惠普 (HPQ) 2006 Q2 法說會逐字稿

Thank you for standing by. Good day and welcome, everyone, to the Opsware Incorporated second-quarter fiscal year 2007 conference call. All participants will be in a listen-only mode until the question and answer portion of the call. Today's call is being recorded. If anyone has an objection, you may disconnect at this time. Now for opening remarks and introductions, I'd like to turn the call over to Opsware's Treasurer and Director of Investor Relations, Mr. Ken Tinsley. Please go ahead, sir.

Thank you, Matt, and good morning, everyone. With me today, our President and CEO Ben Horowitz and, CFO, Dave Conte. Before we begin, I'd like to remind you that during today's call, we will make forward-looking statements regarding future events and our financial performance, including our opportunities in and the estimated size of the data center automation market, future competition, market acceptance of our integrated products and forecasts of future revenues, derived bookings and earnings, 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-Q filed with the SEC on June 9, 2006 for important factors that may cause actual events and results to differ materially from these forward-looking statements.

By now you should've received a copy of our press release that was distributed before the market opened today. If you have not, it is available on the Investor Relations section of our website. In addition we're currently webcasting this call and an audio replay will be available on our website following the conclusion of the call. The terms non-GAAP net income and non-GAAP EPS used in today's discussion exclude certain non-cash charges related to stock compensation as well as non-cash charges related to acquisitions. Projections also exclude FAS 123(R) stock-based compensation expense which cannot be determined at this time. Reconciliations of these historical items to GAAP are provided in our earnings press release and on the Investor Relations section of our website at Opsware.com. Now let me turn it over to Ben.

Thanks, Ken. I am pleased to report a strong Q2. As we forecast, we achieved a key financial milestone in our operating model quarter. In Q2 we generated non-GAAP profitability of $0.01 per share which was better than our expected breakeven forecast. Our GAAP net loss was $0.04 per share. Non-EDS revenue in the second quarter was $19.9 million, up 121% year over year. Total revenue was $25.1 million and exceeded the high-end of our previously guided range. We signed three deals worth more than $1 million. We also signed our first deal in China.

Now let me provided an update on the market opportunity. First some breaking news. Yesterday IDC published the latest marketshare report on our industry titled, "Worldwide Server Provisioning Software 2006 through 2007 Forecast and 2005 Vendor Shares." The report shows that we gained significant share in the last year while everyone else remained flat. Most significantly, it shows that Opsware is by far the number one growth company in the sector. To quote the report, "With 22% marketshare Opsware's growth rate was the highest at 64.9% from 2004 to 2005."

We are poised to take the number one spot in marketshare for the moment held by IBM. We grew eight times faster than they did gaining 10 share points on them and closing well over half the gap between us. In addition to IBM, BladeLogic and BMC also lost share. The second key point to understand the market we are addressing is huge and growing. A based on IDC's analysis of the distribution of servers worldwide multiplied by our estimate, our estimated revenue opportunity per customer based on our historical results, we are addressing a $10.9 billion market.

Third, winning the top end of the market which includes companies with over 10,000 servers will determine the leader. Commanding the top end is critical as these companies provide the most valued reference. In six key verticals our share of the top end is especially strong. In the banking, retail, telco, service providers, government, and Internet sectors we have already signed at least 10% of the top 50 companies. Q2 top 50 deals include UBS, EarthLink, BellSouth, Cablevision, Discovery Communications, two subsidiaries of Time Warner, Advertising.com, and HBO and the Nissan Motor Company.

Fourth, as fast as we are going we are still just 1% penetrated in this $10 billion market. Clearly we are early and our growth potential is high. The new deals we have closed in Q2 validate the power of our three key strategies. Our first strategy is to see the market with our network automation system which drives strong upsell opportunities for our server automation system. And with our Cisco deal coming online, this strategy will be an even bigger factor for us.

Our second strategy is to deeply integrate our server network and upcoming storage automation offerings. This combination is the defining selection criteria for any company with thousands of servers, network and storage devices. To date, 34 customers have purchased our combined server and network offering. We expect this trend to get even stronger as our just shipped System 6 is our first tightly integrated version of our server and network products.

Our third strategy is to provide the broadest technology coverage in the market. Our current product offering spans for more than 65 server platforms and 1000 network devices and gives us a massive advantage in large heterogeneous IT environments. And with the acquisition of Creekpath, we will be able to access an equally comprehensive range of storage devices.

In fact, our acquisition of Creekpath and our product roadmap for storage automation are already making a difference in wins now. Customers looking at server automation understand how critical it is to have tightly integrated storage automation because of the interdependencies between them. The fact that we have a strategy for this now and the competition doesn't is helping us win deals even before we have released our application storage automation system.

On the competitive front we are taking share from competitors both large and small as the IDC report shows. As we anticipate the eventual entry into our segment of larger vendors, Q2 saw us continue to wipe out the point player startups and take away accounts where they have failed. Examples this quarter include displacing BladeLogic at Advertising.com and displacing AlterPoint at Deloitte & Touche. In both cases these customers realized that they were better off throwing away their previous investments in these inferior systems and starting over with us than they would be trying to continue to make inadequate technology work for them.

Now I would like to talk about the key advances with our product line this quarter. We shift the Opsware System 6, the most significant release in our history. The suite is the first truly integrated family of products for data center automation. It represents a major milestone in delivering our whole vision for automated management of whole applications within datacenters. System 6 has already proven itself to be a major competitive advantage for us as seen by the combined network and server deals and the network to server upselling we have been able to close.

Our ability to deliver comprehensive data center automation overwhelms the point players whose products are typically limited to one area of infrastructure within the data center only and were never designed to be integrated. Because of this, they have no ready way of catching up. The level of integration offered by System 6 is very difficult to achieve especially if it hasn't been anticipated from the outset. So it is not simply a question of adding future functionality for them. They will need to revisit their whole architectures.

Similarly we are at an advantage versus larger players who might have offerings in multiple area but whose products are not integrated. By and large, these players have cobbled together worst of breed software packages that are integrated in brand name only. Because these offerings are often based on incompatible architectures, it will take years of work before they catch up to the seamless performance that System 6 offers today. In the meantime, we are winning deals against competitors both large and small because of the value customers see in our integration.

We were already gaining share before System 6 as the IDC report shows. With the additional competitive advantage we now have with this major upgrade of our product suite, we expect to pull away from the pack even faster. The Opsware network is off to a promising start. This subscription service saves IT departments countless hours by sorting through the enormous volume of security and compliance alert and finding those that apply to the systems applications and network devices customers have installed.

The Opsware network tightens our relationships with IT departments and makes us even more essential to their overall performance and quality of service. We have already signed 26 customers for the service, adding almost twice as many in Q2 as we did in Q1.

Finally, a word about Cisco. Q2 marks Cisco's entry into the market with our network automation system which they sell under the name CiscoWorks network compliance manager as part of their proactive automation of change execution or PACE suite. Cisco launched PACE in July, and it's holding customer events in which we will be participating across North America, Europe and Asia.

In summary, I am pleased with our performance in Q2. Our pipeline is strong driven by our just shipped Opsware System 6 release, and we continue to widen our product and technical lead over the competition. Now, here's Dave to provide more detail on our financial results and outlook.

Thanks, Ben. I will quickly cover operating highlights for Q2 and then provide an update on our outlook. Total net revenue in Q2 was $25.1 million, up 78% from Q2 last year, and up 14% sequentially. Non-EDS revenue totaled $19.9 million, or 121% year over year and 19% from Q1.

Non-EDS derived bookings totaled $17 million in Q2, up 59% from Q2 of last year, and 14% sequentially. We signed 109 new deals during the quarter. As many of our customers have standardized on Opsware, we are seeing a greater number of smaller transactions from upsells. Going forward we will eliminate individual license deals worth less than $1000 from our deal count. Using this method, our new license deal count in Q2 was 62, of which 60% were new customers and 40% were upsells to existing customers.

For license deals greater than $10,000 the average deal size for our server product was approximately $530,000. The average deal size for our network product was approximately $140,000. More than 90% of our bookings this quarter were direct and the rest came through the channel. Gross margin excluding non-cash stock-based compensation charges was 78.3%, which was approximately 2 points sequentially. Total operating expenses were approximately $20.3 million in Q2, excluding $3.7 million of non-cash stock-based compensation.

Non-GAAP net income in Q2 was $1 million, or $0.01 per share. Including non-cash charges related to stock-based compensation as well as charges from previous acquisitions, GAAP net loss was $3.8 million dollars, or $0.04 per share. We currently have 58 quota carriers, and average quotas remain at $2.5 million. We maintain our target for 72 quota carriers by the end of the year.

On the balance sheet we ended the quarter with almost $100 million in cash. Note that we closed the Creekpath acquisition after the end of the quarter so payment of the $10 million cash purchase price will be reflected on our Q3 balance sheet. Cash flow from operations was negative $3.1 million, corresponding with an increase in accounts receivable of more than $4 million. DSO rose slightly to 76 days.

To reiterate, non-EDS derived bookings increased to $17 million in Q2. Bookings are being recognized into revenue faster than in the past because our product is maturing. As a result we are seeing fewer deals with acceptance terms which require deferral. Accordingly, deferred revenue was down sequentially. We expect 90 EDS derived bookings to increase again in Q3 and again in Q4.

Turning to guidance. Given our strong bookings growth and our revenue mix transition, we expect to generate more revenue this year than we originally forecasted. We now estimate revenue will be $102 million this year, up from our previous estimate of $100 million. For Q3 we expect revenue of approximately $25 million to $26 million. We have started to absorb the Creekpath operating costs so we expect to be non-GAAP EPS breakeven in Q3. For the full fiscal year, we reiterate our non-GAAP net income per share expectation of $0.03.

To summarize, Q2 was a solid quarter and our strategy to invest aggressively in the business is paying off in the form of strong bookings growth, more than 100% revenue growth and significantly higher market share. With that, let's open up for questions.

(OPERATOR INSTRUCTIONS). Ranjini Chandirakanthan, ThinkEquity.

Just first housekeeping, on the three large deals, they were over what size?

$1 million.

Over $1 million. And are any of those going to be over 10% of AR? Will we see them in the Q, and I guess the real question is can you give the customer name?

We will have, I believe, one in --

Yes, we'll have one disclosed in the Q as a greater than 10%.

Great. And you can't give the name now of the customer?

The name that will appear on the Q will be UBS.

UBS. Great. Terrific. On the large deals, can you describe how long they take to close, and also of the three deals this quarter, did they both include or all three of them include server and network or were they net server?

Yes. So the three deals over $1 million this quarter I believe all three were network and server. Secondly, in terms of time to close the deals that were over $1 million, they vary dramatically. We had -- let's see, of the three, I believe one was right around four months and that was an upsell so they had purchased network and then purchased server. Another was about six months, and that was combined deal for a network and server. And then the longest -- the UBS deal on the last cycle -- so we have had multiple cycles in there with them, and the last cycle is about nine months. If you were to chart it all the way back to our history, you would be quite a bit longer than that, when we first talked to them.

Thank you. You can see from the numbers as you explain moving bookings faster to into revenue, I just wanted to know if you could maybe describe what has changed in the terms. Is it the difference in the product or is it more a network sale than server?

There are really two things, and it's more of a server phenomenon than a network phenomenon. Network has been more steady. First, the product has become dramatically easier to deploy and so the deployment times are shorter and then the reputation around the deployment is better. And that combination has led to one of acceptance. When we've had acceptance terms, it is happening faster and then a lot of customers are not requiring them based on their reference calls.

I guess the last question around that, my last question. One of the things that was brought up to us earlier was because of these acceptance terms, they would make revenues more steady. Do you think now revenues are going to be a little more lumpy now that you can take them faster into revenue?

I think as we look at the combination or the mix of bookings, we think over a period of time it will be smoother. Quarter-to-quarter there could be some lumpiness but that will smooth out especially as the numbers continue to grow.

Jonathan Ruykhaver with Raymond James.

Hey, guys, nice quarter. Those three deals over $1 million, are they actually -- get booked as revenue in the quarter?

There is some revenue coming from all three.

There is?

There is revenue contribution from all three, Jonathan.

How do you determine what portion of those deals get booked as revenue?

Well, as many of you know, the rules around software rev rec are pretty complicated, so it is deal by deal and it's transaction-specific.

Okay. Could you say whether or not the majority of those deals are booked as revenue in the quarter?

Well, we are saying that revenue is following faster the income statement and that revenue is the license component. And so, yes, more of the transactions are going to revenue faster because the license is going to the income statement faster.

Okay. I guess you look at the year-over-year increase in non-EDS bookings of 59%, is that number going to stay at that type of level or would it accelerate more to what we're expecting in terms of revenue growth for the full year?

Well, actually, we would expect that year-over-year bookings number to go up a little just due to, if you recall -- some of you will recall, the old-timers -- that last Q2, it was the quarter that we transitioned from two VSOE. So the Q2 last year is a Q2 non-EDS derived bookings number was a little higher than it would normally be just from bookings. So that ratio is a little artificially low. The actual year-over-year bookings for Q2 to Q2 was closer, a little over 90% gross so we would expect a rate more like that in Q3 and Q4.

Okay. And then I guess a question just related Opsware System 6, the new auditing and the auto remediation, the compliance features on that product, can you determine at this point how important those are to winning deals?

Well, System 6 is really significant in that not only does it pretty much overwhelm the point competition so that we haven't actually lost any deals which we were able to [POC] System 6 yet. So it has been so far invincible in the benchmarking, but it also fits into really two big trends that we are seeing in the marketplace going to dramatically better than the previous release. One is compliance, as you mentioned, so we have the compliance dashboard and a ton of advance in the user interface in terms of how about product drives compliance, but also we have some advances in how we handle virtualization which has really been driving a lot of sales lately.

And specifically I don't know if you saw the new Forrester Report, but Forrester came out with a report that automation is essential to driving any virtualization strategy and with our new virtualization features, virtualization is starting to be the number one driver of new Opsware deals. So we are really excited about that as well.

Just on that virtualization trend, how does that affect the number of nodes as it relates to the pricing? Do you guys price only on physical node, or is there a charge for additional virtual nodes?

We charge by virtual operating, system, so it is actually a boon to pricing.

I guess one final question on the Cisco partnership, you mentioned the past product suite was introduced at the end of the July. Is that deal progressing as you had initially expected in terms of integration with the CiscoWorks product and the official launch and training in the channel?

It's looking really good right now. I'm actually -- I will be in New York next week with the Cisco sales force and customers to kickoff PACE in that region. We're also doing similar launches in Asia and Europe and our interaction with the Cisco field has been really great and intensive so far. So we are expecting good things from that relationship.

Are you aware of any pilots that are in place currently?

We are aware of quite a bit of deals. They are not into pilot or I don't know of anything that has made it to pilot already as -- remember they've only been out there for about two and a half weeks with it.

Do you think it is possible that Cisco closes on some of those deals in this October quarter for them? Too early to tell?

It's possible, but I am not forecasting that.

Mark Kelleher, Canaccord Adams.

Very nice quarter guys. I want to talk a couple of housecleaning stuff. The 62 deals, you said you would refine how you defined the deals now greater than 1000. Can you give us that for the preceding quarter, April and the year ago quarter, what that number was?

Yes. The prior quarter, that number would have been 55 in Q1, and a year ago you know maybe -- I don't have it right in front of me, Mark. I think it's about 35, as I recall.

All right. And do you have the breakout of stock comp by line item?

I do not.

We'll follow up with you on that, Mark.

We'll follow up with you. I'll fly on that, Mark.

And then, just want to talk a little bit about Creekpath. You said you've taken some other costs in the next couple of quarters. What is the -- maybe you can just touch on the growth expectations there. When does that get additive and who do you consider your main competition there?

With Creekpath, we will expect that to start generating revenue in the second half of next year as we are going to ship the product in the first half. So we will start to make money on that second part of next year.

I think that our competition on that segment is actually going to end up being the same competitors that we have now in that we expect the attach rate into the SAS productline to be very high. But we don't expect a lot of people to buy storage without buying the server product because the positioning of the product and the value. And we think the opportunity in the marketplace is managing these, you know, modern data center where storage and server are intimately linked. And so the competition would continue to be companies like HP, IBM, Symantec, BladeLogic, etc.

Great. Thanks.

(OPERATOR INSTRUCTIONS). Benjamin Montgomery, private investor.

I just had a quick question regarding the market opportunity that you guys have quoted. Over the last few years you have kind of bounced between about $9.5 billion to $10.5 billion market. And I'm just wondering what you consider to be the additive market opportunity as a result of taking on this storage network component, or was that always included in your figures for market opportunity?

Sure. So just so everybody understands how we come to our market opportunity sizing. What we do is we take basically IDC's numbers for the numbers of companies that have varying numbers of service, 10,000 or more service, 5000 to 10,000 servers, 1000 to 5000 servers, etc. Then we take our actual results in selling our products to companies like that. So we will take -- we will say, gee, how many server deals have we done with companies with 500 to 1000 servers and how much did we get from each one of those companies?

Then we multiply the number of opportunities by the average deal size and we cut that by what we think is the addressable market by some factor in each segment. We do that for server and networks separately. So the network opportunity we think is in the area of $2 billion, whereas the server is more in the range of $8 billion. We haven't made storage additive because we believe that it is going to be an essential part of the server offering. And we think that you know it will be needed to maintain the price points that we have there for sure from a market sizing standpoint. In the short-term, it will likely be incremental revenue.

So you don't really look for that to increase the size of the addressable market.

It's early to say, but if it ends up having $200,000 to the average sale price of the server product, we will revisit that, but it's too early.

Katherine Egbert, Jeffries.

Just a couple of questions. If I missed it, what was the network to server ratio?

It is about 4 to 1 server to network.

And are you just basing that on the calculation of the average selling price as you gave us, or is that --?

Those are the actual numbers, Catherine.

Okay, because it works out the same, just wondering. Okay, and then did you say what the cash flow from operations was in the quarter?

Yes, we did, a negative $3.1 million.

Can you give us any sort of update on expectations of cash flow, now that you are, you know, basically saying again you're going to be profitable for the year? Can we expect cash flow positive for the year, as well?

Sure. We're not going to forecast cash flow going forward, but we will say that it will roughly follow earnings, and it will swing up over time.

And then on another point, you previously guided $0.03 to $0.04 for the year and then now you're guiding to $0.03 non-GAAP for the year. Is the difference Creekpath?

Yes. Recall when we announced Creekpath acquisition, we updated guidance to $0.03 at that time.

I just wanted to be sure about that. And then another question sort of more broadly. You know you talked about this being a $10 million market and yet you guys continue to call out competitive wins and displacements. I guess I am wondering why you do that if the market is so big. I mean, isn't it big enough for several players?

Well, as long as we get our God-given 50 percentage, it is. Potentially big enough but like the way enterprise software markets work and technology markets work in general, the number one player is the company that is going to be highly profitable and the number two is sometimes somewhat profitable, and particularly in software the number three is generally not the great spot to be in. So we are highly focused on the competition and every deal that we have, despite the size the market, is competitive. This is the age of the Internet. People know what products are available so win rate is critically important even though the market is large.

So you expect to continue to call that out?

Yes, absolutely.

Thank you. Nice quarter.

At this time there are no further questions. I would like to turn the call back over to Mr. Tinsley for any additional or closing comments.

Thanks, Matt, and thanks everyone for joining us this morning. If you have any questions, we are available here in Sunnyvale. Have a good morning.

That does conclude today's teleconference. Again thank you for your participation and have a good day.