甲骨文 (ORCL) 2005 Q1 法說會逐字稿

Good day everyone and welcome to the StorageTek first quarter 2005 financial results conference call.

This call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to the Interim Director of Investor Relations, Ms. Dana Johnson.

Please go ahead, ma'am.

Thank you Carol.

Good afternoon and welcome to StorageTek's first quarter 2005 earnings call.

With me today is Pat Martin, StorageTek's Chairman, President and CEO, and Bobby Kocol, StorageTek's, Chief Financial Officer.

Hopefully you've already received copies of our earnings release, if not, please call us at 303-673-5950 or check our website at www.storagetek.com.

Before we start, let me remind you that during the course of this conference call we may provide information, which constitutes forward-looking statements, including statements regarding future events.

Actual results may differ materially.

Any forward-looking statements that we make today are subject to risks and uncertainties, as described in the company's reports on form 10-K, 10-Q and 8-K that are filed with the SEC and the 10-Q for the first quarter 2005 once it has been filed.

At this time, I'd like to turn the call over to Pat Martin.

Thank you, Dana.

Good afternoon, everyone, and thank you for joining us today.

I'll make a few opening remarks and then I'll turn it over to Bobby who will cover some of the additional financial information and our first quarter performance.

By now I'm sure you've had the opportunity to read our earnings release.

We generated just under $500 million in revenue and earned $0.22 per share up from $0.21 per share in the same period of last year.

While we grew our profits on a year-over-year basis, this is not the quarter that we expected to deliver.

You will recall that we had a very strong fourth quarter, one that substantially exceeded expectations, for those internally and those in the financial community.

As a result, we entered this year with a backlog and pipeline of business prospects that was significantly smaller than a year ago.

However, we felt that with our new products we were well positioned to rebuild the pipeline and deliver a strong Q1.

And indeed, that was the case in the early part of the quarter.

As we entered the last few weeks of the quarter we had enough deals that were far enough along that we were still expecting to deliver results that were more in line with our own expectations.

Obviously, that didn't happen.

The good news is that we did not lose transactions.

Instead, they were delayed or pushed out to later quarters.

And we find that we were not unique in this situation.

As evidenced by several others in our industry, many customers in the quarter delayed purchases for a variety of reasons.

I must add that the transactions that we were involved with at the end of the quarter is not business that we lost, it is business that we now must go out and close in the current and following quarters.

Having said that, our current backlog and pipeline positions have improved from the start of the first quarter of the year and they have improved from the second quarter of last year.

And we expect to deliver better results for the remainder of the year.

That is, we expect to return to year-over-year revenue growth in the second quarter and get back to delivering the earnings growth we anticipated coming into the year.

In addition, there were a significant amount of positive results that we delivered in the first quarter that should not be overlooked.

Our services business continues to perform well.

Service revenue was up 6% for the quarter, and we continue to grow our professional services expertise, which delivered double-digit revenue growth in the quarter.

We continued to see a lot of opportunity in the services area.

Our customers look to our professional services as a key enabler and a key component required to successfully integrate and implement an information lifecycle management solution.

We believe that the addressable markets will continue to be primary storage, data protection and archival requirements.

We are beginning to see the disruption in the primary storage market as new technologies come to market.

Through our existing offerings and those that will be coming out throughout the year, we are enabling our customers to make back up and recovery simple and reliable.

As corporations identify and establish long-term archival policies and requirements, we bring hardware and software services that support them in this process.

Customers are adopting technologies and services in ways they never have before.

We won several new accounts in the first quarter due in large part to our ILM solutions.

As an example one large medical instruments systems provider chose a StorageTek ILM solution including our SL8500, FlexLine disk and professional services.

The customer consolidated three competitor libraries into a single SL8500 and chose the SL8500 because of its redundancy features.

Revenue from our automated tape solutions continued to be strong and was up 70% from the first quarter of last year.

Our SL8500 high-end library and our SL500 midrange library both are gaining widespread market acceptance.

During the first quarter we surpassed our 500th SL500 modular library system shipped.

Customers are using this system to archive and protect their business critical information.

And the SL500 was also named Datamation's 2005 product of the year.

Our automated tape solutions are the preferred solutions of choice for data protection and archiving in the mid range, and especially, the high-end compute environments.

One customer, a major financial services customer was struggling to migrate from a mainframe to an open systems environment.

Continual upgrades to the main frame resulted an increasingly higher costs.

The customer purchased two SL8500's with drives and our professional services team not only helped the customer reduce backup time, but reduced cost as well.

This is just one example in the quarter where the Stream Line library saved the customer time and money, while we made backup and recovery simpler, more predictable and more reliable.

As we look forward throughout the year, we'll be delivering enhancements to automation and VSM product lines and will launch our next generation tape drive and archive software solution.

With our current product line and these new offerings, we'll continue to distance ourselves from the competition, which should translate into improved revenue performance.

The RD&E investments that we've made over the past few years have produced the steady stream of new solutions for our customers.

Solutions that have spanned the total storage spectrum from tape to automation to our ILM offerings.

This year we're maintaining the pace of our traditional new product introductions, refreshing our product line and introducing next generation storage solutions.

Our disk revenue declined a disappointing 27% from the first quarter of 2004.

Clearly, part of the transactions that were pushed out of the quarter included some of our ILM solutions.

Here again, this is more pipeline than anything else.

However, our customers continue to recognize they need an additional tier of storage with price performance characteristics that bridge the gap between disk and tape.

We revenued 45% more Bladestore in this quarter than we did in Q1 of last year.

Our Bladestore is being selected as part of the solution in a variety of environments and for a variety of applications, such as disk to disk backup recovery, which is primarily targeted to customers who are having shrinking backup windows.

Bladestore gives them the opportunity to do a two-stage backup, moving their backup to ATA very rapidly, and then on to tape.

Going forward throughout the year, we'll be bringing out our new ATA product offering and new ILM software solutions, and thus, we're expecting stronger performance in this business area in the quarters ahead.

In the quarter we had a couple of wins in our open systems disk business that I would like to talk about.

The first transaction was with the federal government for disk and networking components.

We were able to compete and win this business based on our ability to combine our Flexline disk subsystem, along with a high-performance file system.

The agency had rigid demands for data sharing and data movement across a large enterprise storage environment and SAN infrastructure.

In another transaction we won a major surveillance opportunity with the Canadian government.

By partnering with a surveillance software solutions firm, we were able to provide a complete solution, using a FlexLine 280 to provide a cost effective and reliable infrastructure on which to store this data with the ability to have a rapid recall when needed.

In the second phase of this implementation, the customer will be adding back-end tape archive to accomplish the long-term storage requirements of this data.

Our ability to provide a complete ILM solution that will manage data from creation to destruction was critical in our ability to win this deal.

Coming off a very strong fourth quarter and anticipating a continuing strong IT spend in the first quarter, we made investments and expanded our sales channel.

This hiring actually started towards the end of last year.

Over the last two quarters, we added over 80 quality people to our sales force around the world.

As these employees become more familiar with our products and services, we expect as to be productive towards the end of the year.

We also filled some key executive positions in the year.

We hired Brenda Zawatski as Vice President and General Manager of information life cycle management solutions.

Her background is an ideal fit to help our customers look for ways to achieve primary storage efficiency, simplifyand automate their backup and recovery processes, and create flexible compliance and archiving architecture.

Prior to joining us, Brenda was Vice President of product and solutions marketing for VERITAS Software, where she was responsible for product and solutions strategy, market/customer segmentation, marketing campaigns and product launches.

Her wealth of experience and product management leadership skills will be a major asset to strengthen our market focus and accelerate growth.

Prior to VERITAS, Brenda built a distinguished 20-year career at IBM.

In addition to Brenda, we recently hired Nigel Dessau to the position of Chief Marketing Officer, where he'll be responsible for all aspects of the company's marketing, communication and branding efforts.

Nigel has spent nearly 20 years in sales, marketing and executive management positions at IBM, in both the US and Europe.

And most recently was Vice President of the Virtualization Solutions Systems and technology group.

Also, John Kitlen has joined us as Director of Internal Audit.

He came from Level 3 Communications where he led their internal audit function.

John is a CPAand began his career at Deloitte Touche.

I would be remiss if I didn't mention that for the fourth consecutive year, "Fortune" magazine has named StorageTek number one in the computer peripheral category in their annual ranking of America's most admired companies.

This is a great tribute not only to the employees of StorageTek, but also, to our customers and partners, who have contributed to our ongoing success.

As I reflect on the quarter, it is clear that the IT market is choppy, as it has been for the past few years now.

While customers are more optimistic, they continue to be cautious.

Having said this, I expect that the IT environment will improve throughout the year.

Of the many customers I've met with throughout the quarter, most were more optimistic than they were a year ago.

However, the majority are still telling me that they haven't seen any real growth in their budgets.

These sentiments were recently substantiated by a recent IDC survey.

Our customers continue to try to do more within their existing spending limits and with our information life cycle management strategy, is singularly focused on helping them manage exponential data growth while lowering costs and enhancing the efficiency of their overall storage operations.

As I look to the remainder of the year, I'm optimistic.

As I said, we're entering the quarter with a stronger backlog and pipeline than we started the year with.

We will be bringing out new products and product enhancements in our tape drive, our tape automation, our ATA family, our virtualization products for both open and MVS, and our ILM software suite.

These products and enhancements will continue to strengthen our position in the marketplace, while we continue to expand our addressable markets.

More importantly, they match the current IT environment, where customer needs are increasing, as their budgets are shrinking.

Through our expanded services offerings and cutting edge technologies, we have an opportunity to position ourselves as the premier partner with our customers.

Similar to other companies in our industry, we experienced a more cautious IT spending environment in the first quarter than we expected coming into the year.

While we believe the overall environment as well as our own circumstances with new product releases will improve as the year progresses, taking into account our first quarter results, it would be prudent to adjust our revenue growth expectations for the year to be in the 2 to 4% range over last year's results.

However, even with this slight decline in our revenue forecast for the year, we still expect to deliver around $260 million of pretax income for the full year.

At this time I'd like to turn it over to Bobby Kocol.

Thank you, Pat.

In order to provide additional insight into our first quarter, let me take a little time to go over some of our results in more detail.

First quarter revenues of 499 million resulted in earnings of $0.22 per diluted share, a slight improvement over Q1 of last year.

Product sales in the first quarter were 266 million, made up of 212 million in tape sales, 32 million in disk, and 22 million in network and other sales.

Service revenues increased to 233 million, an increase of 6% over Q1 of last year.

Geographically, North America represented about 46% of the total worldwide revenue, Europe, approximately 39%, with the Pacific Rimand Latin America making up the rest.

On a year-over-year basis, North American revenues were down 8%, European revenues down 1%.

Asia was down 8%, while Latin American revenues were up 29%.

Overall on a consolidated basis, excluding our hedging activities currency impacts were favorable to revenue on a year-over-year basis by about three points.

Most of the revenue shortfall we experienced was due to direct sales transactions that have been pushed out into subsequent quarters.

As a result of that, our total product sales were skewed to a higher percentage of indirect sales, which represented about 57% of the total.

But going forward, we see this getting back to more traditional splits with indirect sales being around 45 to 50% of the total.

Working down the P&L, most of the key financial metrics remain very solid.

Total gross margins in the quarter were 47%, an increase of 70 basis points from Q1 of last year.

Product margins exceeded 50%, an improvement of 140 basis points over last year, mostly due to a product mix skewed toward more tape automation and virtual software sales.

Our efforts in driving operationa, efficiencies and ongoing cost reduction activities have continued, and clearly contributed to the strength we had in product margins.

As we mentioned on our earnings call last quarter, the upcoming year will be somewhat different than prior years with respect to product margins.

While the first quarter was somewhat of an aberration regarding product margins, keep in mind many of the offerings we are bringing to the market this year are aimed at the small and medium business segments.

So as we sell more tape and disk solutions into the SMB space and do this through our indirect channels, where we typically achieve lower margins on a percentage basis, there should be downward pressure at the product margin level.

In light of that, we are anticipating annualized product margins to be flat or perhaps slightly below last year's levels.

As the revenue mix develops throughout the year, we should be able to get a clearer picture of how this will work out.

Service margins for the quarter were 43%, an increase of 50 basis points year-over-year.

We continued to see solid performance in this area.

Together, product support and multi-vendor system support together grew 4% year-over-year.

And as expected, our professional services revenue grew 15% over Q1 of last year, and increased to12% of the total services revenue.

The mix of services should continue to shift to more professional services, which carry lower gross margins.

So while we are slightly ahead of our guidance on service margins after the first quarter results, it is still appropriate to assume annualized service margins will be relatively flat compared to last year's levels.

Combining both products and services, total gross margins should be flat, to slightly down for the full year.

Total operating expenses for the first quarter were 212 million, relatively flat to last year.

R&D expenditures were 47 million, while SG&A expenses were 165 million.

First quarter R&D expenditures were lighter than anticipated as prototype material for new product launches were minimal.

With significant product launch activity on the forefront, we anticipate R&D expenditures to climb back to the $50 million range per quarter.

SG&A expenses where very close to last years levels and our guidance of SG&A being around 28% for the full year remains intact.

Net interest income added approximately 7 million to pretax earnings, and finally, shifts in the income projections through our international operations should allow our annual effective tax rate to be around 21%, slightly better than we anticipated, although immaterial to this quarter's results.

The balance sheet and financial strength of StorageTek continue to remain solid.

Cash and investment balances are approaching $1.2 billion.

This includes us investing another 57 million in the first quarter through the repurchase of roughly 1.8 million shares of our stock.

At this pace, we would exhaust the current share repurchase authorization somewhere near the middle of next year.

Cash flow from operations was $52 million for the quarter.

DSO at 79 days is six days better than Q1 of last year.

Using the average accounts receivable balance during the quarter, instead of the ending balance, which is skewed by end of quarter shipments, DSO's were 64 days.

Inventory levels were $134million and inventory turns were just under four.

Head count was just above 7100 at the end of the quarter.

We had about 50 additions during the first quarter, mostly in sales, service and engineering.

In the quarter, capital expenditures were 20 million, while depreciation and amortization was just over 18 million, both on target for what we anticipated for the year.

In summary, it was a challenging quarter, and while it's one that puts us slightly behind where we wanted to be at the end of the first quarter, we believe there are steps we can take in order to get back on track going forward.

Granted, there are uncertainties that still exist with the macro economic environment.

But we will continue driving operational disciplines and take the necessary steps to achieve consistent and improving results.

As Pat said, with Q1 behind us we're going to assume a range of 2 to 4% revenue growth for the year.

But we still believe at these levels, we can generate pretax income in a range of around $260 million.

After tax, this should provide an increase in earnings per share close to 10% over the prior year.

The new products we have brought to market thus far are having great success.

And yet, we have a significant number of new product offerings that we plan to bring to market in the current and subsequent quarters.

That, coupled with the growing service expertise we have, which allows us to solve the complex storage issues our customers face gives us much to look forward to in the upcoming quarters.

With that, I'll turn it back to Dana and we'll open it up for some Q&A.

Carol, we're ready to take questions now.

Thank you. [Operator Instructions] And we will take our first question from Shebly Seyrafi with Merril Lynch.

Yes, thank you very much.

Your tape automation business grew 70% year-over year, but your tape overall business declined 5%.

So the missing parts are VSM and tape drives.

It appears to me tape drives were particularly weak.

It would appear to me that if your tape libraries are selling briskly, that they would also have -- you would also experience more tape drive sales through the attachment.

But what happened on the tape drive front?

Well, you're right.

A couple of things to bear in mind.

Last year we brought out two new enhancements to our 9840 product line, which gave us a nice acceleration of tape drives last year.

And secondly, when we went out with the SL8500, we provided the customers the ability to transfer those products to the SL8500, so that they can move more powder horns, and we saw a fair amount of activity in the first quarter.

We don't anticipate that being a significant activity for the -- on the going forward basis.

But it was certainly an awful lot of the transactions in the first quarter.

The other thing I will add to that, Shebly, is as you recall in the past, we've always talked about the ratios that we see in regards to revenue on drives, versus libraries.

And leading up to the actual announcement and product launch of both the 8500 and 500, you recall, we continued to have a high degree of drives, which means in times of purchases, where there are a lot of tactical purchases going on by customers, they're putting as many as drives attaching as many drives on those libraries as they possibly can.

Now as you put an 8500 out there, the good news is, as we see it going forward, is you get the -- I don't want to call it a shell, but you get the automation product out there and they start getting it into production.

They do the migration that Pat has talked about.

Now you start to see hopefully the actual adding of the drives on to it.

So we see a little reversal of where we were two years ago, year and half ago.

Now the new library is out there, and we actually anticipate that, that should turn around.

One more, if I can.

How much higher do you think your backlog and pipeline is now, compared to the first part of Q1?

Well, we don't really give out that type of information.

But I think, as I said in my comments, it was substantially higher.

We'll go next to Tom Curlin with Capital Markets.

You mentioned that your backlog heading into the March quarter was less than your backlog heading into the March quarter of last year.

How would you compare your backlog heading into the June quarter to the June quarter of last year?

I may have not have been very clear.

But I think I said that our backlog and pipeline going into this quarter was also substantially higher than they were a year ago.

Especially our backlog.

Okay.

And, if I could just quickly in terms of new product timing support for LTO3 on the SL500, can you update us on that, and also, the virtual tape for open systems what's the status for GA on that, as well as LTO3 for SL500?

Right.

The LTO3 is going to come out with this quarter and as we said before that our VSM open it will be out in the second half of the year.

And we'll go next to Dan Renouard with Robert W. Baird.

Thanks.

I guess I have just two, if I could.

One is just your -- the cash.

I know this is like beating a drum, but you did buy some more stock back, but your cash balance is still fairly high.

And I guess, one, any thoughts to -- on the acquisition side, Pat, given your potential transition and as you get out into next year to that limit what you guys might do in terms of making an acquisition?

Does that change things and all?

Or what should we be thinking about in terms of your cash use?

And then, my second question is just any kind of an update you could give us on your relationship with HP?

Thanks.

Okay.

I'll make some general comments and give it to Bobby.

I think it's fair to say that my tenure has -- will really have nothing to do with the strategy we have with the company, whether we have organic or inorganic growth.

And obviously, we can't speak about anything more specifically than that.

But rest assured that there's nothing in our process right now that my year and a half and year and few months that I have left would be a barrier to anything that I was thinking about doing.

Bobby?

The only thing I would add, I mean Dan, we're pretty much continuing to look at what's out there that might be able to fill some of the gaps that we have.

As you all know we put a lot of emphasis on the business model.

We want to be able to position ourselves to be able to take advantage of those opportunities as they come.

And I think that's always a potential.

So we continue to look at hardware, software, any of the gaps that we might have that might provide some of the benefits that we need to fulfill the ILM strategy that we have.

As we've always indicated in the past, distribution is another key.

We try to look at what we can do to increase the capacity that we have or even our capabilities, both in our sales and in our service organizations.

But we also look at any steps that will help us from a competitive standpoint.

Outside of that, you know, many, as you know, all of you know, that in the industry there are a lot better heavier in cash, depending upon what you want to define is heavy.

And we mentioned that even today, as many others have, that this environment that we're in is that, it still is a choppy market.

And you know, even some of the economic views today are bringing in inflation into --it's creeping back into the economy.

So we need to make sure that what we are doing is right for the long-term outlook for the company, and obviously want to ensure that we don't do anything that's going to put us at any competitive disadvantage.

Having said that, I think we're going to continue to aggressively repurchase shares, as we have been in this quarter.

And we're going to continue to balance the cash that we have, and we'll return it to the shareholders, along with whatever we believe is necessary for the reinvestment of future profitable growth.

Next question, please.

We'll go next to Andy McCullough with CSFB.

Bobby, just a clarification on your product gross margin guidance.

You talked about expecting a shift back to direct sales in the second quarter after the big indirect mix in the first quarter.

So I guess why shouldn't product gross margins hold up, at least through the second quarter and perhaps through the course of the year?

Good question.

If you look at the split, the first quarter, it was really out of line with what we had in any prior quarter in, I would imagine at least two years.

For the indirect side to be up above 55% is just not what's normal at this time.

We had always talked about in our guidance that, as we bring out these new products into the SMB (ph) space, obviously, we think that the indirect channel business is going to grow.

I think last year we probably ended up somewhere around, you know, the 45% range for the year and we thought that it would creep up towards you know, closer towards 50% this year.

A lot of the solutions we have right now are --they span both.

But we only have so much that we can do with the direct channel that we have.

So when I look at margins, I'm kind of -- I mentioned the word aberration.

It was kind of difficult for me to look at it, because we had so many deals that did not come into play in the first quarter that were direct-related, enterprise-related sales transactions.

So that kind of skewed it.

The other thing that skewed in the first quarter as well was the composition of the revenue.

I believe in the first quarter this year, tape products were closer to80% of the total product sales, comparative to probably closer to 75% in Q1 of last year.

So that means less disk, as we mentioned, less disk, less net working, which, as you know, those are lower margins.

So that was also one of the reasons why, I think, margins were particularly a little bit higher in this first quarter than normal.

Now, as we go forward, more into the SMB market space, more disk sales, more networking sales and that particular environment, we'll put the pressure on the product margin level.

However, if you take a step back, when we came into the year I had talked about, at the product margin level, margins being maybe 100 to 150 basis points down, based upon what we were seeing.

Now that I've added the first quarter in and I'm seeing where we are, basically I'm saying it might be flat to slightly down.

So actually, I'm a little bit above the guidance that we gave at the end of the year, Andy.

We'll go next to Brian Freed with Morgan Keegan.

Thanks for taking my call.

Could you talk a little bit -- you've got over $1billion in cash and short-term investment.

Can you talk about your rationale for not putting it into longer-term instruments that would yield a higher return to share holders?

And secondly, could you talk about your progress on your next generation drives and timing there.

Do you think some of the softness in your drive and media sales are related to customers anticipating that?

I'll handle the second part of the question, last, about the investment strategies.

We're on track to deliver the next generation drive in the second half of the year.

And I'm sure there are some customers who are holding back, and that could well be true.

But, as I said in the first quarter, one of the services that we offer the customers, if they have 9840 drives, that we put them into the SL8500 and the demand for those were substantially higher in the first quarter than we anticipated.

Those customers -- many of those 9840s are older generation products, the A's and B's and not C's and we anticipate that those customers will be upgrading to newer technology, whether it be next generation or the c-level products in the next several months.

And Brian, on the long-term investments, there's been a lot lately in regard to auction rate securities, in regard to how that's classified on the balance sheet.

Looking at long-term investments, if we look at where we are the end of the first quarter this year to last year, we're up about 30% in what we've put in long term, which is maturity that are greater than 360 days.

So we have actually increased it from where we were a year ago, and we'll continue to look at that as we go forward.

Next question, please.

We'll go next to David Bailey with Goldman Sachs.

Thank you.

First of all, given these things that a lot of the deals that didn't close in the quarter merely slipped out and were not lost, how quickly do you think you can get those deals back?

Do you think you'll get most of them back in the second quarter?

And are you announcing that you're going to step down in a year or a year and a half, and if so, have you started putting in place a succession plan?

I guess they're both for me.

My contract is up in the middle of next year, and, you know, I served with the pleasure of the board of directors and the shareholders, and right now there's been no discussions about that going on.

However, rest assured that there will be management continuity and the board is actively involved, and I'm involved with them, in looking at succession.

The first question was --

How much of the business do you think you can close in the -.

Right, right.

Thank you.

That's always a bit hard to say.

But clearly, some of the business we've already closed.

But we don't expect that all of it will come forward in the second quarter.

I said quite frankly, what we have to do is go out there and, in essence, resell them.

Because a lot of these large transactions were in front of CIO's or CEO's, in some cases, and they were frozen as people got more cautious in terms of the environmental, that economic environment that they were looking at.

So we're going back in and reselling at that level to try to secure those transactions.

We expect that a fair number will come in the second quarter, but we think that the there will be some in the third and fourth quarter.

Thank you.

We'll go next to Glenn Hanus with Needham

Can you give any more color on Q2 guidance, since nobody asked that?

You said you're going to be, what, up slightly year-over-year?

So last year you were 516,I guess, and EPS of $0.31.

Any kind of color you could give us on the guidance there?

Glenn, as you know, we try to make sure that we talk about the year.

So we try to guide a little bit on what we do in the quarters, but mostly we make a commitment on what we're trying to do for the year, and that's the guidance that you basically heard in other words annualize margins, annualize revenue growth as we go forward.

Now, having said that, I always would tell you that let's look at where we are in past years.

That's the way our plans are developed, and that's the way that they typically come out in regards to the percentage of business that you do in any quarter, as a percentage of the total year.

So we look for the second quarter to be slightly up.

We do believe there will be some sequential growth as we go from the first to the second quarter.

Unlike last year, where the back end of the second quarter, the last few weeks, there were a lot of transactions similar to this quarter that were pushed out in that particular quarter.

So we are looking for sequential growth, and, you know, I would look at history from the prior years.

The sequential growth from the first to the second quarter has ranged anywhere from probably 6% to 8% maybe 9% in that range.

So just look at the history of what we've done in a normal year, and that's how it would look going into the second quarter.

From an earnings perspective, it's the same way.

Most of our year, we do probably.

I would say probably a little bit less than 50% of the total earnings in the fourth quarter.

We're just skewed that way.

But if you look at the first and second and the third quarter, we've run somewhere around 12% of our income in the first quarter, and then in the second quarter it jumps up to somewhere between 17%, 19% of the total year.

And the third quarter it's actually a little bit better than that.

So, you know, that's the kind of guidance that we try to give, and the reason we do that is because we want to make sure that we're not going to do anything that's going to impact this business.

We don't want to make short-term decisions.

But we do commit to a year, and that's what we're trying to do this year.

We'll go next to Clay Sumner with FBR.

Thanks.

It appears that the deferred revenue may have fallen a little bit more than usual in the accrued liabilities section.

Can you give a little color there and see if that has anything to do or not with new products reducing deferred maintenance.

Has fallen.

Let me look at that balance sheet question here.

As far as the growth rate maybe, it grew 3% year-over-year, versus like 16% year-over-year.

I don't think there's anything in particular there, Clay that comes to my mind that stands out.

I'd have to look into the details of what's underneath that balance sheet account.

And you and I can talk about it.

But essentially deferred revenue is not falling?

No, not at all.

Okay thank, you very much.

We'll go next to Aaron Rakers with AG Edwards.

Thanks, guys.

I was wondering if you could comment a little bit on the competitive dynamics that you saw in the quarter, namely, IBM posting 3% tape growth year-over-year, you guys declining 5%.

If you can, wrap a little color around what's going on in the pricing environment, as well as you can if you can, talk about what you're seeing from EMC and ADIC.

And also, a clarification if you can again on the tax rate and what your expectations are going forward, thanks.

Okay I 'll let Bobby handle the tax question and I'll handle the competitive question.

We didn't see the competitive landscape in the first quarter being dramatically different than we had over the past couple of years.

As reverse to us, if you'll recall, IBM actually had a weak fourth quarter, their revenues were down, and they may well have had a reverse problem in the fourth quarter with a same problem that we had in the first quarter.

They may have come in with transactions that didn't go to revenue.

And we have not let me repeat what I said in my comments, that the business that we expected to deliver in the first quarter was not business that we lost to competition, it was fundamentally business that was moved out to subsequent quarters.

So we didn't see IBM making that big of an impact.

I do believe that IBM still uses their install-based, of max cost had them upgraded to jaguars, and that gives them an opportunity to, in essence, drive that business, and we don't see - and that is not necessarily visible to the rest of the market place.

In terms of others, we don't see them as being a major factor in the market place.

So that you know E.M.C.

I your voices have to be mindful it's insist a big company and we are always mindful in tells of what's going on in the street, but we don't see a material impact in that partnership on our business.

Again on the tax rate, we came into the year thinking it would be right around 23%.

But as we looked at Q1 performance and we look at the shift, not only them the amount of revenue and income within each various country, but, you know, the shift between countries, you know, taxes are a different world today.

You're going to see tax rates that fluctuate, unlike years ago, when it wasn't under the tax reserves and the whole tax area weren't under as much scrutiny as they are today.

And so today, when we look at the best estimate that we have of where the income is going to come in, by geography by country, 21% is what we see at the moment.

Okay next question, please.

We'll go next to Henry Naah with Lehman.

Hey guys two questions, if I may.

First of all, just a clarification.

Did you guys say EPS execution for 10% growth this year?

Yes actually if you take the guidance that we are talking about and we mentioned at the pretax level that we were going to be somewhere around $260 million, when you go all the way down and you tax-effect it and you look at the fact of where the shares are and what we plan on doing or thinking of doing on the share buyback program, you can come to an EPS number that will actually show about a 10%, somewhere around a 10% increase over last year.

Okay, great.

And then the other question was, backing up on the prior question, you know, looking at EMC and IBM's quarters, when they reported, you know, obviously, IBM had some issues on the services side.

But EMC seemed to note that their business was actually pretty strong in the second half of March, and they saw demand accelerate.

I'm wondering, Pat, if you could comment a little bit as to what possibly could have been the difference between EMC's kind of what they saw at the end of the quarter and what you guys saw, whether it was prioritization by the customers in terms of buying disk versus buying tape.

It's really hard for me to comment on what was going on with EMC I have not really taken a look at the financials in terms of how much their revenue growth was contributed by symmetrix versus on how much was being delivered by their indirect channel versus the direct.

And I really can't speak to that.

And obviously, I can't speak to the prioritization between tape and disk.

Now as I said our automation was up very strongly, and a lot of what was deferred out of the quarter was ILM transactions so I can't give you a good answer.

Next question, please.

We'll go next to Jason Williams.

Hi, it's actually John Bode.

I'm looking at the cash position.

When you say a billion one fifteen cash, you have no debt, and your business in a time when the new product cycle is growing 2-4%, I'm trying to get my hands around the unwillingness to be more aggressive, you used the word aggressive, and the share count actually increased this quarter versus last quarter.

So the only thing I can tell is that, hey you're saving your cash for some type of value-destroying acquisition, which no one wants, or you have virtually zero confidence in your business at this point.

Why wouldn't you be more aggressive?

Well, you know, I think if you go back over to our past several years, in terms of what we said, we've been very clear that we are not in the business of destroying value in the company.

And there's been a lot of opportunities that have come our way and we've turned them down, because, quite frankly, we did not believe they were in the best interests of our shareholders.

And we thought that the share buyback that we were engaged in less than a year ago was pretty aggressive and that was the feedback that we got from our investors at that time, recognizing that the number of shares goes up and down depending on the price of stock as more and more options come in and out of play.

It's not all that scientific.

I guess you know that, so I really can't speak to that.

We're not about to sit down here and destroy the value of this company.

We worked too damned hard for our shareholders to do that.

And just to finish on that point, typically the first quarter is when we do most of grants, which is why it did creep up a little bit in the first quarter.

You can anticipate that that will be going down in the last three quarters of the year.

Carol, next question.

Our final question today comes from Kaushik Roy with Susquehanna Financial.

Your services revenue continues to grow and is at 47% of revenue now.

Where do you expect services revenues to be in the percent of total revenues for 2005?

Well, this is Bobby, Kaushik.

We're still looking for our services revenue to probably grow somewhere in the 6 to 7% range for the year.

So depending upon what you're going to assume from a product sales standpoint, inside the guidelines we gave of 2 to 4%, income up with that percentage.

But it should still be north of 40% as you know, for the full year.

Keep in mind in the first quarter, obviously, the product sales that's the weakest quarter of the year in product sales.

Obviously, that 47% that you just came up with is higher than what it will be for the full year.

But I don't believe we're making a lot of progress.

The fact that professional services grew 15% this year, this is something that we have said all along.

This is a key indicator that we're being successful in deploying ILM across the table, because you've got professional service consultants in there designing those architectures, trying to make them work for the customers, to solve their problems.

So I think that's a big plus that that continues to grow.

And on the maintenance side, it continues to grow above and beyond what the normal rates are in the industry.

I think from a product support standpoint, I think the industry averages are somewhere between 1 to maybe 3% at the high end.

And we continue to grow at 4%.

So a lot of that has to do with the composition of what our installation base is made up of.

And so those growth rates, we believe, ought to continue.

Obviously, it's a very steady revenue stream force, provides good margin and cash flow, very predictable.

It's always nice to know that going into the quarter you have 40% of your revenue pretty much in hand at high renewal rates on yearly contracts, so that's a big positive for us.

The professional services are at about 15% now?

Actually, I think this quarter it was about 12%.

I think it was 11%last year in the first quarter.

So we continued to grow there.

For the year last year it ended up about 13%.

And we're thinking that it will exceed that amount this year.

But we think it's going to be above 13% for the full year.

Okay, great, thank you.

Thank you for joining us this afternoon.

As you review the results, if you have additional questions, please feel free to call me.

Have a good evening, everyone.