Netezza Corp. Q3 2009 Earnings Call Transcript

Nov.25.08 | About: NETEZZA CORP. (NZ)

Netezza Corp. (NZ) Q3 2009 Earnings Call November 25, 2008 4:30 PM ET

Executives

Jit Saxena – Chief Executive Officer

Jim Baum – President, Chief Operating Officer

Patrick Scannell – Chief Financial Officer

Analysts

Kathryn Huberty – Morgan Stanley

Nabil Elsheshai – Pacific Crest

Doug Reid – Thomas Weisel Partners

Mark Kelleher – Canaccord Adams

Glenn Hanus – Needham & Company

Alex Kurtz – Merriman Curhan Ford

Rajesh Ghai – Think Equity Partners

Brian Denyeau – Oppenheimer

Operator

Welcome to the third quarter fiscal 2009 Netezza Corporation earnings conference call. (Operator Instructions) At this time I would like to hand the presentation over to your host for today's call, Ms. Deb Murphy, Netezza's Vice President and Corporate Controller.

Deb Murphy

Good afternoon everyone and thank you for joining us on our earnings release conference call for our third quarter of fiscal 2009 which ended October 31, 2008. Speaking today will be Jit Saxena, Chief Executive Officer, Pat Scannell, Senior Vice President and Chief Financial Officer and Jim Baum, President and Chief Operating Officer.

Before we begin, I'd like to remind you that some of the statements made on this call will be forward-looking statements including our comments on expected financial performance, operating performance, the growth of our business and other financial expectations. Actual results may differ materially from those indicated by these forward-looking statements as the result of various important factors including those discussed in the risk factor section of our most recent annual report on Form 10-K and the most recent quarterly report on Form 10-Q, each of which is on file with the SEC.

In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our view as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change.

On this conference call we will be referencing GAAP and non-GAAP financial measures. We provided GAAP and non-GAAP reconciliation information in the press release we issued earlier today announcing our Q3 results. The press release is available on the home page of the investor relations section of our web site at www.netezza.com. The webcast of this call will be archived in the same section.

I would now like to turn the call over to Jit Saxena.

Jit Saxena

Good afternoon everybody and thanks for joining the call. We are very pleased with our Q3 fiscal year '09 performance. I would like to make the following observations. First, both our existing customers and many new customers continue to believe that even under some very challenging economic environment, their investment in data housing appliances and the associated analysis gives them a huge edge in managing their business and in competing effectively in their respective markets.

Second, we believe this reinforces the strength of our value proposition in terms of its performance, time tovalue and the total cost of ownership. Third, the big vendors are finally coming around to our viewpoint that in every market an integrated hardware and software solution presented as an appliance is critical to their market success.

As most of you know, Oracle has finally decided to validate this approach by bringing out their first generation data warehousing appliance. We believe this validation will significantly expands our addressable market in the date warehousing appliance category that we created will become even more commonplace. Even though todate we have not competed with the Oracle appliance directly, we look forward to competing with it and expect to do very well against it.

Fourth, our customers continue to find more new and productive uses for our product on an every increasing amount of data and we continue to learn from them about ways to increase the ease of use, performance and scalability characteristics of our producsts. Input from various generations of our products and will help us in competing with the first generation product very, very effectively from our competitors.

Fifth, we will continue to make selective investment as both product development and our distribution channels to continue to grow our market share. I will now turn to Jim Baum, our President and Chief Operating Officer to expand on these observations.

Jim Baum

I'd like to expand on Jit's comments to give you some more insight into the dynamics of the quarter. In the context of continued economic challenges, we have seen evidence that our selling proposition remains strong. Most of our competitors are selling expensive systems that require large commitments to purchase install and operate and these economic conditions are not welcoming to such an approach.

However, companies do need more than ever, to be able to fully analyze and understand their businesses. Imagine a large CPG company making just a small percentage error in setting manufacturing volumes or understanding product profitability; that small error results in millions of dollars of wasted spend at a time when they can least afford it. Yet many of these companies are in an environment of slowing spending and conservative views on new projects.

Our value proposition is well received in this environment as companies that still have a problem to solve look for faster times to value, lower costs and lower ongoing operating expenses. We had customers in the quarter buy our product to for ,example, match buyers and sellers based on compatibility criteria which is that customers core business, improve sales force effectiveness and customer loyalty in a pharmaceutical company and improve the performance and cost effectiveness of the voice and data communications network in a telecommunications company.

All of these applications are core to our customers businesses and these functions need to be provided to the business regardless of the economic climate. We offer the market an opportunity to solve these and many other business problems more effectively and at lower total cost than competitive solutions.

The competitive landscape did change rather dramatically during the quarter. Oracle announced their entry into the market with a database machine. During the launch of this new product, Oracle made it clear that Netezza has defined the characteristics of a successful offering in this space and as such, is the competition.

We have interpreted this as a very positive development. Oracle in one day has validated our market and our technology approach to it. All the attention on the data warehouse suggests that Oracle believes there is significant revenue here, reinforcing our view of the opportunity in this market.

This has also gotten the attention of the broad community around this space, reiterating the importance of power analytics and high performance infrastructure to get the value from those analytics. In fact, since their announcement, our inbound inquiries have increased noticeably.

While we've not competed against them yet, we do believe we will prevail when the decision is based on the merits and cost of the technology. They have put some compute power close to data but to truly achieve the scale and performance characteristics that our streaming architecture enables would require major architectural changes in a product by Oracle. It was originally designed to be a transaction processing data base.

We look forward to meeting them POC battle and remain quite confident in our product being still 10 to 100 times more performance at significantly lower acquisition and ongoing operating costs.

Meanwhile, our product development organization continues to create further differentiation on Netezza's platform. We are on schedule to deliver another major software upgrade to our appliance in Q1 of fiscal year 10 that will further our lead on our key differentiators.

In addition to our observations in our core markets supporting business intelligence processes, we also continue to see interesting new applications enabled by our architecture. For example, an 8 million member targeted marketing site that matches buyers to advertising, deployed Netezza as its core growth engine for their content business. They use the system to better segment and profile their site visitors combined with behavioral analysis to monetize the customer base, to obtain subscriptions as well as advertising uplifts.

Another of our customers who sells insurance products, uses Netezza for complex geospatially driven risk analysis. This client measures the distance between each insured asset in a range of hazards to determine a risk score. While that in itself sounds simple, what's interesting is they do this across hundreds of millions of these assets.

With Netezza this process is now completed in only five seconds where previously it took them nearly an hour. This has improved their own competitiveness in their business and allows them to better evaluate risk.

Our own engineers are also busy with the integration of the new tech advanced analytics capability. We are orienting new tech more toward a product driven business from what was primarily a services driven business. As such, we're making a considerable number of functions available in our platform to further enable the next generation of analytical applications based on the technology we acquired.

We have now seen interest in these solutions to create applications that are representative of a new generation of business analytics. Applications like optimizing and engine design, improving the quality of mined ore and minimizing the energy costs associated with industrial product production.

There is however, no doubt that the economic climate is challenging. Looking ahead, we are being prudent with our investment as we have seen several order deferred both internationally and domestically. This is happening mostly in the form of decision cycles being extended and requiring further business justification, although in a couple of cases we have seen spending stop at least until year end.

As such, we're being very selective and opportunistic with any future investments that we make. Now I'd like to turn it over to our Chief Financial Officer, Pat Scannell.

Patrick Scannell

Revenue for the quarter was $50.6 million for the third quarter of our fiscal 2009 year, representing an increase of 51% over the third quarter of last year of $33.4 million and was $137 million for the first nine months of 2009 which was up 57% from the same period a year ago of $87.2 million.

Product revenue for the quarter was up 43% and service revenue was up 91% from a year ago. 68% of our revenue came from the install base versus 48% a year ago and 56% year to date. We secured 17 new customers this quarter for a total base of 226 customers. Our average deal size was $1.3 million.

Geographically, 92% of our business was in North America and 8% international and on a year to date basis, 82% has been in North America and 18% international. As we said in the past, we expect that this will be in the 80/20 range domestic versus international as we go through the next few quarters and as we continue to expand our international footprint.

Vertically, our analytical service providers, telecommunications and retail sectors made up 72% of our business with financial services adding another 11%. We had one customer that was greater than 10% of revenue for this quarter. That was in our analytic provider service segment.

We ended the quarter with 46 quota carrying sales teams. During the quarter we added three new sales teams and two teams were managed out of the organization based on performance. The direct sales team accounted for 81% of our business this quarter.

I'll be referring to non-GAAP figures in this call unless I specifically state that I am referring to a GAAP figure. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available on our earnings press release issued earlier today which is posted on the investor relations section of our website.

Gross margins for the quarter were 62% in Q3 with product margins consistent at the 60% level and service margins coming in at 71%. For the same quarter a year ago, we had overall gross margins of 60% with product margins of 59% and service margins of 68%.

Operating expenses were $25.2 million which is up 38% from $18.3 million a year ago. Sequentially, operating expenses were essentially flat from Q2. The company today is operating with 376 people, up from 254 people a year ago.

Operating income was $6.2 million or 12% of revenue from $1.9 million a year ago or 5.7%. We have seen operating leverage build in our operating model. However, we expect that we will see a one to two point decline in Q4 to approximately 10% as we will feel the OpEx impact of the investments that we made during Q3.

Interest income was $845,000 for the quarter, down from previous quarters as a result of lower yields in our cash portfolio investments. Given these uncertain economic times, our cash is invested conservatively in U.S. Government and Government related securities with the exception of the $54 million that we have invested in auction rate securities. I will review our investments in more detail as part of the balance sheet overview.

We recorded $1.3 million in tax expense for the quarter made up of Federal A&P and State and foreign taxes which equates to an effective tax rate for non-GAAP of 19% and 27% for GAAP for this quarter. Non-GAAP net income for Q3 was $5.7 million or $0.09 per fully diluted share on a share count of 63.2 million shares.

Now turning to the balance sheet, we exited the quarter with $153 million in cash, cash equivalents and investment, which is up slightly from what we reported last quarter. This includes an additional impairment reserve that we took of $3.4 million in our auction rate securities given the large fluctuation in interest rates over the last two months. This was all in accordance with FAS 157 which lays out the specific methodology for valuing financial instruments which do not have an active secondary market.

We still hold a balance of $54 million in auction rate securities and do not anticipate any near term relief given the other credit issues that are being worked by Congress and the Senate.

Accounts receivable ended the quarter at approximately $31 million with a DSO of 55 days, well within our DSO target range. Our revenue distribution for the quarter was relatively consistent with our prior quarters with 27% of our business done in the first month, 29% in the second month and 44% in the third month.

Inventory was $24 million, down from $28 million a quarter ago and $34 million a year ago, with more efficiencies in place to manage our bill plan forecasting with our contract manufacturer, our deployment of finished goods and our proof of concept cycles.

Deferred revenue was up $1.4 million from last quarter. Our total deferred revenue balance is roughly $61 million and is comprised of $45 million of deferred service revenue and $16 million of deferred product revenue. Deferred product revenue is a normal part of our business and will fluctuate up and down over the course of the year as it has over this past year.

Turning now to our guidance for the balance of the year, you can expect that Q4 will be flat with Q3. Certain investments that we have made during Q3 will be feathered into the Q4 operating expense run rate and accordingly, we'll have a one to two point impact on our operating margins from what we reported this quarter resulting in non-GAAP operating margins in the 10% range and EPS in the $.08 range for Q4.

For Q4, you should use an effective tax rate of 19% for non-GAAP and 32% for GAAP. For the year, we are increasing our revenue guidance to the $187 million level which will represent a revenue increase of 48% year over year with non-GAAP operating income at the 9% to 10% level for the year and EPS at the $0.30 level. And for the year, we expect to have an effective tax rate for non-GAAP of 17% and 27% for GAAP.

We are in the middle of our planning cycle for our fiscal year 10 and are not in a position to comment on that plan. Directionally, we expect that we may see more impact on the global economic setback on our business. However, we believe that we are well positioned to weather this storm because our value proposition is focused on return on investment and performance.

Today, decisions are still being made for the Netezza solutions based on these attributes. Accordingly, we are being extremely careful in outlining any incremental investment in the FY10 plan and are in the mode of staying focused on the near term execution with limited headcount expansion.

We will present our detailed FY10 guidance in our next conference call in early March when we release the results of Q4 and our full year results for fiscal year '09.

I'd now like to turn it back over to Jit for a few remarks.

Jit Saxena

Before we turn the call over for Q&A, I'd like to talk about the organizational announcement that we just made, appointing Jim Baum as Netezza's CEO effective at the end of this fiscal year. The succession planning at Netezza has been in the works for some time. Most of you already know Jim. Jim has been our President and COO at Netezza for about two and a half years.

I have been working in this industry for about 40 years and will continue to work with Jim and the management team in the areas of strategy and business development as Chairman effective February 1, 2009.

We will now take any questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first call comes from Kathryn Huberty – Morgan Stanley.

Kathryn Huberty – Morgan Stanley

Jim congrats on the new position, very well deserved and Jit I know you're not going far but you'll be missed. As it relates to the transition can you just comment on what gave you confidence in light of the macro environment that the company was in the position for a passing of the baton of the CEO position?

Jit Saxena

As you know, we have been working on this for quite some time. Jim and I and Pat, all of us have been focused on executing our strategies together for a considerable amount of time and I think we felt and the Board felt that this might be the right time to make this change. The company has achieved a lot but we believe that we have a ways to go and the future looks very bright so we felt this was a good time to make the change. I'm very excited about it and again, I also join you in congratulating Jim on his new role.

Kathryn Huberty – Morgan Stanley

Are you planning to bring in a new COO?

Jim Baum

No, we're not.

Kathryn Huberty – Morgan Stanley

As it relates to the environment, I know there's a lot of unknowns and it sounds like you're really focused on the near term and not necessarily stepping up investments from the current level, but have you gone back and looked at for planning next year, do you think the business can still grow and remain profitable even if new customers wins were to trend close to zero? The new customers is where you've seen some pressure over the next couple of quarters. Do you think you have a customer base and a recurring revenue base that can allow this business to grow and be profitable next year? I know that's somewhat of a draconian scenario, but I just want to frame the downside.

Patrick Scannell

We are in the middle of looking at what is the prospect for FY 10 and as you look at our business this quarter, 68% of our business came from the install base, and we'll continue to see 60% to 65% coming from the install base. As we continue to go through and check our visibility as we always do monthly and look at current quarter, next quarter and two quarters out, as we look at those metrics we can still see our business continuing to accelerate.

I don't think that we're in the business of looking at zero new customers. I do think that we have the ability to maintain profitability and much of that will be driven by the install base and we think that we've got great foresight and prospects on the upside to look at new customers and new businesses as we have in front of us today.

So yes, that is draconian and we do look at all sorts of scenarios in our business but I think at a minimum, we expect to see our install base continue to drive 60% or more of our business and then the balance with our 46 quarter carrying reps driving new account activity beyond that.

Kathryn Huberty – Morgan Stanley

How does the productivity look of the recent hires, say in the last six months, versus the productivity you saw a year ago?

Patrick Scannell

We haven't seen a big change in the productivity. We still think about a new sales rep as coming up to speed over the course of nine to 12 months before they're fully productive. We really haven't seen that change. In fact, in North America, we've seen some of the new guys deliver business sooner than they have historically and I think that's largely based on the size of the infrastructure we have now and the amount of pipeline that's there, but no real noticeable change.

Kathryn Huberty – Morgan Stanley

How about in the international business, that was a little light this quarter versus prior quarters. Is that just an execution issue internally or did the macro environment flow more outside of the U.S.?

Jit Saxena

I think it was probably a combined factor both of our internal execution as well as the macro conditions in some of the international markets. We do expect that when you look at the longer term that international will come back to the 20% level and probably grow from there. So I think we feel very good about that.

Operator

Your next call comes from Nabil Elsheshai – Pacific Crest.

Nabil Elsheshai – Pacific Crest

I would also like to pass on my congratulations to Jim although given the economy I'm not sure if you're going to want that. I did want to follow up on the competitive commentary you made about Oracle. I understand you said you haven't competed with them directly. Do you have a sense, have you seen any customers delay or decide to look at Oracle before they wanted to consider Netezza? Have you heard any of that going on in the field?

Patrick Scannell

In the context of our own pipeline we have not. We have heard of places where they're running proof of concepts with the data machine but they have not been deals we've been directly involved in, so we've heard them more through the network in the community than directly through our sales force.

From what we understand of them, they tend to be large Oracle accounts where they've introduced this product and are running some form of a POC. But we've not yet encountered them directly and I can't say we've situations where customers have said, "Stand down Netezza, we want to look at Oracle's new appliance first."

Nabil Elsheshai – Pacific Crest

What about on the terra data front. They've had their appliance out for a couple of quarters now. Have you seen compete rates with that increase?

Patrick Scannell

I don't think we've seen the compete rate increase. We still see Oracle about the same amount of time. They tend to be involved in certainly most of the larger deals that we get involved in. We've had good success against them competing in the market against their appliance and they've certainly continued to be a strong and aggressive competitor.

Nabil Elsheshai – Pacific Crest

It sounds like the previous commentary about three to five sales teams a quarter is probably on hold until we get a little bit better visibility. Is that accurate?

Patrick Scannell

It's not entirely accurate as we will opportunistically add resource selectively in different markets so it's not absolute on hold freeze. We will add selectively.

Nabil Elsheshai – Pacific Crest

On the visibility, it looks like your guide traditionally you wouldn't see a Q4 flat. If you look at linearity from last quarter, it looks like October held up fine. Have you seen something since the quarter ended where things have slowed down or any change in the environment during this quarter so far?

Patrick Scannell

It was really more driven from what we saw during Q3 where we saw a few deals get pushed out in both domestically and internationally and we don't know. We have not seen any indication in terms of other deals, and deals are being lined up as we go down the funnel and go down through the process of the POC to the close cycle.

You just don't know when it hits the CFO's desk whether funny things are going to happen at that particular point in time. I think that the guy that we have right now is just cautious.

Jim Baum

I would suggest that while the actual pipeline is not shrinking, it is elongating a bit. We are seeing people being very much more so deliberate around these types of acquisitions and the approval levels go higher, and so they take a little bit longer. We've seen a couple of cases where things have gone away, where accounts have just said we're not going to spend the money this fiscal year, come back in January, and we'll see what happens in January when they have their new budgets in place. And so that's part of the dynamic as well.

Nabil Elsheshai – Pacific Crest

Have you gotten any sense from your customers what they're thinking about for budgets next year or is it too early?

Jim Baum

It's too early to know.

Operator

Your next question comes from Doug Reid – Thomas Weisel Partners.

Doug Reid – Thomas Weisel Partners

Just on any changes you might see compared to the landscape on Oracle and terra data, I'm thinking specifically Green Plum, are they showing up in any different way now?

Jim Baum

I would say they're showing up less now. It seems that our experience in the last quarter was largely Oracle, terra data related competitively and Green Plum, and I think this may be related to some of the struggles we see at Sun, but it seems like they are not quite as visible in the market as they were.

Doug Reid – Thomas Weisel Partners

Can you give us an update on the transition from HP to EMC?

Jim Baum

Yes. We are just now beginning the shipments of our systems with the EMC disc arrays in them, so that project has been delivered and it's beginning to ship really as we speak.

Doug Reid – Thomas Weisel Partners

I'm not sure if you gave the number but I'm looking for the percent revenue from existing customers. Did you share that?

Patrick Scannell

68%.

Operator

Your next question comes from Mark Kelleher – Canaccord Adams.

Mark Kelleher – Canaccord Adams

I just wanted to talk a little bit about the services line, a tick down sequentially; gross margins came in a bit. Can you talk about what's going on there?

Patrick Scannell

As Jim mentioned in his prepared remarks, part of our initiative with new tech is moving them and shipping them from services/consulting organization more towards a product organization. So some of that shift that you saw and the down tick in sequential revenue of services was due to that.

Mark Kelleher – Canaccord Adams

You talked about some international execution issues, internal execution issues. Are you addressing those? What are you doing there?

Jit Saxena

Of course we are addressing those and there are several new initiatives that we've started that we talked about in earlier time frames, and they do take some time to materialize. For example, our initial entry into Germany and France, I think that will take some time before we see development in some of those territories, but yes, we are very focused on improving our execution in some of those markets.

Operator

Your next question comes from Glenn Hanus – Needham & Company.

Glenn Hanus – Needham & Company

Maybe back on EMC for a second, could you maybe give us an update on the progress on training and engaging with EMC and their sales force and some thoughts on incremental revenues coming from that direction?

Jim Baum

Clearly it's ongoing. The process continues. We have now as I mentioned gotten the product integration in place so the EMC disc arrays are available as part of the Netezza appliance. We've got our field teams beginning to engage. We have several opportunities that we have called on jointly now with EMC and the programs internally with the EMC business development folks and our own business development folks continues to get this information out to the field.

We've got our field now made completely aware, the Netezza field completely aware of this and what the products are and how they're priced, and we're still working on it with EMC to get information to their field. We're still mid process.

In terms of the revenue impact of it, I would still suggest to you that it's difficult to say right now. It's still a bit early. As I mentioned there are a handful of engagements where we have engaged jointly with EMC but in terms of a more broad based impact, it's still too early to say.

Glenn Hanus – Needham & Company

Maybe you could talk a little bit about the Netezza developer network, give us an update there on the joint go to market activities, arrangements and potential impact for Netezza sales next year.

Jim Baum

So the Netezza developer network continues on. In fact one of the examples that I used in my prepared comments was related to a geospatial application in the insurance industry and that is a direct result of a product that was created through the Netezza developer network that we have entered into a relationship with the company that produced that product to both take that to market and to acquire the technology from them.

We added some new partners to it and I would say since the last call, probably the most significant new information there is that we've really taken the new tech business and oriented it toward integrating the functions that they have for analytics and optimization into our appliance. So as part of the developer's network, we'll be providing a whole suite of functionality that our partners will be able to use to drive some advanced optimization and analytics.

Operator

Your next question comes from Alex Kurtz – Merriman Curhan Ford.

Alex Kurtz – Merriman Curhan Ford

You touch a couple of different verticals; Retail and Telco, that have exposure to the consumer. Could you just help us understand why your customers that touch consumers are not getting dour on their CapEx the next couple of quarters and why they continue to spend with Netezza considering their exposure to the consumer space?

Jit Saxena

I think one of the reasons we believe that is true is because many of these businesses need to really get a good handle on their own internal operating efficiencies when they are dealing with a large number of customers that is to both retail and Telco. And we believe that it is those requirements that are driving them towards better analytics and better understanding of really what's happening with their customer base, how can they more efficiently service them, how can they improve their value proposition and so on.

So these investment decisions are not being done lightly but they are really becoming very, very necessary in many of these verticals and I believe that's why they continue to expand the usage of the Netezza product.

Jim Baum

One of our partners, this is not in the verticals you mentioned, but one of our partners just told me yesterday that they're investing in a new program to go and search for revenue leakage in their own business, and they think there's a multi hundred million dollar opportunity there in their business. So these are the kinds of programs that people seem to be putting in place in this environment.

Alex Kurtz – Merriman Curhan Ford

Would you say that you are consuming your percentage of the CapEx budget with one of your customers maybe expanding, if the overall number is contracting, you're percentage is growing potentially?

Jim Baum

Probably yes.

Alex Kurtz – Merriman Curhan Ford

The New York Stock Exchange has been building out a couple of major data centers. Have you been involved in those and if you have, is that continuing to drive business for the next couple of quarters?

Jit Saxena

It's difficult for us to talk about the details of specific customer implementation but the New York Stock Exchange continues to be a great customer for us, and we expect that we'll continue to do very well with them.

Alex Kurtz – Merriman Curhan Ford

Following up on that services questions, that new tech explanation that you gave us, are we expecting the services margin then to return to where it was in Q1, Q2 time frame?

Patrick Scannell

The services margin this quarter was 71%. As we guided last quarter, you'd see it in the low 70's. So the 70% to 71% is probably is a good metric for you to use.

Alex Kurtz – Merriman Curhan Ford

What was the cash flow from operations and Cap Ex?

Patrick Scannell

Cash flow from operations this past quarter was $4.9 million and CapEx was in the order of $1.5 million.

Operator

Your next question comes from Rajesh GhaiThink Equity Partners

Rajesh Ghai – Think Equity Partners

You mentioned in the past that your sales cycle is typically nine to 12 months, I was just wondering these projects that involve Netezza whats the funding of the cycle, is it typically close to the end of the cycle, that is typically done a few months before.

Patrick Scannell

I think the funding is varied from account to account and vertical to vertical. Part of our prospecting and qualifying for the sales effort is first to determine whether or not funding exists for a particular opportunity, and certainly a commercial opportunity versus a federal opportunity, that whole funding question is dramatically different.

But it would vary. But with a nine to 12 month sales cycle, before we embark on month two or month one of that sales cycle, we need to make sure funding is most probable.

Rajesh Ghai – Think Equity Partners

So you mentioned that 32% of the revenue came from new customers. Can you talk about if there was any particular strength of some verticals or weakness of verticals in regards to new customers?

Patrick Scannell

I don't have the new customer segmentation versus the existing customer, but our business, our core business centers around the Telco's, the e-business segments. Its new emerging markets of pharmaceuticals and healthcare are emerging markets that will be significant opportunities for us and are current opportunities for us.

Rajesh Ghai – Think Equity Partners

You mentioned some orders were deferred and a couple of instances stopped. Any specific vertical again or was that, can you comment on that?

Jit Saxena

No particular trend in terms of a vertical there.

Rajesh Ghai – Think Equity Partners

You mentioned this business intelligence appliance strategy, the OEM strategy as a way to increase distribution. You’d announced Actuate at your user conference, any color on how successful that has been and any plans going forward for extending that strategy to other OEM vendors?

Jim Baum

In terms of Actuate, we're just getting started with that relationship so it's too early to comment on how successful it's been, but the contract is signed so that's good news. We're still working on getting that to market. In terms of strategy as it applies to other vendors, obviously we're interested in those things and we do have a function in the company that does pursue those types of opportunities.

So as we find those opportunities we will certainly opportunistically pursue them in the best interest of the business.

Rajesh Ghai – Think Equity Partners

Interest income was reduced quite dramatically from last quarter and you mentioned that you had taken a conservative stance as well as managing cash. Do we assume the same interest rate going forward?

Patrick Scannell

Yes.

Rajesh Ghai – Think Equity Partners

And that's factored into your $.30 guidance for fiscal '09?

Patrick Scannell

Yes it is.

Operator

Your final question comes from Brian Denyeau – Oppenheimer.

Brian Denyeau – Oppenheimer

If you could just talk, you mentioned you're seeing the funnel elongate here. Can you just talk to what steps you're taking with your internal sales teams to get them to deal with that new environment and how they're going to try to close deals in that sort of environment. If you could just walk through that a little bit that would be great.

Jim Baum

I think a lot of it also comes back to coverage, so as we see deal cycles elongating it's also important that we have other opportunities that can drop in. You know, we're very focused on prospecting on the one hand. On the other hand, we're also making sure we spend a lot of time with the install base. The install base continues to be a place that represents substantial opportunity for us where the deal cycles are more normal. They're not as elongated.

The technology is in place and proven, and so we see customers that have a need, and they don't go through an evaluation process, so they contact Netezza and the sales cycles run much more quickly. It's hard for me to say that we have a renewed focus on the install base because that's always been very important to us. We invest a lot of energy in ensuring great customer success. But it certainly an area that provides opportunity when new opportunities sales cycles are elongating.

Brian Denyeau – Oppenheimer

Are you seeing any change in the sales cycle length in the install base at this point or has that stayed relatively constant?

Jim Baum

It's stayed relatively constant.

Brian Denyeau – Oppenheimer

After the change here with new tech on the services component this quarter, is that going to be an issue or change in the January quarter or has that kind of run its course and we should go back to the more normalized quarter over quarter increases in service revenue going forward?

Jim Baum

I think you should see the more normalized quarter over quarter increases as you have seen in the past, yes.

Operator

There are no further questions at this time. I would now like to turn the call back over to Jit Saxena for closing remarks.

Jit Saxena

Thanks everybody. Thanks for you support and enjoy the Thanksgiving holiday.

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