惠普 (HPQ) 2005 Q2 法說會逐字稿

Thank you for standing by, and welcome to the Opsware Inc. second 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. And if anyone has an objection, you may disconnect at this time.

Now at this time, I would like to turn the conference over to the Director of Investor Relations, Mr. Ken Tinsley. Mr. Tinsley, please go ahead.

Thanks, Duane, and good afternoon, everybody. With me today in Sunnyvale are our President and CEO Ben Horowitz; CFO Sharlene Abrams; and Chairman Mark Andreesen. 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, cash flows and earnings per share, all of which are subject to risk and uncertainties. Actual events and results may differ materially from these statements. We assume no obligation to update the information provided on this call to revise any forward-looking statements or to update the reasons actual events or results could differ 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 actual events and results to differ from these forward-looking statements.

The term "non-GAAP net loss" used in today's discussion will exclude certain non-cash charges related to stock compensation as well as non-cash charges relating to the acquisition of Rendition Networks and Tangram Enterprise Solutions. Reconciliation 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 our press release that was distributed after the market closed today. If you have not, it is available on the Investor Relations section of our website. In addition, we are currently Webcasting this call and an audio replay will be available on our website following the conclusion of the call.

Now, let me turn it over to Ben.

Thanks, Ken. Today, I am pleased to report a solid second quarter. Q2 revenue was $14.1 million, up more than 60% from Q2 of last year, and above the top end of our previously guided range. Non-EDS revenue is up 160% over Q2 of last year and up 20% sequentially. Deferred revenue and advances grew to $23.1 million, up almost 50% from Q2 last year and up $2.6 million from Q1.

Since our last call, we signed deals with the following customers -- Time Warner Cable, Unisys, Canadian National Railway, CompuCredit, Allegis, Tenex (ph), The Fort Worth Star, Metavante, Landata Technologies, Robert Half, WebTrends, GoRemote, Goodis Inc. (ph), Microsoft, InfoSpace, Genzyme, Scottish and Southern Energy, University of Pittsburgh Medical Center, T-systems, LHM Transportation, SunGard, Blue Cross Blue Shield, The Church of Latter-day Saints, Bristol-Myers Squibb, Atos Origin, Lockheed Martin, Booz Allen Hamilton, Fry Inc., Bed Bath and Beyond, TiVo, the Federal Reserve Board, AIG and a large intelligence component of the U.S. federal government. I would like to highlight the significance of a few of these deals in particular.

Time Warner Cable purchased the Opsware server automation system. Time Warner Cable has abandoned their deployment of BladeLogic and is replacing it with Opsware, which is now their corporate standard. The initial deployment will automate thousands of servers across multiple data centers.

Bed Bath & Beyond, with 732 superstores nationwide, selected Opsware to remotely manage their entire network infrastructure in their retail stores. Automated and proactive management of their network is critical to supporting the transmission of payment and inventory information which is core to their operations.

Along with our previous wins at the Home Depot, The Gap, Target, and Rite Aid, the momentum in retail is excellent. Canadian National Railway, the largest Canadian railroad, selected Opsware to automate their mission-critical network infrastructure that is the backbone for their information and communication systems. Opsware will help insure Canadian Rail's networks are compliant with external regulations and internal policies, and will automate change management across thousands of devices.

TiVo, the leading provider of digital video recorders, purchased both our server and our network automation products. TiVo chose Opsware to automate their entire stacked server and network technologies that power their home entertainment business. Importantly, an increasing number of customers are purchasing both products as a total automation solution for their server software and network management challenges.

This quarter, we also signed a multimillion dollar deal with a large intelligence component of the U.S. government that chose Opsware for our superior security architecture and disaster recovery capabilities. On the product development front, this quarter we shipped the most important release in our history -- Server Automation System 5, code-named Darwin. The Darwin product has consistently dominated competitive benchmarks, as shown by our high win rate.

Additionally, in Q2 we announced a new capability, the Opsware Global Shell, which provides our customers with a powerful automation platform. Finally, we won our seventh consecutive competitive product review with our network automation system. This maintains our track record of consistently being ranked the number one solution.

In summary, I am pleased with our results. Our non-EDS business continues to grow at well over 100% annually. We are rapidly expanding our customer base, and we are beating and displacing the competition. As a result, we are well on our way to being the number one company in this large and exciting new market. Now, here is Sharlene to provide more detail on our financial results and outlook.

Thanks, Ben. As Ben mentioned, Q2 was a good quarter. We had a healthy mix of new deals, with approximately half of our bookings coming from deals greater than $600,000. Total net revenue in Q2 was $14.1 million, up more than 60% from Q2 last year. Non-EDS revenue was $9 million, up 160% year-over-year, and up 20% sequentially.

Cost of revenue in Q2 was $3.5 million, which translates to a gross margin of approximately 75%. Total operating expenses were approximately $14.2 million for the quarter, up from $13 million last quarter. Most of the increase was due to continued expansion of our sales force. We currently have 32 quota carriers, up from 29 announced on our last call.

GAAP net loss in Q2 was $3.9 million, or $0.04 per share. Excluding certain non-cash charges related to stock compensation, as well as non-cash charges for previous acquisitions, non-GAAP net loss was $2.6 million, or $0.03 per share.

Turning to the balance sheet, we ended the quarter in a strong position, with over $100 million in cash. Deferred revenue and advances grew to $23.1 million, up from $20.6 million at the end of Q1. Looking forward, we expect Q3 revenue to range between $14.5 and $15.5 million. For the current fiscal year, we now estimate revenue to range between $58 and $60 million.

The midpoint of this range translates to non-EDS revenue of approximately $38 million, which represents more than 115% growth over last year.

As we previously indicated, in our effort to provide the most relevant metrics for the business we are shifting over to the P&L for guidance metrics going forward. We expect a non-GAAP EPS loss of $0.02 to $0.03 in Q3, and we expect to be non-GAAP EPS breakeven in Q2 of next year.

Non-GAAP EPS excludes non-cash expenses for stock compensation as well as acquisition-related expenses. As we change our focus to profitability metrics, cash flow may fluctuate quarter to quarter, and we expect negative cash flow in Q3.

To summarize the metrics and guidance we have discussed today, we have 32 quota carriers with an average annual quota of $2.5 million. Q3 revenue is expected to range between $14.5 and $15.5 million. We expect full year revenue of $58 to $60 million, of which about $37 to $39 million will be from customers other than EDS. We expect a non-GAAP EPS loss of $0.02 to $0.03 in Q3, and we expect to be non-GAAP EPS breakeven in Q2 of next year.

We believe that we are in the early stages of a large new market. To maintain and further our lead position, we will continue to prioritize growth over cash or margin optimization in the near-term. By doing so, we believe that we can build the best product and the best sales force to make Opsware the standard in IT automation.

With that, we now invite your questions.

(OPERATOR INSTRUCTIONS) Amy Feng, JMP Securities.

Questions for you regarding -- can you give us a sense of what did bookings look like for the July quarter? I believe on your conference call for Q1, you talked about -- you saw twice the number of transactions as well as twice -- on a sequential and year-over-year basis. Can you give us a sense of what you saw in terms of bookings for the July quarter, as well as what should our expectations be for your deferred revenues and customer advances on the balance sheet going into the October quarter?

Okay, so a couple of things. First, so -- Sharlene went through the metrics that we are releasing. But now that we have VSOE, I think bookings are pretty easy to -- or at least a good proxy for bookings as the increase or revenue plus change in deferred and advances is pretty close to the bookings number. So if you take that for this quarter, I believe it was up about -- a little -- about $3 million over the previous quarter. So we were pretty pleased with bookings from that -- in that regard.

And going forward, we are not -- actually forecasting the deferred. The forecast is as Sharlene read it. The revenue plus the earnings forecast.

And then lastly, what are you -- your expectations for a headcount for the sales force by year-end?

By year-end, we expect to be between 40 and 50 quota carriers.

Katherine Egbert, Jefferies & Company.

A few questions. First, how many new customers did you sign this quarter?

Let's see -- we read off about 36 customers. And the mix was about 60/40, new to existing.

Okay. And did Darwin or the release of Darwin at any effect on the average selling price this quarter?

The average selling price was up a little from last quarter, but again, not terribly different. So it has been pretty consistent.

Okay. And going back to the deferred revenue, you saw a spike quarter on quarter of about 5.6 million or 35%. How much of that 5.6 million came from off-balance-sheet backlog versus how much was related to new deals signed in the August quarter alone?

Okay, let me give that one to Sharlene. Let me make sure (multiple speakers) right.

Okay. So I think what you are trying to find out is what would deferred and advances look like as we if we had not yet achieved VSOE? And the balance is -- it would not have been significantly different, and we still have well over $1 million in contracts that are still off balance sheet.

Okay, that's helpful. And then can you talk about your profitability outside of the EDS revenue stream? Would you ever consider breaking that out? Is it meaningful to?

Well, it is a little tricky, because so much of our expense is in R&D. EDS is certainly a significant part of that. But the R&D goes to all of the customers. In general, as far as -- the way we look at the business, as Sharlene said, is we really think this a very big opportunity.

If you were to look at where we are in terms of our cycle, where this is our third year in the software business, we would look at the comparable companies in their third year of selling. Companies like Mercury and Veritas. And if you look at where they were, Veritas did about 15 million in their third year and Mercury did about 24 million.

And given where we think the opportunity is going, where we believe the opportunity is going, given that we are in a comparable market, we are really not going to go for a significant margin expansion in the short-term. As Sharlene said, we are forecasting breakeven in Q2. And we will advance the business carefully. But we think that the opportunity to expand the sales force and continue to improve the product line is a lot greater than the short-term earnings opportunity.

Okay, understood. Sharlene, will you continue to be cash flow positive between now and next July when your actually EPS breakeven?

I think -- I don't know if you heard where we said that the cash flow will fluctuate from quarter to quarter. So we are not going to actually forecast cash flow metrics anymore. We are really turning our focus to the P&L.

Okay, got it. And then last question and I will turn it over. Since you brought it up then, what happened with Time Warner Cable that they ripped out BladeLogic and installed you guys?

Yes, so we think this is an interesting situation that will probably happen again in the future, in that Time Warner Cable selected BladeLogic. And I believe BladeLogic even has them in their boilerplate press releases on their web page. And they attempted to deploy BladeLogic. The BladeLogic product, while having some interesting features, has not really been designed for upgradeability or scalability. In an environment like Time Warner, the deployment failed.

As a result, with the Darwin release, they found that all the functionality that they liked in BladeLogic they could get with Opsware, plus a robust product that could scale. So we were able to get in and displace the BladeLogic installation, and still get quite a nice-sized piece of business for ourselves. So we are looking forward to more opportunities like that for sure.

Chris Russ, Wachovia Securities.

I just wanted to go back to the issue of the negative cash flow I guess for the third quarter. Given the fact that the operating loss is going to be, I think, less next quarter than it was this quarter, are you implying that deferred revenue may not grow as significantly as it has in the last, say, two quarters, where it has jumped quite a bit? We have seen like a 5.6 million jump this past quarter.

No, we are not inferring that.

Okay, (multiple speakers) then what would be the cause for the negative cash flow then? Because you were positive cash flow this quarter.

So in the past, we have chosen to optimize results and manage the business to cash flow. But at this point, we are pleased with the results, how the market is shaping up, and we think that instead of managing all of the various balance sheet elements that go into cash flow, we are shifting our focus to a P&L-oriented approach.

Okay. Was Rendition -- did that contribute any revenue in the quarter or not?

Rendition did contribute revenue. We don't break that out. But it was certainly on the small side.

Okay, so it wasn't material, or it was material? I.e., less than 3% or more than 3% of revenue?

We are not going to break it out.

Okay. And what about the competitive environment vis-a-vis Veritas and Jareva? Of course, it seems like you are making strides against BladeLogic, obviously. What about -- any comments on what you are seeing from Veritas and Jareva? Are they still distracted by the merger, or --?

They are certainly distracted by the merger. If you look at the top kind of three competitors as they show up in accounts on the server side, it is IBM, Jareva, Veritas, and BladeLogic. So they are certainly appearing in accounts and so forth.

What we have been finding pretty consistently with their product is, their product is quite a bit more narrow than our offering. So it is not -- the competition isn't quite so head-to-head. We typically do not benchmark against them. But we have certainly had very good success in competing with them. Given their reach and coverage, in that case it is possible that they are in accounts that we are not aware of, though. And we are mindful that, and expanding our coverage as a result.

Okay. And you have -- with BladeLogic, do you think some customers are concerned about the fact that they are relatively small company, a private company? Is there any issue with regard to the fact that you are public and BladeLogic is not, and therefore BladeLogic is not seeing the kind of results that it should, or --?

We think that -- as we talk to customers, first and foremost we now have a pretty significant product lead on them, even in the areas that they previously were strong. So that is probably the biggest factor. But we do have probably a little more than 10 times as much cash is they have. And probably easily triple -- somewhere between triple and quadruple the quarterly revenue.

So for smart enterprises, I think they consider which company is going to spend more on R&D over time on a product. And given that, we have about 130 people in R&D, which is probably triple their R&D spend. We are a much, much safer bet than BladeLogic. And that is coming into play more and more in conjunction with our product advantage.

Yes, I noticed. I think BladeLogic's last round of financing was only 7 million, right?

Right, and the D round. And those who have dealt with the venture capital world, that is -- the D stands for "don't do that" round. So generally, you do want to go to four rounds of private financing.

Ranjani Chandura (ph), Canton (ph).

My first question has to do with demand drivers. I know you have talked to us in the past about data center migrations, and a couple of customers we have spoken to have talked a lot about compliance. I'm curious if one is becoming bigger than the other, if you are seeing more compliance?

As a tactical demand driver, compliance is probably the biggest one right now. And it just has to do with the cost, primarily driven by Sarbanes-Oxley. So the number of companies that have IT compliance concerns has dramatically increased in the last year. And that is probably the biggest driver today.

We think that as people understand the space in the market more, the efficiency gains and some of the broader, higher-impact metrics are going to be more important. But for sure over the next two, three quarters, we expect it to continue to be compliance.

Great. And then you mentioned a little bit, I know that you can't give the number on Rendition. But I am curious how many joint deals that you have with both server and network automation?

Yes, I believe -- that is a good question. I don't have the number off the top of my head. We have -- it's today a small number. It is around the order of half a dozen. But we are certainly seeing, one, a ton of interest in the joint offering, plus it is an excellent way to elevate the sales. So we are able to get much larger sales.

If you look at the deals we have done joint, like TiVo or Sallie Mae, bringing the network and server together moves us up to the top of the organization and gets us a much broader deployment that we'd normally get with just the server product.

And in those cases, was it -- did they initially engage with you because of server automation, or because of network automation? Which side was pulling the initial sale?

Well, it has been different in different accounts. So it can go either way, for sure. So some of them have been network, and some of them have been server. The network product is a little easier to kind of try before you buy. So it is a decently lead generation product for the entire product line.

And then last question. I guess with Darwin and the network automation products, I had expected ASPs to go down. Do you see that happening over time, or am I looking at it wrong?

Well, a quarter is such a short time for us. So all I can say is we announced these U.S. government -- basically an intelligence component of the DoD. And all I can say is that the deal was on the large side and it drove up the average.

I see. So we might have more smaller details deals with Darwin and the network automation that might just not be visible on the ASP this quarter?

Yes. I think we definitely did have more smaller -- more deals sub-300,000 than normal for sure, which is on the small side for us on the server.

Scott Zeller, First Albany.

Any way to give a little bit more historical perspective on the bookings? You did mention the Q to Q change of 3 million. Any way to comment on looking further back in the trend?

Well, I think that -- like I said, I think even going backwards, the easiest way to look at bookings is just take revenue plus change in deferred and advances. And that is going to be close. Now, there are things that go off balance sheet. And there is still stuff that is off balance sheet that Charlie said -- well over $1 million off balance sheet today. But as a trend and how to look at it over time, I think that is a pretty good proxy.

Seth Wonder (ph), Tracer Capital. (ph)

Just one quick question. The profitability next year in July -- does that imply the 18 to 20 million revenue that you were referring to, I guess last call, as the profitability point?

Yes, we did say that. I think we have probably tweaked that slightly to say somewhere between probably 19 and 20 million. (multiple speakers) from looking at non-GAAP operating expenses (multiple speakers) profitability.

Right, but just to be clear, we are updating our guidance on breakeven to say Q2. (multiple speakers)

Right.

(multiple speakers) No, I am saying Q2 next year, I think breakeven originally implied an 18 to 20 million in revs?

(multiple speakers) well, we hadn't said Q2 before. So Q2 is our current forecast, and would supersede our previous forecast. I think that's the right way -- still certainly in that neighborhood.

Okay. And is that an EBIT positive as well? Or that's an earnings number, and you still might be EBIT negative at that point?

It is -- I gave the definition of our non-GAAP, which was to exclude non-cash compensation charges, stock compensation charges, and to exclude acquisition-related expenses.

Okay. And then just lastly, just to go forward on Chris's question a little bit further so I understand it. On the last call, you had said -- at least I thought you had said that you would be cash flow positive from here on out. And I know that cash flow can fluctuate from any quarter to quarter, but why the decision to not manage to cash flow any longer? And then also, what are the reasons that if your operating loss would be less in Q3, that you would dip back into being cash flow negative?

Well, in general cash flow is going to follow earnings roughly. (multiple speakers)

Over time.

So they are definitely (multiple speakers) -- over time, they are not going to diverge. They are going to the roughly married (indiscernible) so. There is nothing fundamental or terribly different about the model.

We got -- just in terms of discussing our projections with investors, and looking at the business, moving to a P&L-based model at this time now that we are at this level of maturity, and the top line is getting big enough so that we are pretty close to breakeven -- that made more sense. Now there are optimizations in terms of what we pay when on a quarterly basis that kind of would drive you slightly negative or slightly positive in any given quarter. And given that we are transitioning, we are making optimizations kind of the other way than we had in the past.

(OPERATOR INSTRUCTIONS) Andrew Schroepfer, Tier 1 Research.

I guess all of the analysts on this call deal with investors and trying to talk them through different reasons and when to look for excitement. And I agree with your strategy to build the Company, almost as if one that -- the strategy of a private company. So I am curious for how you look at kind of the game plan for the next year in terms of -- what milestones are you looking to achieve that would be different than status quo of building a Company that is looking to be a long-term large size leader? (multiple speakers)

I understand the question, Andy, I think. It is a good question. The way we are managing the Company, we really do believe strongly -- and complete with putting our money where our mouth is on it, that this is a big market opportunity. And what we are driving to do, what we are confident that we can do, is be the number one choice in what looks like one of more significant enterprises software markets to come along in many, many years. And that is the investment opportunity in Opsware, is to invest in the company that is going to be the number one choice.

I think that the investment opportunity is that there is a penny bet error in earnings here or there or so forth, you are right. We are more -- we are taking a little longer via the business in that for sure. And we really think it is justified.

If you look at the performance to date in terms of the size of the business, we have been, like I said, selling software for three years. We are going to do $60 million in our third year, which is on the high, high side of the big enterprise software markets and the leaders in those categories. So we are really comfortable with how we are managing it in terms of being the number one player.

And granted, there is going to be some volatility in how people view the market and how people view us and how the stock trades, but still the right strategy in my view.

Got you. That is a fair answer. I will take more up (ph) with that during the quarter. Another question on the cash balance. You made comments in the past a lot about -- it is nice to have 100 million in cash on the balance sheet, go after customers. Since I doubt there is a capital-raising opportunity for you in the future, what -- how does that play into your thoughts on any smaller acquisitions like the ones you made look in your next 12-month horizon?

Well, we don't have any acquisitions that we are planning to announce right now. So I have got nothing to announce. And in terms of what is out there, like I said, we are always looking at the market, and seeing what is available, and whether it makes sense for us to acquire. I think that what we are seeing in terms of the valuations of private companies is again indicative of the market is going to likely be pretty large. So we are evaluating those carefully and so forth.

But we have certainly nothing to announce in the short-term. And if we didn't acquire anything in the next 12 months, it would not make us too sad, I think, in that there is plenty of growth opportunity in that current product line.

Final question -- on the sales reps that you are hiring, you will have a lot more to hire before year-end, it sounds like. Any change in terms of the tenure of the people you are hiring, which would change the inflection on how quickly they are going to get to full productivity on their quota?

I'm not sure if I totally -- are you say you are we hiring more or less senior people?

That's a good way to restate it, yes.

I think it will be pretty consistent. I wouldn't expect us to -- the thing that will help us get them to productivity quicker, quite frankly, is the size of the pipeline. So if you bring on a sales guy and you give him a pipeline, he can get to productivity in three or four months. If he has get got to grow a patch from zero, then that is going to take quite a bit longer.

Because we are -- have pretty -- at least some coverage in all the major regions, then we are now splitting territories, that will help somewhat. But in terms of experience in the market, probably not so much. I would not expect that to really accelerate time to productivity.

Okay, maybe one more. Is there a benefit still to being coy about the number of customers you are signing in a particular quarter, or the absolute bookings or the absolute off balance sheet number?

Well, there is -- yes, there's a few. The biggest is those are all unaudited numbers that you are referring to. So we try to be pretty consistent that what we report and what people base investment decisions on have been audited by Ernst & Young and are things that not only have we interpreted, but somebody else has interpreted, and there is a common definition that investors can look at. So that is going to be our strategy going forward, and we are going to try to be as transparent as we can on those things, and forecast as much as we feel comfortable and confident in.

That was our final question. Now at this time I would like to turn the conference back to Ken Tinsley for closing remarks.

Great. Thanks again, Duane, and thanks, everybody for participating today. As always, if you have any questions, please contact us here in Sunnyvale.