Double-Take Software, Inc. Q3 2008 (Quarter End 9/30/2008) Earnings Call Transcript

Double-Take Software, Inc. (DBTK)

Q3 2008 Earnings Call

October 28, 2008 4:30 pm ET

Executives

Erica Mannion – Investor Relations

Dean F. Goodermote – President, Chief Executive Officer & Chairman of the Board

S. Craig Huke – Chief Financial Officer

Analysts

Aaron Schwartz – J.P. Morgan

Shaul Eyal – Oppenheimer & Co.

Joel Fishbein – Lazard Capital Markets

Walter Pritchard – Cowen and Company, LLC

Peter Busey – JMP Securities

Richard Sherman – MKM Partners

Aaron Honig – Canaccord Adams

Shawn Hannon – Needham & Company

Jonathan Ruykhaver – Thinkpanmure LLC

Presentation

Operator

Welcome to Double-Take Software’s earning conference call for the third quarter 2008. The date of this call is October 28. This call is the property of Double-Take Software and any recording, reproduction or transmission of this conference call without the express written consent of Double-Take Software is strictly prohibited. This call is being recorded. You may listen to a webcast replay of this call by going to the investor relations section of Double-Take’s website.

I will now turn the call over to Erica Mannion, Investor Relations for Double-Take.

Erica Mannion

Good afternoon and thank you for joining us to discuss Double-Take’s 2008 third quarter financial and operating results. With me today are Dean Goodermote, President, CEO and Chairman of the Board of Directors and Craig Huke, Chief Financial Officer. On the call today you will hear forward-looking statements about events and circumstances that have not yet occurred. Statements regarding projected financial results, statements containing words such as will, expect, believe and should and other statements in the future tense are forward-looking statements.

Actual outcomes and results may differ materially from the expectations contained in these statements due to a number of risks and uncertainties. Please refer to the company’s recent SEC filings at the SEC’s website at www.SEC.gov for detailed discussions of the relevant risks and uncertainties. The company undertakes no responsibility to update this information in this conference call under any circumstance.

The press release distributed today that announced the company’s results is available on our website at www.DoubleTake.com in the investor relations section under financial press releases. The current report on Form 8-K furnished with respect to our press release is available on our website in the investor relations section under SEC filings.

In addition, in this conference call we will provide non-GAAP financial results. The reconciliation of these measures to GAAP measures is set forth in the tables that reconcile our non-GAAP results to GAAP results from the press release located on our website as I just described. Before I turn the call over to Dean I would like to mention that the company will present at Thomas Weisel Partners’ Small and Mid-Cap Conference on November 18 in Chicago.

Now, I will turn the call over to Dean Goodermote, Chairman, President and CEO.

Dean F. Goodermote

Thank you all for joining the call. As you know this past quarter was challenging for us as we missed our revenue guidance by about 7%. While a modest discrepancy by some measures we understand how important it is to meet expectations we have set. With that said our earnings performance was solid and we achieved the high end of earnings guidance we set forth in July.

We were able to achieve these earnings with reduced revenue because we were cautious in hiring given the economic environment and because our compensations tied heavily to performance. Our sales force has a considerable portion of its pay tied to commissions. Our executive compensation is tied closely to achieving both revenue and income targets and most of our North American non-sales personnel receive part of their compensation based on the achievement of those same targets. Therefore, reduced performance lowers our cost.

We missed our revenue targets because we failed to bring in deals that we projected and lacked sufficient coverage to make up for those deals. Most of the push in deals occurred in the Americas region. It is easy to blame the economy but we try to take into account economic conditions when we give guidance and we do not credit the economy when we do well.

Still, in some cases we experienced some of the signs of struggling companies such as new levels of approval required at the last minute, some sales cycles elongating and some buyers just plain becoming quiet. The push was across multiple verticals. Some of these deals have now closed. There are few we are skeptical of and the rest we still project to close.

The overall near term opportunity for us still appears to be strong. While we would like to do better in Europe it is improving from poor performance in previous quarters and performed roughly as expected when we gave guidance in July. Asia continues to grow though it’s a small contributor and U.S. pipelines are as strong or stronger than they have ever been. But when providing guidance for the future we cannot ignore the predictability issues we had at the end of September, the negative impact, the appreciation the dollar has on revenue and most important, pummeling news we constantly receive about the world economy and IT spending specifically.

We’ve tried to take this turbulence into account when looking to the completion of the year. That is why we have revised guidance down from previous estimates and why we’ve widened the range. I must add that for the most part neither our employees or most of our customers exhibit the negative outlook about the future of IT that we see in the press.

We also continue to get reinforcement from our customers with the value they get from our products. For example, while Hurricane Ike held back a few orders for us, it also produced many examples of successes. We received several notes from our customers. Now I’ll quote one of them here written to one of our sales professionals: “Hello, Jeff. Thanks to Double-Take we are doing just fine. With our replicated data to one of our other locations we are up and seeing patients once the patients could get to us. We appreciate your concern and your overall support of our organization. On behalf of the doctors and staff we want to say thank you.”

Natural disasters, power outages and operational errors will continue regardless of the condition of the economy. Craig will comment on our distribution but I’d like to add a word about HP. That channel continued to disappoint with sales down more than 20% from last year. However, the two companies continue to make progress in attempting to improve our sales relationship.

We were able to adjust our economic relationship in certain segments so that we can now jointly sell together as we do at Dell and HP is planning to pre-install on all HP ProLiant storage servers with storage mirroring their OEM version of Double-Take to make it easy for customers to purchase a license and use the product. Just to be clear, this is not all ProLiant servers but it is the storage servers.

Most of our new products contributed this past quarter and though small they show growth. TimeData continues to show quarter-over-quarter growth. N-Boot revenue was better than anticipated and Linux also showed modest growth. We also gained some early accounts with our Livewire product which we released late in the quarter.

We anticipate that ultimately this will be a good contributor to our business. It opens up a lower tier market for us that does not require the full capabilities of our standard Double-Take and it also takes on the few competitors who nip at us through their sales into this lower tier market. Our virtual skews also continues strong, nearly doubling in sales from where they were in Q3 of last year which is a faster growth rate than we experienced in Q2. These skews represent about 13% of our product sales last quarter.

I’ll turn it over to Craig now to get more detail but in summary, even in these economic conditions we’ve generated solid earnings in cash flow. And while the current market conditions make predictions difficult for us, the overall opportunity for our products has not changed.

S. Craig Huke

The third quarter as Dean said was a difficult one from a revenue perspective as we fell short of our revenue guidance by about 7%. This was the first time since Double-Take went public that we’ve not met our guidance. However, even with a lower-than-expected non-[PEP 0:05:36.0 file (2)] revenue, non-GAAP operating income was within the guidance and diluted earnings per share is at the high end of our range.

Our September 30 cash position was strong at $68 million. Accounts receivable balances were down from previous quarters and our DSOs remain constant. Deferred revenue did decrease by about $400,000 from the balance at June 30 but the decrease was due largely to the stronger U.S. dollar compared to the Euro on September 30.

Looking at some of the details of the financial results. Total revenue for the third quarter was $24 million, an increase of 12.4% from $21.3 million in the third quarter of last year. Software license revenue was $12.8 million, an increase of 1.6% from Q3 of 2007 and maintenance professional services revenue totaled $11.1 million.

As we stated in our October 6 press release Dean mentioned earlier in the call, sales in North America were less than we had expected with the number of deals that we had expected to come in during the last week of September not closing. Revenue from EMEA was slightly less than expected at the beginning of the quarter but the difference was due primarily to exchange rates and the strengthening of the U.S. dollar versus the Euro. Asia came in pretty much as we had originally expected.

Included in the third quarter revenue is $118,000 of sales from TimeData and $257,000 of sales from products acquired from emBoot. Our resellers generated 74.4% in total sales. Distributors generated 12% of total sales and OEMs, primarily HP, generated 4% of sales. Overall, our indirect channel generated 90.5% of sales in Q3 compared to 88.2% last quarter and 87.5% in Q3 of last year.

Dell and Sunbelt continue to be our only 10% plus partners and CDW continue to be strong as well. Dell contributed 19.1% of sales during the quarter which is higher than the 17.5% it delivered last quarter. Sales from HP decreased by 22.6% during the quarter and year-to-date revenue from HP is down 24.5%.

Gross margin for the quarter was 89.6% compared to 89.2% last quarter and 90.6% in Q3 of ’07. Excluding stock option expense, gross margin was 90% in Q3 and 90.9% in Q3 of last year. Total operating expenses were $17.1 million, an increase of 16.3% compared to the third quarter of last year and up 18% excluding stock option expenses to $16.2 million.

Sales and marketing expense increased 21% to $8.4 million in the third quarter from the third quarter of last year. Excluding stock option expense the increase was 20.9%. The increase resulted from higher head count both in the United States and Asia, increased marketing spending and a reallocation of certain expenses from Double-Take in Europe from G&A as these people are now more directly related to the sales and marketing efforts.

Excluding stock option expense, sales and marketing was 34.2% of revenue in the third quarter 2008 compared to 31.8% in the third quarter of 2007. Research and development expenses increased 42.4% to $4.3 million in the third quarter. Excluding stock option expense the increase was 37.2%. The increase is due to increased head count, increased third party costs for resources we used to supplement in-house development activity and the expenses related to our acquisition of Double-Take Canada which was the TimeSpring acquisition and emBoot.

R&D expenses from Double-Take Canada were $500,000 in the quarter and the expenses from emBoot were $200,000. Excluding stock option expense, R&D as a percent of revenue was 16.9% in the third quarter of 2008 compared to 13.9% last year. General and administrative expense decreased 17.8% to $3.4 million in the third quarter of 2008 from the third quarter of 2007. Excluding stock option expense, G&A expense was $3 million or down about 10% from the end of Q3 of 2007.

The decrease is a result of decreased public company costs associated with the audit and survey and [inaudible 0:00:35.1 file (3)] costs incurred in the third quarter as compared to third quarter of last year and certain reallocation of costs in Double-Take EMEA. The decrease is partially offset by several head count added during the quarter.

Excluding stock option expense, G&A was 12.3% of revenue in the third quarter of 2008 compared to 15.4% in the third quarter of 2007. Depreciation and amortization expense increased 61.5% to $1 million in the third quarter of 2008 compared to 2007. The increase was a result of depreciation on capital expenditures made over the past year and the amortization of about $200,000 related to technology related intangible assets associated with their acquisitions. Of the $900,000 of depreciation and amortization in the quarter, about $400,000 of the total was the amortization of the intangible assets.

GAAP operating income for the third quarter was $4.4 million compared to $4.6 million in the third quarter 2007, a decrease of 5.3%. GAAP operating margin was 18.3% in the quarter compared to 21.7% in the third quarter of 2007. On an adjusted non-GAAP basis, operating income was $5.4 million in the third quarter compared to $5.8 million in the third quarter of 2007, a decrease of 6.8%.

The $5.4 million was in the middle of our previously stated guidance for the quarter which had been $5.3 million to $5.5 million. Adjusted non-GAAP operating margin for the third quarter was 22.5% compared to 27.1% in the third quarter of last year. A reconciliation of these non-GAAP financial measures as well as other non-GAAP financial measures referred to in this call to the most directly comparable GAAP financial measures is included in the appendix of our press release that preceded this call and is available on our website at DoubleTake.com under the investor relations tab.

Turning quickly to other income, investment income decreased by $400,000 in Q3 2008 to $400,000 when compared to last quarter. The decrease resulted from lower returns on our invested cash, the investments that matured during 2008 which had been invested during the year at rates much lower than what we saw last year.

GAAP net income was $2.6 million or $0.11 per fully diluted share for the third quarter of 2008 compared to GAAP net income of $3.3 million or $0.14 a share for the same period a year ago. The decrease in net income and earnings per share is primarily related to increased costs associated with increased head count, costs associated with our acquisitions of TimeSpring and emBoot as well as lower-than-expected revenue growth rates for the quarter.

During the quarter, both 2008 and 2007, recorded income tax expense was $2.1 million. Our expected tax rate on GAAP net income was 44.1% in Q3 2008 compared to 38.3% in the third quarter of 2007. The increase in the effective rate in 2008 relates to virtually all stock option expenses in 2008 being non-deductible for tax purposes while in 2007 a substantial portion of stock option expenses were deductible because they were identified as disqualifying dispositions for tax purposes. The number and amount of these disqualifying dispositions in 2008 has been negligible.

For the third quarter, adjusted non-GAAP net income was $3.6 million or $0.16 per diluted share compared to $4.0 million or $0.17 a share last year. To get to non-GAAP net income we exclude only non-cash stock based compensation expense associated with stock options.

The effective rate on non-GAAP income during the quarter was approximately 36.4%. We ended the quarter with cash and short term investments of $67.9 million compared to $73.8 million at the end of June and $64.7 million at December 31, 2007. Cash from operations during the quarter provided $5.3 million. We used about $500,000 for capital expenditures and we used about $9.9 million of our cash on hand for the acquisition of emBoot in July of 2008.

Through three quarters, cash from operations totaled $16.3 million, an increase of 34% over $12.2 million generated at this point in 2007. Accounts receivable at September 30, 2008 was $17.6 million which is a decrease from the $18.1 million we recorded at June 30, 2008. Accounts receivable days sales outstanding was 66 days compared to 67 days at June 30 and 68 at September 30 of last year so the number for the DSO stayed relatively constant over the past year.

As I mentioned earlier, deferred revenue decreased by approximately $400,000 from June 30 to September 30, ’08. The change in deferred revenue is comprised of a decrease of approximately $1 million due to the U.S. dollar being stronger versus the Euro of September 30 as compared to June 30. Excluding the effect of exchange rates, deferred revenue increased by approximately $600,000 or 2% during the quarter.

Head count was 388 at the end of the third quarter 2008. This does include five employees that came from the emBoot acquisition. This compares to 382 employees at the end of June. We have been and remain very deliberate in hiring additional employees and we will remain so for the rest of the year. We will hire new employees in areas we deem critical but others will likely be pushed out until 2009 or until revenue growth picks up or is more predictable.

Finally, we’re providing the following guidance for the fourth quarter of 2008 and the full year. Double-Take expects revenue for the fourth quarter 2008 to be in the range of $24.8 million to $26 million. With actual revenue through the third quarter at $71.3 million, full year revenue is expected to be in the range of $96.1 million to $97.3 million.

Now, in compiling this guidance we’ve assumed that the U.S. dollar will be approximately 15% stronger in the fourth quarter 2008 as compared to the fourth quarter 2007. We have the effect of reducing revenue by approximately $1 million. Non-GAAP operating income excluding the impact of stock option expenses will be in the range of $5.4 million to $6 million for the fourth quarter, between $20.6 million and $21.2 million for the full year.

These numbers do include the effect of the amortization of intangible assets which will be about $400,000 in the quarter and total $1.3 million for the full year. Non-GAAP income per share for the fourth quarter is expected to be in the range of $0.15 to $0.17 per share and for the full year to be between $0.59 and $0.61. The effective income tax rate on non-GAAP income for the fourth quarter and the full year is expected to be between 36% and 37% and weighted average diluted shares for the fourth quarter and full year are assumed to be approximately 23.2 million shares.

So once again thanks everybody for joining us and we’ll now open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Aaron Schwartz – J.P. Morgan.

Aaron Schwartz – J.P. Morgan

I had a question about how you think about the balance of growth and reinvestment. Obviously you held back a little bit here in the quarter and obviously things have gotten a little different this year than probably a lot of us expected but if you look at your budgets going into next year should we assume a continued very, focus on expenses and you’re going to manage to the margin or can you just walk us through some of the inputs that you think about as you plan your, as you put together your plan beyond more than just a quarter?

Dean F. Goodermote

This is Dean speaking. Not sure what next year brings quite yet but I would think there might be some margin compression because we do want to continue to invest in the future. So certainly in the engineering area we would probably add some resources although not rapid expansion like we might have if conditions still are tough. And we probably don’t need to be as aggressive in the sales area as we were last year when we staffed up to that level.

There could be still a small opposition so it’s possible if reduced revenue growth is still there, that there should be some margin compression but I’d still think we’re in a strong operating position for a company our size. I’m not talking about going into single digits or certainly not losing money in any case. Does that answer your question?

Aaron Schwartz – J.P. Morgan

In terms of your acquisition strategy you’ve done a handful of very smaller in size transactions but does the environment change at all your strategy or are you constantly looking for technology type of acquisitions to bring into your portfolio?

Dean F. Goodermote

It might change. There’s never been a strict rule of not to look at something else, companies that might be more revenue generating have tended to be too big for us to swallow. They might prove to be opportunities for us now if they have related product carries that we can push through distribution if they come down in price which they should.

Aaron Schwartz – J.P. Morgan

Last question for me, a specific question on the guidance. You achieved at the midpoint your non-GAAP income and earnings targets here but it seems like the year still comes down and I’m just trying to reconcile those two, if we should assume some incremental expense here in Q4 that maybe wasn’t in the model previous to today.

S. Craig Huke

I think, Aaron, you’ve got some additional expense in Q4 versus what we had in Q3; not a lot. So I think what we’re looking at is a little bit higher revenue in Q4 than Q3 which would bring along with it some additional variable expenses such as commissions and bonus. I think you’re seeing some of the effects of that because the operating income is a little bit higher than we are showing for Q3.

Operator

Your next question comes from Shaul Eyal – Oppenheimer & Co.

Shaul Eyal – Oppenheimer & Co.

Dean, with a slowdown in mind, can you provide us with some color about the ASP status? What was trending through the quarter? What could be the case as we look into the December quarter?

Dean F. Goodermote

Yes, I’m sorry. I think that was roughly the same as its been the previous quarters. It was about, rounds to about $11,000 for the ASP. Yes, it was a couple hundred dollars difference so I guess, but basically the same. And I don’t anticipate that. It may but I don’t have any empirical reason to think it would change.

Operator

Your next question comes from Joel Fishbein – Lazard Capital Markets.

Joel Fishbein – Lazard Capital Markets

Just one point of clarification. I’m not sure if you addressed this but on the software licenses for Q4, are you expecting that to be down on a year-over-year basis? Craig, I think you made a comment but I wasn’t sure if I heard that correctly.

S. Craig Huke

We are not looking, with the guidance that we’ve given, at the low end it would be a little bit of growth but flattish, not down and actually once you factor in the exchange rates, up a little but we are not, at least right now with this guidance, not looking for license revenue to decrease year-over-year.

Operator

Your next question comes from Walter Pritchard – Cowen and Company, LLC.

Walter Pritchard – Cowen and Company, LLC

Just one question. Craig, you walked us around the deferred revenue off the balance sheet and the decline there which I understand. Guess I want to look at deferred revenue on the cash flow; it looks like it’s a bit weaker this year than it was a year ago and probably a bit weaker than I expected given what it was last quarter. Just wondering if you could talk through maintenance renewals and the factors that influence that part of it and what may be going on there.

S. Craig Huke

Yes. The maintenance renewal rates that we’re seeing in the United States or in Asia actually are trending about the same as what we’ve seen all along so if you look at year-over-year growth, the first half of the year was a little bit stronger than what we saw in Q3. I think and we’ve talked about this in the past; I think we had some renewals in the first part of the year directly related to the new product release and how it was priced and getting some people back on maintenance who may not already have been on.

We are seeing renewals in Europe down a little bit from what we’ve seen in the prior years. I think you’re seeing some of that in the deferred revenue. The other piece of this is that that number is also affected by a multiple year maintenance that customers will typically sign on for when they buy licenses and that number, for the first time that I’ve been tracking it over the last couple years was down year-over-year in Q3 so I think you’re seeing that as well.

And quite frankly I think that seems to make a little bit of sense, that we’re still getting some of the license deals with one year maintenance; just not as much going out extra years.

Operator

Your next question comes from Peter Busey – JMP Securities.

Peter Busey – JMP Securities

Just a quick question. When you looked at your overall business, what percent came from your existing customer base?

Dean F. Goodermote

It was about half.

Operator

Your next question comes from Richard Sherman – MKM Partners.

Richard Sherman – MKM Partners

My question is about the growth in the pipeline that you indicated early on in your remarks. As you look at the aging of those deals, is the growth in the pipeline a function of just deals being open and not closing or is it primarily a function of new deals being added to the pipeline?

Dean F. Goodermote

I think it’s a little of both. I think certainly the sales force sales back there were generating more leads and they’re generating more opportunities and there’s some hangover. Now I don’t think, I think when you miss a quarter you typically don’t get it all back plus whatever you thought you were going to get.

But the sense of optimism that the sales force has, I think they both feel like they’ve got a bit of a hangover plus new opportunities out there.

Operator

Your next question comes from Aaron Honig – Canaccord Adams.

Aaron Honig – Canaccord Adams

I just wanted to talk about the deal that got pushed out. What percent of the deals are closed already and how much do you expect to close from the Q3 deals?

Dean F. Goodermote

Yes. I don’t have that for you, sorry.

Operator

Your next question comes from Shawn Hannon – Needham & Company.

Shawn Hannon – Needham & Company

Sorry if beating a dead horse is getting to some of the deal pushouts but I guess to take a step back and think about this a little bit more conceptually, at what point are you able to actually sense whether you’re on a precipice of actually seeing deals cancelled versus the actual pushouts that you’re citing today? And to what degree do you have confidence in what it is that you’re hearing through your sales force? Because I think that you had cited a few customers have gone silent.

Dean F. Goodermote

Yes. I think the guidance we’re producing is at a level of conservatism that both sales management is putting on the sales force and then Craig and I have put upon sales management. So very few from the direct customer contact have disappeared. Certainly they haven’t gone to the competition and for the most part I’m not sure if I’ve heard that any are telling either their partners or our people that they are gone. But we’re putting a level of conservatism in that that says it’s a long dating which will mean probably somewhat elongated again at the end of this quarter.

Shawn Hannon – Needham & Company

Is there any reason, I suppose just to come at this from a different angle, at what point does that process of seeing deals elongating do you start to then think we could have some cancellations that are looming? Am I not going about it correctly?

Dean F. Goodermote

Yes. I think that’s already in what we’re trying to give you for guidance I think and I’d be very surprised if others don’t. They might not look at it that way but have to think about it that way too.

Operator

Your next question comes from Shaul Eyal – Oppenheimer & Co.

Shaul Eyal – Oppenheimer & Co.

That’s fine. My question has been answered.

Operator

Your next question comes from Walter Pritchard – Cowen and Company.

Walter Pritchard – Cowen and Company

Just one followup I was trying to sneak in there before. Dean, on the products side, I guess one thing I’ve heard from some of your partners and your customers is, if you’ve just got, you’ve got a lot of products especially some that are new right now and things that have been renamed and some that have, were features of products before and are now separate products. I’m wondering if you think there’s any issue with just a product line that’s gone from Double-Take as very simple to something that’s a lot more complex in either the channel or maybe around sales people struggling a bit with that, with the new account complexity there.

Dean F. Goodermote

In some ways, by combining stuff it should make it simpler and that you don’t have to actually answer the question, do I do it this way or that? So I’m not what you’re hearing. I think there is some confusion that we can probably do a better job at of how you do things within Double-Take.

So with many, as is true with some other products, consumer products or whatever you have there, there may be multiple ways to print a word document and as the product expands, there are really multiple ways to say protect an exchange server. It might be in some cases through what we call our Double-Take application manager or perhaps it’s more appropriate using full server failover.

So I do, I then do think you’re correct in sensing that but it may or may not make a difference in revenue generation. The other areas, I think probably emBoot is not well understood yet and so I think that’s probably clear. TimeData should be. And then finally, not to put words in your mouth but I know you wrote about this after the VMworld at least then and I find again that froth around VMware and what they do and don’t do, not just with us but relative to other people who they think are partners, are somewhat confusing too.

Operator

Your next question comes from Aaron Schwartz – J.P. Morgan.

Aaron Schwartz – J.P. Morgan

Just a quick followup question. Craig, do you have the rough split in terms of deferred revenue? What’s U.S. dollars versus what is other?

S. Craig Huke

Aaron, I’ve got that back in my office. I can get that to you though.

Aaron Schwartz – J.P. Morgan

Then a similar question. Do you roughly, in terms of your cash, what’s onshore versus offshore?

S. Craig Huke

Yes. There is about, it’s somewhere between $4 million and $5 million right now that is outside of the United States and that’s all in Europe.

Operator

Your next question comes from Jonathan Ruykhaver – Thinkpanmure LLC.

Jonathan Ruykhaver – Thinkpanmure LLC

Just for clarification, can you repeat what you said virtual skews were as a percent of prior shipments? Did you say 13%?

Dean F. Goodermote

They were. I think the number that I, what I also, says that they were almost double. They were over 90% more than last quarter and so the good news about, from a percentage point, is they were up but we obviously did not sell enough total licenses, right? So as a percentage I think it still shows good growth but, and they did grow well but remember our overall licenses were down so it would say there were 13% of total product sales.

Jonathan Ruykhaver – Thinkpanmure LLC

You also suggested that Double-Take for Linux grew quite well so what are you seeing just related to license copies around exchange? Is that where the weakness is coming from or can you tell what application it is? Is it Sharepoint Exchange sequel or is it tough to know?

Dean F. Goodermote

Relative to our expectations, I couldn’t say it’s there. These are modest improvements in Linux and TimeData, etc. so I think to the extent we missed it was really what I say across the board and depend to be maybe what some people would call medium sized companies; some larger companies. But they tended to be our larger deals and they were across the board type of applications.

Jonathan Ruykhaver – Thinkpanmure LLC

So they activity you saw for Linux, that only started shipping in the June quarter so it was pretty immaterial?

Dean F. Goodermote

I think it was about $120,000, was it?

S. Craig Huke

Yes.

Dean F. Goodermote

So it’s not huge and I, as you know we sell the product for anything but I haven’t heard anecdotally that Exchange was a problem.

Jonathan Ruykhaver – Thinkpanmure LLC

Looking at Double-Take for Linux again, would you potentially look to enter into OEM deals for that product?

Dean F. Goodermote

We might, yes, sure.

Jonathan Ruykhaver – Thinkpanmure LLC

Is that something European’s explored?

Dean F. Goodermote

We haven’t extensively. We haven’t seen that opportunity but we would. It may turn up, like for instance, in different markets. We’re getting geographically more interest out of Japan, vertically more interest out of the educational institutions. It may well be that it’s a lower priced option since in some places for some applications since a lot of institutions that use Linux are really using it because they think it’s less expensive.

Jonathan Ruykhaver – Thinkpanmure LLC

I guess the final question, virtual recovery system for Hyper-V? Any kind of color on activity there?

Dean F. Goodermote

Yes, I think that’s doing well. Oh, for Hyper-V?

Jonathan Ruykhaver – Thinkpanmure LLC

Yes

Dean F. Goodermote

That’s just getting off the ground, sorry. I was thinking in general. I wouldn’t say that’s been a contributor yet.

Jonathan Ruykhaver – Thinkpanmure LLC

So still too early on that?

Dean F. Goodermote

Yes.

Jonathan Ruykhaver – Thinkpanmure LLC

I guess I can squeeze in one final question. Did the partnership you announced with Altech a couple weeks ago, I believe Arrow has been a partner historically. How is this announcement different from what you’ve done with Arrow historically, if it is?

Dean F. Goodermote

I don’t think it is different.

Jonathan Ruykhaver – Thinkpanmure LLC

So the press release from a couple of weeks ago is more elaboration publically of what you’re doing with Altech or Arrow combined?

S. Craig Huke

It was the piece that was outside of the US that was the most recent press release. So, there was one really about the US based partnership and one for outside.

Dean F. Goodermote

It was geographic based.

Jonathan Ruykhaver – Thinkpanmure LLC

So an extension I guess of your partnership with Arrow to new markets internationally.

Dean F. Goodermote

Right.

S. Craig Huke

Yes.

Operator

Ladies and gentlemen thank you for your questions. I would now like to turn the call back to Dean for any closing remarks.

Dean F. Goodermote

I just want to thank all the people who were on the call and listened and a special thanks to all those with your questions and give a thanks of customers of Double-Take and give a special thanks to the employees here who have worked very hard. I look forward to speaking to you in the future.

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