Compellent Technologies, Inc. Q3 2008 Earnings Call Transcript

Oct.21.08 | About: Compellent Technologies, (CML)

Compellent Technologies, Inc. (NYSE:CML)

Q3 2008 Earnings Call

October 21, 2008 5:00 pm ET

Executives

Jenifer Kirtland - EVC Group

Philip Soran - President and CEO

Jack Judd - CFO

Analysts

Mark Kelleher - Canaccord Adams

Katy Huberty - Morgan Stanley

Eric Martinuzzi - Craig-Hallum

Tom Curlin - RBC Bank

Rajesh Ghai – Think Equity

Alex Kurtz - Merriman Curhan Ford

Andrew Nowinski - Piper Jaffray

Alfredo - Thomas Weisel Partners

Glenn Hanus - Needham

Operator

Ladies and gentlemen, thank you for standingby. Welcome to the Compellent Technologies Third Quarter 2008 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions).

As a reminder, this conference is being recorded today, October 21, 2008. Now, I would like to turn the conference over to our host, Ms. Jenifer Kirtland of EVC Group. Please go ahead.

Jenifer Kirtland

Thank you, operator, and good afternoon everyone. Thank you for joining us for the Compellent conference call and webcast to review financial results for the third quarter of 2008. Before we get started, during the course of this conference call, we will make projections and may make other statements about Compellent's business that are forward looking and are subject to many risks and uncertainties that could cause actual results to differ materially from expectations. A detailed discussion of the risks and uncertainties that affect our business is contained in Compellent's filings with the SEC including its Form 10-K for the year ended December 31, 2007, under the heading Risk Factors.

Copies of these filings are available online from the SEC or on Compellent's website. These forward-looking statements are not guarantees of future performance and speak only as of the date hereof, and except as required by law, Compellent disclaims any obligation to update these forward-looking statements to reflect future events or circumstances. In addition, during today's discussion, management will comment on both actual results and certain non-GAAP results. Reconciliation of actual results with these non-GAAP results are provided in today's earnings release, which is available on our website at compellent.com.

And with that, I will turn the call over to Phil Soran, President and CEO of Compellent, who is joining us from Europe, where he has been attending the Storage Expo Conference in London and meeting with partners, customers and media in the United Kingdom, Paris and Amsterdam. Phil?

Phil Soran

Well thank you, Jenifer. And thank you all for participating in our third quarter earnings call. Also on the call today is Jack Judd, our Chief Financial Officer. Jack joins our call from our Corporate Office in Minnesota.

Well, I am really excited to share our third quarter results with you today. This was an excellent quarter for Compellent as we reached many milestones. We generated our first quarterly GAAP profit of $464,000, achieving this profitability milestone a quarter ahead of our internal schedule. Adjusting for the non-cash expense of stock compensation, our quarterly profit was $1 million.

We set another quarterly record for revenue at $24.6 million, which represents our twelfth consecutive quarter of growth and a 17% sequential growth rate from the second quarter and an 84% year-over-year growth rate. Our end-user customer base continues to grow. At September 30th, we had 1086 end users compared with 740 at the end of 2007, an increase of 47%. All of these accomplishments are result of continued demand from mid-size enterprises for our feature-rich, cost effective, energy efficient storage solution.

Our third quarter results are significant in the face of a challenging economic environment. We are well aware of recent technology discussions that indicate a possible slowdown in IT spending. We find our core business remain strong. We believe our continued strength is because the needed for data storage is not discretionary. But more importantly, we believe Compellent offers a solution significantly more efficient and cost effective than legacy solutions, which is a major decision point during these tough economic times. Because we are so confident that we are the most efficient provider of data storage.

Early in the last quarter, we issued a space reclamation guarantee to end users. Basically we guarantee the enterprises will reclaim a minimum of 40% of their allocated capacity, when migrating from competitive storage solutions. If we did not achieve this, we will provide the hardware and software to makeup the short fall at no cost to the end-user.

We continue to support our 100% assisted channel sales model. This model saves us cost and speeds up the process of market penetration. We invest heavily in sales support for our partners including field personnel and staff at our home office.

Our solutions continue to be very well received and during the third quarter Compellent received additional recognition. We won the best of VMworld 2008 in the hardware virtualization category and our Storage Center 4.0 SAN was recognized as the ideal platform for the virtual data center built with VMware server virtualization technology.

We are also named the fastest growing SAN in the world by Gartner for the second consecutive year. We received several more certification from key technology leaders, including the Oracle VM server virtualization certification for supporting virtualized Oracle applications, integration with VMware Site Recovery Manager and Citrix Ready certification.

Compellent is tightly integrated with other technology leaders to deliver end-to-end interoperability, as superior end-user experience. These alliance partnerships play a significant role in influencing and validating our solutions with our end users. We have seen consistent growth of new end users as well as expand the business from our installed base.

International sales continue as a major contributor to our growth, with almost 1100 customers worldwide and systems deployed in 25 countries, we are quickly building a global business. A few days I spent in Europe, meeting with channel partners and end users confirmed our cost effective, energy efficient data solution is the answer to many of the issues that IT manager must address today.

I would like to highlight a few several new end users, Marie Claire, the well-known French publisher of magazine sold in 30 countries around the world, including Marie Claire and Cosmopolitan. Versatel a large German telecom access service provide and Helix Energy Solutions, a US customer, which added systems this quarter at its Aberdeen and London sites.

We are also especially pleased results with recent Wave 11 storage survey of storage customers conducted by The InfoPro, an independent research network of IT professionals. Our customer gave us the highest ratings out of any vender in four key categories, including network storage, SANs, IOM and replication. Wave Studies measure customer ratings on a range of criteria including technical innovation, positioning, strategic vision, brand, value, quality and technical support. Compellent received higher ratings from end users over all other competitors.

Turning now to our product development efforts, we continue to update and introduce new functionality, building our innovative feature set advantage. We recently announced Live Volume, a new automated business continuity feature, which will provide continuous coordinated access to data stored on Compellent SANs regardless of location. This roll out enterprises to manage dispersed stored sites around the world as one virtual data center.

As end user move applications from one physical or virtual server to another for maintenance, local site issues or disaster recovery, Live Volume will proactively and automatically, migrate the associated storage volumes. Live Volume will be perfectly suited for virtual server environment like VMware and Microsoft’s Hyper-V, as it enables stores to automatically follow the application, wherever it is migrated.

These two features scheduled for release in the second quarter of next year. We see there has been a lot of industry interest around solid state drives because of the large performance and permit they can provide. However, customers have raised concerns about their cost. We believe we are solving this cost issue in a way that other vendors cannot, by leveraging our Thin Provisioning and patented Data Progression technology.

We reintroduced SSD into our product lineup the Compellent SAN will reserve frequently accessed, active blocks of data for applications like transactional databases that can take advantage of the significant performance gains of solid state drives. We will dynamically move the frequently accessed inactive data blocks to lower storage tiers can store less expensive conventional drives.

Simply put, the end users will require a few SSD drives in the Compellent SAN. The Result will be true SSD performance at a fraction as in 10% of the cost of traditional vendors implemented in a manner that is scalable, automated and ready for the. We expect to formally introduce Enterprise SSD to our automated block-based tiered storage architecture in Q1 of next year.

Before I turn the call over to Jack, I'll like to touch on another positive corporate development. We're very happy to announce a new Compellent Board member. Duston Williams the CFO of Infinera has joined our Board and will also serve in our Audit Committee.

Duston has 28 years of financial management experience, including significant time spent in the Storage Industry and executive positions at Maxtor and Western Digital. Drawing conclusion, we feel we had a great third quarter and our fourth quarter guidance will show our thirteenth consecutive quarter growth. We have demonstrated solid execution and I personally would like to thank all of our employees for this accomplishment.

To achieve profitability at quarter early is a testament to doing hard work. I would also like to thank our business partners, and our end-user customers for their continued support. Now I would like to turn the call over to, Jack, for more detailed look at our third quarter financial results and our outlook on the fourth quarter of 2008.

Jack Judd

Thanks, Phil. I am excited about taking everyone through our third quarter results. Before I go into the financial details of our third quarter, I want to reemphasize to all of our investors the significance of reaching profitability at our revenue levels. We could not have done this without business model differentiation that matches our product differentiation.

Through a combination of an all channel assisted sales model, industry standard hard work and virtual manufacturing, our cost are lower and therefore we reached profitability sooner. Our business model advantages are even more pronounced as we grow our business and are especially valuable during tougher economic times.

During the third quarter, revenue grew $11.2 million and $24.6 million or 84% increase from the prior years third quarter. Compared to the second quarter of 2008, revenue grew at 3.6 million or 17%. We continue to grow in international markets.

International revenue increased to $3.6 million in the third quarter, approximately 153% more than the previous year. Our end users at the end of the quarter totaled 1086 compared to 642 one year earlier. Our revenue from existing end users measured on a year-to-date basis was 40% of product revenue and new end users made up 60% of product revenue. This combination of new end users and our current base coming back for upgrades in additional systems makes the Compellent story exciting.

Our gross margin increased to 53.7% in the third quarter of 2008 compared to 49.9% in the same quarter last year. During the recent quarter, product margin was 52.1% and product support and services margin was 59.6%. Our margin increases are driven by leveraging our productivity increment cost and our Copilot Support Services.

Operating expenses increased to $13.4 million in the third quarter of 2008 from $8.8 million one year earlier, as we continue to build infrastructure in all areas especially our sales and marketing teams.

Other strategic areas where additional employees have been hired are our Copilot Support team and research and development. Our total employee count at the end of September was 268 compared to 212 and 191 at the end of December 2007 and September 2007 respectively.

We are proud of our first quarterly profit. Net income for the third quarter of 2008 was $464,000 or $0.01 per share, compared to a net loss of $2 million or $0.45 per share during the third quarter of 2007. Excluding the effect of stock based compensation, our net income for the third quarter was $1 million compared with a net loss of $1.8 million the previous year.

We ended the quarter with $95 million in cash and investments. Our balance sheet includes $17.4 million of deferred revenue, an increase of $1.8 million from June 2008 and $6.8 million from December 2007. The growth in deferred revenue reflects both the increase in new end users choosing three year maintenance contracts and the almost 100% renewal rate of our current end user base.

Our aging of our accounts receivable increased slightly from the prior quarter end. Our small inventory growth of 177,000 from June 30 was mainly due to an increase in field service parts and increases in evaluating systems at potential new end users. Our strategy of virtual manufacturing continues to deliver value as our inventory levels lead the industry.

Now, I’d like to provide our thoughts and guidance for the fourth quarter. Our pipeline remained strong. We therefore forecast another quarter of sequential growth. We currently expect revenue to increase to approximately $25 million in the fourth quarter of 2008, compared $16.9 million in the same quarter of 2007. Our net income will be similar to the just completed third quarter.

That concludes our formal remarks. Now operator, could you please open the call for Q&A.

Question-and-Answer Session

Operator

Thank you, sir. And we will now begin the question and answer session. (Operator Instructions). Our first question is from the line Mark Kelleher with Canaccord Adams. Please go ahead.

Mark Kelleher - Canaccord Adams

Hi, guys. Can you hear me?

Jack Judd

Hey, Mark.

Phil Soran

Hey, Mark.

Mark Kelleher - Canaccord Adams

Yeah. Just wanted to, very good quarter in a very tough environment. Can you talk about what we’re seeing in the competitive environment? We’ve got new Clarion coming up from EMC. We’ve got HP and LeftHand, we’ve got Dell and EqualLogic. What’re you seeing there and then can you just take that, give us an indication of what you’re seeing for vertical market strength? Thanks.

Phil Soran

Well, first of all in the competitive landscape, as always it is a competitive environment and we see, frankly the same competitive vendors out there, nothing major different there in the price areas or products features etcetera. I think though what it does do it’s a with all the competitors out there does highlight our better advance on the feature set and we are seeing customer take a longer look at the feature set before they make decisions. And I turn over to second here Mark, it was regard to what.

Mark Kelleher - Canaccord Adams

Yes, vertical market, any particular vertical market that were stopped?

Phil Soran

Yes, as usual, we are seeing installs from across the vertical industries here, no one there particularly and is dominated there, so, once again strength across all of the verticals, no one, particular one that stands out.

Mark Kelleher - Canaccord Adams

Okay, thanks.

Operator

Our next question is from the line of Katy Huberty with Morgan Stanley. Please go ahead.

Katy Huberty - Morgan Stanley

Thanks, another great quarter. Just a follow-up on the first question. How broad based is this the strength across your major partners? Did you see an increase in penetration of the top ten or so partners in terms of the revenue would be or the new customers you signed up in the quarter?

Phil Soran

Jack you want to take that one?

Jack Judd

There really hasn’t been much movement in our top ten channel partners. On a year-to-date basis, we still run around 48%, 50% of our businesses in our top ten channel partners. So, on this past quarter, it was similar to the numbers we’ve had throughout the year, really no statistically significant difference at all.

Katy Huberty - Morgan Stanley

Okay, thanks.

Operator

Thank you, Ma’am

Phil Soran

Thanks, Katy.

Operator

And our next question comes from the line of Eric Martinuzzi with Craig-Hallum. Please go ahead.

Eric Martinuzzi - Craig-Hallum

Thanks. Curious to know about demand trends across the different geographies, you guys are trying to increase your footprint overseas, I know that’s part of the reason that Phil you are, where you are today. Could you talk about if there are differences by geographies? And then I have a follow-up.

Phil Soran

I can't say this that not much different across geographies. I mean every one is talk about the economic crisis, but frankly like I said earlier we're seeing demand both here in Europe and in the US. I’m over here some of the shows and I'll tell you we've had very good reception that we're at the Gartner Data Center conference here in Amsterdam today and Storage Expo last week. We saw good lead generation activities there and a lot of customers have heard about us and want to know more and so. Right now I really don't see change in demand in the one geography or in other.

Eric Martinuzzi - Craig-Hallum

Okay and then follow-up on the gross margins, terrific performance there again. In Q2 you guys talked about the reasons for that, you talked about manufacturing efficiencies and then services group leverage, all those the same things driving at this quarter or is there something new there?

Phil Soran

I think its continuation of the last quarter. I'll let Jack also comment on it. But our Copilot Services helps drive some of that margin and also the better product line et cetera. Things like this going to happen as you get larger.

Jack Judd

Hi, Eric you asked good question. I'll also give you teamed in more detail on our international business. In the quarter international business was just fractionally short of 15%, and really on a year-to-date basis we're about 15%. So, they are really, while international business is a lot higher than last year. This year the trend is similar percentages from quarter-to-quarter.

I think Phil explained quite well, what's happening with our margin. I’d say that margins were very similar to the previous quarter. Nothing material actually was happening that will change things from last quarter. We did a good job of handling our professional services in the quarter without it brining margin to down too much I guess would be the comment I’d make.

Eric Martinuzzi - Craig-Hallum

Thank you.

Operator

Thank you, sir. And our next question comes from the line of Tom Curlin with RBC Bank. Please go ahead.

Tom Curlin - RBC Bank

Good afternoon and congratulations on another great quarter. Just real quickly on the tax rate. What sort of tax rate do you want to assume for that Q4 guide and also just doing tax rate for next year. What do you want free use on the non-GAAP tax rate?

Phil Soran

Jack probably you take that one.

Jack Judd

Yes. As I have said in previous quarters, we have not spent tremendous amount of time modeling future tax rates because we are long way of away from paying cash taxes. It’s very nice to reach profitability. We are several quarters away from having to internally for book purposes recognize income taxes. That been said, I do not believe that we will have any difference in our tax rates in another companies similar size and operating within similar geographies. So, I’d say somewhere between 35%-37%, but that will not be a cash expense next year for us.

Tom Curlin - RBC Bank

Okay. And are you, is that what you are using for Q4 or just better to use that for next year?

Jack Judd

To tell you the truth, Tom I haven’t much thought about putting a tax rate on our internal financial statements, because I’m more of cash based guy at this level with taxes and, for GAAP purposes we won’t be required to put a tax rate on our books for the fourth quarter here.

Tom Curlin - RBC Bank

For the net income, you said net income similar to the third quarter, I guess assuming as zero percent tax rate is that right?

Jack Judd

Yes, the way that the accounting rules work with income taxes, is that as soon as you term profitable, it would be unusual at that point in time to recognize income taxes. I will guess that sometime at the end of 2009 or into 2010 generally accepted accounting principles will required at that time to recognize an income tax provision on our financial statements, until then our financial statements will be presented without any tax expense.

Tom Curlin - RBC Bank

Okay. And then just going back to the competitive environment, how would you describe the tone of deals in September. Did you see some of the large incumbents getting more aggressive I guess, as they push to close deals or do you think it was roughly similar to the behavior in the June quarter?

Phil Soran

I think it’s been competitive for quite a while and it was pretty similar to that. So, I wouldn’t say substantially different, like everyone has been aggressive with these times right now. But now like substantially more than the other time.

Tom Curlin - RBC Bank

And any change in the mix of competitors that you see in deals, I guess frequency or it sounds like the intensities about the same, but anybody you are seeing more or less?

Phil Soran

No. It’s all pretty similar to what has been in the past. We normally see the large incumbent tier 1 storage vendors, the majority of the time and we do see some of the emerging players and depends on certain parts of the market, but nothing different than we see in the past.

Tom Curlin - RBC Bank

Okay, excellent. Thank you.

Jack Judd

Thanks, Tom.

Operator

Thank you, sir. And our next question comes from the Alex Kurtz with Merriman Curhan Ford. Please go ahead.

Alex Kurtz - Merriman Curhan Ford

Yes, thanks. Congratulations guys, on the GAAP and non-GAAP profitability. My first question was about the Federal contribution, was that greater than 10% of sales this quarter and if you did see strengths there, did you see any of those systems get pushed into your 4Q pipeline?

Phil Soran

Alex, could you repeat the first one?

Alex Kurtz - Merriman Curhan Ford

Sure, the Federal Government, made contribution to 3Q results and looking into the fourth quarter, if any of those, if you are seeing continuing deployments in that vertical?

Phil Soran

Yes, we did have a good quarter in Federal, that is, as you know, it’s the end of their fiscal year in [soft] September is, and we did have nice finish to the fiscal year as we completed and we have seen some carry over into the fourth quarter for the Federal business, I find not as great as we saw in the third quarter, but there is some carry over.

Alex Kurtz - Merriman Curhan Ford

Okay, so Jack would it be fair to say, that Federal may be was greater than 10% of sales this quarter?

Jack Judd

Yes, it was.

Alex Kurtz - Merriman Curhan Ford

Okay. And what gives you guys, I mean, can you just go through your pipeline inspection process, and what gives you the confidence in this kind of environment. The issue, the guidance you guys did, are you doing more, are you getting more, you spending more time with the partners; can you just go through that at a high level?

Phil Soran

So I’ll pick that one there. So first of all, just some general trends, I mean, there is no doubt there is a tough economic environment right now. I think the mid-size enterprise customer is a little more resilient. It doesn’t mean they’re not being hit by the economic environment, but I’ve seen some numbers, forecast in storage growths and it’s been hit hard at the large accounts, the enterprise accounts and the mid-seize enterprise.

The other thing that frankly we’ve seen is that, somewhat advantages start coming out of times like this, and I have physically seen the difference with customers where they want to understand in a much greater depth how our features work, because they want to kind of really understand how much it’s going to impact their total cost of ownership.

While in the past they might have said, hey, that’s a niche feature, now we’re going to hold it. How is that work again and let me look at my days where I really think I will be able to reclaim lost base, I’m going to be able to save money with things like automated tiered storage and it just take a lot longer look and try to do that.

So we’ve, I’ve talked to a lot of people who made out in the past without replacement of tier one storage vendors and now they are looking for real options to do some of that. So that’s why I want to be optimistic but caustically optimistic, so we did announce that we think we can continue to grow in the fourth quarter and that’s kind of what we see in the market right now.

Alex Kurtz - Merriman Curhan Ford

Okay. And Jack just looking at cash flow from operations and free cash flow, just it looks like you guys were pretty positive in the quarter, may be a million plus or so. Do you have a read on that for what you guys did in Q3?

Jack Judd

We’re cash flow positive for the year; it had to be 1.5 million in the quarter. I don't measure cash flows on a quarterly basis. It measures itself better on a year-to-date basis.

Alex Kurtz - Merriman Curhan Ford

Okay. All right guys, thanks a lot.

Phil Soran

Okay. Thanks Alex.

Operator

Thank you, sir. Your next question comes from the line of Clay Sumner with FBR. Please go ahead.

Unidentified Analyst

Hi, guys this is (inaudible) for Clay Sumner.

Jack Judd

Hi, (inaudible).

Unidentified Analyst

I was wondering if you guys can talk about the linearity of bookings, and I guess from that were you able to grow any backlog?

Phil Soran

Jack go ahead.

Jack Judd

We really don’t have backlog as such. We tend to ship everything in a quarter that our customers want to ship in a quarter. We can occasionally receive orders at the end of a quarter that the customer wants shipped let's say in October and that's not an unusual situation. But, we never comment on how much that is compared to previous quarters, or how much it is in total amount. So, I really don't want to comment more than that.

Unidentified Analyst

And can you comment on how demand is shaping in the early weeks of October?

Jack Judd

I would say that October is so far shaping, now it's 21st of the month, and we still have 10 days left, but October will be shaping out very similar to what previous first months of the quarter are. And again, we've said previously that it's kind of a 25, 25, 50 split.

Unidentified Analyst

Okay. And where do you expect service gross margins to trend over the next several quarters?

Jack Judd

You mean product and support services or just professional services.

Unidentified Analyst

Yes. Sorry, support services.

Jack Judd

I think that it will be in the upper 50s. I think that portion of our business when you add cost to support new end users and the variable component of providing installation and training services I think that the number that it is this past quarter will be as similar to what it will be in future quarters.

Unidentified Analyst

Okay thanks a lot guys.

Operator

Thank You Sir. And our next question comes from the line of Andrew Nowinski with Piper Jaffray. Please go ahead.

Andrew Nowinski - Piper Jaffray

Thanks guys. Great quarter.

Jack Judd

Thank You Andrew.

Phil Soran

Thanks Andrew.

Andrew Nowinski - Piper Jaffray

Hey just quick question. I guess if my calculations are correct, this 40% year-to-date you got from the current customers, it’s about $4 million this quarter. And I am just wondering is that what is your sense I guess of customer’s current capacity in their systems? Are they running a little harder now given the macro trends? Are they kind of based on what their initial purchase was? Just wondering what you guys think or what you expect from recurring revenues kind of going forward.

Phil Soran

We’re really retract, I think it’s say are they running into higher levels of allocation so that as you know with our FIN provision stuff they tend of run higher than they do at incumbent vendors and stuff, but it appears to seem they are growing in all base and I don’t have statistics actually to look how that would give indication on that but I would anticipate that existing end users would continue to upgrade if they’re somewhat upgrade.

Andrew Nowinski - Piper Jaffray

Okay. So, I guess, I was trying to get idea. It looks like its been pulling down for last few quarters, and if they’re kind of try to save money by not spending on capacity upgrades, where they would have in the past maybe. We would see a kind of ramp up in the coming quarters but it’s not something…

Phil Soran

In some quarters we out pace on the new end users. Now that’s it the upgrades and stuffs and so it was a nice upgrade quarter.

Andrew Nowinski - Piper Jaffray

Got it. And then, just one quick question on the SSDs. You had mentioned in previous calls that you wouldn’t really consider adding most of your platforms until your customers started demanding it. I am just wondering is that implying that you are getting into some larger higher performance deals or that require higher performance deals?

Phil Soran

We are getting pulled in to more enterprise deals require that and also some of the technologies advanced more on the solid state, where it is getting closer and relate to prime time. So, a kind of a combination those two things be the solid state answer. So, it’s not going to overtake spinning this technology anytime soon. But it is some customers want to talk about and it is going to free out, like this is the budget because it is pretty expensive and then, we think that really with our data progression, we’re going to have significant advantage over other vendors and how they would have to deploy solid state drives, they got low volumes and there is suppose to blocks of volumes.

Andrew Nowinski - Piper Jaffray

Yes, thanks. That’s it.

Operator

Thank you, sir. And our next question comes from line Doug Reid with Thomas Weisel Partners. Please go ahead.

Alfredo - Thomas Weisel Partners

Hi, this is Alfredo in for Doug Reid. My question is, wanted to understand more about partners. I want to find out your visibility if that’s changed at all in to partner leads or the pipeline within more challenging environment?

Phil Soran

Yes, Alfredo. Our CRM system is pretty sophisticated and also the partner portal that our customer sees is also really elegant. So, they are still can need to do all their quotes on our system and with that we get visibility to what they are bidding on. We continue with our assisted sales model. So, with we get people, who are actually seeing the end user customers before they, while things are changing suffer too. So, I think the visibility has changed at all in, despite the economical environment it’s very much, we have a good feeling on the situation for being at that point of time.

Alfredo - Thomas Weisel Partners

Okay. Thank you.

Operator

Thank you, sir. And our next question comes from the line of Glenn Hanus with Needham. Please go ahead.

Glenn Hanus - Needham

Good afternoon and congratulations.

Jack Judd

Thanks, Glenn.

Phil Soran

Thank you, Glenn.

Glenn Hanus - Needham

Maybe you could talk a little bit about credit conditions you’re seeing out in the marketplace with customers. You serve a little bit more of SME kind of customer, is that more challenging for that kind of customer and is that been impacting your sales at all, out there to get some color on that?

Phil Soran

Jack, do you want to cover the questions?

Jack Judd

Yes, I don’t really think that there is much to report this past quarter in terms of anything that we see happening on our [AR]. We certainly don’t think there is any macro risk that we don’t see any right now the channel partners will be unable to pay their bills. We don’t see that as immediate risk. We watch our AR closely. We tend to have pretty good history as to when we receive payments. So, we do watch it, but the types of partners that we deal with right now don’t seem to be showing credit risk at least at this time.

Phil Soran

Glenn, also then majority of our insulations are purchase versus lease to. So, the lease is where we might see some credit rejection stuff like that.

Glenn Hanus - Needham

Give us a little more play by play in the quarter, as we went through the Lehman issues and did you start to see any lengthening of sales cycles or push outs in deferrals as we got laid in the quarter?

Phil Soran

I’d say throughout the quarter we saw some people deferring or freezing budgets. We saw a few of those of deals there and one thing has been nice there, our pipeline growth and we were able to get more [adapts] in this environment and so that's all. That’s made up for the one to defer into sideway to freeze budget or some of that. It wasn’t dramatic, but as you can tell, there is a little bit more challenge out there in some of the environments.

Glenn Hanus - Needham

And maybe lastly as you start to think about next year, how are you thinking about hiring plans, any adjustments to spending, any thoughts there?

Phil Soran

Well I think with the economic environment you don't want to be too aggressive. On the other side is, we still view we can be a growth company, so you don't want to be safe too much either right. So we still have a chance to invest in up things where we can touch more customers and also keep our technology advantage.

But we're also going to be smart on the higher end front there. So, we're just going through the '09 budgeting process right now, we'll see how that kind of plans out but right we'll be cautious, but we won't be, try not to miss the growth curves too.

Glenn Hanus - Needham

All right. Thank you.

Phil Soran

You bet.

Operator

Thank you, sir. And our next question comes from the line of Rajesh Ghai of Think Equity, Please go ahead.

Rajesh Ghai – Think Equity

Hi, guys. Congratulations on a great quarter.

Jack Judd

Thank you.

Phil Soran

Thanks.

Rajesh Ghai – Think Equity

Yeah. So, most of my questions have been answered. Just one question on repeat business, I know it's down to about 40%, what's driving it right now? Is it the same factor that were driving it last quarter or do you see since some change in usage patterns?

Phil Soran

So, I don't really see the change why people upgrade? It is our natural growth. Another advantage we have right in these economic environments is, we don't have any models. We have one product, the Storage Center. So, customers can start smaller and grow into their system where the other vendors they’re going to have to pick the right size model or else they’re going to suffer financial or disruption later on, when they try to upgrade some of that.

So, we always continue to see nice upgrade always from our customers and it just comes from this normal growth that they have and I don't see any changes in what's driving that demand. A lot more people too are very conscious of things like disaster recovery.

So we just see some upgrade orders there where people are buying their replication system for disaster recovery, but that's been also the case in the past also. So, it's mostly just capacity growth and replication are the two big things that drive their upgrade business.

Rajesh Ghai – Think Equity

Okay. And one last question. Can you give us as a sense of how many of the customers are utilizing SSD in their deployments and also could you give us a sense of how many of your deployments have virtual server environments?

Phil Soran

And the first one that I (inaudible) but I heard the second one how many have a virtual server environments and what was the first one?

Rajesh Ghai – Think Equity

Solid state drives, SSDs.

Phil Soran

Oh, SSDs. Yeah these SSDs, we used to have couple end user. We’ve had them for a while actually. So it’s not even a percent. I mean, it’s a very small number. Now more and more people are talk about it but they’re not going to be deployed yet. So, just a handful there.

On the virtual server side, in one stage or another, I mean, I don’t have the exact numbers but it’s a large, large majority have some type of virtualization either in process or been deployed out or being evaluated. So I’d estimate 90% of our systems have virtual server environments attached to them in one form or other. Some in test environments, others in actual production but it’s a large number.

Rajesh Ghai – Think Equity

All right. Thank you so much. Congratulations.

Phil Soran

And by the way that’s a real good driver for us to, because our virtualization does enable some of the advantage that they are looking for in those virtual [decent] environments.

Operator

Thank You Sir. And our next question is a follow up from the line of Alex Kurtz. Please go ahead.

Alex Kurtz - Merriman Curhan Ford

Yeah guys, just wanted to ask this quick question. ASPs and the number of systems for net new customers, can you give us a sense of directionally quarter-over-quarter, do you see an increase in both of those? And what customers are doing when they are deploying new systems?

Phil Soran

Jack once collectively.

Jack Judd

As we have said in previous quarters, system ASP is really not something that we concentrate on. The truth is that if somebody buys the system, we know they are going to operate it and buy additional discs, software enclosures et cetera as we go into the future. That being said is that the average system was very similar to what it was in previous quarters. Up maybe fractionally, but I would not say significant or strategic in terms of why it went off.

Alex Kurtz - Merriman Curhan Ford

Okay. All right, thanks a lot guys.

Operator

All right, thank you sir. And that concludes our question-and-answer session. I would like to turn the call back over to management for any closing remarks.

Phil Soran

Well, I just, hopefully you guys pick it up. We’re really excited about this quarter. It’s a tough environment out there. I think we’re doing really, really well there. And we’re still optimistic. We are cautious but optimistic for the future. And we really appreciate all you guys support and all the good questions we had here. So, with that we look forward to talking to you next quarter. Thanks a lot.

Operator

And ladies and gentlemen, this concludes Compellent Technologies third quarter 2008 conference call. If you would like to listen to a replay of today’s conference, please dial number 303-590-3000 or number 1800-405-2236 and enter access code number 11120585. AT&T would like to thank you for your participation. You may now disconnect.

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