惠普 (HPQ) 2004 Q3 法說會逐字稿

Good day, everyone. Welcome to the Opsware Inc.'s third quarter fiscal year 2005 conference call. Our participants will be in a listen-only mode until the question and answer for today's call. Today's call is being recorded. If anyone has an objection, you may disconnect at this time. Mr. Ken Tinsley, please go ahead.

With me today in our headquarters in Sunnyvale, is our President and CEO, Ben Horowitz and our CFO Sharlene Abrams. 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 10K filed with the SEC on April 13, 2004, and our reports on forms 10Q and form 8K filed with the SEC for discussions of important factors that may cause the actual events and results to differ from these forward-looking statements. 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 web site at www.opsware.com. We are currently web casting this call and and audio replay will be available on our website following the conclusion of the call. Now let me turn it over to Ben.

Thanks Ken. Today I am pleased to report a strong third quarter. Q3 revenue was $10.2 million up more than 100% from Q3 last year and above our guidance. Deferred revenue and advances grew to $17.6 million from $15.7 million sequentially. Since our last call, we signed significant new customers, including Federal Express and one of the largest retailers in the U.S. Given this momentum, we are increasing our full revenue -- our full-year revenue guidance to 36.7 million to $37.7 million. This implies that non-EDS revenue will grow to $17 million this year, up almost 500% from last year. Our third quarter results continue to validate the strength of the IT automation market and the growing demand for automation software. This is a market that IDC estimates will be $5 billion by 2008. In addition to significantly lowering operational costs, regulatory compliance requirements such as Sarbanes-Oxley and HIPPA are also driving the demand for Opsware software. We expect these and other compliance initiatives will fuel demand for Opsware over the next several years.

Since our last call, we signed many new deals that strongly endorsed Opsware's product superiority and applicability to several major vertical markets. Notable deals include Federal Express, the Gap and Guardian Insurance, plus important upsells to the Hartford and Inflow.

I'd like to highlight a few of the wins. Federal Express, the world's premier provider selected Opsware to automate its global data center operations. Automation is a strategic priority for Fed Ex and Opsware will be the company's platform to achieve its goals with 22,000 servers, Fed Ex runs one of the most advanced IT. environments in the world. Opsware is unique in its ability to automate the largest, most complex global IT environments. The Opsware System continues to be the only automation solution capable of addressing the needs of enterprises with such environments.

We also signed one of the largest north American retailers, the Gap. The Gap has thousands of outlets and runs thousands of servers worldwide across several major data centers. Opsware has unique capabilities including satellites and multimaster for managing these large scale distributive environments. The Gap selected the Opsware System because of these major product advantages, which makes Opsware the best system to solve the complex IT problems of large retail organizations.

Also this quarter, the U.S. Department of Defense community greatly expanded its use of Opsware. Under a new contract, another Department of Defense agency will use Opsware to automate data centers across the globe. Government agencies recognized our unique audit and compliance capabilities. Our advance security architecture and our common efforts also continue to be a major advantage in selling in the government sector.

Other new customers include Commerce Bank, Cox Communications, Genzyme, and Scottish and Southern Energy. These customers will deploy Opsware products to automate everything from day-to-day IT operations to asset maagemet andcompliance. Opsware will help them reduce ongoing IT costs and improve service quality.

On the partnership front, we entered into an important partnership with VMware, the market leader in server virtualization technology . The partnership is significant in that Opsware can now automate physical servers in a virtual server environment. VMware, which is now part of EMC, is being quickly adopted across IT organizations worldwide. Opsware is one of the few solutions that automates deployment and ongoing management of VMware's market leadig server virtualization products. The rapid proliferation of VMware is contributing to increased demand for Opsware.

On the product development front, we shipped Operating System 4.6. System 4.6 added support for more server platforms, including Japanese operating systems, and the fast growing Linux platform. Opsware now supplies far more platforms than any other IT solution the market. Opsware System 4.6 also includes a Japanese version of Opsware making it the only IT automation solution with full support for the Japanese market. As a result of our broad product product line, and accompanying price points, our average deal size is greater than $600,000. This includes licensed deals signed since inception, including pilots, whose total value is greater than $10,000 and does not include EDS.

In summary, I am pleased with the progress we made this quarter. Our product development efforts, and unique ability to automate major data centers and servers at remote locations, have paid dividends in the retail and defense segment. With our aggressive product development, Opsware remains one of the broadest, most accessible offering in the market, and the only product proving to scale to thousands of servers across multiple data centers in thousands of remote locations. With the addition of significant new customers, we continue to further our leadership position in this new, high-growth software category. Now here's Sharlene to provide more detail on our financial results and outlook.

Thanks, Ben. Net revenue for the quarter ended October 31st, was $10.2 million, up over 100% from the comparable quarter last year, and up 18% sequentially. You'll notice that cost of license revenue rose sharply to $4.2 million driven almost entirely by a $4 million non-recurring expense for equipment purchases related to the EDS renewal. On our last call, we estimated this expense would range between 3.5 to $4.5 million. The actual expense of $4 million is within this range and we treated this as a one-time charge and cost of goods sold. We expect no further equipment-related charges for EDS going forward.

To reiterate how we treat and record customer contracts, there are three categories under which a customer contract can fall. First, if we sign a contract and have completed all deliverables, the amounts are records as deferred revenue. 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 on the financial statement.

Now, turning to expenses. Operating expenses totaled approximately $10.1 million up from $8.1 million in the previous quarter, mostly due to increased sales and R & D staffing and related costs. GAAP net loss in Q3 was 8 cents per share and included the $4 million nonrecurring EDS equipment charge.

Turning to cash flow. Our GAAP operating cash flow was negative $2.6 million and included approximately $4 million of equipment related cash payments for the EDS contract renewal that we talked about last quarter. Excluding these payments, we generated positive operating cash flow. These payments completed our hardware obligation under the contract and are reflected as a one-time expense and cost of goods sold as discussed earlier. No further charges or cash outlays are required for this obligation. On the balance sheet, deferred revenue in advances grew to $17.6 million, up from 15.7 million last quarter.

Turning to guidance, we expect 10.5 to $11.5 million of revenue in Q4. This translates the full-year revenue of 36.7 million to $37.7 million, increasing our full-year guidance which was 35 to 37 million. Our non-Eds revenue is on track to increase from $3 million last year to $17 million this year.

To characterize our growth expectations going forward, we expect that our bookings growth rate next year will exceed the growth rate we will see in the current fiscal year. Finally, we plan to run the business deposited operating cash flow. To summarize the financial metrics that we're providing today: Sales head count we currently have 21 quota carriers up from 18 on our last call. Q4 revenue will be between 10 to $11.5 million. Full-year revenue will range between 36.7 million and $37.7 million. Non-EDS revenue will be approximately $17 million this year up from $3 million last year. Excluding EDS, our average deal size since inception is greater than $600,000. And finally, our bookings growth rate next fiscal year will be greater than the bookings growth rate in the current fiscal year. As the business matures, we will continue to assess additional operating metrics to assist with the evaluation of our business. With that, we now invite your questions. Marc Andreessen has joined us to answer questions as well.

Thank you. The question and answer session will be conducted electronically. If you'd 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 speaker phone, please make sure the mute function on your phone is turned off, so the signal can be read by our equipment. Once again, star one for questions. We'll go first to Seihun Kong. Please go ahead.

Hi. Thanks a lot, and congratulations. I want to start off by asking --I'm a little curious about what's driving some of the vertical expansion you're seeing right now? You've gone from insurance and government to banks and now media and retail. Is this strictly a factor of, you know, sales coverage or do you see the opportunity as purely horizontal?

Yeah. That's a great question, Sam. This is Ben answering the question. So there's a few things to note. Yes, we're seeing great expansion and as Sharlene mentioned, and as a result of that -- this really surprised me when we looked at it -- but it is really phenomenal that you see bookings or bookings rate acceleration actually increasing this year to next year, beyond what it was last year to this year, and a lot of that comes from both sales force expansion and product line expansion. So specifically in the case of the media companies and the retail companies, the satellite product has been very, very significant in our being effective in those areas. Because if you look at what goes on in retail at a place like the Gap in particular, you've got just a huge number of stores with a very small number of servers in each store. And the satellite enables us to make the network very, very transparent, and to kind of eliminate things like network bottlenecks, netting, fire walls, all these kinds of things are transparent to the management system. So that's been a big, big help for us.

Do you see the satellite product as being applicable to, you know, high demand for a lot of other traditional verticals and things like that as well?

Well it is. It's not as, you know, it doesn't have the same level of criticality. It's also very critical in a thing called Comcast where you have many cable heads and things of that nature. So it's highly distributed IT environments is where it's most applicable. Now in financial services, there tend to be, you know in general, a fewer number of data centers.

Gotcha. That's very helpful. And outside of, you know, the Gap and Fed Ex and really good customers, some of the other customers that you mentioned, can I check and just see how many of these deals are what we consider sort of comprehensive full stack or multi-feature, types of deals versus, you know, people buying one or two features at a time and looking to expand later on in time?

We're still not to the point where we're doing many deals at all of just a few features. We are actually trying to get to that point. And you'll see a lot from us in the coming couple of quarters on modularizing the product more and delivering, you know, the features in a little more of a segmented fashion, and in fact, you know, we're looking forward to that day, but right now, the vast majority of the customers and the vast majority of the revenue comes from the full Opsware System.

That was actually the next question was, you know, are you finding that, you know, sort of an all-or-nothing approach has been a bit of an inhibitor to some customers?

Well, I think strategically, the way I would view it is, you know, from our perspective, coming to the market from where we come from, we drive a lot of advantages. Those advantages, in terms of having an automation product that can scale to an EDS or Federal Express, gives us the ability to go in and command large deals which has given us a big R&D advantage. I think we're up to 90 people in R&D, which is far more than we think the competition's able to fund, due to the much greater amount of cash that we're bringing to the company. Now, the downside of that is that just, you know, yes, we would like to be able to go in at some lower price points and lower end deals, and we're going to be able to do that. We're well on our way to it. We feel really, really quite good about our product capabilities going down market, but we're not, you know, we're not at that release yet, that really makes us world class in that area, and you'll see that coming from us in the Q1 time frame.

Cool. That's great. I appreciate it. Thanks so much.

We'll go next to Donovan Gow with American Tech Research. Please go ahead.

Hi, guys. Can you talk a little bit about the upcoming VSOE, what impact it'll have? As I understand it, the off-balance sheet will go away and also the advances from customers line goes away. Does it impact or contract the revenue recognition cycle at all?

We said in previous quarters that we're continuing to recognize most of our revenue ratably over the next year. All of our revenue guidance assumes primarily ratable recognition going forward.

Right. But if you do achieve the SOE, does it have any impact to the revenue recognition cycle, even though it is ratable, does it contract it at all?

No, it does not.

Okay, great. Secondly. On sales ramps, you guys have been ramping strongly there. Do you plan on continuing at that kind of hiring rate through the rest of the year and also any comments on sales productivity today?

Yes, we definitely plan to continuing -- continue that sales ramp due to the rather good productivity numbers that we've seen so far from the sales force. While, you know, Sharlene outlined the metrics that we disclosed, I'll just give up a couple of anecdotes. Over the last quarter, we've had our first, our first sales reps, to use the language of our head of Sales, to draw blood, in the first quarter on boards, in the first three months, to get deals on board, which is something new, and speaks, I think, to a little more maturity in the market, a little more maturity in the product. And so we're really pleased with what we're seeing there. And you should expect us to continue to expand the sales force. And again, you know, certainly at this rate, you know, the rate you've seen.

Great, thanks.

We'll go next to Amy Feng with J MP Securities. Please go head.

Yes. In general, can you give us the sense of what's the percentage you revenues that you book to this quarter of activities in a current quarter? As well, outside of EDS, can you give us a sense of what kind of plans do you have for expanding your distribution channel versus with other system integrators?

So on the first part of the question, Amy, most of the revenue, again, we book all of our revenue ratably.

Right.

So almost all of the bulk of the revenue that comes in the current quarter is booked in previous quarters, and we don't give any further color than that.

Right. On the system integrator front, so in terms of distribution and again, I think we've talked about this with many of you in the past. We are primarily due to the price software, so from a sales distribution standpoint, we're primarily a direct sales channel, which we think makes sense for this kind of business. We do have distribution and integration relationships currently with NEC and HP, and in addition, we have relationships on the deployment side with a number of specialized firms, such as August Shell, Xoriant and Fortuna and several others, particularly in the federal sector, that give us a lot of leverage in terms of our ability to scale customer deployments where, you know, we continue to look at the market and, you know, consider the kinds of capabilities from other integrators, but we're pretty pleased with our capacity right now. Again, we think for the most part, we'll be able to market and direct some but we're going to mainly fulfill our direct in terms of our sales motion.

Okay. One final question. Outside of the Department of Energy and EDS, were there any new customers signed this quarter that also signed multi-year contracts with you?

There-- I do not believe we have any new multi-year contracts to announce.

Okay, great. Thank you very much.

Okay. Thanks, Amy.

We'll go next to Joseph Crane with Needham and Company. Thanks. Joe Cragan from Needham & Company

Ben, if you could, can I get to you talk about the two fronts. Inn the retail area, you mentioned GAAP, you mentioned how important satellite was. Could you give us an idea how far out in front GAAP is from the rest of the market? Are they an outlier way out in front or are we kind of on the cusp of something on a few other deals over the next six to 12 months?

That's a great question. I think that they are the first of quite a few, so we without talking too much about the pipeline, we see a fair amount of action on the retail sector and they look like some very interesting deals. So, we do expect that to expand.

Okay, and secondary, internationally, you mentioned that the Japanese operating system and you list Commerce Bank as one of the customers. Is that something that is also on the cusp or are we kind of just in the very early stages of that?

We're definitely earlier internationally than we are in the U.S. So, the U.S. is moving quite a bit faster. It's followed not too far behind by the UK, followed by Japan. We are saying you should see us going into some other regions in Asia fairly shortly. We're certainly earlier there but we do expect to see some more flow through. It's not -- if you were to compare it to the retail sector, I think that you'll see, you know probably, faster action at least from us out of retail than on those other are fronts.

Okay, and then just kind of a clarification here. Sharlene, you mentioned talking about running the business cash flow from operations positive. Umm.. I may have missed it, did you give sort of time frame from when we can expect a positive cash flow from operations on a steady state basis?

We've been positive cash flow from operations for the last six quarters.

Okay so this is--

Yeah. On a pro forma basis from this ongoing software business.

Okay. I just want to clarify, this is just--this is just the one-time blip related to EDS?

Right. We talked about that last quarter, that we expected to make that payment.

Exactly. Thank you.

We'll go next to David Rudow from Piper Jaffray Investments. Please go ahead.

Yeah, good afternoon. Sharlene, why wouldn't you book those that expense for the hardware, and just recognize it over the life of the contract?

So --this wasn't a matter of choice. We reviewed all of the facts with our auditors, and we applied generally accepted accounting principles, and this dictated that we take this one-time cost of revenue related to the acquisition cost of obtaining this new agreement.

Okay. Okay. I was just wondering. On the VMware side, could you talk about the revenue opportunities, what type of product it's going to be?

Sure. Yeah. We actually have an offering available today that provisions, basically provisions operating systems into VMware servers. So, for those of you who aren't familiar with VMware, it provides a virtual-- essentially a virtual machine. So if you have a server, VMware can make it look like many servers, and each one of those machines, virtual machines. You can provision an operating system into it. And that's something that we have made available on our product today, and have been selling , and seeing quite a bit of interest in. VMware itself, I would say is one of the, you know, itself is a trend. Server virtualization is a trend. But VMware by far is the strongest player today then, particularly on the server side, and, they've got really outstanding product. DMC has done a really excellent job in working with them, and so they are starting to represent a significant number of operating systems out there on the market . So, you can think of our relationship with VMware so you know, like relationship with, you know, someone who provides hardware, or something like that, that needs a-- you know, a management partner to provision the operating system. So it's -- we're really excited about it, we think it's, you know, along with us and others, represent a trend in enterprise software and the way enterprise software is going in the future, you know, more towards helping people build out their large systems. This new generation of applications. So we're excited to be a part of it, and we look forward to some really good results from that relationship.

And they're not putting any selling resources behind this relationship, are they?

This is not a resale agreement. It's a product integration agreement, and a co-marketing agreement.

Ok. Perfect. And then on the international side, what percent of revenues to MIA and APAC, and how many sales people do you have now in the international regions?

We-- we recognize, and that's a lot different than booked. We recognized revenue this quarter in a little bit over 10% in international, and I think we have about, you know, about five or so people sitting in internationally.

[voices speaking at once] Yeah, it's about, I think it's six, six international.

Sales head count.

Sales head count.

And any update in the competition? HP with Novadime, have they come out with their new plan yet? Have you seen them out there at all?

Yeah. With HP and Novadime, we haven't -- we don't actually have them, the thing about the forecast, we haven't seen much from them. We're really familiar with the Novadime product in that it was something actually, you know, at one time we even took a look at it mostly from a financial standpoint, on whether we should acquire the desktop capability. We think it is, you know, a fairly good desktop product. We don't see from a product capability standpoint, a lot of competition from HP on the Novadime front just because it's not well designed for the server environment, and also, as many desktop products tend to be, it is very, very Windows oriented and we tend to work much more in heterogenous environments, and the Unix capability of the product is extremely mature.

Okay, thank you very much.

Okay.

We'll go next to Mark Lamb, Shemano Group. Please go ahead.

Great report. Hit it again. Good job on all your hard work.

Thank you. Thanks, Mark.

The question generally on the merger that happened last February, I can't remember the name of the company offhand. How's that going integration-wise and what do you see coming out of that going forward?

Yeah. The merger was a small company in North Carolina by the name of Tangram, and that is going well. We've integrated the products into our product line. We have -- we've been pleased with the performance of the maintenance revenue stream from them. If you look at that entity and you look at the maintenance dollars that have come in versus the R&D. expense, it, itself is generating cash, which we're quite pleased with. And then we've been able to take a lot of the great engineers from Tangram and apply them to Opsware. It's a very advanced data warehouse capability coming out from the Opsware product line and that technology was built by Tangram.

That's great. Any further cross-selling opportunities?

Yeah. We certainly see them and you'll see that, you know, as Sharlene pointed out, the bookings acceleration that we're seeing is pretty startling and that we're hitting, you know, we're coming up on what we seem to -- seems to be the knee in the curve of the market, and that Tangram customer base is certainly a part of that.

Okay. How would Fed Ex rank as far as your size of customer? Top five? Top ten?

Yeah, we --

just roughly because that's a big server system I assume.

Yeah, we do not have clearance from Federal Express to talk about the deal size. You can see by the number of servers it's a pretty substantial deal.

Gotcha. Lastly, Marc, I always like to get Marc involved. We never hear his voice. Marc, can you talk a little bit about whether you are seeing expansion or consolidation in the server business and data centers going forward, and exactly what's driving that?

Sure yeah, and the overwhelming uh -- thanks for giving me a chance to make my voice heard. The overwhelming trend that we, you know, continue to see as continued proliferation servers and more than anything else these days, I think it's pretty clear that's being driven by the economics of Intel and AMD-based server hardware. We just see enormous proliferation of server counts both in the form of ratma [ph]servers, as well as now blade servers running, you know, combinations of O.S.'s, a tremendous amount of Microsoft, a tremendous amount of Linux. You probably saw Sun did a big announcement about Solaris 10, which they are really targeting hard at the AMD Opteron server platform. They've got a whole new generation of server hardware coming out based on Opteron, which really brings them strongly into the sort of Intel-compatible world, and Solaris 10 seems like a really strong operating system for that environment. So, now you've got three sort of mainstream O.S.'s, Solaris 10, Linux and Windows, that target Intel -based server environments, and that just seems like just a gigantic freight train. Of course, HP and IBM are heavily behind that as well as Dell, as well as now, Sun. Basically what we just hear from customers over and over again, contrary, interestingly, to what you read in the press, what we hear a lot from customers is they just love being able to buy the servers, being able to get enormous hardware bang for the buck, being able to run a lot of tremendously compelling software on them, these days a tremendous amount of java, a lot of [inaudible] applications, a lot of in-house developed applications, and that then leads directly to the problem we address, which is, you know, these organizations are dealing with thousands to tens of thousands new servers every year, and their environments are just compounding in complexity.

Great. That's all I have. Thanks.

Thanks.

Thanks, Marc.

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

Thanks, Keith. Thanks, everyone for participating today. As always, if you have any questions, please contact us here in Sunnyvale.

Ladies and gentlemen, this does conclude today's teleconference. We appreciate your participation. You may disconnect your phone lines at this time.