惠普 (HPQ) 2007 Q1 法說會逐字稿

Good day and welcome, everyone, to the Opsware Incorporated first quarter fiscal year 2008 conference call. All participants will be in a listen-only mode until the question-and-answer portion. 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.

Great, thank you, Amy, and good morning, everyone. With me today 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 market share in the data center automation market, the capabilities and release dates of certain products, our expectations regarding our partnership with Cisco Systems, and forecasts of revenue, bookings, derived bookings, deferred revenue, operating margin, earnings and our book-to-bill ratio, all of which are subject to risks and uncertainties. Actual events and results may differ materially from these statements. We assume no obligation to update the information provided on this call or to revise any forward-looking statements. Please review the section entitled risk factors in our 10-K filed with the SEC on April 13, 2007, 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 loss, non-GAAP EPS, and non-GAAP operating margin used in today's discussion exclude certain non-cash charges related to the stock compensation and past acquisitions. Reconciliations of these historical items to GAAP are provided in our earnings press release and on the Investor Relations sections of our website at Opsware.com. A reconciliation of forward-looking guidance has not been provided because future stock-based compensation expense cannot be determined at this time. With that let me turn it over to Ben.

Thanks, Ken. Good morning. I'm pleased to report that we're off to a good start for fiscal year 2008 with a strong first quarter. We closed the acquisition of iConclude early and I'll expand on this in a moment. Q1 revenue of $28.3 million was above the high-end of our guidance. We had two big wins in the financial services market, Goldman Sachs and Merrill Lynch. 72 new software license deals closed in the first quarter, three of which were worth more than $1 million. Bookings are on plan and sales pipeline is up sharply. We were at the high-end of our range with the non-GAAP loss of $0.01. Cash flow from operations totalled $3.3 million. During Q1 we had wins in the financial services, government, systems integration, and technology sectors. A few of these included AMD, the Australian Department of Foreign Affairs and Trade, CheckFree, where they are displacing BladeLogic with Opsware, Unisys and Wells Fargo.

Now let me provide an update of our market opportunity, which is driven both by key trends in technology and the superiority of our offering. Recent research further validates our leadership in rapidly growing segments. According to an IDC report published during Q1, our Network Automations System is the clear market share and growth leader in its segment. Titled Worldwide Network Chains and Configuration Management 2007 To 2011 Forecasted Analysis, the report shows that we led the market last year with a 31.4% share and that this market itself grew annually at a healthy 112%. Opsware moved from fifth place to first place over the course of last year growing five times faster than the overall sector. These results are complementary to the dynamic growth of our Server Automation System. IDC's 2006 report on sever automations 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. As the IDC market share reports validate, we are leading the data center automation race and our trajectory shows us continuing to increase our lead.

As strong as our market position is, it will only just get stronger with our just released Server Automation System 6.5. Announced last week and shipping tomorrow, this version brings important advances in automation to support the major trends and fastest-growing platforms in the data center, Windows, Linux, and virtualized servers. The new release includes -- deeper Windows management and compliance capabilities; automation of next generation Linux environment, such as Red Hat Enterprise Linux 5.0; deeper support for managed, virtualized environments, including DMware and SunFlair's 10; and more advanced capabilities to automate the ITIL standard. The advanced ITIL automation capability is achieved through tight integration with our recently-acquired iConclude solution, known as the Opsware Process Automation System. As I mentioned before, we closed the iConclude acquisition early.

As we expected, their product removed a significant barrier to entry for selling of our server and network automation systems. By simplifying the task of making our software conform to the customers' processes, this resulted in our proof of concept activity more than doubling from Q4 to Q1, helping us achieve a 50% growth in our current sales pipeline over this time last quarter. The next major addition to our suite is the Application Storage Automation System. This system positions Opsware as the first Company with all four of the fundamental infrastructure solutions necessary for comprehensive data center automation, servers plus network plus storage plus processes. The storage product will be available for early access in Q2 with general availability and revenue starting in Q3. Our storage automation software will give us the most complete footprint of any data center automation vendor and it's tight integration with the rest of the Opsware suite significantly raises the bar on the competition.

The Opsware Process Automation and Application Storage Automation Systems are significant additions to our product set. These releases, along with favorable market trends driving the rapid adoption of data center automation, create a big opportunity for us this year. In summary, the year is off to a solid start. With the addition of our Process Automation System, we are seeing dramatically increased activity and we are well-positioned for strong growth. Now here's Dave to provide more detail on our results and outlook.

Thanks, Ben. I will review our operating highlights for Q1 and then provide an update for Q2 and the remainder of the year. At the end of Q1, we closed the iConclude acquisition earlier than anticipated. We've seen early success with the product, as Ben mentioned, with Opsware Process Automation System lowering the barrier to server and network product sales. I'll highlight some of the Q1 financial impacts of the transaction in a moment. For the quarter, total revenue was $28.3 million, up 29% from Q1 last year and higher than the 20% growth rate derived from the midpoint of our guided revenue range. Non-EDS revenue in the quarter totalled $23.1 million, up 38% from Q1 last year and higher than the 27% growth rate derived from our previously guided non-EDS revenue range. Non-EDS drive bookings totalled $20.5 million, up 38% from the same quarter last year and in-line with our plan. There were 72 new license deals worth $1,000 or more during the quarter. Note, that starting with this call and going forward we are including deals sold through the Cisco channel in our deal counts.

We signed three deals worth more than $1 million, all of which included the purchase of multiple products. Of the customers who purchased licenses in Q1, about half of them bought both our server and network product together or own the network product already and then purchased our server product. This demonstrates the effectiveness of our strategy to seed with our network product. For license deals greater than $10,000, the average deal size for our server product was $537,000. The average deal size for our network product was approximately $115,000. Almost 15% of our bookings came from through the channel and 85% were direct. International operations contributed about 10% to total revenue. Overall gross margin was 78% in Q1. Non-GAAP net loss in Q1 was $1.4 million or $0.01 per share. Including non-cash charges related to stock-based compensation, as well as charges from acquisitions, GAAP net loss was $10.6 million or $0.10 per share.

Prior to the close of the iConclude transaction, we resold more of their product than we'd anticipated. This earlier than expected success requires to pay them more royalties, the impact of which you can see in our cost of license revenues line. The acquired operating expense base of iConclude is roughly $2 million per quarter, which will primarily increase our R&D and sales expenses beginning in Q2. With respect to our sales force, we entered the quarter with 81 quota carriers compared to 73 on our last call. On the balance sheet, we ended the quarter with $74 million in cash. Our cash balance reflect the initial payment of $22 million of the total $30 million cash consideration for the purchase of iConclude. The additional $8 million was paid after the end of the quarter and will be reflected on our Q2 balance sheet. DSOs were 75 days, compared to 70 days in Q1 of last year, and cash flow from operations in Q1 was $3.3 million.

Now looking forward, as Ben mentioned, our pipeline has grown 50% from the same time last quarter. Based on this, we expect Q2 bookings to grow 55% to 60% year-over-year and we expect total revenue of between $31 million and $32 million for our second quarter. We expect non-GAAP loss per share of $0.01 in Q2, which includes the incremental and fully absorbed $2 million expense base of iConclude, which will cost approximately $0.02 per share in Q2. We maintain our full year non-GAAP EPS target of $0.09 to $0.13. For the full year, we reiterate our previous guidance as follows. We expect bookings will grow 60%, revenue will range between $142 million and $147 million, non-EDS revenue will range between $121 million and $126 million, a 50% year-over-year increase. We expect non-GAAP operating margin to range between 5% and 8%. We expect book-to-bill to be positive for the rest of the year. Looking further out, we reiterate our 12% to 16% non-GAAP operating margin expectation for next year, which is our fiscal 2009.

With regard to Cisco, following our last call they asked that we not disclose their sales activity or pipeline, which of course we'll respect. As our relationship with Cisco matures, we are learning more about how their sales activity flows to us. Specifically, Cisco bookings are generally reported to us over a two-quarter period which follows the quarter in which they sign a deal. For example, of the Q4 sales activity we referenced on our last call, less than 20% was reported to us in our Q1. We expect the balance should flow to us primarily in Q2. Next, while a majority of the deals they closed in Q1 continue to be sourced from our pipeline, we saw a notable increase in the number of deals that they sourced directly. In Q2, for the first time, we expect that they will generate and close more deals from their own pipeline than from ours. Based on the two-quarter lag in reporting that I just described, we expect to see the flow through from Cisco's Q2 activity in our Q3 and Q4.

To summarize, I'm pleased with our results and our overall execution. The significant increase in our Q2 pipeline is driving bookings acceleration and we're on track for full year bookings growth target of 60%. With that, let's open it up for questions.

Thank you. (OPERATOR INSTRUCTIONS) We'll go first to Tom Curlin with RBC Capital Market.

Hi, did you provide a breakout of the revenue from iConclude for Q1 '08 as well as the impact on EPS?

No. So what we said is we're expecting $2 million to $3 million of revenue from iConclude in the year and the amounts were certainly insignificant to the overall revenue level of the first quarter.

Okay, all right. Thank you.

Thanks, Tom.

We'll go ahead and go next to Katharine Egbert with Jefferies. Hi, good morning. I just wanted to clarify on Cisco. So they're on a June fiscal year-end -- .

July. Katharine, they're on a July fiscal year-end.

Okay. Fair enough. If they're in July fiscal year-end, so the deals you sign with them in their July quarter and your July quarter, you'll start seeing in October?

From a revenue standpoint. Let me explain to you what the lag is, because it's a little confusing. Basically, the way the contract works is Cisco reports to us 45 days after they achieve revenue on the deals. They typically, when they book a deal, the way Cisco works, particularly if they book it toward the end of the quarter, they typically won't ship it until the following quarter. So basically they'll recognize -- what will happen is they'll recognize revenue in the quarter after they ship and they'll report to us 45 days after the close of that quarter, i.e., the quarter they recognize revenue not the quarter they book it. So if they book a deal, there's typically a quarter lag on the revenue recognition and then they report to us 45 days after the end of that quarter that it lagged into.

Okay. So deals that they sign in July, you'll start really seeing meaningful uptick in your January quarter? Is that right?

Perfect, correct, yes.

Okay, got it. And then when you say your bookings are going to be up at least 60% this year, are you including your outlook for Cisco in that right now?

Yes. That's all inclusive, yes.

Okay. And then I'm just wondering with your bookings being up so much, why aren't you raising your revenue guidance for the year?

Well, the revenue guidance for the year is a 50% growth in revenue and a 60% growth in bookings. And that's about the ratio that we expect to have going forward.

Cause it sounds like the pipeline increased quite a bit from last quarter to this quarter. Is that true?

Oh, yes, there's no question that the pipeline increased, but we will wait until we beat until we raise and do anything like that, but we do have good pipeline activity and we're excited about that.

Okay, fair enough. Thanks.

Thank you. We'll go next to Brendan McCabe with CIBC World Markets.

Brendan? Amy, let's go to the next caller, please.

We'll go next to Denny Fish with JMP Securities.

Just a couple quick questions. Just want to make sure I understood right. You were talking about cost of revenues were impacted by the fact that you had royalties paid to iConclude during the quarter?

That's right.

So the revenue contribution was insignificant? I'm just trying to reconcile that commentary.

Sure. As you can see in our financials, amount of cost of license that we incur typically isn't that high and this quarter it was almost $1 million. Under a reseller agreement, as you can imagine, the revenue splits are pretty -- they're more heavily weighted towards the vendor than the reseller. So the contribution that we had to give to them in terms of royalties as a percentage of the revenue we recognized was relatively high. That's what you can see in the cost of license revenue line.

Okay. So that implies you recognized at least $1 million from iConclude?

It was less than $1 million.

It was less than $1 million?

That's right.

Yet you recognized cost of $1 million?

So, our costs they were around $750,000 approximately, Denny, and that's not exclusive to iConclude. We have other third party royalties in there as well.

Okay, understood. Looking at the pipeline for a moment. What are you seeing -- as you talk about your pilot activity being up, pipeline being strong, maybe give a little color on length of sales cycle, sort of competitive environment today relative to say a year ago? Are we starting to see sort of a compression in time associated with the pilots, or are they still fairly lengthy? Maybe a little commentary there?

The big difference that we've seen, and I just want to be a little bit cautious in that when we say pipeline, those things are in the pipeline, not through the pipeline. So we don't have all the data on how long those cycles are going to be, but one of the things that's very encouraging to our sales cycle-wise is our time to get to the pilot or proof of concept event has basically shrunk considerably by about 50% with the -- since we've added the iConclude product to the solution. And this a little better than we had hoped for, but it's basically -- the essential theory behind the acquisition was that there is a pretty big set of objections that we had trouble getting past. Now in addition to that, we're just getting more people into proof of concept. So we got kind of two benefits. One, we get in there faster and two, we get more people in.

That's what's resulted in last quarter using that product we were able to basically -- we had announced the deal the whole time we closed so that the embolic customers knew we were acquiring them. We were able to more than double the number of proof of concepts, which led to a big increase in, basically, forecasted pipeline. So that's what we've seen. That all around has been -- was much better that activity, that early activity was much better in Q1. Now the Q1 sales number -- the Q1 revenue number was a result of Q4 activity pre iConclude, regular run-of-the-mill quarter. Q2 will be the first kind of results quarter that has that dynamic in it and we'll have a lot more data at that time.

Okay, great. Just one last question. You cited two large financial services wins in the quarter, Goldman and Merrill. Can you just comment on what the competitive environment was there and why you won and which products you sold?

So, both of those, as you would imagine giving some of the recent activity with BladeLogic, the reasons that both of those companies selected us were due to, I would say, primarily the scale of the product. And that's kind of a blunt term for what I'm talking about in that. So there's things that range from how good a job does the product do at supporting multiple data centers and both of those companies, as you imagine, have multiple large data centers, but the other thing that was significant, extremely significant was the ability for multiple people to work together.

So for example, if you have an expert in Oracle and an expert in Solaris and a difference expert in BEA and you want them to all set standards for what they know about, but then to have a fourth person assemble that and deliver that, that's very hard to do in any competitive solution and it's very straight forward in our product. Those were the kinds of things that led to our selection. should say that both companies -- well, Goldman purchased both the iConclude Process Automation System, they actually bought that from iConclude before the acquisition, and the server product and then Merrill purchased through or actually through us the network product and the server product. So I'm sure that was a factor as well.

Okay, great. Thank you.

We'll take the next question from Mark Kelleher with Canaccord Adams.

Thanks. Just so I can -- just so I'm sure I understand how iConclude is really helping you, really what it's doing is lowering the barriers or the pushbacks that you're getting for customer for selling your server and network automation, is that kind of -- it's a key value?

Let me walk through that because it's pretty complicated, but it's critically important. So when we go into sell, basically the Server Automation System and the Network Automation System, the value proposition is we will make you a lot more efficient by automating the tasks that your people do. Our software will do it for them. The problem with that is that when we go in, the customer says, well, that's great, I love to be more efficient and I even accept that I'm inefficient, but the way that I'm inefficient, I still do the work. That is, I've got a set of people, I've got a set of processes, I have a set of controls on those processes and they're not well understood, they're not well documented, so if I bring in your software to do things more efficiently than I do them today inefficiently, I'm going to have to change those people, those processes, and those controls and I do not have time to do that project. That is the number one sales objection by far that we get.

So with iConclude, the fundamental thing that iConclude does is it says, look, we will take your existing process, we will document it with our software in three days, we'll tie in all your existing control systems and we'll tie that to our back-end automation and so you don't have to worry about all that. In fact, we'll come in and we will do it in the proof of concept by interviewing your people. We'll give you a free service to get your processes documented in the meanwhile and that's just a very important -- it's just a very important factor. It is 95% of why we acquired the Company. So it's really, really important to understand that phenomenon as you look at the iConclude product.

So if we're trying to judge the success of the iConclude acquisition, it would be more in the acceleration of the core server storage network products than necessarily the iConclude revenue itself?

That is how we're viewing it.

And then if we -- so if we take that sort of scenario and we flip it into the next quarter, where you're going to be up several million dollars on the topline, what exactly are the costs that are inhibiting you from getting more -- from improving on the $0.01 loss you did this quarter?

So the big thing is we pick up the iConclude expense of about $2 million on the bottom-line and so that's the big factor there. And we think we have a lot of acceleration in terms of earnings in the back half of the year and that's -- so we plan the business that way. We could have taken some of the other expenses down to pay for the iConclude things, but we think the top-line momentum is good enough that it makes more sense to run earnings flat quarter to quarter and then pick it up in the back half.

Okay, great. Thanks.

We'll take our next question from Heather O'Loughlin with America's Growth Capital.

Hi. I have a question about the CheckFree win against BladeLogic. Can you walk us through that win and were there any others that you think are also representative of the strengths that you have against BladeLogic apart from what you've already talked about? And then I have a follow-up.

Sure. Let me be clear. The CheckFree one was a displacement. So CheckFree was and, I think for about the next 30 days, will be a BladeLogic customer. They then -- they got to about, I think, about a 400 node deployment with BladeLogic and then when they went to expand it to the enterprise, they did a -- they reopened it up to competition.

Okay.

In that competition was us, BladeLogic, and HP.

Okay.

And we were able to basically win the evaluation. It was on things pretty similar. They had some much more kind of specific issues that they experienced and knew about with BladeLogic, but they weren't that dissimilar to either what we've seen in other displacements or what we saw at Goldman and Merrill. There were also customer support process things that they were concerned with.

Is it that BladeLogic doesn't scale? I'm trying to get a sense of where you're really, with all the different attributes the software, bigger software brings, is it -- what are the two or three things that are allowing you to take share from BladeLogic and do you think that will accelerate going forward?

Well, there's really three places that we're very strong versus them. The first is scale. Having the super large deployment at EDS and so forth has helped us to have to work through all of those issues pretty easy early in the product architecture and scale is in a few dimensions. So it's number of nodes, number of data centers, number of people working together, number of objects in the system, all those kinds of things. So, in big account we have a lot of strength and that's reflected in our customer base. The second is an integration of all of the elements of the data center. So server network, storage and process and integration is also along a couple of dimensions. Most importantly, an integrated data model, so a network engineer and a server engineer have a common view of the -- a common view of what the overall system looks like. Secondly, an integrated infrastructure. So what does that mean? One agent on the box to manage server or storage. One multi-master network to link together all of the products, one satellite network for remote data center access, no matter if you're network, server or storage.

So all those kind of things. Because we've made these acquisitions early, we have -- so we have the products, which is nice to buy from one vendor, but more importantly we have the products integrated. And so that is a significant lead. Then the third thing that we've done pretty consistently better than them is just reputation in terms of our willingness to make the product work in environments where it might not work initially. With products like ours or BladeLogic's, you're going to run into some customer environments that have things that you didn't anticipate. They've taken what I would say is the, in the short-term is probably a better path in that they will say, okay, we sold it to you, we've got the money, we're going to move to the next one, whereas we've made an investment in making sure that the customers that we have stay satisfied. So that's where you get the disparity in the displacements.

Great, that's very helpful. Then on the M&A front, what are you thinking about this year? Are you expecting to make more acquisitions, do you expect to make relatively small acquisitions, if you are looking at that relative to your history? Trying to get a sense of what you might be looking at over the next 12 to 18 months.

Right now, I'll say that operationally we have our hands full with integrating the products that we've acquired as we're planning to ship storage and we just acquired iConclude. So there is -- we're certainly not on the prowl or anything like that. We definitely have -- we don't have anything to report at this time, but we do have a bit of integration work to do in the short-term.

Okay, great. Thank you.

We'll take the next question from Michael Huang with ThinkEquity.

Thanks very much, good morning. A few questions. The first, in terms of the pilot activity picking up as a result of iConclude and I think you had mentioned this is better than you expected. But in terms of your bookings guidance for the year, relatively consistent with your previous view, I believe. Does that imply that guidance for, bookings guidance for the year is a little bit more conservative than previously?

We hope so, but I just want to reiterate that a little of that remains to be seen. So big increase in activity. There's a difference between activity and closed deals. So we're not at a point where we can say that -- we're not at a point where I would say comfortably that it's conservative or it's getting more conservative. I think we're very enthused about the activity that we're getting, but let's be clear that the pipeline increase and the proof of concept increase at this stage is still activity and we haven't seen it come all the way through to bookings, which are the things that would cause us to either change the forecast or say, oh, yes, we've got a better conservatism built in.

Great. Just in terms of kind of the quality or the scope of the proof of concept that you guys running, do they represent more multi-product deals tied together with iConclude than you would have anticipated? The virtue of iConclude is that it ties together multiple product categories. Is that kind of the proof of concepts that are running?

Yes. So if the pipeline bears out, and like I said that's an if, we think that iConclude, the iConclude product will attach to -- in the second quarter, it looks like it will attach to half or more of the server deals, which is very fast pickup. So if you remember our network, the first quarter we are at about 10%. So on the pipeline, we've got more than half of the deals have been proof of concept together and we think that -- so if that flows through to actual orders, than the cross-sell on those two is going to be very high.

Great. In terms of kind of the key assumptions in your bookings guidance for the year with respect to win rates and products including the storage automation product, could you comment a little bit on how you see that trending over the next several quarters given kind of the breadth of solution that you actually have now?

The POC activity pickup is pretty related to the win rate. We're, like I said, a little early to talk about win rate, let's celebrate on the five yard line here. But what part of the increase in proof of concept, so there's removal objections and then there's also in talking to the guys in the sales force, there's a confidence to go into deals that we'd normally look at as, gee, that criteria isn't going to suit us well. So every product in the market has its strengths and there are some deals that are really very well designed for NHP or a BladeLogic or whomever. Those deals, and it's a relatively small percentage of the deals, but those are deals that we might stay away from in the past that now we would go in through the strength of the integrated product line and get to the storage guy or get to somebody who's running the network operation center who's got a run-book problem and try and turn those deals. So part of the pickup in activity is definitely going into deals that we didn't go into in the past.

Great. Last question for you. In terms of the integration of the teams per iConclude, have you been able to retain the key personnel? And could you comment on how quickly your existing sales reps are getting trained on iConclude? Thanks.

Sure. In terms of personnel retention, in terms of the engineering team and the marketing team, which were the key teams that we, of course, were looking to retain. Today we have 100% retention. We're like three days or a little more, maybe 30 days into the closing of the deal, so I'm not getting overexcited about that. I've had a lot of discussions with the really key guys and we're working hard to make sure that the top people in that organization stay on, and that's certainly very important to us. In terms of iConclude -- what was the second part of the question?

Training.

Training, sorry about that. (Inaudible) Our sales force has been trained on their product and all of our SCs have been trained on their product. We have -- but I would characterize that as our sales engineers are not yet experts in the iConclude products and we have expert training, which we expect to complete this quarter for the majority of those guys so that in a kind of pure process automation deal they'd be effective. So right now if we run into a pure process automation deal, we'll use one of the existing iConclude personnel, we're looking to transition that quickly. That's a longer training instead of a couple of days, it's about a week. So we expect that to be complete by the end of the quarter.

Great. Thanks very much, guys.

We'll take the next question from Brendan Barnicle with Pacific Crest Securities.

Thanks. I had a question to follow-up on the bookings guidance for Q2 and for the full year. Looks like, based on that guidance, we should expect a pretty big ramp-up, sequential ramp-up in deferred revenue in Q2. Looks like about the highest level sequentially we've seen in the last, maybe since '05. And if we -- and then through the remainder of the year, it looks like it gets a little bit slower on a sequential basis. Is that a right assumption and why would we see the big spike up in Q2 and then sort of a little less dramatic increases in the second half of the year?

Actually, when I think about it, you're right, there's certainly a big uptick in the second quarter's bookings rate. We expect book-to-bill to be positive, but we expect bookings to continue to accelerate for the balance of the year to get to the 60% growth rate for the full year. So from a bookings perspective, I think that the ramp actually doesn't flatten, it actually continues to grow.

Okay, great. Then based on that, we should also see, I would assume, improving cash flow. So we should continue to see sequential improvement in cash flow in the second quarter as well over what we saw in Q1?

Yes. Cash flow is going to roughly follow earnings, which it has historically and that's what we expect going forward.

Okay, great. And then lastly, on the 12% to 16% op margins for next year, where do you see the main leverage coming for that as we look out to next year's at a high level?

The main leverage, it's across the board, but certainly G&A contributes first followed by R&D, followed by our Professional Services organization and then we feed the monster of sales and marketing.

Terrific. Thank you.

We'll take the next question from Victor Churamani with Lehman Brothers.

Hi, guys.

Hi, Vick. How you doing?

Good, good. Just a couple of follow-ups. The first on Cisco. You guys had mentioned last quarter that Cisco had managed two deals over $1 million and then also generated about, I think, $4.8 million or so, if I remember them correctly, for pipeline activity. Can you give us some metrics of what you saw this quarter? And also, how many Cisco sales reps are fully educated on your product set? And then I have a few follow-ups.

Okay. So I would love to give you this quarter's number on that. Cisco actually listened to our last quarter's call and they called me and they said do not give out our bookings numbers anymore and they referred to that in the script and I apologize for not being able to do that. So we're going to have to report our numbers from Cisco, which, again as Dave said, about 20% of the $4.8 showed up in this quarter and there's a couple quarter lag. So we were -- because we get so many questions on it, we wanted to give a little more advanced indication, but we really can't. We did also, Dave -- the other important thing that Dave said about Cisco in the script was that Q2 is the first quarter that more of their deals are going to come out of their pipeline than our pipeline, which is really, really significant in that off of that when it flows through, that's when you'll see them not like hurting our bookings but helping our bookings because instead of cutting our bookings in half for the deals they took from us, they're going to be contributing their own deals in, which will be positive. That's really good news on that deal. But that's as much as we can say on that.

Okay. I guess then if you look at it, if the second half bookings numbers it looks like year-over-year growth can come to the high 60s or even touch 70s. Is that partially because -- mainly because Cisco? Is that you getting the big hockey stick effect?

Cisco is definitely a contributor to that phenomenon, absolutely, because, right, they're depressing our bookings growth rate in the first half and then they are contributing in the second half, so it's a double whammy in terms of the growth rate in particular.

Okay. And then on iConclude, the $2 million is that a surprise or was that something that was already factored in when you guys were going into the year in terms of -- ?

That was absolutely factored in. It's their people. So $2 million is basically what it cost to keep all the brilliant engineers and product managers and product marketeers over there in the Company, which we absolutely need. So that was the original plan.

Okay. Two quick questions. Just on the Virtualization Director product, Ben, if you can share any color in terms of early trends, what you've seen in the market in terms of adoption or proof of concepts? And then lastly, have you guys seen any impact in your business from some of the hardware guys having a tough Q1? I know you guys are off quarter, but have you seen any impact in North America as it relates to your business? Thanks.

Okay. So in terms of us seeing an impact, you've seen our Q1, so that's our Q1 and I would say our Q1 from a performance standpoint was in-line with how we planned it to go. One of the things that Dave mentioned was 70% of our new bookings came from, or I'm actually sure if he mentioned this, that 70% of our bookings in the quarter came from new customers as opposed to 30% from the installed base. So in terms of the new activity was actually pretty good in the quarter and, again, we're on pretty level numbers, so we don't see the whole market. But macro environment-wise, we were fine and I wouldn't say that based on the pipeline we had going in, we closed what we thought we would close. I think we feel fine about that. In terms of Virtualization Director, I'd say -- the way I would characterize that product is we're getting really good feedback for the customers, it makes them very comfortable directionally with where we're going. It attaches to most of the server deals that we sell, particularly -- well, all the server deals that we sell if they have virtualization deployed.

Now, having said that, virtualization deployment's in production and are still a relatively very small percentage of the overall servers in production in a typical account . Well, Goldman Sachs, which is -- I would consider a really leading edge IT shop, they're very sophisticated, probably some of the smartest IT guys in the world are there, they're highly committed to virtualization. They spend a lot of time on it in the lab and so forth, but in production they have yet to roll it out. That's not atypical, so that we see as a building trend, but not one that's fully engaged, at least in our part of the market.

How many -- do you have many customers on the product right now or what would be your assumption going into the year for that product set?

So there's a number of customers on the product and then there's a number of nodes within those customers on the product. A fairly high percentage of our customers are getting it. I'd say well over half. But in terms of the number of nodes that they're buying it for, it's relatively small and insignificant right now.

Okay. And then, Ben, just from the North American question, I was -- my question was more focused in terms of what are the drivers for your businesses basically purchasing new boxes. If 100 shipments are slower, do you -- have you guys seen any impact or do you see most of your business coming from people switching from manual to automated solutions?

I think that the -- if you look at our business overall on the margin, new server shipments, over time it's significant and particularly the combination of new server shipments and virtualized servers, so the creation of kind of new things to manage is important. But in the short-term, you got to remember that the install base of servers is both largely unmanaged and dwarfs the number of -- the marginal differences in new server shipments that are coming out on the hardware side. It really didn't impact us much. And you can see from the numbers, it wasn't a high impact on us and that kind of thing, depending on -- the big thing for us is over time how many managed nodes, but in any given year, how many servers are shipped doesn't really drive the business that much. It's a pretty marginal factor.

Sounds good. Thank you.

Thanks.

We'll go next to Brendan McCabe with CIBC World Markets.

How you doing, guys? Can you hear me now? Works better with the mute button off. So a quick question. Cash flow from operation look pretty strong. Can you guys just pull out a couple of line items that were pretty impactful in getting to that number?

I think the big -- .

The big one, Brenda, was accounts receivable. We ended last quarter with well over $30 million in receivables and some folks said, jeez, what's up with DSOs and we said, not a problem. And we collected all that money. So that was a big contributor.

Okay. Then just one more thing on the Cisco deal, when do you guys see the cash from the Cisco?

Cisco currently is paying us on a quarterly basis.

Okay. And then last question is, on guidance for this year, are there any particular line items, particularly in the back half of the year, where we should look to see leverage, because clearly there's going to be some sort of pretty big ramp in the back half of the year?

Yes, certainly, I would look at G&A and R&D.

Okay. That's really all I had, guys.

Thanks, Brendan.

Thanks.

We'll take a follow-up from Tom Curlin with RBC Capital Markets.

Hi, can you give us the percentage of bookings from new customers, which I think is a metric you've provided in prior quarters?

Yes, 70%.

Okay, excellent. Thank you.

We'll take a follow-up from Heather O'Loughlin with America's Growth Capital.

Hi, again. Do you think it's likely that you'll be giving iConclude executives more stock and is that something we should think about in terms of our stock count?

Yes, we don't have necessarily any plans. We had in the acquisition and I think all that should be factored in or a material amount of that should be factored in.

And then what about international? Can you talk about the business there and what you're doing to either grow the business or manage the business more aggressively or go into different regional markets? I'm just curious what's going on there.

Sure, that's a great question. International performance, as you've seen, was a little underwhelming as far as the quarter went and let me -- I'll talk about the strength first and then talk about sort of where we are and how it reflects for the overall business. In Asia-Pacific we're seeing a lot of good starts in regions such as -- we got our first deal -- we just put a rep in Australia and he got a deal his first quarter in and that was really good, a significant deal. We're off to a great start in China. Our Korean business looks pretty good. We've not developed Japan that well and we're currently doing some work there personnel-wise. Europe has been -- was, as you know, disappointing and we've brought in a new head of EMEA about a quarter and a half ago and we've been -- I've been impressed by what he's done operationally so far, but certainly that hasn't flowed through yet. We would expect and I am expecting the most growth to come from EMEA in terms of internationally. The impact on the overall businesses that the U.S. growth rate definitely had a drag on it by EMEA, which really didn't grow at all year-over-year. So that's just something that we, from an execution standpoint, have to do a much better job on.

Great, thank you.

We'll go next to Todd Raker with Deutsche Bank.

Hi, this is [Piten Depunjet] for Todd Raker. Just a couple of questions. For the last quarter you had some EDS booking showing up in the non-EDS line. Was there anything in this quarter?

No.

Okay. Second question I had was do you see any interest from big data center windows in this space? Are you seeing any of these guys getting more interested?

Well, Equinix is a customer, Verizon business is a customer, Centiguard is a customer. So we have a lot of business there currently and we think that's a pretty good segment in general for us just because the product fits in there fairly well.

Okay. I had actually -- my question was more on the competition side. Do you see -- apart from BladeLogic, who else do you see in the data center space?

From a competition standpoint, I think you also have to put Hewlett Packard in that category in that they certainly show up, although their product set is not as good as BladeLogic's currently. But they've got the breadth.

Do you get a sense that they are interested to get like more involved within this space?

There's no question of that. In terms of the large companies that would like to be more significant in our space and who view it as an interesting market, they think in that category you could put Hewlett-Packard, EMC, Symantec, IBM, and CA are the ones who I think that strategically indicate, give strong indication that that is a market that they would like to participate in for sure. And there are others as well, but those are the most significant.

Okay. And just one last question about which verticals do you see your pipeline the strongest?

So the pipeline -- financial services has been, from a dollar value, by far the best vertical for us because really they have the biggest environments and the most sophisticated IT people. That works well to us because our strengths are large environments and when people really know what they're doing, we tend to get selected. So that has been historically the best, but other environments like that also have been pretty good. So teleco looks like a very big segment going forward. Retail, as you know, we've got Target and Home Depot and Safeway and Bed Bath and Beyond and customers like that, so retail has been very good. And high-tech is also been good with companies like MSN, AMD, Cadence. Those are probably the top sectors as well as governments. We now have government customers in the U.S., U.K., and in Australia, which is a pretty good start for the government business.

Okay, Ben, thanks a lot.

Thank you.

We'll take a follow-up from Denny Fish with JMP Securities.

Thanks, guys. Just one quick follow-up on international. I think the number was 10% of revenue during the quarter was from international, is that right?

That is correct.

Okay. So as we think about that throughout the year, Q3 the last couple of years seems to be the softest quarter internationally. How are you thinking about that as you plan internally for the year? Are you anticipating seasonal weakness in Q3 or do you think improved execution sort of outweighs the seasonal weakness? Just trying to get a feel for that?

Yes, Europe, is typically going to be seasonally weak in Q3. However, I think that our execution has been weak enough in Q1 that we would expect Q3 to be superior to Q1 for sure internationally, or I'm going to be real mad. The pipeline increase, we do have a pretty good contribution coming from EMEA, so we're seeing better activity there and then they're also competing more effectively. There's a lot of things that are improving there. I don't want to get overly optimistic about how well they're going to do until they show me something, but I have a lot of confidence in Colin Roland, who runs that region and I think he's going to do good things throughout the year.

All right, thank you.

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

Great. Thanks, Amy, for your help today, appreciate that. Thanks, everyone, for your participation this morning. Have a good morning.

That does conclude today's conference. You may disconnect at this time.