惠普 (HPQ) 2006 Q1 法說會逐字稿

Good day and welcome, everyone, to the Opsware, Inc. First Quarter Fiscal Year 2007 Conference Call. (Operator Instructions.) Now for opening remarks and introductions, I'd like to turn the conference over to Opsware Treasurer and Director of Investor Relations, Mr. Ken Tinsley. Please go ahead, sir.

Great. Thank you, Sherlon, and good afternoon, everyone. With me today are President and CEO, Ben Horowitz, and CFO, Sharlene Abrams. Before we begin today, 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 expected sales force growth, our opportunities in the data center automation market, the planned product launch by Cisco, the benefits and capabilities of our new software products, bookings growth, and forecasts of future revenues and earnings per share, all of which are subject to risks and uncertainties.

Actual events and results may differ materially from these statements, and we assume no obligation to update the information provided on this call or to revise any forward-looking statements. Please review the section entitled Risk Factors in our Form 10-K filed with the SEC on April 14, 2006 for a discussion of important factors that may cause actual events and results to differ from these forward-looking statements.

The terms non-GAAP net loss and non-GAAP EDS used in today's discussion excludes certain non-cash charges related to stock compensation as well as non-cash charges relating to past acquisitions. For historical results, a reconciliation to GAAP is provided in our earnings press release and on the Investor Relations section of our website at Opsware.com. For projections, a reconciliation to GAAP has not been provided as future stock-based compensation expense cannot be determined at this time.

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 that we are off to a good start for fiscal year 2007. Our solid Q1 results combined with the Q2 release of the most significant product suite in our history has fueled major pipeline momentum. Based on this, we are increasing our FY07 revenue estimate from $93 million to $100 million.

Revenue in the first quarter totaled $22 million, up 74% from Q1 last year. Non-EDS revenue in the first quarter was $16.7 million, up 124% year-over-year. We signed 62 new software license deals in the first quarter, two of which were worth more than $1 million.

Now let me provide an update on the market opportunity. There are three things to understand about this market. First, based on IDC's analysis of the distribution of service worldwide multiplied by our estimated revenue opportunity per customer, based on historical results, the market opportunity we are addressing is $10.9 billion.

Second, winning the top end of the market, which includes companies with over 10,000 servers, will determine the leader. Commanding the top end of the market is critical, as these companies provide the best references for the rest of the market. In Q1, our penetration of the top end increased from 15% to 17%. Our growing share of this segment solidifies our market leadership position. Third, we are forecasting $100 million this year and we are just 1% penetrated in this $10.9 billion market. Clearly, we are early in this market and our growth potential is high.

The new deals we closed in Q1 validate the power of our three key strategies. Our first strategy is to seed the market with our network automation system, which drives strong up sell opportunities for our server automation system. Customers of our network product who subsequently purchased our server product this quarter include T-Mobile, Bell Security Solutions, and Daimler Chrysler.

Our second strategy is to deeply integrate our server and network automation offering. This combination is the defining selection criteria for any company with thousands of servers and network devices. In Q1, six customers purchased our combined server and network offering. Among them, AIM Investments, one of the nation's leading investment companies, G-Tech, the world's largest provider of gaming technology, and BT, the largest teleco in the U.K., who signed a multi-million dollar deal with us.

Our third strategy is to provide the broadest technology coverage in the market. Our current product offering spans more than 65 server platforms and 750 network devices, and gives us a massive advantage in large heterogeneous IT environments. This strategic advantage drove wins at [Louison Technologies], SunTrust, GAD, and Wachovia, the fourth largest bank in the U.S.

In Q1, not only did we gain share in every segment of the market, but we continued to take accounts from competitors. This quarter, we displaced BladeLogic at Guitar Center, the nation's largest musical instrument retailer. This marks the fourth consecutive quarter in which we displaced BladeLogic in a major account. We are encouraged for our wins this quarter, and we are even more excited with the growth in our pipeline that stems from the broad interest in our upcoming product suite.

Opsware System 6 offers four major new products, including Server Automation System 6, Network Automation System 6, Visual Application Manager, and the Opsware Network Service. This suite will increase our competitive advantage and accelerate market adoption.

I'd like to highlight a few of the breakthrough capabilities in System 6. First, the new release delivers on the promise of our integrated server and network automation. Second, it includes a powerful new compliance automation system that enables companies to address their most critical needs. Third, the Opsware Visual Application Manager renders a complete picture of all servers, software, and network elements, and their relationships. Fourth, the Opsware Network Service, a proactive security offering, identifies vulnerabilities in the network environment and automatically remediates them. Lastly, the suite provides automated management capabilities for voice-over-IP networks, which are highly compelling to service providers and large enterprises as adoption of VOIP accelerates.

Q2 will also mark Cisco's entry into the market with our network automation system. Cisco tells us that they are encouraged with the early demand they are seeing for our product, and they expect strong receptivity when they formally launch this summer.

In summary, we are off to a strong start this year. The dramatic increase in our pipeline, driven by our upcoming product release, compels us to increase our fiscal '07 revenue estimate to $100 million.

Now here's Sharlene to provide more detail on our financial results and outlook.

Thanks, Ben. Q1 was a solid quarter. Total net revenue in Q1 was $22 million, up 74% from Q1 last year. Non-EDS revenue totaled $16.7 million, up 124% year-over-year. Non-EDS derived bookings totaled $14.8 million in Q1, up 90% from Q1 of last year.

We signed 62 new deals during the quarter, which were split roughly equally between new and existing customers. For license deals greater than $10,000, the average deal size for our server product was $512,000, and the average deal size for our network product was $171,000. Approximately 80% of our bookings came from our direct sales force, and 20% through our channel partners.

Cost of revenue totaled $5.2 million in Q1, which excludes $300,000 of non-cash stock-based compensation. This translates to a gross margin of approximately 77%, which is consistent with last quarter. Total operating expenses were approximately $19.2 million in Q1, which excludes $3.3 million of non-cash stock-based compensation. Note that expenses now include the impact of FAS-123R.

GAAP net loss in Q1 was $5.8 million, or $0.06 per share. Excluding non-cash charges related to stock compensation, as well as charges from previous acquisitions, non-GAAP net loss was $1.4 million, or $0.01 per share.

We currently have 52 quota carriers, up from 45 on our last call, and their average annual quotas remain at $2.5 million. We reiterate our expectation to have 72 quota carriers by year-end.

Turning to the balance sheet, we ended the quarter in a strong position with over $100 million in cash. Deferred revenue and advances totaled $29.6 million this quarter, up from $20.6 million last year.

Looking forward, we are raising our full year revenue guidance to $100 million from $93 million. This represents 64% annual growth this year, following 62% last year. We now expect non-EDS revenues to total approximately $79 million, which is approximately 100% year-over-year growth. This would mark the third consecutive year of 100% or more non-EDS revenue growth.

For Q2, we expect total net revenue of approximately $23 to $23.5 million, and we reiterate our expectation of non-GAAP EPS breakeven. For the full fiscal year, we reiterate our non-GAAP profit per share expectation of $0.03 to $0.04. Non-GAAP EPS excludes non-cash expenses for all stock compensation, as well as acquisition-related expenses.

To summarize, we are early on in an $11 billion market. We've seen our investments to date pay off in a big way. We've been successful in increasing our market penetration and taking share from competitors. We're seeing tremendous momentum in the pipeline, and we're raising the roof on our financial plan to $100 million in revenue this year.

We now invite your questions.

(Operator Instructions.) We'll have our first question from Ranjini Chandirakanthan from Think Equity.

Hi, guys. Great quarter. Congratulations.

How are you?

Good, thanks. My first question is on Opsware Visual Application Manager. I'm curious if this is a product that you'll sell mostly to install base or is this another product like Network Automation that can stand on its own?

Yes. So it will sell separately, but it will sell in its original--in its initial release, it's going to sell into customers who buy Opsware Server Automation System. So in the first instance, it will require Server Automation to run. We'll have a subsequent release in the back half of the year that will be standalone.

Great. And what is the competition for that particular product?

Yes. So there are a lot of new companies, let's see, Symantec bought a company called [Relacor]--.

--Yes--.

--That does similar functionality. There is a startup called InLayers that is in the category. Mercury Interactive bought a company called Apilog that's got functionality that's similar. But the big difference between those and Visual Application Manager is those products all draw a picture. Visual Application Manager, you draw the picture and then you can actually go in and change things and fix the problem. So that has been received really, really well from the industry analysts who all acknowledge that we're unique in our ability to not only discover things, but then to also change them.

Great. Were there some of these features in the base to your automation product already?

Well, some of the data was there. But the graphical representation in particular, and then additional data on basically kind of real-time information on what's talking to what. So if you--what processes were communicating with what other processes.

Great. Okay. And just on to the sales force. Just how--obviously you're hiring at a great clip here. I'm curious with the size of your sales force just focused on server network automation it seems to be one of the bigger sales forces dedicated to this area. And I'm curious how many times you get to a customer and you're able to set the RFP. Do you find that happens more often than not in the new territories that you're going into? Or--I know you'd said that there's been other products there in the past. And I'm curious how often you can set that RFP.

Yes. We're--we generally do set the criteria. So I would say more often than not is the right way to characterize it [indiscernible] more than half the time. The are--of the competitive--in the competitive landscape there aren't that many companies that are really yet competent to do a good job of setting the criteria. So of the whole competitive field, I would say only the new companies are really competent right now at setting the criteria. And of the new companies, we're by far the largest sales force. So for that reason, we get in more often than not.

I see. So there--it seems like the other companies are more features then. That's how I can look at that.

Yes, exactly.

Okay, great. And I guess, just a last question on channel progress, particularly in the U.S. for network automation. I'd like to know where you're at.

Yes. So--and I believe, Sharlene, you've got the channel mix. We're early on I'd say still with--we are saying, as I said, we're really encouraged by what we've heard out of Cisco in terms of what they are seeing in their pipeline demand. We're not ready yet to update the forecast for them or anything like that yet. But they are definitely super encouraged by what they've seen. And we also have seen really great momentum from our partner Nortel, among the big--and those are the two largest potential channel partners. And I'll let Sharlene talk about the actual results.

Yes. As I mentioned, the direct/indirect mix was 80/20.

80/20. All right. And is the 20% mostly international on the channel side?

No, that's the mix.

The overall mix. Okay, great. Thank you.

Thanks, Ranjini.

(Operator Instructions.) We'll have our next question from [Ben Singer Scott] with Raymond James.

Hi, guys. Good quarter.

Thank you.

I just have a quick question about deferred revenue and bookings. It looks like they accelerated or even were down sequentially--down 18%. Should we read into that that you're increasing your sales of network automation products as opposed to server, because that usually is the less deferred revenue component, or how should we look at that?

Well, actually our non-EDS derived bookings were--they were in line with our internal plan. They were up 90% year-over-year.

yes.

So overall, just the whole mix, we expected the seasonality and we predicted it last quarter.

Okay. So we shouldn't--every prior quarter if there's a sequential increase we shouldn't look at that other than seasonality?

Okay. So let me tell you why and how we look at that. If you look at fiscal year '06--.

--Yes--.

--And we had both products then. You can see that non-EDS derived bookings in Q1 represented 15% of the annual total.

Yes.

And Q4 represented 35%.

Okay. All right. Thank you.

That's the easiest way to think of it, Ben. And the reason for that, in addition to being big deal seasonality and then big deals do tend to stack up in the second half, is our Q4 also spans December and January recall. So that is the last month of the last budget cycle and then the first month with the new money. So Q4 tends to be oversized for us.

Right.

And it's been consistently that way.

And what we're saying is that you should basically expect similar seasonality, as we've said before, and then build your model based on that.

Okay. Thank you.

Thank, Ben. Thanks for all your help on the initiation report. That was a good piece.

Thanks.

I look forward to working with you. Thanks.

(Operator Instructions.) We'll go next to [Andy Schelpfer], Tier One Research.

Hi. Thanks and congratulations as well. As you are looking at scaling up this year and then looking into '08, you gave some excellent high level views into how you look at the customer base at your Analyst Day. Just wondering for an updated view if there is any change on how you are looking at FY08 in general as a year of--how much investment versus how much leverage you're going to try to yield in the year as you start to achieve some more acceleration and adoption rates.

Yes. And we don't yet have a formal forecast for that. And I want to just say that I'm not making a forecast now. But let me give you some color. So with the growth rate being so high, we will certainly expect more leverage next year than this year. And some of it depends a bit on how fast we expand that product category and how fast the market is developing. But just in general terms, it should be--you should certainly see more leverage than this year.

Okay. That's a fair statement. On your new channel partners that you're signing on, any comments anecdotally or otherwise on how quickly they're starting to generate first deals or ability to start selling more quickly or less quickly? Or any comments about the adoption of new resellers?

So I would say we're not--we're early enough with them that we don't have meaningful numbers that I can give you, but--in that. So we've just got things like our partner extranet fully up and going and we've got them all through training. And they are out there starting to sell. But we're certainly seeing a lot of activity.

And our channel--our total channel pipeline across the new resellers, if we exclude - and I'm going to exclude Nortel and Cisco from that - is pretty healthy. So if you compared it with our direct pipeline, it's about maybe 20% for the non-Nortel/Cisco channels. And we'll see how that pipeline converts. But that's sort of the early days. So we don't have real good numbers on sell-through yet.

Okay. The last question on the average deal for the server automation product. Is the level of consulting and integration revenue going up or down per deal?

Generally, it's about the same. I mean, you can look at our license/service mix and you can see it's been in a range of 65/35 all the way up to like 73/27. So it's in a fairly narrow range.

Okay. But on a deal-by-deal basis?

Deployment times are going down. So if you look at--let me kind of describe two different sort of scenarios that we have. So deployment times have dropped from sort of their peak of about three months to now the average is right between about four and five weeks, I believe, on the deployment of the server automation system.

The overall consulting on some of the extremely large deals, and particularly the European deals, British Telecom for one, where we had a very, very large project, it was just high as a percentage. But that--those services weren't related so much to deployment as overall project and customizations. We're also doing quite a bit of services work, for example, at JP Morgan/Chase, where they're doing some fairly innovative things, such as self-service IT automation for their developers. So we're starting to get into that as the platform becomes more mature and you're able to build applications on it.

Okay. Then, a last question. On your first deployment - and generally speaking with customers on the server side - is it going more towards a specific application and all the infrastructure for a particular application? Is it more of a subset of that or is it a broader--what's the trend of where you're getting that first installation in new accounts?

Well, I think that there's not so--I won't say it's so much of a trend. I will say that in Q1, we certainly did more what I would call kind of transactions or product kinds of deals than mega deals. I mean, you can see that in the multi-million dollar number where we did two deals of a million or more in Q1 coming off five in Q4. So Q4 had more of the kind of gigantic deals. And that tends to happen also more at the end of the year when people are doing those. Those big projects tend to just fall in the end of the year for whatever reason.

But I don't--I wouldn't think that's a trend as much as it's a seasonality.

Okay. So there's no change in terms of where your--your sales force isn't having any different success in a particular--going after an application, a department, or a pod, a test within an overall IT platform?

No. I mean, so if you look at our big account penetration, which we talked about last time--so if you look at the top tiers and where our penetration rates are, we're kind of in that--if we win the account we are--we get to pretty quickly on the first or second deal to about a 30% penetration. So that hasn't changed.

Okay.

On average.

Thanks a lot.

Yes.

And at this time, we have no further questions in the queue. I'll turn the conference back over to Mr. Tinsley for any additional or closing remarks.

Great. Thanks, Sherlon. And thanks, everyone, for your participation today. As always, if you have any questions, we're available at our headquarters in Sunnyvale. Have a good evening.

And that does conclude the Opsware, Incorporated First Quarter Fiscal Year 2007 Conference Call. You may disconnect at this time. We do appreciate your participation.