惠普 (HPQ) 2005 Q4 法說會逐字稿

Good day, and welcome, everyone, to the Opsware, Incorporated fourth quarter and 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, I would 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 everyone. With me today are President and CEO, Ben Horowitz, CFO, Sharlene Abrams and our Chairman, Marc 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 expected sales growth, our opportunities in the data center automation market, the timing of bookings and forecast of future revenues and earnings per share, all of which are subject to risks and uncertainties. Actual events and results my differ materially from these statements. We assume no obligation to update this information provided on the 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 the section entitled "Risk Factors" in our Form 10-Q filed with the SEC on December 12th, 2005, 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 exclude certain noncash charges related to stock compensation, as well as noncash charges relating to past acquisitions. Projections also exclude FAS 13-R stock based compensation expense, which cannot be determined at this time. 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 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. As a reminder, we will be hosting our Analyst Day on March 28th in New York City, and we look forward to seeing you then. Now, let me turn it over to Ben.

Thanks, Ken. Today, I am pleased to report an exceptional fourth quarter that caps an outstanding year. I'll start with fourth quarter highlights, then follow with our forecast for the year ahead, a year in which we expect our tremendous growth to continue. Revenue in the fourth quarter totaled $18.6 million and exceeded the high end of our guided range. NonEDS revenue was $13.3 million, up 107% year over year and up 33% sequentially. We signed a record 61 new software deals in Q4, the highest number of new deals signed in any quarter since our inception. We signed a record five deals worth more than a million dollars each.

I would like to highlight some of the new deals in particular. First, the Royal Bank of Scotland, the 6th largest bank in the world, selected Opsware as their standard for data center automation. Second, Sun Guard, one of the world's leading IT services companies, selected Opsware for the management of their server infrastructure. Previously, this customer was using a product from an East Coast competitor to manage 1,000 servers. Based on shortcomings they experienced with that product, Sun Guard abandoned its implementation and is now standardized on Opsware. Sun Guard is the third recent deal in which we have displaced the same East Coast competitor.

Third, Safeway, Incorporated, one of the largest food and drug retailers in North America, selected Opsware server and network automation software to automatic the management of their vast IT environment. Fourth, a Fortune 50 diversified technology, media and financial services company who selected Opsware as their standard for server management in Q3 elected to accelerate their second purchase of Opsware software to an enterprise-wide deployment. In Q4, this customer more than doubled their investment in our servicer automation system. Previously, this customer used a product from an East Coast competitor. Fifth, Atos Origin, a leader provider of IT services internationally, select Opsware to automate management of thousands of servers across multiple data centers. On the distribution front, earlier this month, we announced a new multi-million dollar worldwide distribution agreement with Cisco Systems. This agreement is significant to our business in three ways. First, the Cisco channel represents a major expansion of our sales force.

Second, Cisco's credibility in the marketplace strongly positions Opsware to lead the data center operation automation market. Third, given the tight linkage and necessary coordination between network and server changes, any account generated by Cisco for our network automation product has a heightened need for our server automation products. We expect that the revenue contribution from this partnership will not be significant in fiscal '07; but we forecast that the Cisco revenue contribution for fiscal '08 to be at least $10 million. Looking forward, with our rapidly growing sales force and expanding worldwide coverage, combined with our Cisco distribution agreement, we are set up for an exceptional year. For the current fiscal year ending January 31st, 2007, we are forecasting nonEDS revenue growth of 83%, which translates into full year revenue expectation of $93 million.

In summary, I'm extremely pleased with our performance. We had a tremendous year, growing nonEDS revenue by 126% and dramatically accelerating bookings. We are even better positioned for the year ahead, after nearly doubling the size of our sales force and completing a new, worldwide distribution agreement with Cisco. Now, here's Sharlene to provide more detail on our financial results and outlook.

Thanks, Ben. As Ben discussed, Q4 was an excellent quarter. Derived bookings, which we define as revenue plus the change in deferred revenue plus the change in advances from customers, drew to $24.2 million, up from $19.1 million last quarter and up from $13.3 million in Q4 of last year. Derived bookings excluding EDS were $17.8 million, up from $14.1 million last quarter and up from $7.4 million in Q4 of last year. For the full year, nonEDS derived bookings were $50.5 million, double the $25.3 million in fiscal '05. Total net revenue in Q4 was 18.6 million, up 61% year over year and up 18% sequentially.

Total net revenue for the full year was $61.1 million, a 62% increase over the 37.8 million we reported for fiscal '05. NonEDS revenue for the year was $39.8 million, up 126% year over year. Of the 61 new deals signed during the quarter, 28 were with new customers, 33 were upsells. Seven of the new deals included both server and network products, which brings the total number of customers using both or SAS and NAS products to 18. The average deal size for our server product was $500,000, and the average deal size for our network product was $159,000. Approximately 80% of our bookings in the quarter came from our direct sales force and 20% through our channel partner.

Cost of revenue in Q4 was $4.2 million, which translates to a gross margin of 77.5%, consistent with last quarter. Total operating expenses were approximately $17.5 million in Q4 compared to $14.4 million last quarter, reflecting increased investments in our technology, as well as expansion of our worldwide sales coverage. These investments are paying off, as evidenced by our rapidly accelerating bookings growth in Q3 and Q4, as well as an increased number of competitive wins and displacements. This yea,r we increased quota carrying head count from 25 a year ago to 45 today. We expect to increase quota carriers by another 40 to 50% this year, and we expect average annual quotas to remain at around $2.5 million. GAAP net loss in Q4 was 3.3 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 $1.4 million or $0.01 per share.

Turning to the balance sheet, we ended the quarter on a strong position, with over a $100 million in cash. Deferred revenues and advances grew to $32 million, up $5.6 million 21% from Q3, the largest sequential jump in the history of our Company. Cash flow from operations was approximately $800,000. Looking forward, we're projecting revenue of approximately $93 million in fiscal 2007, which represents over 50% top line growth year over year. We expect nonEDS revenue to total approximately $73 million, which is 83% growth year over year. As Ben mentioned, the Cisco reseller relationship will not contribute significantly to our $93 million in fiscal '07. However, we expect the Cisco channel will generate around $10 million of revenue in fiscal '08.

For Q1, we expect total net revenue of 19 to $20 million. As we have been getting more history under our belt as a software company, we're starting to recognize certain trends in our booking patterns. In fiscal '06, approximately 70% of our full year bookings came in the second half of the year, and we expect this seasonality to continue. For fiscal '07, we expect between 30 and 35% of our bookings targets to be achieved in the first half of the year and 65 to 70% in the second half. As a result, we expect Q1 derived bookings will be up sharply year over year but down sequentially from Q4. During fiscal '07, we plan to expand our lead in this rapidly growing market, and we will continue to make investments in sales, marketing, product development and support.

Based on this plan, we expect a non-GAAP EPS loss of $0.01 to $0.02 in Q1, and we reiterate our non-GAAP EPS break even in Q2. For the full fiscal year, we expect a non-GAAP profit per share of $0.03 to $0.04. Non-GAAP EPS excludes noncash expenses for stock compensation, including the impact of FAS 13-R, as well as acquisition related expenses. In fiscal year '07, cash flow from operations will fluctuate, and we expect it will roughly follow earnings. To summarize, we are pursuing an estimated $8 billion market opportunity, and our investment in the business is paying off. Our bookings are accelerating and our momentum is continuing, as evidenced by our performance in Q3 and 4. Our sales execution, our partnership strategy and our product development efforts are firing on all cylinders, and we will continue to invest and expand our lead. We now invite your questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, you may do so by hitting star one on your telephone; star one for questions. If you're using a speaker phone, please make sure the mute function is turned off so the signal can be read by our equipment. Star one for questions. We will go first to Regini Chanderpit with ThinkEquity Partners.

Congratulations, great quarter.

Thanks.

I guess the first question is around the million dollar deals and how those will be accounted for. Should we expect to see the million dollars spike in a quarter, or will we -- should we see it a little more radically?

Well, I think one interesting thing is 80% of our revenue recognized this quarter actually came from deals that we booked in previous quarters. Most deals are made up of first of all, you know, three components -- license, maintenance and services. So the license -- and again, it will depend on the specifics of the contract, so some things may be recognized radically depending on the contract. In other cases, the license may be recognized up front, maintenance over the term of the contract and services as delivered.

Great. So when we look at million dollars deals, I suspect the largest component is license? Is that the right way to look at it -- versus services?

Yes, usually it's around, let's say, 65 to 70%, sometimes more. And again, it will depend -- it depends on the specifics of the contract.

Got it. On the average -- the deal price, the average sales price, it seems to be going down -- came down between October and January. I guess I was still a little surprised given the number of large deals. Does that mean there's many small -- smaller deals in

Yes, actually we were pretty excited on the server side. The server deals in Q4 -- we actually did more server deals in Q4 than we did all of last year, so a huge spike in the number of transactions. And that really, you know, was a result of our ability to do a lot of smaller starter deals, which is something that we have been working on for quite some time. So we were pretty excited to have a mix of, you know, the real high end deals as well as a bunch of -- you know, more regular kinds of deals.

Great. So the starter deals, do you view those more as a base product with more modules or a project that could expand?

There's definitely some of both. I would say more of projects that could expand.

Okay. And Sharlene, could you again give us those -- I'm sorry, I didn't write them down quick enough -- on the network versus server deals? You had mentioned in the million dollars deals the number they had -- the combined network and server.

We said of the total 61 deals in the quarter, 7 of the new deals included both products.

Okay, great. And then the million dollar deals, can you describe -- were they both or mostly server?

I think they were mostly server, generally.

Okay, great. Thank you so much. Great quarter.

Thank, Regini.

We will go next to Katherine Egbert with Jefferies & Company.

Hi, thank you -- pardon my voice, I have a bit of laryngitis. So hopefully you can hear me. What Cisco products are you guys going to be incorporated in? And Ben, can you tell us why you will get at least $10 million in fiscal '08, what gives you that number?

Sure. Katherine, I didn't quite get the first part of the question, I hate to make you talk again.

It's what products are you in of Cisco's?

So Cisco hasn't announced the name of their product yet, but it is our NAS product, our network automation solution; and so the NAS product will be basically rebranded and distributed by Cisco under the Cisco brand. The basis for the $10 million forecast is many fold. It has to do with early demand that we're seeing in their forecast and what they were they can do, as well as some of the structure of the deal and the guarantees around the deal. But it's a number we're very comfortable with you modeling for next year, which is one of the big questions we had at the Cisco announcement call.

Sure. Okay, and then, you talked about competitive displacement, can you tell me why you are displacing the Blade Logic?

Yes, and it really comes down to a scale robustness issue. So in a small environment with a single administrator in particular who is getting more productive with less than a thousand servers, it's been our experience that the Blade Logic product works okay and can generally meet the needs. However, once a company gets to a greater size and scale, and particularly if they have 10 or 50 or 100 people working on the software, the product just doesn't work that way. And in addition, there are some real, real scale problems across data centers and other things. So when we see a Blade Logic customer like that, we have been targeting them, and that's worked well. In the Sun Guard case, they were actually a customer of Blade Logic, then they purchased a company called Inflow, which was a customer of Opsware; and based on the results that they were seeing on both sides, they wanted to consolidate, and they went ahead and consolidated on Opsware.

Okay. And then one last one, and I'll let you not have to listen to me any more. Macro trends, I mean, there's a lot of thought on the Street that this area of instant automation is really heating up. Can you talk about why that is. Is there a hardware replacement cycle or some other macro factor that you're seeing? And then also comment on M&A in the space, particularly Symantec buying [Relacor].

Yes, I think that when you look at the market, the big things that are driving acceleration of the market are awareness and success -- early success of the customers who have bought. So, you know, the way our price software works, and then people always -- you know, particularly people who are new to the space -- always go, well, you know, when is it all going to happen? And it's a slow process whereby customers buy the initial products, they understand them, and they -- you know, as they get success with them they tell their friends and they tell their friends.

And at some point, the market is just aware that there's a solution to this problem of how do you manage 1,000 servers or 2,000 servers or 5,000 servers, or -- and the same thing on the network device end. And we're getting to the point -- you know, really for the first time -- where the awareness is going up, and that's making a lot of the larger companies excited about this space as well. As far as Symantec goes with their [Relacor] acquisition, our view on that is, you know, it is like the other acquisitions they have made -- it's very similar to, say, Adjacent or [Jereeva] in that it's a -- we would regard it as a feature as opposed to a product. And so it's a neat feature, but we don't really expect it to change the competitive landscape much in that without a solution that makes sense to customers, it will be difficult to sort of build a product line around something like [Relacor] or [Jereeva] or Adjacent for that matter.

Okay, thanks.

We will go next to Richard Petersen with Pacific Crest Securities.

Hi, congratulations.

Thanks Richard.

Thanks. Just trying to understand better the strategy behind managing -- or the balance between growth and profitability. You know, looking at a 45% increase in head count sounds big on a percentage basis, but you know, it's 20 -- it's two dozen people. So, you know, I agree with one of the statements you made in the previous questions; it sounds like this market is very healthy, clearly you guys have been seeing a big acceleration if your business. Why hire so few people? And then also, you know, on the flip side, it doesn't appear that -- I mean, you are still sticking on the same plan to get to the profitability with what looks like a higher top line growth. How -- just maybe you could explain to us -- how are you thinking about the trade off between growth and achieving break even? Give us a framework for how you guys think about that.

Well, the big thing is to keep in mind that, you know, with 127% or 126% nonEDS growth last year, and as Katherine pointed out, the market really starting to gain awareness of the space and a lot of activity heating up, we think that the growth potential is very high. We think the market is probably, as we have said before, less than 5% penetrated. And so our plan is to grow as fast as makes sense. And we think that's going to be pretty fast. So we will stick to getting to break even in Q2. But we don't want to forecast yet, you know, given the way we think the market is going to go sort of faster EPS expansion, because we think we can maintain a very high growth rate. You know, our initial was for 83% nonEDS revenue growth. So we're thinking growth one, margin expansion two; and we do believe we're at the very beginning of the market. So as the market gets a bit more mature, then you will see us shift.

Okay, that helps, thank you.

We will go next to Chris Russ with Wachovia securities.

Yes, hi, good afternoon. Sharlene, a question for you on the cash flow. I think you mentioned 800,000 in the quarter and that cash flow in fiscal '07 should track, I guess, earnings growth. I'm just trying to get a little more precision around what you mean by that. You know, should we expect that the revenue growth, which is, you know, the 83% nonEDS, should we expect a similar improvement in cash flow in fiscal year '07, or what kind of numbers could we be looking at? Like 5 to 10 million or higher for cash flow?

Well, actually, first, what I said was that cash flow will roughly follow earnings. So based on what we're projecting in EPS, that's where I was using it as the starting point.

Okay.

But given -- and given our 126% growth in business in fiscal '06 and forecasting 83% growth this year, we're really focused on growing the top line at a rapid pace. So we're -- you know, not going to specifically forecast cash flow over time, and we definitely can plan to continue to invest in the growth.

Okay. The deferred revenue account grew significantly sequentially, I think by over 5 million. So I would have expected cash flow would have been stronger this quarter. Was receivables an issue -- did those go up sequentially, or -- ?

No, receivables are not an issue, but we can see a very large growth in the receivables as well.

Okay. And then with regard to Cisco, you mentioned 10 million in fiscal '08, 83% growth in nonEDS business in '07. Any -- could you hazard a guess as to what kind of growth rate in '08 we should expect for nonEDS business? You know, 50% -- are we looking at those tentative growth rates in '08?

No, I mean, we're not going to provide, you know, detailed guidance for fiscal '08 this early, other than to say that we are expecting the $10 million from the fiscal challenge and basically that we're planning to grow the sales for this year at least to 40 to 50%.

40, 50%, okay. And just, on the derived bookings on the weighting for the year, you mentioned -- was it 30 to 35% for the first half of '07, and then 65, 70% in the second half of '07? Were those the right number?

Right.

Okay, so 65 to 70% in dry bookings. So that means that --

We said in bookings in general.

In bookings. Okay. Would that imply that more than deferred revenue growth would occur in the second half then of '07?

Yes.

Yes. Okay, all right, thanks very much.

We will go next to Jeff Englander with America's Growth Capital.

Good afternoon.

Good afternoon Jeff.

Just talk a little bit about some of the expense side? The one thing I was a little bit surprised at, just the G&A expense, obviously the sales, and marketing, and even R&D be up. But the G&A was up a little higher than I expected and I'm wondering if you can maybe provide some color around that?

Okay. Go ahead.

Go ahead, go ahead.

Okay. I think if you look back over the last four quarters throughout this year, you can see G&A has actually fluctuated up and down, and the primary reason for that is the noncash stock comp expense, which fluctuates with stock price, and the stock price was up. So you end up with a bump as a result of that. But to help you model it for the next year, basically, we expect the G&A will actually trend down as a percentage of sales throughout the year, and that by year end it should get pretty close to our short-term target of around 10%.

Okay. Great And can you talk a little bit in terms of, you know, as you go into the deal with Cisco and others, what you're seeing in terms of the market is heating up, are the sail cycles getting any longer, getting any shorter? Are you going in front of any different areas than you were before?

Yes, so the -- one of the metrics we have given out in the past, which is time to first deal -- so time from a sales rep being starting his first day at work to closing the first deal -- was, I believe, 3.7 months for the quarter, which is down a bit from where it has been. So, you know, it's quicker to first deal and that's a result of a more robust pipeline and a growing sales force. In terms of overall sales cycles, I would say we're doing more small deals, and those deals do have a shorter sales cycle associated with them. You know, we have been able to do them in, you know, sometimes three months or less. But overall, the large deals do still take, you know, six to nine months on average. You know, we talked about the million dollars deals, those tend to be extended campaigns.

Great. And are you -- when I say going into -- are you going further up the chain earlier than you expected, or is that progression in terms of the actual, the final decision-maker and the budgetary authority, is that still about the same?

Well, with the -- yes, and this is very recent -- since the Cisco deal occurred, we're able to get height accounts more rapidly due to that endorsement. So people, you know -- in general, most IT shops have a strategic partnership with Cisco, and the announcement has gotten, you know, those calls returned and those meetings have -- you know, we probably have -- you know, I personally have more of those kinds of meeting since the announcement of the deal than we probably had in the whole quarter before. So we are seeing some of that happen. But a little early to tell what that does to the cycle.

Right. Great, thanks very much.

Thanks Jeff.

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

Hi guys, nice finish to the year. Just going back to the average deal size, I think this quarter you said it was a result really of your ability to sell into smaller deals. Is that going to be consistent going forward? Do you think your average deal size will be more in the half million dollar range on the south side of the house? And just for clarification, is the total opportunity that you're selling into smaller, or is it that you're selling for a smaller number of servers initially with the opportunity to grow up from there?

Yes, so the little deals, it's definitely, you know, generally selling smaller number of servers on the initial deal. And most of our -- the opportunities in the accounts are still very large. But, you know, half a million dollar server average deal size is pretty darn good average deal size for an enterprise software product. So we would expect that, you know, it will be around that annually; and if you look at Q1 and Q2, we were right around that half million dollar number. We were presently surprised to see the network product, the NAS product, rise up to about $159,000 average deal price, which is quite a bit higher than what it's been previously. So I think that for -- you know, from a modeling standpoint, half a million for average server deal is probably a good number and will continue to be so.

Do you have a split -- or at least a ratio -- between SAS and NAS for the quarter?

Yes, it -- recognized revenue was basically six to one server network.

Okay. And then on the competitive wins, you said you have gotten three of those under your belt right now. How far along in the implementations are you fining these companies decide that can't work with your competitor's product and they need to go to yours?

It typically gets at about a thousand servers.

Okay, great, thank you.

Ladies and gentlemen, this will conclude today's question and answer session. At this time, I would like to turn the conference back to your speakers for any additional or closing remarks.

Great. Thanks, Keith, and thanks, everyone, for your participation today. As always, if you have any follow up questions, we're available here in Sunnyvale. Have a good evening.

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