惠普 (HPQ) 2005 Q1 法說會逐字稿

Good day and welcome, everyone, to the Opsware, Incorporated first quarter fiscal-year 2006 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.

Now for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Mr. Ken Tinsley. Please go ahead.

Thank you, Carol, and good afternoon. With me today at our headquarters in Sunnyvale are President and CEO, Ben Horowitz; CFO, Sharlene Abrams; and Chairman, Mark Andreessen.

Before we begin, I would like to remind you that during the course of today's call, we will make forward-looking statements regarding future events and our future financial performance, including forecasts of future revenues, all of which are subject to risks and uncertainties. Actual events and results may differ materially from these statements.

We assume no obligation to update the information provided on this call today, or to revise any forward-looking statements, or to update the reasons actual events or results could differ materially from those anticipated in the forward-looking statements. Please review our Form 10-K filed with the SEC on April 15, 2005, and our reports on Forms 10-Q and 8-K filed with the SEC for discussions of important factors that may cause the events -- actual events and results to differ from those forward-looking statements.

The term "non-GAAP EPS loss" used in today's discussion excludes certain noncash charges related to our acquisition of Rendition Networks. 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 received a copy of the press release which was distributed after the market closed today. If not, it will available at the Investor Relations section of the 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's me turn it over to Ben.

Thanks, Ken. Today I am pleased to report an excellent first quarter. Q1 revenue was $12.6 million, up more than 70% from Q1 of last year, and at the top end of our previously guided range. Non-EDS revenue was up 200% over Q1 of last year. In Q1, not only did we more than double the number of transactions for our server automation product, we also doubled the total number of transactions compared to the previous quarter.

Last call, we stated that the IT automation market will reach a critical inflection point where market adoption will greatly accelerate. The record number of deals we signed this quarter is a strong indicator of the strength of the market and our market leadership position.

In the quarter, we signed deals with the following customers -- USA Today, Pegasus Solutions, Lawrence Livermore Laboratories, Northrup-Grumman, Equinex; Bell Security Solutions, New Century Mortgage, JPMorgan Chase, National Oceanic and Atmospheric Administration, Rite Aid, Wal-Mart.com, the U.S. Department of State, MegaPath Networks, Touchstone Health, Knight Trading Group, the New York Times, InfoSpace, Landata Systems, Analog Devices, the State Department's Office of Strategic Research and Analysis, Rogers Communications, Florida Rock Industries, Sallie Mae, Investors Bank, University of Pittsburgh Medical Center Health, Principal Financial Group, Temple-Inland, P Systems, Vodafone, Poly-America, Shell International, Logica CMG, Siemens, NTT Communications, and Samsung.

I would like to highlight the significance of a few of these deals in particular. USA Today, the nation's best-selling newspaper and affiliate of Gannett, America's largest newspaper group, selected Opsware to automate operations for multiple USA Today properties. Opsware will be broadly deployed to automate management of service across three large data centers.

Pegasus Solutions, a global leader in providing technology and services to hotels and travel distributors with nearly 60,000 hotel properties purchased Opsware to automate their server environment and significantly reduce the cost and time associated with disaster recovery.

Logica CMG, a major international force in IT services and wireless telecoms headquartered in Europe selected Opsware to manage its application infrastructure worldwide as it continues its rapid expansion in the outsourcing market. Opsware Automation will serve as a global solution for Logica CMG's customer-facing applications hosted across thousands of servers.

Samsung SDS, one of largest companies in the world, with over $100 billion in annual sales, selected Opsware Automation as the key platform for its utility computing initiative. Samsung SDS will deploy Opsware to manage the entire scope of their customers mission-critical server infrastructure worldwide. Notably, Samsung marks the first company in Korea to adopt Opsware Automation software.

MegaPath Networks, a leading provider of security, access and managed network solutions, selected Opsware to automate the management of its service provider network, which supports over 18,000 customers throughout North America. Opsware will be the key solution for MegaPath's compliance management strategy and will automate operations for over 10,000 network devices.

NTT, the world's largest Teleco and customer of the Opsware Server Automation System, purchased our network automation technology for deployment across their adulate hosted services business. NTT is Opsware's flagship customer in the Asia-Pacific market and is a great example of the need for Opsware's integrated server and network management.

On the product front, this week we announced the most significant release of Opsware automation software in the Company's history. The new release, code named "Darwin," adds 16 new major capabilities, and most significantly, provides cutting-edge technology in the area of compliance management and time to value. Our Darwin release provides the capabilities to accelerate our sales cycle and enable smaller starter-sized transactions.

In the area of Network Automation. Our technology is consistently ranked number one in the market, winning every comparative review and industry award ever granted in the space, including being named WSA's most promising new technology and network computing's best infrastructure configurator in Q1.

In summary, I am pleased with our momentum. As -- as stated last quarter, the market for our IT automation software is accelerating and the number of servers within IT organizations skyrocket and compliance initiatives create an immediate need for automation. On the basis of early demos and pilots of our recently announced Darwin product, we signed more double the number of server transactions over the previous quarter. With the June shipment of Darwin, we expect even greater sales acceleration.

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

Thanks, Ben. As Ben mentioned, this was a record quarter for us in terms of new customer deals signed. We booked twice the number of new customer deals this quarter than any other quarter in the Company's history. We had a healthy mix of deal sizes, with 43% of -- of bookings in Q1 coming from deals greater than $600,000. Total net revenue in Q1 was $12.6 million, up more than 70% from Q1 last year. Non-EDS revenue was $7.4 million, up more than three times year-over-year.

To update our status on VSOE, we have now established VSOE on the fair value of maintenance and services. Starting on the Q2 balance sheet, you will begin to see the impact of this milestone. You will see the advances from customers line diminish gradually over time, and new contracts once billed will go directly into deferred revenue. As we previously stated, achieving VSOE will not have a significant impact on our revenue because we expect that the bulk of our revenue will continue to be recognized ratably.

Cost of revenue in Q1 was $3.1 million, which translates to a gross margin of approximately 76%. On expenses, operating expenses, excluding noncash items, totaled approximately $13 million for the quarter, up from $11.1 million last quarter. The largest increase was in R&D, which reflects the run rate of the acquired headcount from Rendition Networks.

Sales and marketing expenses grew due to accelerating sales activity as evidenced by the record customer success we had in Q1. We currently have 29 quota carriers, up from 25 announced on the last call. Average annual sales quotas are $2.5 million. GAAP EPS loss for Q1 was $0.05. Excluding noncash charges relating to the acquisition of Rendition, non-GAAP EPS loss was $0.03.

Turning to the balance sheet, we ended the quarter in a strong position with over $100 million in cash. Deferred revenue in advances grew to $20.6 million, up from $19.3 million sequentially.

Turning to cash flow, on our last call, we said to expect negative cash flow from operations in Q1 due to the acquired expense run rate from Rendition. As a result, actual cash used by operations in Q1 was $1.2 million. We expect to return to cash flow positive from operations in Q2, and to generate positive operating cash flow for the full fiscal year. Further on guidance, we expect Q2 revenue to range between $13 million and $14 million, and we reiterate our full-year revenue range of $53 million to $66 million.

Looking towards profitability, we currently view cash flow to be the best operational metric to manage our business. Although we aren't providing specific EPS guidance yet, we expect to turn profitable when quarterly revenues reach the $18 million to $20 million range.

Now I will summarize the metrics and guidance we have discussed today. We booked more than twice the number of new deals in Q1 as we did in Q4. 43% of new bookings were from deals greater than $600,000. We have 29 quota carriers with annual quotas of $2.5 million. We expect Q2 revenue to range between $13 million and $14 million. We expect full-year revenue to range between $53 million and $66 million. We expect to run the business to positive cash flow for the remainder of the year. And we expect to turn profitable when quarterly revenues reach $18 million to $20 million.

And with that, we now invite your questions.

Thank you. [OPERATOR INSTRUCTIONS] And we will go first to Amy Feng with JMP Securities.

Yes, good quarter. I wanted to ask you about some of the things that may have negatively impacted your stock of late. Three things mainly. One is, can you give us a sense of the sales cycles that you are seeing currently? Second, in terms of ASPs and prices from competition, who are you seeing out there? What are your win rates against them? And what have you seen in terms of pricing versus your competition? And then third, regarding your VC overhang, specifically Benchmark Capital, how many shares are still left with that VC? Thank you.

Thanks, Amy. Good to hear from you. Yes, so let's go through those in order. First of all, sales cycle. Sales cycle is one that I think some people did get confused about, and I am not exactly sure why, but let me just make sure that we are really clear. What I've done is, since sometimes sales cycles can be interpreted differently depending on, when does it start? Does it start on the first call or the first meeting and so forth. What I thought would be most constructive is to just go through basically our month to productivity. So what I am going to look at here is the time that a sales person starts with us, his first day at work, to the time of his first deal. And if you look at all of the salespeople that we have hired in the last 12 months, and we take the average time for the productive reps between new hire start date and time to first deal, we are right at 4.44 months to first deal. So that is down by about half from where it was 18 months ago. So, as you know, we have been quoting sort of a 6-to-12-month sales cycle, and from a productivity standpoint, they were hitting in on average at about nine months and now they are at about 4.4 months.

And then if you say, well, okay, what is going on in the first quarter? If you look just at the guys who we hired between January and April, there were nine hires. Four of those have closed deals, and then another four were hired in March and April. So in general, I would say sales cycles have been dramatically compressing as we indicated earlier, and I think that is due to several things.

First, the market is just much more receptive than it was 12 or 18 months ago. Second, with the Darwin release, we have the ability, as I stated, to deliver functionality with a much, much faster ROI. And so that's really helping us collapse the sales cycle. And finally, the networking product is off to a good start in terms of what we can do and how quickly we can turn deals. So we are really, really pleased with the sales cycle.

Second, on pricing. In general, pricing has been really stable over the last several quarters, and so, again, I am not sure where that came from. I did read -- Gretter Odd [ph] reported this morning that some of you probably also read, but one of the things they mentioned was we were getting pricing pressure from BMC and Novadyme. And let me state just to be clear that in deals of $100,000 or more in Q1, Novadyme was in no deals that we were in in the last quarter. We didn't see them at all. And BMC was in one deal and that was in the U.K. and that deal closed for $1.8 million. So we feel pretty good about our ability to hold pricing, and in that deal BMC was actually the incumbent.

In terms of overall competitive landscape, it has been pretty consistent. We are seeing -- we continue to see Veritas, although less since the acquisition occurred on the sort of the large company front. On the small company front, we see AlterPoint, Voyence, and Voyence on the network side, and BladeLogic on the server side, and we've had really great success against them in the last quarter, in fact, we had no competitive losses at all. So I would say I am pleased with the pricing, and we don't expect to have any falloff due to pricing pressure.

On the third question, the VC overhang, Benchmark Capital originally had about 10 million shares, I believe. And they are down to 1.2 million shares, so they hold currently, I think, 1.25 million share shares or something like that, which we would expect them to distribute some time in the future, but I don't know when.

Yes, one other question. Regarding EDS and EDS reselling of your solutions, how has pricing been from the EDS, the end point to your end-use customers?

Now EDS does not resell the solution. We should be very clear on that. EDS is our largest customer that uses Opsware to run their Managed Service business. So they use it to run their outsourcing business and they use it on behalf of their -- of customers that they outsource, but that is all directly to EDS, and under the -- what's been basically $100 million so far on licensing, is basically pays out at $20 million a year. And EDS has been going well in general, but there is no kind of reseller component to that.

In terms of your non-EDS business of $7.4 million, how does that break out between new customers and existing?

Excellent question. And that is -- it's primarily -- it's dominated by new customers, although remember it is revenues so it's a little lagging. It's a little different than bookings.

I see, if you want to talk about bookings.

Why don't I just talk about bookings really quickly because that is probably what you are asking for and it is actually number that I know off the top of my head, whereas revenue is a little trickier to calculate. But this quarter, if you look at the names I read, which is about 35 names, about 60% of those were new deals, brand-new customers we never sold to before and 40% were up-sells.

Thank you very much

We will go next to Seihun Kong with ThinkEquity Partners.

Hi, good afternoon and congratulations on the quarter. I first want to do a little housekeeping. Can you tell us exactly when does or when did VSOE kick in. Was that at the very beginning of this quarter, at the very end of last quarter?

We are saying it is beginning now. So it is beginning of Q2.

Okay. So --

Not reflected in the Q1 numbers.

Not reflected in Q1.

Got you. I just wanted to make sure. And can you talk a little bit about the Darwin product? How do you -- I guess in the field, delineate between what products you sell, the SAS product versus the high-end product. Is it divided by complexity, by scalability, functionality? Can you talk about the go-to-market strategy for that?

I think the easiest way to think about it is that with the previous versions of the Server Automation product prior to Darwin, we really didn't have the ability to play in a very small deal. So -- and we talked about it a lot with many of you before that under 200 servers is pretty difficult to get in there, so we rarely did deals much sub 500K. With Darwin, we did have a lot of functionality that appeals at a very small size, and it has enabled us to be much more aggressive against some of the lower-end competitors, and particularly BladeLogic, and I think that some of the confusion that people had was, we really went in there and competed very effectively against them in Q1, which I think affected their numbers, which -- which I believe people misinterpreted as that they would affect our numbers because it was a market event as opposed to a competitive event. And I think that, with -- so with Darwin, it mainly kind of gives us functionality that gets us into those deals.

In terms of segmenting it, it ends up being things like, do they need multiple data center support, do they need some of the more complex application management features that we offer, and those sorts of functionalities as opposed to just the ability to access boxes and make changes and run scripts, which would be more of the low-end product.

Okay. So is the accelerated deployment packs -- I don't know how you call that. Is that going to be available for the core product or is that just specific for the Darwin product?

Well, Darwin is the new version of the -- what we call the core products. So it will be in essentially the 5.0 and beyond release.

Okay. I guess, you seem to be gaining a lot of traction in Asia, and I just wanted to see if you've changed at all your go-to-market strategy. I think up to this point it's been mostly on a partner basis, but are you going to build a bigger direct sales presence in that area and any plans for headcount for the quota carrying side?

Yes, so in Japan and Korea, due to our really nice flagship customers with NEC, NTT and Samsung, which we couldn't have picked three better customers for those regions, we're going to have direct presence in both those countries. When you expand to Singapore, Australia, and sort of some of the rest of the attractive targets in Asia, we are going to start out a bit more partnered on that, but as we start to establish some -- some traction, then you will see us follow with the direct sales force. We just want to make sure that we manage carefully from productivity standpoint. Those of you that who have followed us know that we like to kind of hire salespeople as they get productive and not too much in advance of that, and that will hold for Asia-Pacific as well.

Okay. If I can just ask one more quick follow-on question. When you talk about the guidance range, the yearly annual range is still at 53 to 66. I am wondering, what level of bookings for the next three quarters is assumed and let's say the low end of the guidance range versus the high end of the guidance range? Any sort of color on what's got to happen in order to get to the low end and what's got to happen in order to get to the high end?

It is a little bit -- it's less of a bookings question and more of a deferred in advances versus what goes into revenue. So it's really how much of what we are booking gets recognized as where we have the swing. What you will see from us is, you will see us narrow that and sharpen it up a bit next quarter, because as we get further into the year, we will know where deployments are, and we now know where we are with VSOE and other kinds of things that impact what goes into deferred and what goes into revenue. So we are basically a quarter away from giving a bit more clarity on where that is going to end up.

And with VSOE, is the timing of revenue recognition still tied to the customer actually deploying and signing off? Or is it essentially started as soon as maintenance starts when they sign the check?

Well, it's going to depend on the specifics of the contract. Generally if there is a deployment, and those are essential services, then those need to be delivered.

Okay. Thanks a lot. I appreciate it.

Thanks.

We will go next to Andy Schroepfer with Tier 1 Research.

Hey, Andy.

Mr. Schroepfer, your line is open. Please check your mute button.

Hey, guys. Sorry about that. Good quarter. I'll start out with an easy one. I know you guys are starting to give more metrics. Can you give a customer count, or how many new customers did you have for just the stand-alone Opsware product and how many customers did you have for the joint product in the quarter.

As we said, the stand-alone -- or the stand-alone Opsware -- the main two products are the server network and server product doubled over Q4 and the network product was new, and it, I would say had a fine quarter. In terms of the total customer, we read off, I believe, 35 names this quarter, and there were probably on the order of a half dozen beyond that in terms of deals. But we are not giving out customer counts as a metric.

Okay. How about -- I'm trying to think of how to re-ask this question, but I'll --.

The average deal size that Sharlene mentioned earlier, I should say, or the deal stratification she mentioned in her talk applies to all deals. So you don't have to break them apart in terms of which product.

On the pipeline for million-dollar bigger deals, those are the ones I would assume is your sweet spot. How has that changed year-over-year in terms of the pipeline and maybe the sales cycles for those type of deals?

Yes, that has both -- it has changed in two ways. First of all, it's a dramatically bigger pipeline, and it is -- if you were to go back probably three quarters, we would probably have about four times the dollar value on the million-dollar deal plus pipeline. So the number of large deals has gone way up from -- from where it was just three quarters ago.

And the second part is, what is the sales system look like on the really big deals. And I think on the really big deals, the sales cycle is still more -- it is closer to the nine months than the 4.4 months. Some of the longer deals or of the big size. But over time, I would say it is getting shorter, but we do have -- particularly on the multimillion dollar ones, we have some government deals that are on a greater than a year sale cycle and that really pulls up the average.

Got you. And I don't know how to ask this in a politically correct fashion, but I think there's a lot people on this call that are perplexed with the way the stock has acted. I know there has been a number of events including Benchmark sale that kind of influenced that recently. But what are your comments that you can make on a plan B, or a passion to remain independent or potentially doing a buyback with funds you raised since the stocks underwater from there, stopping the insider sales. Any comments you can make just to those general things that I think are an overhang on the stock?

Sure, let me address them. The first thing is, Andy, stock prices weren't your job in terms of when it acts irrationally. The main thing is, we are going to keep growing the business and eventually we believe that will take care of itself. And I think that because of the environment, people have tended to grab on to a lot of -- well, odd rumors and false rumors, and just weird things. And, at the same time, they have been waiting for -- we have said that bookings were accelerating and that people would see that, first, in the number of customer names and you've seen that now. And the next quarter you will see that on the balance sheet and then following that, you will see it on the revenue, and I think that just based on the world we live in, some people are -- are from those areas that were show me the numbers. So I think some of it is just that. And it will happen that way.

In terms of insider selling. Let me -- I think people got a little confused on that, so let me run down some of the facts on insider selling at Opsware. So if you look at 16B officers and you say -- and we have probably more 16B officers than the average company and that was just in an effort for us to be more transparent. But if you look at the critical officers, those that are 16B in any company, and the ones that are really had their finger on the pulse of the Company and have the biggest stakes.

You have Mark Andreessen, who is our Chairman, and the largest shareholder in the Company. He owns about -- a little over 11 million shares, and if you look at -- we went public in 2001, so four years ago and Mark has never sold a share, not in the IPO, and not ever since then. Then you look at the second most important is probably myself, I'm the -- being the CEO. I have sold, since we have been public, less than 5% of my holdings in a single transaction. Sharlene, our CFO has sold less than 5% of her holdings. She's probably the next most important. Tim Howes, who is our founding CTO has sold less than 5% of his holdings. And then Mark Cranney, our Head of Sales, hasn't sold any shares.

So overall, if you look at those key officers -- which I think you would -- anyone would agree are the key officers in any company, we sold a total of 2.3% of our holdings since going public. And if you just compared that to sort of another -- any other public company to say, a good company like Google, for example, those same individuals at Google has sold 10% of their holdings in their first nine months of being public.

So there is going to be some selling, it is a lot of people's net worth. It's certainly a lot of my net worth, and there's going to be some selling from time to time from executives, but I think overall from a track record, from a factual standpoint, it hasn't been that significant. Then if you look at the kind of beyond that, and, again, some of these people probably won't be 16B and other companies and falls under the category of no good deed goes unpunished, trying to be very transparent.

I think people overreacted to something called a 10b5 program. 10b5 for those of who are not familiar with it is basically a program that the SEC set up to basically help executives not insider trade. So you make a decision to sell stock at a regular basis, kind of in the future, and it can be at -- either at whatever price or at a certain given price or so forth. So a bunch of our other executives from 10b5s set up that do regular trading, and those regular trades hit the wire like all the time.

And I think that has caused investors to think, oh, wow, there is a lot of selling going on and then they have also, based on that, concluded that people are selling like into the end of the quarter. I think there was a misinterpretation that one of our employees was selling right before the end the quarter, which of course, would have been illegal. So it was silly when you thought about it, but it was the 10b5 program registering his shares.

So the grand total of all of the other 16-B officers have sold 1.2 million shares total. And so, there just hasn't been that much insider trading, but I think that it is one of those things where, people who are shorting the stock did a great job of making hay with it, and I take my hat off to them on that. But I think that they had better -- their time is running out, I would just say on that, as the numbers come in and people see our momentum --.

Good answer, Ben. I am pretty sure the market will allow you to sell if your stocks hit $240 a share as well.

Exactly.

Final question. I would be remiss if I didn't bring Marc into the conversation. So, Marc, I'll point this question to you. On the acquisition front, I assume if you are going to sit on the 100 million cash, it's not just have 100 million in cash that you're thinking of doing things. If you were to talk about the category you would be looking to for a next acquisition, whether that's a year from now or a month from now, what things are you intrigued with that would be synergistic that are on the market at prices in the range you're looking at.

Well, thanks, Andy, I appreciate the question. First of all, there's no way I can answer it because, of course, I wouldn't want to forecast any potential interest of other potential acquirers. I will dodge the question, sidestep it neatly just by saying I am actually really happy with the Company's acquisition track record so far, I think. In the history of of the software industry, the blended average of kind of people's success with software acquisitions across the board has been quite low. I think it is well known in the industry that most software acquisitions fail. And I think we have actually been the beneficiary of that over the last three or four years, as various of our potential competitors have gotten bought by big companies and then basically disintegrated.

So we have been extremely careful, as you know, on the acquisitions that we do and we have set very high criteria. We've looked at a lot of companies to potentially buy and we passed on all but two, the two that we bought, Tangram and Rendition, the results, we think, have been above our expectations. I think they have been really quick quite objectively. So I would say in general, our strategy is to definitely, in general be an acquirer, but to be very selective, to be very careful, to be very prudent, and to make sure the ones we are doing are ones that we think we can really execute on and outperform. We will keep looking at things and we'll be very careful.

Great. Thanks, guys. I will turn it over to somebody else. Take care.

Thanks, Andy

We will go next to Katherine Egbert with Jefferies.

Hi, thanks. Good quarter. A few questions. First of all, the growth in the non-EDS revenue has been very consistently accelerating over the last few quarters. Can you talk about -- since you guys see the bookings and we don't, what you think the growth rate of that revenue can continue to be?

We had -- we had forecast -- I mean, just for the whole year that non-EDS revenue growth would be -- I believe that was, like, between 80 and 150%, depending on where we fell within the range. We also had mentioned the last quarter that for the entire year, EDS revenue would be about 30 to 38% of revenue this year, down from like over 50% last year.

The other thing that I will point out that we have said in the past and continues to be true is that our bookings growth rate this year is going to be larger, we believe, than our bookings growth rate last year. So the nice thing about the non-EDS revenue growth is that we think it is sustainable, not only through this year, but well into next year as well based on our current bookings momentum.

Okay. That's what I was trying to get at, thanks, Ben. Also given your bookings visibility. Can you give us a sense of when you might reach that 20 -- or 18 to 20 million break point. I think it will be early next fiscal year or middle of the year?

We are not -- we are not going to forecast that yet. We just wanted to give you an idea of both -- basically what our expense rate would be and what the revenue level would be at that time frame.

Okay. And then two questions on Darwin. Did you have any sales of the product in April? Maybe a beta edition of the product? And then, also, what is the pricing there, and how are you preventing cannibalization?

Okay. Well, in the -- in Q1, we didn't actually sell Darwin yet because it wasn't yet available. But in terms of the cannibalization issue, the good news is -- and we just -- although we have been piloting it and demonstrating it, particularly in the second half of the first quarter, we were able to close business pretty well prior to delivering it. And the nice thing about having a routable revenue, delayed routable revenue model that we have is we were okay in terms of revenue because we weren't going to take any revenue on those deals anyway. So that worked out well for us. In addition, we will be delivering it in Q2, so we are in good shape in terms of cannibalization. We did, I think, a nice job of waiting to show it until we could manage that particular phenomenon.

Okay. And will you announce pricing when you announce the product?

Sorry, didn't hear that.

I am sorry, will you announce pricing at the time you announce general availability?

Yes. And the pricing is going to be the same as the previous version of the product.

Okay, great. And then just quickly with respect to the customer counts since it was a headline in the press release, it sounds like maybe you had around 40 customers. Is that fair? And that was double what it was last quarter?

More than double, and that's the right number, and, again, about 60% of the ones we read were kind of new customers and about 40% up-sells.

Okay, good. Thanks a lot.

We will go next with Scott Zeller with First Albany Capital.

Thanks. Another question on Darwin. Can you tell us how large an organization can actually make use of Darwin? How high up could it go?

How high up -- are you talking about in the customer organization do we sell it?

Yes.

Well, interestingly, the sort of highest-level value proposition that we have is turning out to be the combined network and server offering. And the reason that that one seems to be of such interest to CIOs is that they are grappling now with the issue that -- that we actually -- you sort of saw when we made the acquisition that much of the application functionality has moved into the network. So as you move performance and security onto the network, the coordination between the network and server groups is difficult and it turns out that in many organizations that still meets at the CIO. And so in a lot of ways, that ends up being the highest level value proposition.

Now, on the other hand, compliance is also become a CIO-level issue, and that's a bit more recent, and so in that light, Darwin sells in there. But I would say still for the most part, we are selling to the person in charge of operations, so if you think of the CIO as running operations plus development in an IT organization, we tend to be one level down from that for the majority of the sales, but certainly not all of them.

Okay. I am sorry, maybe I wasn't clear. I was asking more about the size revenue-wise of the company that could make use of Darwin.

So how big --

How large an organization?

How large an organization do you need to buy Darwin. Interesting. I think -- not that big in that, one of our early customers -- I mean one of our smaller customers in terms of size of company is Good Technologies, and thing their company is probably on the order of 200 employees. So you don't have to be -- and that's the whole company, not IT.

Right. And how high up can you go? Can you go to the very high end of the middle market?

Well, EDS, right -- in EDS, we are running 154 data centers and that's worldwide. I think we are on every continent with them other than Antarctica. I think that -- and then that's over many tens of thousands of servers and over -- in terms of employees engaged there, it's on the order of 5,000. So, that's a really big operation and I don't know that we have seen any IT operations that are much larger than EDS.

So I think we get among the largest, and those are -- just to give you some other idea, 22 different kind of independent cores that are Multimastered together, so 22 kind of organizational, kind of data center local hubs, and then satellites hanging off that, and those subs coordinated through Multimaster. So very, very large-scale deployment. We are quite confident it's the largest scale deployment in that world of this nature.

Thank you.

Thanks, Scott and thanks for the initiation report, we appreciate that.

We will go next to David Rudow with Piper Jaffray.

Good afternoon, everyone.

Good afternoon, David.

A question on the guidance, what percent of revenues do you think will be licensed?

Well, in the last five quarters it's ranged between 65% and 74%, and it will probably be in that range.

Okay. And then what caused the slowdown in the bookings? It has been ticking down if you look at a sequential and a year-over-year basis over the last four or five quarters now. On top of that, I believe you said your expectation was that bookings would increase, and I would assume on a year-over-year basis at a higher rate than revenues, but that has not been the case. Can you tell us what is going on in the booking side?

I think you actually completely misread the numbers, and we probably should sit down with you and explain to you how the financial model works again, because we have been accelerating, and, in fact, one of the things that I think you are not understanding is there is a delay between when we book something and when it moves into deferred and advances. And, typically, that is about a quarter delay before you see it at all. So it is an invisible part, and we actually have a pretty good chart on this we can walk you through. So you have greatly misinterpreted it.

I would disagree with you. I mean, you look at it, the sequential change in bookings, which is the change in deferred plus change in customer advances with 6% sequentially and 46% this quarter. If you look a year ago, it was 40% sequentially.

But you are looking at bookings from a quarter or two ago, David.

Well, yes, but your customer advances went down by 48 --

You are looking at customer advances from a quarter or two. It doesn't go into customer advances until we collect the cash, which is typically the quarter after we book.

You have to really collapse both the categories, but I think what would be easiest, David, is to take offline and we can walk through your question.

I think it is important to understand, because I think that you are going to be in for a horrible surprise next quarter on deferred and advances and advances and deferreds and advances from customers. You are missing the boat. And, also, so I will just say, you are wrong about bookings, and you really ought to --

I am just looking at what you guys report on the balance sheet. That is all the information we have. You don't give us any details on backlog. It's nice to know that you have doubled the customers, which is fabulous. We only go by what you say in the quarter.

This quarter's bookings, as we stated, will show up on next quarter's balance sheet, so you will be able to see it.

But you said you double customers linearly. Now first, these customers, I would assume, when they pay their bills go into customer advances, correct?

When they pay.

When they pay.

Exactly. You said the quarter was more linear than you have seen in the past. So I would assume you collected cash throughout the quarter.

We did not say that. We did not say the quarter was more linear than we have seen in the past.

No, and there is off-balance sheet amounts right now that we don't disclose.

And yes, there is off -- there is a significant amount of off-balance sheet, and we did not say the quarter was more linear than it has been in the past. In fact, it was not more linear than it has been.

So by looking at the customer advance then we can assume it was probably more back-end loaded because you might have sent bills out at the end if you signed contracts towards the end of the quarter.

That's correct.

That's fine. Can you talk about kind of the region exposure, how you did in the U.S. I don't know what you did on the government side this quarter. And then if you look Internationally as well, how did you do on that side?

Sure. So there is a couple of things from a -- are you interested, David, from a revenue perspective or from a bookings perspective?

I would like to hear from a bookings perspective just to see how current deals are going.

Okay. Great. So we have seven regions. And those regions are, just so you understand how the business works, Western, Eastern, and Central United States, Federal -- the U.S. Federal Government, Asia-Pacific, EMEA, and then we have an overlay function that covers both kind of network and EMS products to some degree. All seven regions contributed -- and they all contributed pretty significantly, so there was no region that was -- no region less than about -- I think the lowest once was maybe 6 or 7% of the total number, so everybody was on the board for sure.

In terms of International versus domestic, I believe we were probably two-thirds, one-third, two-thirds domestic, one-third International. And then in terms of the Federal Government, the Federal Government did contribute in the quarter, and it was on the order of -- I don't have it in front of me, but on the order of 10 to 15%.

Okay.

Is that helpful?

Yes, that's very helpful. Not to go back to the customer advances, am I looking too far into it seeing the large sequential decline. Now granted this account will disappear next quarter, am I looking too deeply into that 50, 48% sequential decline.

Yes, because that's just a matter of timing. That is sort of just a -- it is just a stopping point on the way to deferred revenue.

Okay. Okay.

Yes, and you will see. So let me -- and I appreciate the confusion, and I certainly didn't intend to be short with my response, but let me just go back on what we have said in the past, because I think it has been confusing, not just for you but for several people. There is a delay between bookings and deferred and advances in revenue. And I think that there were definitely -- and what you've seen is, the bookings -- what you've seen so far are really things that were mostly booked last year, and last year came out where it came out and basically drove the guidance, most of the revenue guidance for this year, and I think that as we know coming off last quarter, that definitely impacted the stock price.

And one the things that we've tried to articulate, that I want to make sure that we are being very clear on is that bookings have -- really did start to accelerate, as you are seeing, started to accelerate this year in a big way, and what we said last call was you would see that in customer names this quarter, but not yet on the balance sheet. We expect you will see that on the balance sheet next quarter, meaning that deferred and advances plus -- deferred plus advances, the bookings momentum should show up in those two categories, and then in the second half of the year, that will start to work its way through revenue. And I do believe things should be somewhat less confusing now that we have established VSOEs. So some of the things -- it will be a little less delayed, but we will still have some of those properties.

So, again, apologize for the newness of the software company and newness of the model, but I think what you are seeing is -- in some ways I think bookings last year were probably not what some of you expected, which led to the range, but that's all baked into the range. What's happening now is very different from that and I want to make sure that we draw a clean line between last year's bookings and this year's bookings and what you are seeing.

So, with the visibility that you have, can you provide us some guidance with what you expect the increase in deferred plus advances will be going into Q2 then?

We are not guiding on that just because, again, it's the mix of deferred and advances, and revenue is not something we are precise on, but we believe that -- you'll see -- you'll see the bookings. What we are talking about when we say bookings acceleration, you will see a lot of that show up in deferred and advances.

Exactly.

So you won't hear this story from me next quarter. If that makes sense.

That's fine. And understand, we are only working with the balance sheet, and believe me, I fully understand your model. I think I wrote a 50-page initiation last year. Believe me we fully understand the model. We are just going by what we investors see on the balance sheet, so.

I understand.

Thank you very much.

Thanks, David.

We will go next to Andrew Cole with Wachovia Securities.

Thank you. Nice quarter, guys. I just wanted to come back to the issue of the services and license mix. It seems mostly to be the services mix seems to be kind of increasing each quarter rather than bouncing around. I'm just wondering where you see that going or is that just not a pattern there, it's just a coincidence.

It is not necessarily a pattern. It really depends on the mix of the particular deals that are being recognized ratably and how much services they happen to have, and the size of deployment, but as I mentioned, it is actually for the last five quarters been between basically 65 and 74%. So expect it to be in that range, and that may narrow as time goes on, but that's -- that's the range I would expect to see it.

Okay. And then I think on the last call you had said two-thirds of the low end of the full-year guidance was already business you've booked. I was just wondering for the first quarter, what the percentage of revenue coming off the balance sheet was?

We don't break it down by that. We were just giving that metric as a one-time in the year, just so that you would have a comparison to the previous year.

Okay.

It's just a once a year.

Okay. It would be higher than that, though, I would imagine, right?

Yes, on any given quarter.

Right. Okay. And then do you comment on the mix of the asset management product? How much of that is in revenue per quarter?

We are not -- we don't break down by product or by how we are selling features or functionality. We are selling an integrated product.

Right. Okay. And then just last question. The 18 to 20 million break-even, that's kind of like a moving target, I guess, because it depends on when you achieve it, what your expenses are going to be. Do you -- just going back to the question someone else asked, can you kind of give us an idea. Is that a target for this year or for next year?

We had said on last quarter's call we are not going to forecast profitability, because we are really investing in our accelerating bookings, and so that -- that number -- we are saying we are not forecasting this year, but we wanted to give you an idea. We could pick basically a number to be profitable at, but we would -- you wouldn't want us to do that because we really need to invest in the growth that we are already starting to see this quarter.

Right. Okay. Thank you.

Thank you.

We will go next to Scott Donahue with Tier 1 Research.

Hi, guys, just a quick question on sales model for 5.1. If I understand correctly, you said that you're going to -- the way the product is set up and the features in there, it would be more competitive or more attractive to a smaller market or a smaller enterprise sale. Will the sales model change at all? Or do you have any plans to address how -- how that might change your overall cost of sales on the product?

I think that the sales model is going to probably be pretty consistent in the -- at least the short-term. It is possible that down the line that changes, but for right now, I think that it's going to continue to be a direct offering, and just important that people understand the server product is just about 100% direct right now in terms of how we sell it. We really don't sell through alternate channels. And that -- with this release, the deployment times are much shorter, and the -- it is a bit easier to sell, but I wouldn't go as far as to say it becomes a product that will have success in the very near term moving through an alternate channel.

Great, thanks.

At this time, we have no further questions. I will turn the call back to Mr. Tinsley for any closing remarks.

Thanks, Carol. Thanks, everybody, for your participation today. As always, if you have any questions contact us here in Sunnyvale.

This does conclude today's conference. We thank you for your participation and you may now disconnect your phone lines.