We also signed a multi million dollar deal with a leading systems integrator for the U.S. defense and intelligence agencies.

On the product development front, we continue to lead with the most scalable and broadest product available. In the second quarter we further this lead by shipping the first fully expendable market in the product, Opsware System 4.5. This new release provides customers not only with a rich set of capabilities out of the box, but now for the first time customers can build their own customation modules to automate any IT process that's unique to their organization. With this major new capability customers can automate almost any IT process. Our customer Lehman Brothers for example relies heavily on this functionality.

Another major product announcement was Opsware Satellite appliance, which allows customers to rapidly deploy Opsware in branch offices and remote locations. The satellite appliances is compelling for IT organizations with servers deployed across numerous remote locations, such as branch offices, retail outlets and other points of presence. Customers can simply drop the appliance into remote locations and in less than an hour have those servers under Opsware's management.

Finally, as demand continues to grow, we have been adding support for more server platforms. Last quarter we added support for nine new platforms, including [INAUDIBLE]. As a result of our broad product line and the accompanying price points, our average deal size is greater than $600,000. This includes all deals signed since inception including pilots, who's total value is greater than $10,000 and does not include EDS.

In summary, I am very pleased with the progress we made this quarter. With our aggressive product development, Opsware remains the broadest and most scalable offering and now with system 4.5, the most extensible product in the market. The additional $50 million commitment from EDS is a validation of the significant value that we bring.

This combined with the number of new deals furthers our leadership position in this new high growth software category.

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

Thanks, Ben.

Net revenue for the quarter ended July 31st, was $8.6 million, up over a 100% from the comparable quarter last year and up 17% sequentially. Gross margin was consistent at 76%.

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, the amounts are record as deferred revenue. Second, if we sign a contract and have received cash but have not complete 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 on the financial statement.

On the expense side in the second quarter, operating expenses totalled approximately $8.1 million, up about $1 million from the previous quarter, mostly due to increased sales staffing, plus our first full quarter of R&D head count cost from the Tangram acquisition. GAAP net loss in Q2 was 800,000 or negative 1 cent per share.

Turning to the cash flow, we generated pro forma cash flow of $1.2 million in Q2, our fifth consecutive quarter of positive cash flow from the software business. Our GAAP operating cash flow was negative $942,000 and included approximately $2.2 million to be paid in Q2 to settle the Qwest litigation that we talked about last quarter. Highlights of the balance sheet at July 31st, include growth in deferred revenue and advances, which grew to $15.7 million, up from $14.1 million last quarter.

Now, for a little more detail on the EDS deal we announced yesterday. The additional $50 million EDS contract extends their subscription license through March 2008. From August 2004 through March 2008, the total payments to be received from EDS is $74 million. This includes $24 million from the final year of the existing contract, plus $50 million from the new contract. The original $52 commitment and the new $50 million commitment did not overlap. From an accounting standpoint, we will recognize the $74 million ratably over the period August 2004 through March 2008. This will yield an annualized revenue from EDS of approximately $20 million or $5 million per quarter. In conjunction with in expanded deployment with EDS, we expect to make 3.5 to $4.5 million in one-time equipment related payments in the second half of this year.

Now, on guidance, we plan to run positive cash flow software business going forward. One exception may be in Q3 or Q4 of this year as a result of this one-time equipment purchase for EDS. We are reiterating our full year revenue estimate of 35 to $37 million, and for Q3, we are forecasting revenue of 9 to 10 $10 million.

We now invite your questions.

Thank you, ma'am.

At this time, ladies and gentlemen, if you would like to ask a question, please press the star key, followed by the digit one on your touch-tone telephone. If you are using a speaker phone for today's conference, please make sure your mute function is turned off in order for your signal to reach our equipment. Once again, if you like to ask a question at this time, please press star, one. We'll pause for just a moment to give everyone an opportunity to signal.

We'll take our first question from Seihun Kong with ThinkEquity Partners.

Hi good afternoon and congratulations with the quarter. I wanted to ask you two questions.

First, Sharlene, on the -- this incremental 24 million plus the $50 million of EDS revenue, just to clarify, you mentioned that it's going to be recognized ratably from August 2004 beyond?

Correct.

Is that the case? All right.

That is the case.

I believe the original contract was to model it out 6 million per quarter for the next four quarters but that's going to be changing?

The cash we'll receive will be 6 million per quarter, but the revenue recognition will be ratable so it will be approximately 5 per quarter.

Got you.

The other thing is I was wondering if you could talk a little bit about some of the customers. CSC in particular. Can you tell us, give us an idea of perhaps how they're using the software? You know is this being used to automate their customer's data centers? Is this for some other internal use project?

Yeah well in that case, I believe it's an internal use case. In general, customers use the software with few exceptions which we've highlighted in the past, such as NTT and ESM of course HP [INAUDIBLE], the product is being used in internal cases and those accounts, the product is being used on behalf of customers.

Got you.

One other thing, just very quickly. On some of the terms of some of the EDS deals, I just want to make sure, does this cover a fixed number of servers? You know, is EDS going to be able to deploy above and beyond the original 18,500 servers that they had contracted which was supposed to expire I guess August 2005?

Right. So the way the contract works currently, if you look at the old contract and the new $50 million contract with the EDS, the easy way to look at it is the first contract was at $52 million for the first three years, and the new contract is $50 million for the next two years, seven and a half months.

What's in the contract has been fine tuned from the last time we negotiated with EDS to this time to take into account a lot of the nuances and the way their deployment goes that we weren't aware of before. So two of those that are I think significant are first, the original contract had an exclusive, so we could not sell the product to named sets of accounts that EDS competed with and we removed that. And then the second issue that was very important and adding flexibility is that they really wanted the capability to run parts of Opsware on a lot of their servers, many of which are very old, running old operating systems such as HPR Extend 20 or NT4 in which they had moderate control over or which didn't have a high rate of change. An the way the pro server pricing worked in the original contract it didn't contemplate that. So we moved them from that original pricing structure into an enterprise license and that's the way the contract works going forward.

Perfect. Thanks so much. I appreciate it.

Okay. Thanks.

We'll take our next question from Joseph Craigen with Needham & Company.

Thank you. Ben, I think you mentioned that you signed a large system integrator during the quarter.

Correct.

Can you give us a little bit more detail on that and what the opportunity is there going forward?

So we actually have a lot of traction right now in U.S. defense and intelligence markets, and in fact, in that specific case, that integrator signed up with very, very specific deals in mind that are on the short horizon. And so -- which is why we're not naming them because they are around defense and intelligence and we try to be very careful about what we say specifically about that because it's a -- of course a security concern.

But in general, we're really pleased with our traction in the government and the fact that we're getting, you know, people are signing up to a multi million dollar contracts with us, just shows that there's a lot of interest in that sector.

And where do you stand as from as getting a large commercial SI signed up?

Yes, well it's -- so we do have one large commercial SI set up and that's you know, Concord.

We have also got a fairly broad set of smaller systems integrators signed up, such as [INAUDIBLE] and Fortuna among others who do deployments for us. We're working through how many we can bring on at a time. I mean, a lot of it is how many sort of Opsware trained personnel we need out there.

We certainly need integrators in the government sector because they have to be cleared in but in terms of our deployment capacity among the firms that we have now, we do have enough capacity.

I should also mention that NEC in the Japanese market is an integrator which has signed up and that we use, so it's a mix. I mean, we're really thinking of it in terms of the deployment channel more than demand generation at this stage, which I think is the correct way for us to be thinking about it.

Okay.

And of the customers that you mentioned, I'm sure you don't want to give us a size as far as the actual dollar value that's reflected in the financials, but that whole list that you gave, Comcast, J.P. Morgan, all the rest, can you give us some idea how many of those customers are reflected in the financials today both the balance sheet and the P&L?

The balance sheet and the P&L. Well, of the customers that we signed in the quarter, I think almost -- probably zero on the P&L. There's probably nothing reflected in revenue that we signed this quarter.

In terms of the balance sheet, I don't -- I think there's -- there may be -- it's likely di minimus on either end, so there may be some that have come in, particularly although unlikely much, but whatever it is it's extremely small.

Great. Thank you.

We'll take our next question David Rudow with Piper Jaffray.

Good afternoon and nice job on the quarter.

Sharlene, that 3.5 to $4.5 million equipment cost that you're going to incur during the quarter, how does that flow on the balance sheet then? Is that just depreciated over the length of the contract as well?

We're still working that out with the auditors, the feedback accounting treatment.

Okay. And is that normal? Did you have to do that initially when you signed EDS back in August of '02?

It's a little different than what we did originally and basically let me just give you some insight into that. When we signed the deal, there were really two key values in the EDS contract. The first is of course the $50 million and all that implied. So the message to the market, the statement of value and these kind of things.

But the other which is also quite important to us is EDS a the largest showcased deployment in the space, so there's no vendor that's got a bigger deployment or bigger customer with bigger ambition than EDS. And so both we and EDS really wanted to optimize for getting to the largest deployment possible in the shortest amount of time, and the plan is to get to by end of next year, them deployed in 90 data centers were a multi-master ring, including 17 different multi-master sites and then another 73 satellite locations on top of that. So really a big -- the biggest deployment in the industry by probably a factor of five or six.

And in order to do that, the thing -- we went through a lot of details on, you know, what was required and one of the things that really is going to help them accelerate deployment is us delivering Opsware essentially as a -- an appliance preconfigured on the boxes, so that's -- was new to this deal and something that we learned in the last deal .

And this -- the appliances so then so you're taking on the cost for that over the -- through March of 2008 then as well for all the boxes that you will be shipping?

So that charge that Sharlene describes is the complete total of it.

Right. It's just cash outlay that will occur in Q3 or Q4 of some combination.

Okay. Okay.

And then does the deal with EDS, does that include all products including Satellite? I mean, will they be a reference account for the Satellite product then too?

Yes, they will.

Okay.

And you expect them to roll out with some of these modules by year-end like will they be using Satellite by year-end do you think?

Satellite, yes, definitely.

Okay.

And how much servers does EDS have right now, do you have any wild guess or?

In their population?

Yeah.

Yeah, it's -- and they don't like to us talk about it too much of the the last time we did the deal, they did let us talk about it, it was 50,000 at that time. The -- you know, I'll leave it to you to guess how much that's grown or what have you.

What's your total customer count right now?

Yeah, so we have I think as we've said before, over 250 customers and then Opsware customers, we haven't disclosed a grand running total, I don't believe.

Okay.

Because I think last count that I saw was 20 so if you add what you have here it could be closer to 30 now, that's my guess.

Okay.

And then any any international sales during the quarter?

No, actually, we did -- We did have some international up sales during the quarter.

Okay. Good. Thanks a lot.

Okay. Thank you.

We'll take our next question from Curtis Shauger with CIBC World Markets.

Good afternoon, everyone.

Good afternoon.

One quick question on accounting. You had made mention before about the VSOE rules regarding Rev Rack and I was wondering if you could give us an update on that, if there was any acceleration of revenue recognition in the quarter?

What we stated last quarter was that even after we achieved that our revenue recognition would remain ratable, and so we're not so much focused on that except that for model purposes, you should assume that our revenue recognition will be ratable going forward.

Okay. Great.

And also, just to dig a little deeper into translating some of the trends on the balance sheet. As I look at the progression of defferds from your fiscal Q1 to Q2, is this quarter's results more reflective than of last quarter given that, you know, as you mentioned, some of your customers signed this quarter don't even show up there?

Right. So you -- you will see -- I think last quarter it grew 10 to 14 and and now to 15.7 million, and the real determining factor is you don't see it on the balance sheet because there's a lag between the time of booking and when they pay in cash, which is usually within -- you know, by the next quarter.

Okay.

So you see usually a jump as a result of that.

Okay so I guess to clarify my question, would we expect, just to characterize this quarter's performance, versus last quarter's, was there a noticeable improvement? Or given the environment I mean, it was a bit challenging. I think as we've seen across software. Or would you characterize it in your circumstance you know better, worse, indifferent, how would you characterize it?

I think it was a really great quarter for us. I mean, we didn't think it was, you know, challenging versus previous quarters, I would say no, it was not challenging versus previous quarters. We signed a $50 million deal with EDS. We signed a record number of customers and, you know, what showed up up was on the balance sheet was certainly highly positive. So in general -- and cash flows were good, which is was a pretty decent measure of recent history.

I think that where we're a little different than the companies that were struggling in that I think that we're one, smaller and then the second thing to note is we're in a really radically different market where completing oriented around web-based architectures and large server deployment as opposed to, you know, some products that are getting towards the end of their cycle.

Sure.

The beginning of our product cycle.

And just one last question on the partnership front. Obviously good signs that you signed a deal through HP. They're doing a lot of things on the server side to enhance their -- or augment their capabilities there.

Any mention or indications that your relationship with them might go a little bit deeper into terms of -- you know, in your ability to enhance their server product lineup?

I think --

Their server product lineup, excuse me.

With HP, you know, -- we're certainly pleased with the New York Times. We think that's a great account and we're really pleased to be working with them on that.

In terms of working with their server product line, I do think that in general customers and they're finding out from their field that that their customers are very interested in working with Opsware and working with our technology to make their solutions more cost efficient or more cost effective. We're definitely not though not in a position to forecast new relationships with HP. We're still working on developing the ones that we already have.

Great. Thank you.

Thanks, Curtis.

We'll take our next question from Donovan Gow with American Technology Research.

Hi. Did you give out the number of the total number of new deals and the total number of deals overall?

The metrics that we give are, you know, revenue, deferred in advances, average deal size and then we named a set of customers, but we -- those are -- that's the extent.

Last quarter you gave out -- I think you said eight new deals. Is that correct? So you're not giving out that metric anymore?

No, I mean, I think we mentioned that in a different context, but not so much as a metric. And that wasn't the total number of deals, by the way, last quarter. That was just a -- we talked about eight.

Okay.

And then on the sales front, since Mark Cranney came onboard, can you talk a little bit about the -- you know, any changes to the sales org and how many quota carrying reps that you have today and hiring plans for the remainder of the year?

Sure. So we have been developing sales force quite a bit. We have 18 quota carriers on board today. We do plan to expand that, we're continuing to expand that throughout the end of the year.

We're seeing quite good sales productivity from the people who have been on board for at least six months, so we're really encouraged by that and you should look for us to continue to expand that pretty aggressively throughout the end of the year.

Okay.

And then finally, I assume you're still carrying some off balance sheet deals. Are those trending -- you know, can you give us any sense, is that off balance sheet component you know, is it trending up or down sequentially? How should we think about it?

We don't disclose the off balance sheet number.

But there are deals off balance sheet.

Yeah, there are certainly deals there.

Okay. Great. Thanks.

We'll take our next question from Nicholas Aberle with Caris & Company.

Thank you.

Ben, I was wondering if you could just quickly provide some color with respect to the nature and the status of the secondary you announced last quarter?

Sure.

First thing to understand is that we don't need cash, so there's -- if you look at our numbers, you look at the guaranteed payments stream we're getting from EDS. You look at our revenue, you look at our expenses, you look at the $60 million or so we have in the bank, we didn't need cash to operate the business and we won't for, you know, hopefully ever, but certainly not in the foreseeable future.

So we are -- it's a long way of me saying we're price sensitive and we think that the -- you know, at these prices, we're not nearly as interested in raising money as we were previously. Having said that, we still are interested in doing -- there are some interesting M&A opportunities out there and we continue to look at those and cash is certainly helpful in doing that. So we'll continue to evaluate the secondary market but we have no plans to do a secondary at this time.

Got you. And then the other thing was did Tangram acquisition contribute within the quarter?

The Tangram acquisition, no, understand that the Tangram and Opsware product lines have been integrated and Tangram has been assumed in the Opsware product line family, so we don't have it as a separate item, but yes, it did contribute both from primarily from the maintenance stream as we had forecast previously.

And I was --

Had indicated previously.

Okay. And I was curious if any of the new customers you signed during this quarter the ones that you listed, were directly cross sold over from old Tangram customers.

There has been some cross selling. I'm not -- you know, off the top of my head, I can't give you a for sure answer on that but definitely there's been cross selling of customers from Tangram.

Okay. Thank you.

We'll take our next question from Scott Cochone with [INAUDIBLE] Group.

Hey guys. How are you?

Good.

Ben, real quick, could you address or talk about the competitive landscape out there? And also, address Blade Logic and how they relate to that space with you all.

Sure, be happy to.

In terms of the competitive landscape, it continues to evolve. We've seen from the larger companies, if you look at IBM, CA, and BMC. IBM is probably the most aggressive, continues to be the most aggressive in that group and they're the competitor that we've seen most often with their Think Dynamics acquisition a known orchestrator in their product line. Still, you know, probably market -- probably people finding the budget and doing things and that nature.

On the start up side, Patch Link acquired Moon Light. So that was a little more -- you know, some continued M&A activity on the startup side and we expect to continue to see that.

With respect to Blade Logic in particular, I'd like it spend just a little bit of time -- a little bit more time than probably it warrants in terms of competitive activity, just because I've had a lot of feedback from investors that they've heard a lot of interesting stories from Blade Logic, you know, which for the most part have not been true.

And just for those of who you haven't heard them, the last story was, which was out last week after we signed the EDS deal, that we were not going to get the EDS renewal. So they've been saying some things that aren't quite accurate. So I would like to clarify just what the facts are around them and make sure that everybody is on the same page.

We would like that too.

I welcome this question. So first of off, we haven't sent them all that often but when we have seen them, we've generally beaten them and I've mentioned some deals in the past, including Hannover Inflow and Lehman Brothers and in the Inflow case, of course they share a board member in common with Blade Logic, so that was one of the few accounts where we didn't have a big corporate advantage and was purely a technical win.

In the most recent quarter, we were in a handful of deals with Blade Logic. Of the handful that we competed with them in, only one has closed thus far for either company and the rest should close within the sort of next three months to a year time frame so. This just gives you I think I a pretty clear picture of the activity.

In the deal that closed, that deal was interesting in the fact that one, it was greater than a million dollars. Two, I think this organization's probably one of the three or four most respected IT organizations in the U.S. Three, it was a very deep technical evaluation in that both products were piloted which is not all that common. And then they -- the company had a lot of insight into the pilot because they already had purchased Veritas Opsware similar to [INAUDIBLE] and so they knew about the criteria. The customer ultimately found that Opsware was a far superior technical solution, selected us and signed a deal and we'll be announcing that in the next 30 days or so. So you will see that come out. You'll know right away by the company that they are one of the great IT organizations in America. So it's not going to be any secret that they knew what they were doing. Now, that's a technical side.

So then if you look at the corporate side of the picture, if you were to go back and add up every deal, if you really look at the numbers and add up every deal that Blade Logic has every signed and then add their most optimistic forecast for the next 12 to 18 months, that total would be substantially smaller than just the EDS booking. So that matters to customers because it's an indication of R&D spending. And so overall, they're a -- you know, they're a fine start up competitor but they're way exaggerating their position versus us and we're not terribly concerned with them.

Very good. Have I another real quick question. Actually, try to flush Marc out on these conference calls once in a while. Marc, quick question for you.

Yeah.

What are you seeing in the enterprise software space, you know, a higher level view, who's hot, who's not and maybe why, just a quick synopsis from you.

Sure. I always try to respond to a good flushing so here we go.

Basically it's, you know, it's kind of a Charles Dickens kind of situation. It's kind of the best of times and worst of times. And the way I would express that or describe is is it goes back to what Ben said earlier on the call. Which is I believe this is a really product cycle business.

I mean, if you lock at the history of this industry, products go through a cycle where they -- you know, they go through growth phase, they go through maturity phase and they eventually go through decline and a lot of the bigger or sort of more established enterprise software companies out there, you know, whose names you guys recognize and deal with all the time. They and their products have been in the market in some cases now for 15, 20, 25, even 30 years and a lot of the product cycles are past the maturity point now and in the decline period. A lot of that is linked to the architecture shift that is taking place from client server to web which we talked about a lot. It is really serious architecture shift. It's no a coincidence that a lot of the client server business applications or a lot of the client management products are selling fewer and fewer each quarter than the quarter before. This happened before in the transition from mainstream to client serve and I think it's happening again.

Conversely, if you're at the beginning of your product cycle because you're addressing the new needs correlated to the web architecture to large server deployments to the new technologies like LINUX for example then you tend to see sales momentum and sales growth and independent of us you can see that certainly with VMware. You can see that with a lot of security companies, internet security companies. You can even see it with new business models like salesforce.com that are taking advantage of the exact same trends. So I think it really depends which side of that divide you're on. Whether you're defending an older franchise with an older architecture and an older product or whether you're going after the new opportunities.

And I think that divergence is going to become you know, starker and even more clear over the next couple of years. And I think a lot of investors and a lot of commentators on the market are getting a little bit confused on this because people still tend to describe tech spending as if it's a thing and it really isn't. It's really product by-product and it matters what product you've got.

And that's why we feel so good about our opportunities because we're squarely addressing the new opportunities, we're squarely addressing web architecture, we're squarely addressing large server deployments, we're squarely addressing Intel servers, Linux, Microsoft web applications, Java and all the new stuff, which is why we seem to be getting a lot of traction in the field.

Interesting. That's great. I appreciate that.

Sure.

Well thanks, guys.

Thank you.

We'll take our next question from Amy Feng with JMP Security.

Yes, I have three questions for you.

My first question is when you look at your existing customers, what percentage of them in terms of their total number of eligible servers does Opsware technically sit on currently?

My second question is, given the exclusive clause that were stricken out of the new EDS contract, would that preclude us to think that perhaps you will start pursuing some of those customers that EDS has currently to be direct Opsware customers?

And then my third question has to do with ASPs on the per server basis. You have stated that longer term it should drop down to probably around 12 to $1300 per server. What do you see in ASPs currently on a per server basis? Thank you.

Okay. Great. Thanks, Amy.

So in terms of existing customers percentage of penetration, we don't have tremendously accurate data on that. So it's hard to tell, it's hard to tell accurately what customers have in their accounts. I think we estimated if you exclude EDS, which we've talked about in detail, if you exclude EDS, we certainly estimate it at less than half and probably less than 25%, but it's a little hard to say. And that's one I wouldn't want to you hold me to just because we don't have great data on it.

Second, in terms of the exclusive being removed from the EDS contract, which named again I believe it was four EDS competitors, yes, the answer is yes, we will be pursuing those accounts now. And then third, we do not give the per server ASP and again, we're -- we try to pricing turns out to be an important competitive advantage and we try to keep that relatively closely held.

Okay.

And then my last question, did you give out the number of deals that you signed that were over $1 million in the July quarter?

No, we don't give that one out. We had one deal that was over $49 million though.

Okay. Congratulations on a good quarter. Thank you.

Thanks, Amy.

We'll take our next question from Scott Donahue with Tier 1Research.

Hi guys. Good afternoon and nice quarter. A really quick question on the Satellite product. Can you tell me how many customers have adopted that product or deployed it or how many servers it's running on?

Okay. So the satellite product was released on July 31st. So that's not a long time ago. And so we're just starting to deploy it now. But we expect actually -- we expect the Satellite because its versatility to be probably go into just about all of our customers. It's really a very, very powerful piece of the product line in that it's highly -- it's highly flexible in the way can you deploy it and let itself configure. So can you cascade Satellites, you can do lifts with Satellites. You can run them. They do things like they handle firewalls very nicely so they consolidate communication through firewalls and they handle any kind of netting issues for those of who are familiar with that. In fact, we have employees -- we have on employee who uses on their to stream his home PC's music to his work PC through our netting and firewall here at work. So it's incredibly flexible and important piece of technology and we think about all of our customers will get a lot of use from it.

Very good. Thank you.

We'll take our next question from Catilin Wolford with Trelis Management.

Hey guys. Seems like a long time since October of '02.

Yes, it does.

I just wanted to focus on a couple of items. One on the -- Sharlene, maybe you can address this. But how do I think about the growth of the service lines vis-a-vis now that we're actually breaking those out. The growth of the service lines vis-a-vis growth in license. Does it stay roughly 75/25 split, does the services have to be staffed up and grow faster and kind of what level of margins we see out there in the future. And second of all, just -- I know the question was asked about the sales force. Is there any further reshuffling or things have you to do in order to get to the sales force to the level that you would like it going forward?

Okay. So I'll take the first part.

First of all, license versus service, that was about 74% for the last couple of quarters with license and 26% service. And as you know, since we haven't been in the software business that long, there is -- we're just going through the first renewal cycles for maintenance. So over time, maintenance would probably become a little bit bigger portion but -- so it's probably in the let's say 70/30, 65/35 over some lengthy period of time as you see more maintenance renewals.

On the margin side -- so you look overall at the overall gross margin and that was about 76% and again, longer term, you expect to bring that up slightly but I'm not really as much focused on P&L right now as we are just managing to cash.

Okay. That's good to hear.

On the sales force, I mean, I think we can add sales people at a pretty good clip, given the structure that he we have now. So the structural question I mean, I think we're quite pleased with Mark Cranney and the progress he's made thus far, the kind of deals that he's been able to bring in, the kind of people he's been able to recruit. So I don't see any significant changes in that on the horizon.

Okay. Great. Thanks a lot.

And due to time constraints this does conclude today's question-and-answer session. At this time I'd like to turn the conference back over to Mr. Tinsley for closing comments.

Okay thanks Chris and thanks everyone and for your participation today. As always, if you have any questions, please contact us here in Sunnyvale. Thank you.

One again this does conclude today's conference. We thank you for your participation. You may now disconnect.