惠普 (HPQ) 2006 Q4 法說會逐字稿

Good day, everyone and welcome to the Opsware Inc. fourth-quarter fiscal year 2007 conference call. All participants will be in a listen-only mode until the question-and-answer period 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 would like to turn the call over to Opsware's Treasurer and Director of Investor Relations, Mr. Ken Tinsley. Mr. Tinsley, please go ahead, sir.

Great. Thank you, Rufus and good morning, everybody. With me today in Sunnyvale are President and CEO, Ben Horowitz and CFO, Dave Conte. Before we begin, I would like to remind you that during today's call, we will make forward-looking statements regarding future events and financial performance, including our opportunities in the data center automation market, the benefits and capabilities of our products, the seasonality of our business, the benefits we expect to achieve in acquiring iConclude, the financial impact of this acquisition, our expectations regarding our partnership with Cisco Systems and forecasts of future revenues, derived bookings, operating margin and earnings, 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 this information provided on the 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 December 11, 2006 for important factors that may cause actual events and results to differ materially from these forward-looking statements.

By now, you should have received a copy of our press release that was distributed this morning. 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 for 30 days following the conclusion of the call.

The terms non-GAAP net income, non-GAAP profitability, non-GAAP EPS and non-GAAP operating margin used in today's discussion exclude certain non-cash charges related to stock compensation and past acquisitions. Projections also include 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.

Before I turn it over to Ben, I would like to remind you that we will be hosting our Analyst Day on March 21 in New York City. Please contact me in Sunnyvale if you have any questions about that event. Now here is Ben.

Thanks, Ken. Q4 capped a strong year in which we surpassed a critical milestone of $100 million in revenue. In fiscal 2007, we grew our non-EDS revenue by more than 100% to $80 million. We accrued non-EDS derived bookings by 60% to $80 million. We improved our non-GAAP operating margin from negative 19% last year to -1% this year. We achieved breakeven in Q2 and sustained it thereafter achieving profitability in Q4 and for the full year on a non-GAAP basis. We booked twice as many deals, new deals, as last year.

We succeeded in our strategy to seed the market with our network automation system with 55% of server deals in Q4 representing combination deals where customers also bought our network product. This strategy should prove even more important this year with our Cisco relationship ramping up.

We expanded our product lead by adding the Opsware Visual Application Manager, the Opsware Network, Opsware Orchestrator, Opsware Visualization Director and Opsware Operational Management Data Base or OMDB, giving us the broadest and most integrated data center automation suite in the market.

During Q4, we were particularly strong in the technology and financial services sectors and started to see some return in our international investments as well. Among the wins in these markets were Abbott Laboratories, Acxiom, A.G. Edwards, AMD, Applied Materials, Bank of China, Bridge Capital Corporation, Cadence Design Systems, Charter Communications, China Construction Bank, Dutch Tax Authority, First Data, [Hong Won] Securities, IIJ Technologies, JPMC, Level 3 Communications, Network Appliance and Society General.

Having crossed the $100 million revenue milestone, we are beginning FY '08 with strong momentum. We reached this milestone quickly, just 4.5 years after becoming a software company in 2002 and our growth far outpaces our competition. IDC's August report on server automation shows us growing eight times faster than IBM on a trajectory to overtake them soon as the leader of this expected $10.4 billion market.

Their January report on network change and configuration management doesn't rank vendors, but states that the market is accelerating aggressively to $4.5 billion in 2011. Clearly, the prize for winning this race is huge and we are in the pole position.

This morning, we announced an acquisition that will add significantly to our competitive lead. We are acquiring privately held iConclude for approximately $30 million in cash and 3.39 million shares of stock. Acquiring iConclude makes Opsware the best-of-breed leader in IT process automation. iConclude's software orchestrates the complex operational tasks necessary to run data centers giving us three important capabilities.

First, it complements the existing Opsware suite by simplifying and accelerating automation projects. Because it readily adapts to customers' existing processes and infrastructure, it greatly simplifies and speeds up the task of automating IT. Unlike most competing systems, the software does not force customers to change the way they do business or change any of the tools they currently use. Not only does this prove dramatically less disruptive for customers, but it also accelerate sales cycles for our whole product suite by making Opsware so much easier to implement than the competition and making the overall prospect of automating the data center less daunting.

Second, thanks to powerful orchestration capabilities and seamless integration with disparate IT management tools, iConclude software makes it dramatically easier for customers to adopt end-to-end IT process automation. The software provides the glue that binds ticketing, asset management, source control, monitoring and the full range of management software from heterogeneous vendors that IT departments use. In conjunction with the full Opsware automation suite, it allows customer to achieve orders of magnitude savings in cost and labor and to establish a degree of process control and management visibility that was previously unattainable.

Third, the software expands our footprint into the network operation center with a run-book automation solution and sell stand-alone. Taken together, these additional capabilities add a major competitive advantage for the whole Opsware suite. Give us an excellent opportunity to upsell our installed base and give us a powerful solution to sell stand-alone getting us a deeper footprint in IT and a new means of seeding the market. iConclude has an impressive installed base themselves with customers such as ACS, Alaska Airlines, Charles Schwab, GlaxoSmithKline, Halliburton, NYK Logistics and Sharp Healthcare. As an example of the benefits these customers are achieving, NYK Logistics realized a 50% reduction in IT operations costs by automating with iConclude.

Finally, I would like to add that the iConclude has a stellar team. Their work has led them to be named a Gartner Cool Vendor and they are known for having developed one of the best user interfaces for any data center application. Dave will talk more about the impact of iConclude in a moment.

Another factor that should accelerate our momentum this year is the maturing R&D investments that we have made. During Q4, we added significant capabilities by delivering products that are perfectly suited to capitalize on the three key trends driving growth in our sector; virtualization management, Linux security automation and compliance automation.

Let's look at these trends in detail. First, virtualization management. The rapid proliferation of virtual server technology is taking IT by storm. But IT departments are realizing that virtual servers require every bit as much management as real servers do. The Opsware Virtualization Director addresses this need by allowing IT to manage virtual and real servers side-by-side in exactly the same way. It supports both VMware and Sun Solaris 10, the most popular virtualization technologies in use today.

Second, Linux security automation. With the increasing adoption of Linux within the enterprise, tremendous focus has been put on the need for mature patch management tools for it, especially as the growing popularity of this operating system has made it increasingly targeted by hackers. Opsware has integrated with the Red Hat Network to allow our customers to automatically download the latest Linux patches and updates and then apply them to using all the automated processes and compliance controls built into Opsware.

Third, compliance automation. The Opsware network now includes the industry's only subscription service for automating both server and network compliance. We have added the capability to provide dynamically updated compliance policies to customer installations. These policies automatically determine which security and compliance updates are relevant to a customer's specific environment and then apply those updates dynamically to the correct servers and network devices. During Q4, we added more than 2000 such compliance checks.

Our capabilities in relation to each of these key growth drivers sets us apart from the competition and leaves us poised to reap the benefits from the investments we have made during the year.

Finally, I would like to give you a brief update on Cisco. As you know, they've started reselling our network automation system under their on brand name during Q3. During Q4, they more than quintupled their sell-through over Q3. Importantly, they also gave our software their advanced technology designation, which means that going forward, their sales representatives will earn more than double their usual commissions on it. Dave will provide more details about Cisco in a moment.

In summary, I am pleased with our performance in Q4 and FY '07 as evidenced by the strong financial performance and impressive additions to our productline, which has grown from two products at the start of the year to six at the end. We began FY '08 with strong momentum. Now, here is Dave to provide more details on our results and outlook.

Thanks, Ben. I will review operating highlights for Q4 and the full year, then provide a detailed update on our current fiscal year outlook. In Q4, non-EDS derived bookings totaled $26.7 million, up 50% from the same quarter last year. Similar to last quarter, non-EDS derived bookings included approximately $600,000 of professional services that we sold to EDS, which are incremental to the existing $20 million annual contract. This was the second and final phase of the services engagement we discussed on our last call.

Total revenue was $29.6 million in Q4, consistent with our approximate $30 million estimate. Non-EDS revenue in Q4 totaled $24.3 million, up 83% year-over-year and up 23% sequentially. International operations contributed about 10% to total revenue. We signed 84 new license deals worth $1000 or more during the quarter compared to 59 deals in Q4 of last year and 74 deals last quarter. We signed four deals worth more than $1 million.

In addition, we are aware that Cisco signed two deals of our network product worth more than $1 million each. Approximately 35% of bookings were from new customers and 55% were upsells to existing customers.

For license deals greater than $10,000, the average deal size for our server product was $487,000. The average deal size for our network product was $127,000. Almost 25% of our bookings came through the channel.

Overall gross margin was 81% in Q4, up about four percentage points from Q3. This improvement was primarily due to higher margin on services. Non-GAAP net income in Q4 was $3.5 million or $0.03 per share. Including non-cash charges related to stock-based compensation, as well as charges from previous acquisitions, GAAP net loss was $1.7 million or $0.02 per share.

For the full year, non-EDS derived bookings increased 60% to $81 million. Full-year revenue was $101.7 million, up 67% from the prior year and consistent with our guidance. Full-year non-EDS revenue totaled $80.5 million, an increase of 103% from last year. We ended the year with 73 quota carriers compared to 64 on our last call.

On the balance sheet, we ended the quarter with $91 million in cash. DSOs were 98 days compared to 87 days last year, consistent with our expectations since Q4 is our seasonally highest bookings quarter. Total deferred revenue was $30.2 million, up $2 million from Q3. Cash flow from operations in Q4 was -$1.5 million.

Now, looking forward to this year, which is our fiscal '08, we expect continued high sales growth. Specifically, we expect non-EDS derived bookings growth to at least equal the 60% growth rate we drove from fiscal '06 to fiscal '07. We expect total revenue of $142 million to $147 million, which represents annual growth of 40% to 45%.

We expect to close the iConclude acquisition in early Q2 and for the balance of the year, expect approximately $2 million to $3 million of revenue contribution, which is included in our forecast. We expect non-EDS revenue to total $121 million to $126 million, which translates to annual growth of 50% to 55%. Given this bookings and revenue guidance, we expect our book to bill ratio to be positive for the full year.

Full-year seasonality is likely to be comparable to our last two fiscal years. We expect 35% to 40% of our bookings to come in the first half of the year and 60% to 65% in the second half. Consistent with this seasonal split, we expect revenue of $26 million to $27 million in Q1 with a non-GAAP loss of $0.01 to $0.02.

Turning to our longer-term profitability outlook, we have invested in our distribution and product expansion aggressively, but at a disciplined pace. This is an improvement in our non-GAAP operating margin from 19% in fiscal '06 negative to 1% negative last year. As we said, we expect our high growth to continue and we look to improve our year-over-year operating margin again this year.

As it relates to iConclude, we expect to retain most of their personnel or 45 FTEs. Our plan is to absorb their $2 million quarterly expense base within our existing financial plan without significantly impacting our profitability targets. Based on this, we are maintaining the top end of our non-GAAP operating margin expectation for fiscal 2008 and updating the range to 5% to 8%.

After the integration, we expect the acquisition to be accretive and we reiterate our fiscal 2009 non-GAAP operating margin of 12% to 16%. Between stock issuance, assumed operating expenses and lower interest income, we expect that the iConclude transaction will reduce non-GAAP EPS by $0.05 this year. Incorporating these impacts, we expect non-GAAP EPS to total approximately $0.09 to $0.13 in fiscal '08.

With respect to Cisco, based on their initial sell-through report to us, they achieved approximately $600,000 of gross bookings in their third quarter. We haven't yet received their Q4 report, but know they achieved gross bookings at least eight times this amount. We are aware of these Q4 results since these were deals that moved directly from our pipeline.

As expected, there was no incremental revenue from Cisco above our prior forecast. We still expect Cisco to contribute at least the $10 million that we previously forecasted for fiscal year '08. Once we establish that their Q4 success is sustainable from their demand generation versus coming out of our pipe, we will update that forecast. In the short term, we expect to continue to seed their business from our direct bookings while we help them get to scale.

Summarize, I am pleased with our Q4 and full-year performance. Our outlook for fiscal 2008 is strong and our growth expectations will fuel a positive full-year book-to-bill ratio. Our investments in the business are driving leverage in our model and we remain focused on building a highly profitable business. With that, let's open it up for questions.

(OPERATOR INSTRUCTIONS). Kash Rangan, Merrill Lynch.

Just a couple questions. First on the acquisition. It sounds like this product capability overlays very nicely on what you have. Could this be the beginning of a re-architecting your entire platform around the new technology. It sounds like it is fairly core and that you can improve the flexibility and do a whole lot of other things. Just wanted to clarify how you look at this iConclude acquisition and I have a couple of other tactical questions. Thank you.

Well, the iConclude acquisition -- it's not really overlapping the technology we have. It is almost completely complementary. There is really no overlap in functionality. What it adds is a process layer that really makes our productline much easier to adapt. So the most common question that we get when we go in -- people see the benefits and they say, "Wow, I would like to get that savings. I have all those problems. What do I have to do?" Their first question is always, "What do I have to do organizationally and process-wise to adopt your technology into my environment?" And we have good stories on that and you can start with things that don't require any organizational change and then move on and so forth.

But with iConclude, what we can do is literally graphically say, "Well, what is your process today?" Using the software, build up a graphical depiction of their software, of their process and hook it right in to what we are doing. So they don't have to change their process at all. They don't have to change their organization at all. They can adopt it and bang, get the benefits right off the bat.

So it is really a high-impact turbocharge for our existing productline, as well as being a pretty good standalone business to get started with. "Okay, just want to automate my process and not necessarily automate the tasks that I complete within that process." In those cases, we can sell stand-alone into the network operations center or other areas of the organization.

So the modeling and the execution environment will become the same after you integrate the product in Q2?

Right, exactly. So you can just think of it as -- so if you have, for example, a process in the NOC for -- okay, gee, the answer to this problem is to go patch the server. Well, here is a dead simple interface for a NOC guy who can just click, click, click -- NOC being, I'm sorry, network operations center. So these are the kind of low-end guys in IT. They can click through some very simple task-based screens, which will then call out to the server product or the network product to go do the actual patching [mems], the whole security infrastructure, all the complex policies and so forth. The dependency analysis, all that happens under the covers. But the process flow, the user interface just connects right onto that.

Got it. Just two final questions there for you guys and thanks a lot. What is the implied server management growth rate in your forecast from fiscal 2008 if I include the network piece? Also secondly, if you can clarify whether you're going to be expecting to book -- to recognize the Cisco revenues of $2 million plus in your April quarter, that will be fine. Thank you very much.

So the first one. As Dave alluded to, we expect to maintain last year's bookings growth rate of about 60% this year and just in the quarter, the ratio of server to network was about -- between three and four to one in terms of server bookings to network and we expect that ratio to maintain next year. So the growth rates will be roughly similar.

And then the second question --.

The second question on cash is we are maintaining our forecast of $10 million from Cisco in fiscal '08.

So I will have to do the math (indiscernible) server management growth rate. How does it compare to the server management growth rate that you had in '07, fiscal '07?

So it is very similar and as Dave alluded to earlier, the Cisco -- the money coming through Cisco doesn't dramatically, at least at the $10 million rate, doesn't dramatically change the network products growth rate because, at least early on, most of that is coming out of our pipeline, which has a little bit of a dampening effect on the network growth rate in the sense that when we give them a deal, we get only our portion of that booking, which dampens the growth rate a bit. Now, once they start generating demand, which we expect about in the second half of the year, then that will pick up, but there is not really a huge incremental growth impact of the Cisco at least at the $10 million forecast on the NAS server growth rate or the NAS growth rate.

Brendan Barnicle, Pacific Crest Securities.

I was hoping to get a little more clarity on expenses for Q1. They were a little bit higher than what I had been forecasting. I don't -- based on what you just said on the guidance, it doesn't sound like we are going to see any impact from the acquisition in the Q1 numbers. Is that right?

Yes, that is right. We are expecting to close the transaction at the beginning of May, so it won't be reflected at all in the quarter.

So are you expecting expenses for Q1 to just stay flat sequentially? It looks like actually they need to go up a bit to get to where the guidance is?

Yes, so as we have said before, we have been investing particularly internationally and in salesforce expansion and those investments we have made through the balance of the year. Of course, you will see those at that run rate going forward into the first quarter.

Great. And then just on that point of investing in the salesforce. I think you said you were at 72 quota carrying sales reps at the end of the quarter. What is the expectation for the end of the year in terms of numbers? Can you give us any more color on how much you are changing the quota during this year for each of those reps?

Yes, so actually we ended the quarter with 73. We had forecast 72. We think that going forward, we will report actual sales headcount on an actual basis each quarter, but we think we have given all the relevant info in our guidance in terms of how to build a model and particularly given the absolute size of the numbers now, giving a sales headcount number didn't make a lot of sense to us.

Okay. Great. That does it for me. Thanks.

Katherine Egbert, Jefferies.

I just have a question on the Q1 guidance. Last Q1, you've guided up a little. This quarter, you are guiding down a little bit relative to consensus on revenue that is. Can you just talk about -- and then obviously you are maintaining for the year, just a little slightly more of a hockey stick for the fiscal year. Can you just talk about that?

Sure. So as I mentioned, we have forecast our seasonality of about one-third of the bookings in the first half, two-thirds in the back half. This year, revenue will follow bookings based on -- if you recall last Q2, we had the phenomenon of doubling revenue yield. We are now at a constant and normalized rate of revenue. So what you will see through the year is revenue following bookings. Q2, Q1 of last year, that wasn't the case given the uptick we saw in the revenue yield.

Of course, Katherine, you will recall we had a corresponding sharp downtick in deferred last Q1, which goes to the revenue number. So bookings are very similar year-to-year.

That's helpful. And then can you just give us a quick update on the storage product, what you bought from Creekpath. How did that do?

Sure. So the storage product hasn't shipped yet. Just recall that we will be shipping the initial release of that in the first half of the year and that is going to be in the second quarter and we won't expect to see any kind of significant revenue for that until the third quarter.

Okay. Sorry about that. I forgot. And then the last thing, just to follow up on Kash's question regarding iConclude. Can you just maybe give us, in like 10 words or less, exactly what you are getting there and then --.

In 10 words or less?

Yes, well, or maybe 20 words or less, but just give us a clear, concise definition of what exactly they are providing that doesn't overlap. What is better?

Well, it is really what is different. So what they provide is process automation. So a graphical way to automate any process in IT and then connect that into whatever systems you have so that process -- if you think of the overarching process of, okay, you have got to issue a request and that request turns into a trouble ticket and then that trouble ticket gets worked on by a server automation product or a network automation product or a human being and then that gets confirmed back into the system. That whole process we don't have functionality around and that is what iConclude provides.

And is this a time-to-market issue? Why you are buying them versus developing this?

Yes, definitely a go-to-market aspect to it, as well as it is really a fantastic piece of technology and a really exciting product in terms of the capability that it provides. And we have had unbelievable reception to it from the initial introduction to our own installed base.

Heather O'Loughlin, Americas Growth Capital.

I have got a couple of questions about the model. It seemed like the margin on the cost of services and maintenance was much higher this quarter. Can you tell me if that would be sustainable going over the next one or two fiscal years?

Yes. So we do expect the overall margin to be roughly 80% on a steady state.

Okay. And then also G&A was down to about 11%. Is that also sustainable over the next several quarters?

Yes, we certainly expect to see leverage coming in G&A first, so I would say yes.

Okay. And then just two follow-up questions. On iConclude, do you have any kind of revenue forecast you can give us for the next say three or four years? Do you expect it to be a $59 product or whatever?

Yes. So we really see it -- it is at a very similar state to Rendition, when we acquired Rendition. So if you look at that, Rendition in the first quarter that we had them did about $800,000 in revenue and they were working off a slightly bigger installed base, but about $800,000 in revenue in their first quarter and the first two or three quarters were about at that level.

Last quarter, which is the I believe eighth quarter that we have had them, they did a little under 10 times that in the quarter, plus we added the Cisco relationship, which we think will sprawl out of growth for the overall productline. We see a very similar trajectory on the iConclude product. We think that once we get the sales force fully engaged on it just based on the early interest and where we think we can go with the pipeline and the applicability of it into the market and into our installed base, we think that we will get a similar kind of a growth rate. Going out past that first year is a little hard to measure at this point, but we think we will get a pretty rapid growth rate off it.

Great. And then just one last question. The Company seemed to have an exceptional quarter in Asia. Is that sustainable and how do you see your international revenues as a percent of total revenues? Do you expect it to go up over the next fiscal year or stay up approximately where it is at 10%?

We think it should go up sharply over the course of the year. We are getting -- so just in terms of building out the teams, we now have kind of what I would consider fully enabled teams in all the regions. So you have got country managers in place and the full technical complement as well as the sales representatives. We have seen particular strength in the North Pacific Rim where we are getting good traction in China, as well as Korea and we do see that continuing. We also had a couple of nice deals in Japan including IIJ Technology.

I saw that, yes.

So that has been pretty good. We are seeing really good pipeline growth in Europe as well. So we would expect international to do far better this year than last year and we will certainly update on our reporting on that and so forth. We have a specific forecast as a percentage of revenue, but sharply up.

Denny Fish, JMP Securities.

Just a couple of questions real quick on the acquisition once again. So obviously iConclude was in the partner program. You were reselling it previously. Is that how we should think about your acquisition strategy going forward? The partner program is the testbed for some of this stuff and did you have a solid joint pipeline that you were looking at and that is what got you comfortable with purchasing iConclude versus say another run-book automation vendor and then I've got a couple more? Thanks.

Sure. So the partner program -- I don't want to overstate what that is. It is a partner program for partners. I think that of all the partners in the technology alliance program that we have and we have got nearly I guess a couple dozen guys in there, iConclude was by far the best received by our customers and prospects and they were most excited about it. We had a tremendous amount of interest. If you compare it to the other run-book automation players, which we did look at in detail, one, we thought it was the best technology and two, it was also the technology that most complemented our current productline. So the strengths that they had were strengths that we really valued and then the things that the other players might have done better were things that were capabilities that we could easily complement with technologies that we already had in-house. So it was the best technology plus the best fit.

Okay, great. And does this also, much in the same way the Rendition acquisition gave you an opportunity to seed the network piece ahead of the server piece? Essentially even take it a step further in terms of seeding accounts for both network and server down the line that you can sell it independently.

That is probably one of the most exciting things about it. So if you go in and somebody is doing say an ITIL, which is -- ITIL is an information technology infrastructure library. It is a standard put out by the U.K. government that most large IT shops are following. If they have a project around, they always start with their process and so the first thing that they buy tends to be some kind of toolset around or consulting around redesigning their processes. While this is a perfect product and already has tons of ITIL process stuff built in, so you can out-of-the-box get ITIL, start with that and then as you want to become more efficient in how you deliver ITIL then the rest of the productline follows. So it is an excellent seed product for both network and server.

Great. And then talking about other products for a moment. Virtualization Director, has that shipped yet?

Yes, that is shipping.

Okay. Great. And then lastly, now that VSOE has been established for some time and revenue -- I think you had mentioned you have a normalized rate of revenue. Is bookings as an important metric to look at now? Do you have license deals that are sitting in deferred currently where you weren't able to establish VSOE or should we assume at this point that all the deals that you are selling are getting recognized during the quarter?

There are really no ratable deals. The only ratable component of our balance sheet would be from the Opsware network product, which is sold as a subscription and our maintenance revenue. So in terms of VSOE, yes, that is very far in our rearview mirror and we think selling perpetual licenses -- you will see revenues tracking to bookings.

Okay, great. And then just one last question. Any 10% customers during the quarter?

EDS would be the only one.

Okay. So outside of EDS, no 10% customers?

No.

(OPERATOR INSTRUCTIONS). Michael Huang, ThinkEquity.

So another question on iConclude. I am curious when you look at the opportunity, do you actually believe that bigger opportunity in fiscal '08 is from cross-selling to existing customers or could we actually see iConclude as a nice lever with new customers in fiscal '08? And then just with respect to the model, how conservative do you actually believe you are in model iConclude contribution in fiscal '08?

Well, it is a little tricky to tell whether kind of standalone or cross-sell is a bigger opportunity, but we think that the bigger opportunity is probably going to be cross-selling it early. That will change as our field gets competent at selling it directly and that was -- at least that was the case with the networking product where in the beginning we basically sold it to the installed base until we learned how to get into the network portion of IT and sell it stand-alone.

We based the forecast on what we did with Rendition. Now, Rendition when we acquired them had about 30 customers. Whereas, iConclude has got a little less than half that. So Rendition had a little bit more of a mature business at this stage than iConclude does.

Having said that, the initial interest and uptake both in our field and our customer base is a little higher with iConclude than it was with Rendition. So higher interest on a smaller business and we kind of try to split the difference and take the old Rendition forecast and map it over to iConclude in the early days. So that is how we came up with it. Whether that proves to be conservative or how conservative that proves to be in the first three quarters, time will tell, but we sure are excited about the opportunity and do think that it is going to be a really big product with just an excellent return for us and investors over the medium term.

Great. And another follow-up. So in terms of -- I think you had mentioned in your prepared remarks that iConclude could accelerate sales cycles. Was wondering if you could provide some color on where in the sales cycle that it actually helps out. Is it in the proof-of-concept and the speed of demonstrating? Is it in the ease of demonstrating the overall value proposition? Then also in terms of like how much it could speed or accelerate the sales cycle, is it by a month or two or is it by more than that and will we be seeing more of that benefit in fiscal '09?

Yes, so basically why we are saying it worked very early on is that a couple of things that you have to prove during the sales cycle currently or that we have to prove during the current sales cycle is that we can map in to the company's organizational design and processes and map in to the organization's existing technology. Those technologies are, as I said, source code control systems, trouble ticketing systems, monitoring systems and so forth.

What we can do with the iConclude product is really in a live demonstration in a couple of hours integrate into all of that during a demonstration proof-of-concept, period which is something that we normally would defer outside of the general proof-of-concept. We would say, "Yes, we can integrate and we can do this and we can do that." But we have to prove that through a lot of conversations and a lot of customer reference examples and so forth. So there is a pretty good chunk of the cycle that we currently devote to that, which we put on the order of one to two months and to be able to just show them as opposed to talk them through that, we think is a big deal and we have seen it be a big deal early on. So we would expect to see a shortening of the sales cycle for sure in fiscal '09 with that and hopefully earlier.

Great. And last question that I had -- so when you actually compare the sales cycle that you are seeing for the integrated server network opportunities versus just either a server stand-alone or a network stand-alone, are these deals taking longer to close, but yield a higher [SK]? Maybe you could just give us some color on that. Thanks.

We try not to slow down the sales cycle by tying them together. We generally will split them apart if it looks like we are going to delay the cycle to get the bigger opportunity. However, selling the concept of them together is powerful in a couple ways. One, it does increase the deal size and then secondly, it provides a pretty strong differentiation against all the competition because it is not just that we have network and server, but the level of integration is extremely high. So you have one deployment infrastructure, one way to get to remote locations that both products leverage. You have got one data model, which they share. So the network's view of what an application is, where servers are plugged in is identical to the server's view. So you get a commonality that provides a pretty potent feature differentiation as well.

Vik Churamani, Lehman Brothers.

Dave, did I hear correctly that Cisco helped you land two deals over $1 million?

Yes, Cisco actually landed themselves two deals over $1 million on the networking product, which we think is significant in a couple of ways. One, probably most significantly, if you like -- and if you talk to guys at Cisco, that is a pretty rare bird software deal for Cisco. So they normally don't do $1 million software deals. So the fact that they can do $1 million deals on our product has really gotten the attention of their sales force and their product organization. So that is a big deal for us.

It is also significant in that those large deals that they booked, as Dave alluded to did have a little bit of it because those were deals that were in our pipeline as you would expect that we used to seed. The Cisco channel did have a bit of a dampening effect in our bookings growth in the quarter, but we think that is a really worthwhile investment and will pay off big time going forward.

So what sort of margin contribution is Cisco giving you? As you also look out for '08, did that have any impact is this quarter on the positive side?

So in terms of expanding our own margin, not yet just because of the way we set up the deal initially and how we comp our own sales force plus the effort we are putting in plus the cut that we get. So until they really start generating a lot of their own demand, we won't expect that to have a really positive impact on margins and we think that is going to happen the second half of '08, but given in the first half of '08 that we are going to be continuing to seed them, which is very consistent of course with our forecast, which we said is going to take us about a year from start to get them ramped. I wouldn't expect a net margin improvement in the year due to Cisco. The following year, we should start to see that.

And then just to follow up, on the cash flow side, any high-level thoughts on what we should expect for cash flow as we look into fiscal '08?

We think, overall, cash will roughly follow earnings. So that is the way we are thinking about it for the next fiscal year and beyond.

Okay. And then just a last follow-up. Ben, you mentioned operational DB, I assume that is another term for CMDB. If not, correct me. Then when was that made generally available and when do you expect the next maintenance release for that product and --? Sorry, go ahead.

It was made generally available in January and we expect the next release in April, end of April.

Who would be your competitor in that space?

Well, generally with that product, probably the biggest competitor would be BMC with their Atrium product, but we are selling it with a bit of a different tack than they are. So we won't be engaged directly with them on that many deals. I would consider that more a product that we forecast into our own installed base. So we will upsell it into the server product and the network product, but as a stand-alone going in first, that is less likely in its current stage of evolution.

And just to clarify on the Cisco side again, Ben. So did they help you land the two deals over $1 million because what I am confused is that if they did, then we should see a much -- you are off to a pretty solid start going into next year and assuming at least $10 million in revenue, you have already done $2 million in Q4, I am just trying to figure out why the conservatism? If you can just explain the (inaudible) here.

So those two deals, the two deals that they did over $1 million and actually the whole set of deals that we reported it on from Cisco were deals that we sort of found and got going and had in our pipeline and then we partnered with Cisco to close the deal. So generally, as opposed to them going out and generating demand and bringing us deals that we wouldn't otherwise see or forecast. So that is -- that is why I am dampening -- like if they just flat out did that on their own, then we'd probably give you a higher forecast for next year, but I think that would be misleading and so I just want to draw that distinction. Now it is good news for them that their sales guy got commission on a big deal and that generates a lot of momentum with their sales force, but I don't want to overstate its impact on our overall growth.

And Vik, those amounts too are the gross bookings to Cisco, so that is what they are taking down. That is not going to be our portion once they report to us.

Okay, good. That clarifies things. Thanks very much.

Andy Schroepfer, Tier 1 Research.

Congratulations.

Thanks, Andy.

I wanted to re-ask a question about -- when you signed the EDS deal originally, there were a couple of companies that you weren't allowed to work with for a certain period of time. I just wanted to confirm that that time period has lapsed and any update you can give us on where discussions would be without mentioning the name of the other partner. How close might we be to having another deal along --?

To the first questions, those have expired, so there's no current exclusives versus EDS. No, we do not have a forecast for when we would do or we are not forecasting when we would do another EDS sized deal. I would just note that the competitors who EDS named in that deal have since become competitors to us. So I want to proceed (technical difficulty) on that.

All of them though, Ben?

Well, the two primary competitors that they named in the deal with the longest time were IBM and HP.

Right. And if the other was Accenture, I would assume that would still be --.

Yes, I believe -- no, I don't believe Accenture was named. Do you recall, Dave?

I think they were.

Oh, they were. Yes, so Accenture, sorry.

And another question. As you are hiring more and more sales reps again, is the pace quickening to where these people are starting to become productive and what percentage of the base would you say is fully productive today?

So we are seeing -- it is still about a year in our experience to get to full productivity, still between a 3.5 and 4 months to get to your first transaction. Of course a little quicker in North America where we are more mature and a bit longer oversees as Ben mentioned. Roughly just over half of the force I would say is now fully productive or tenured enough to hit those productivity expectations.

Are pipelines building at the same type of pace or greater or lower in AP and EMEA?

Well, they are growing at a greater pace than they did --.

Relative to where you were in the U.S.?

Slower, slower than the U.S. Although I would say there is the exceptions being -- there are two exceptions being the U.K. and China right now where they are growing pretty fast.

Excellent, thanks. Congrats.

Ladies and gentlemen, this does conclude our question-and-answer session. Therefore, Mr. Tinsley, I'll turn the conference back over to you for any closing remarks.

Great. Thanks, Rufus, appreciate your help today. And thanks, everyone, for your participation. As always, we're available here in Sunnyvale if you need to follow up with us after the call. Thanks very much.

Ladies and gentlemen, this does conclude the Opsware Inc. fourth-quarter fiscal year 2007 conference call. We do appreciate your participation and you may disconnect at this time.