惠普 (HPQ) 2005 Q3 法說會逐字稿

Good day and welcome everyone to the Opsware Incorporated third quarter fiscal year 2006 conference call. [OPERATOR INSTRUCTIONS].

For opening remarks, I'd like to turn the call over to the Opsware Treasurer and Director of Investor Relations, Mr. Ken Tinsley. Please go ahead, sir.

Thank you, Keith, and good afternoon. With me today are President and CEO, Ben Horowitz, CFO Sharlene Abrams, and Chairman Marc Andreessen.

Before we begin, I'd 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 flow, and earnings per share, 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, 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 terms non-GAAP net loss and non-GAAP EPS used in today's discussion excludes certain noncash charges related to stock compensation as well as noncash charges relating to the acquisition of Rendition Networks and Tangram Enterprise Solutions. Reconciliations of these items to GAAP are provided in our earnings press release in the investor relations section of our website at Opsware.com.

By now you should have received a copy of our press release, which was distributed after the market closed today. If you have not, it is available on the investor relations section on our web site. We are currently webcasting this call, and an audio replay will be available on our web site following the conclusion of the call.

Let me turn it over to Ben.

Thanks, Ken.

Today I am pleased to report a solid third quarter with exceptional bookings. Revenue of $15.3 million was on the high end of our previously guided range. Non-EDS revenue was up almost 100% over Q3 of last year. Derived bookings, which Sharlene will discuss in a moment were up 57% over Q3 of last year. Non-EDS derived bookings, which is the best indicator of our quarterly sales performance, increased 125% over Q3 of last year and 32% sequentially.

As we have stated, bookings are accelerating. During Q3, we signed 56 new software license deals, the largest number of new deals we have signed in any quarter since our inception. New deals were split about evenly between existing and new customers. Significantly, we signed four new deals worth $1 million or more.

I'd like to highlight the significance of some of the new deals in particular. First,a multi-billion dollar products division of a Fortune 100 company selected Opsware at their standard management of their server infrastructure. Previously, this customer used a product from an East Coast competitor. Due to dissatisfaction with the competitor's product and major performance and scalability issues, this customer discontinued its use and elected to standardize on Opsware to manage thousands of their servers.

Second, a top five global financial institution selected Opsware to manage both their server and network infrastructure across North America, AMEA, and Asia Pacific. Our win was based on Opsware's unique ability to scale and automate their IT operations across seven major business lines. Opsware is now their global standard for automation of their server and software infrastructure. This deal was greater than $1 million, and addresses just 10% of all their servers.

Third, T-Mobile, one of the fastest growing wireless service providers, has been using our network automation system to manage over 20,000 network nodes at hotspots across Starbucks, major hotel chains, and airports. This quarter, T-Mobile expanded their investment in Opsware with the purchase of our server automation system, which will automate management of their server infrastructure. T-Mobile International will use Opsware for life cycle management of their servers and use both our products to automate compliance initiatives including Sarbanes-Oxley.

Finally, Pitney Bowes purchased both our server and network automation software to automate their IT infrastructure. In selecting an automation solution, Pitney Bowes narrowed it down to Opsware and an east coast competitor. After a deep head-to-head evaluation, Pitney Bowes chose Opsware based on the breadth of our capabilities, our customer references, and our overall company strength.

In addition to our growth in Norse America, we are seeing solid demand from Europe and Asia Pacific. Our customers across these regions are realizing significant benefits from IT automation and, as a result, are expanding their investment in Opsware software. For example, Samsung data systems first purchased Opsware in Q1 to automate the management of their data centers. This quarter they quadrupled their investment in Opsware server automation software. Opsware is highly strategic to Samsung and is a foundation for transforming their outsourcing business to a utility computing model.

To expand our reach, we continue to grow our sales force. Since our last call, we have grown our direct sales force to 36 quota carriers. In addition, we have expanded our channel partner network, adding 16 VARs bringing our total to more than 40 VARs worldwide.

On the product front this quarter, we shipped a new release of the Opsware Network Automation System. The new release adds more capabilities to automate the management of large environments and significantly outpaces the competition in the area of scalability and enterprise-class features. As a result, we continue to see high win rates in Q3 among customers that have large network environments such as Chrysler, MBA Properties, and Schering-Plough.

In summary, I am pleased with our results. The market is maturing. Our bookings are accelerating, and we expect to see continued high growth.

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

Thanks, Ben.

Q3 was a very good quarter. Derived bookings, which we define as revenue, plus the change in deferred revenue, plus the change in advances from customers grew to $19.1 million, up from $16.7 million last quarter, and up from $12.1 million in Q3 of last year. Derived bookings, excluding EDS, were $14.1 million up from $10.7 million in Q2. Total net revenue in Q3 was $15.3 million, up 50% from Q3 last year. Non-EDS revenue was $10 million, up almost 100% year-over-year and up 12% sequentially.

During the quarter, we signed 56 new software license deals. The average deal size for server license deals was $765,000, and the average deal size for network license deals was $115,000. Our server versus network product revenue mix for the quarter was roughly an eight to one ratio server to network. Two-thirds of our bookings in the quarter came through our direct sales force, and one third came through our channel partners.

Cost of revenue was $3.6 million which translates to a gross margin of approximately 77%, up from 75.4% last quarter. Total operating expenses were approximately $14.3 million for the quarter, roughly flat from last quarter. We currently have 36 quota carriers, up from 32 announced on our last call. GAAP net loss in Q3 was $2.8 million, or $0.03 per share. Excluding noncash charges related to stock compensation as well as noncash charges from previous acquisitions, non-GAAP net loss was $1.9 million or $0.02 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 $26.9 million, up $3.8 million or 16% from the end of Q2. Non-EDS deferred revenue grew by $4.1 million to $21.6 million in Q3, the largest sequential growth in our history. As a result of our shift in focus from cash flow to profitability as a key operating metric, as we forecasted, cash flow from operations was negative $2.6 million in Q3. We expect to return the business to cash flow positive in Q4.

Looking forward, we reiterate our Q4 revenue estimate of $17 to $18 million which yields a full year revenue estimate of 59 to $60 million. This translates to non-EDS revenue of approximately $38 to $39 million, which represents about 120% year-over-year growth. We reiterate our previous non-GAAP EPS guidance of $0.01 to $0.02 loss in Q4 and break even in Q2 of next year. Non-GAAP EPS excludes non-cash expenses for stock compensation as well as acquisition related expenses.

To summarize, I'm pleased with our progress in the rapid growth of our non=EDS business. Bookings are accelerating an d during this high growth phase, we will continue to invest in the business and expand our leadership position. Our long-term operating model targets gross margins of 80 to 85% and our operating margin of 20%. We expect to reach our steady state model when we are significantly more penetrated in this large and growing new market.

We now invite your questions.

[OPERATOR INSTRUCTIONS]. We will go first to Richard Peterson with Pacific Crest. Please go ahead, sir.

Hi. Congratulations. Thanks. Question is on selling more smaller deals. It sounds like you guys had very strong success this quarter in large transactions, but you've mentioned in the past a strategic push to selling your software in a more modular way. And maybe you could give us an update on your progress there. Thanks.

Yes. Thanks for the question. This is Ben talking. So on the smaller transactions, first on the network side, as we said, the average transaction size for the network stand-alone deals is about $115,000 a transaction, and so that's continued to be a really good sort of transactional business.

On the server side, we did in the quarter continue to have an increasing number of deals in sort of the smaller end of the range in that kind of 2 to $300,000-dollar range which is small for the server product, but the average, as you saw, $765,000 per deal, was up largely due to the fact that we had a lot of big deals, four over $1 million. Some of those were well over $1 million. That just drove up the average.

Thanks. Then a question on cash flow and profitability or return to positive cash flow. What needs to -- what is the primary driver of returning to a positive cash flow in Q4?

Well, couple of things there. One is, understand this, that where -- due to the market receptivity and the big acceleration in bookings, we continued to have the pedal to the metal in terms of driving growth in the business. As a result of that, we knew that when we transitioned from sort of a cash flow focus to a P&L focus, we didn't want to leave a lot of margin or cushion because we wanted to continue to invest aggressively. Given that transition, the business is pretty naturally going to be cash flow positive in Q4 so nothing extraordinary will need to occur.

One last one if I could. It sounds like business accelerated pretty quickly here in the quarter around these large transactions. Is this a function of internal execution, or did you see something in the market just generally in terms of customer acceptance, or anything else outside of the company that changed dramatically in the quarter?

Well, we started to see, as I think we forecasted a bit in some of our earlier calls -- we started to see a pick up in the market for sure starting early in the year, and we saw -- and it happens in stages.

First you see the pipeline expand. Then you see the number of pilots expand. Then finally it goes all the way through to the bookings. I think what we're seeing is the pick up in activity that we've been seeing all year finally work its way all the way through to the financials. And so it's a pick up in the market that I think we did a pretty good job of anticipating in our sales force expansion and our spend. The nice thing about this quarter is it's easy to -- it's easier to communicate it this quarter just because we have made it all the way through to the deal.

Thank you.

Thanks, Rich.

[OPERATOR INSTRUCTIONS]. We'll go next to Peter Coleman with ThinkEquity Partners.

Thanks, guys. Nice job. First question, I guess just around -- dig a little bit more into the channel side with the new head of channels and obviously you've done a nice job picking up the number of VARs there with one-third of sales coming from that area. If you go out a year or two, what do you think the mix of revenues from direct to indirect is?

Indirect will likely continue to expand, but where it ends I think it's a little early in the cycle to tell. So again, on the network side, I think we'd anticipate that it will probably eventually get to sort of more than 50% from the channel. On the server side, that depends a little more on a broader variety of factors ranging from the kinds of integrators we get, the number of them and so forth. It's a little hard to forecast that one at this point, but I think that -- other than say it will go up.

Okay. Any characterization of the deals that you're getting there? I mean, are they typically larger or smaller size deals? Any particular verticals that seem to be stronger on the VAR side or pretty much across the board?

If you just look at the quantity of deals, there are more on the smaller side. It's a better channel to go down. There are some exceptions particularly in the government space. The channel can do some larger transactions there.

Finally, you mentioned in the past getting some deals from a compliance perspective. I'm kind of wondering if that's still a driver, and if there are any particular verticals that seem to be more leaning towards compliance as a reason to buy.

Well, compliance is definitely still a driver. I think it's more geographical than vertical. The U.S. is really focused on compliance right now due to the fact that Sarbanes-Oxley poses a really large challenge from an IT perspective.

Europe is a little behind. I mean, they have compliance issues, but they're a little behind from a regulatory environment standpoint in terms of the market development. Japan and Asia Pacific is probably the furthest along, and they are very focused on a broad set of compliance initiatives out there. So, U.S. one, Japan two for compliance probably.

Are you seeing -- is it more specific to X number of servers or is it an enterprise-wide type or is it too early to tell? For compliance.

Generally the projects end up being enterprise-wide. From a Sarbanes-Oxley requirement standpoint, it's the servers and network devices that support the systems that impact the financials. What we're finding is first of all the network is not segmented, so people have to bring their entire network into compliance. And then we're also finding that many of the systems, including things like customer support systems and purchasing systems and so forth, are in the revenue chain. So they end up having to be in compliance as well.

Great. Thanks a lot. Nice job.

Thanks, Peter.

We'll go next to Chris Russ with Wachovia Securities.

Hi. Good afternoon. If you look at the non-EDS revenue that grew 125% year-over-year, I guess off of based of this year it will be about 40 million, what should we think of in terms of the sustainable growth rate for the server provisioning market? I guess we can't really take the non-EDS number as a proxy, 125, you think that might slow to something like 50? Is it still going to be extremely high growth over the next 12 to 18 months?

A couple things there. One is, I think that we should characterize it -- I wouldn't characterize it as narrowing the provisioning market, I think that market is not that big, server provisioning is probably like 5% of the business we do on the server side. That wouldn't be the right way to think of it. I think that -- and we'll get into this. We've actually just done a lot of work with IBC on characterizing the market and so forth.

The server automation market is less than -- far less than, we think, 5% penetrated, so there is a lot of growth in front of us, and I think that the growth rates, although we're not giving a forecast yet, but the thing that I would say is bookings are accelerating. The growth rate of bookings are accelerating which would lead to significant revenue growth going forward. So we're not thinking that we're anywhere near any kind of market saturation that would slow growth.

Okay. And also, given the huge growth in the non-EDS business, does that imply that the EDS business -- is it flat or declining and at what rate?

The EDS business is flat and will be flat at 20 million a year guaranteed through March of 2008. And then on the auto renewal which we expect to get, would go through 2013 at 20 million a year. Approximately 20 million a year.

Okay. Great. And would you say -- you mentioned an East Coast competitor. Again, I guess that's BladeLogic. You talked about them on the last conference call. Would you say that the competitive landscape has moved even more in your favor this quarter relative to last quarter versus that company and maybe some of the other companies like the utility computing solutions from Symantec Veritas?

Yes. I think that is a fair characterization. Our win rate continues to be really really strong, well over 80% in all deals. And particularly with respect to BladeLogic, the win that we announced against them, we believe was their largest customer, the displacement of 2500 servers so significant even on a maintenance revenue for them. And was also the featured case study on their web site which they've now removed.

From a competitive positioning standpoint, we would consider that a body blow. For the rest of the competitive space, our position has improved every quarter since we've released the Darwin product, and we do expect that to continue given our relatively large investment in R&D versus the competition and what we think are some long-term architectural advantages.

All right. Thank you.

Sure. Thanks, Chris.

[OPERATOR INSTRUCTIONS]. We'll go next to Andy Schroepfer with Tier 1 Research.

Congratulations. Start on pricing. As you're getting more bookings and getting more deals closed, especially this quarter you got a lot of large ones, what are you seeing on the pricing dynamics different from previous quarters where you've had to do more market education on closing deals.

The pricing has -- in the quarter was pretty steady from the quarter before, so I don't want to -- I don't think we're getting the opportunity to lift prices yet. In terms of from a competitive dynamic, we're in a bit of a better position in that we rarely get into real price competition. And so that's been occurring less, particularly if you go back to before the Darwin release. We were experiencing much more significant competitive pricing issues.

But in terms of the overall market and what the market will bear and what the perceived value is at point of purchase, that was pretty steady quarter-over-quarter. And where -- as I said, we've developed a pretty, I think, well constructed market analysis that looks at pricing and how that impacts and will be rolling that out to all of you guys and all the investors and so forth. A little too complicated to cover on a call, but we think that the market is very, very large. As I said, if it were really early in terms of market penetration, far less than 5%.

Sharlene, I think in the past you've made a statement about future growth forecast for the non-EDS business, and I think your statement -- I don't want to mischaracterize it but it was don't forecast for more than 100% year-over-year growth. Is that a statement that I'm remembering accurately? Care to reaffirm that, if it is correct?

What we're actually going to do is give detailed fiscal year '07 guidance on the Q4 earnings call.

Okay. I like the trends, before we go into that. On the competitive side, I'm really interested in comments directly about IBM if you could make them specific, but with the bigger players that have a big management platform, from IBM to HP to CA, I'm really interested to know are they active in the deals that you're substantially invested? What do they like differently than BladeLogic?

It's definitely a different kind of competition. We mentioned a top five financial institution that we won, and we did compete with IBM in there, and I think that was pretty typical of how we end up competing with IBM. IBM was in just because it was one of these things where the initial deal was over a million dollars and that was for 10% of the servers so a very large environment and a global environment and so forth, and the kind of deal you would expect them to be in just because they are IBM.

They did not make it to the technical bakeoff due to the fact that they just couldn't respond technically to the requirements of the proof of concept, and that is really typical. So a company will, in these scenarios, say okay, here are the 27 things that we need to automate, and in this case it was things like we need to build a mirrored Oracle environment on the fly, and with Veritas clustering and this, that, and the other, and they just didn't respond and that's pretty typical from IBM.

I think if we can force a benchmark, we can beat IBM generally fairly easily because they can't succeed in the benchmark with their product line. That's very different than BladeLogic who doesn't have that kind of coverage, but will show up in the benchmark and compete at the technical level.

That's it? Hello?

Mr. Schroepfer, your line's still open. We'll go next to Richard Peterson with Pacific Crest.

Thanks. Just a quick follow-up. When we're thinking about next year's target of break even and what that implies for cash flow, can you give us any guidance on what the relationship should be between non-GAAP net income and cash flow from operations?

So we've said we'll be positive cash flow in Q4, and break even -- non-GAAP EPS break even in Q2 of next year. So over time, you'd expect that cash flow will track pretty closely to net income.

Okay. Thanks.

We'll go next to [John Rapique with PAW Partners].

Hi, Sharlene.

Hi, John.

Just a question. You said that the business is accelerating, which is a present tense comment, so should we think about bookings growth accelerating from this point going forward?

Yes. I mean, I think that -- and again this is the just know with the maturity of our business and so forth that one of the caveats it is we always put out there any time we talk about bookings is that they're going to be a lot more lumpy than revenue. But generally, if you look at the pipeline growth and so forth, we are seeing continued acceleration.

Nice quarter. Thanks.

Thank you.

At this time, we have no further questions in the queue. I'd like to turn the conference back to the speakers for any additional or closing remarks.

Thanks everyone for your participation today. If you have any follow-up questions, you can reach us here in Sunnyvale. Have a great evening, and have a great Thanksgiving.

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