Double-Take Software, Inc. Q4 2008 Earnings Call Transcript

Double-Take Software, Inc. (DBTK)

Q4 2008 Earnings Call

February 5, 2009 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

Dan Jones – Vice President, North American Sales and Marketing

Analysts

Walter Pritchard – Cowen and Company, LLC

Rich Kugele – Needham & Company

Tim Klasell – Thomas Weisel Partners

Analyst for Rob Owens – Pacific Crest Securities

Peter Busey – JMP Securities

Joel Fishbein – Lazard Capital Markets

Jonathan Ruykhaver – Thinkpanmure LLC

Presentation

Operator

Welcome to Double-Take Software’s earning conference call for the fourth quarter and year-end 2008. The date of this call is February 5. (Operator Instructions)

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

Erica Mannion

Good afternoon and thank you for joining us to discuss Double-Take’s financial and operating results. With me today are Dean Goodermote, President, CEO and Chairman of the Board of Directors; Craig Huke, Chief Financial Officer and Dan Jones, Vice President of North American Sales and Marketing.

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 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’ Technology and Telecom Conference 2009 on February 10 in San Francisco.

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

Dean Goodermote

Thanks Erica. Thank you all for joining the call. We were pleased for the results for the quarter particularly our cash flow and are enthused about the long-term position of the company getting a growing stable of product suites produced by acquisitions and internal development. We were challenged in the fourth quarter and will continue to be by two factors; the negative impact of exchange rate changes when comparing year-over-year performance and a sales environment that has become less predictable for us especially in the U.K. and America.

Revenue came in within our expected range and though at the low end of the range it produced strong earnings because of our leveraged compensation structure and because of the cautious approach to hiring which we have maintained throughout the year. We will continue to have a cautious approach to headcount addition for the coming year. We had a pedestrian performance in license growth in the fourth quarter with modest performance in many categories.

In particular our recent acquisitions did not contribute to the growth with both TimeData and emBoot products lines generating less than $100,000 each. In the case of TimeData we pulled back while we work on integration, an effort we delayed as we were lulled into pursuing lots of small, independent sales opportunities. In the case of emBoot it is just too plain early but there is great enthusiasm around its potential. Both product lines figure prominently in our product strategy which I will cover in a moment.

Geographically, Europe steadied in its products and sales but the U.S. was much weaker than anticipated. No one vertical was particularly stellar. Yet there were modest highlights as well. Though still small and showing poor performance for the year our HP channel grew in the fourth quarter well above performance last year at this time.

Sales of our virtual SKU’s on the VMware platform were up more than 40% for the quarter. Our new product Livewire had nearly $1 billion in sales in its first full quarter and Asian and Middle Eastern sales were solid. Last quarter I noted that we were light in revenue because of slippage in deals particularly in America.

We tracked many of these and about 50% of the revenue from those accounts came in during the fourth quarter. Some of the larger accounts scaled back their orders which enhances the pipeline for the future in that they still plan to purchase the entire amount in the future but it hurts the current quarter. This contributes to our sense that actual pipeline activity is strong but booking is not commensurate.

While our pipelines grow our closure rates decline. For the most part we have the same people in sales and marketing using the same metrics so the major change is buying patterns of the customers presumably due to real or feared impacts of the global recession. We have also seen a trend in our sales mix. In recent past, product sales were usually sold to new customers versus existing customers by a small majority.

We are now selling a slight majority to existing accounts. In the fourth quarter about 54% of our product sales were to existing customers. This is positive as it shows our current customers not only continue to be satisfied and that they are not saturated. However, it may also show that newer businesses may be more risk averse, shrinking or perhaps not even being created in this environment.

Our medium and average deal size have not changed significantly though the average is creeping up. There were 5,300 and 11,000 respectively for the quarter and 5,400 and 9,400 for the year. Predicting sales in the near term will likely remain a challenge but we are enthused about the long-term because we now believe we can expand into new markets.

Aggressive pursuit of these markets will take some more development and maybe some small acquisitions as well as some packaging and marketing but with much of the product ammunition we have in place today we can start to attack these markets now. We have long executed well and have a good reputation in disaster recovery or high availability market but with Livewire and TimeData we can now position a product suite into the back up space.

With a repurposed Double-Take we are moving into the migration market and with the emBoot product line we can enter the infrastructure market for both desktops and servers. This all comes under the rubric of workload optimization moving workloads for a variety of purposes. In the past we have moved them for rapid recovery. Now we can move them for many purposes all in the form of portable software.

Our opportunities for 2009 and beyond are many. New markets to penetrate, growth within the largest server company in the world, HP, growth within Microsoft’s Hyper-V virtualization market and expansion into new geographies such as Asia. Although it may be out of our control perhaps you will see stabilization or improvement in customer buying patterns.

To the extent that these opportunities and buying patterns work in our favor we should be able to be at the high end of or exceed our guidance. Of course to the extent that these opportunities are not realized and buying patterns are not stabilized the contrary is possible but we do feel well positioned for the long-term.

With that I will turn it over to Craig.

Craig Huke

Thanks Dean. Good afternoon everybody. As Dean had mentioned our revenue for the quarter was at the lower end of our guidance but the non-GAAP operating income did exceed our guidance and the diluted earnings per share came in at the top of our range despite the negative impact of exchange rates.

Our December 31 cash position remained strong at $73 million and generated $5.2 million of cash during the quarter. Looking at the specific details, total revenue for the fourth quarter was $25.0 million, an increase of 6.1% from $23.5 million in the fourth quarter of 2007. Software license revenue was $14.1 million, a decrease of 0.8% from the fourth quarter 2007. Maintenance and professional services revenue totaled $10.9 million for an increase of 16.5% from the fourth quarter 2007.

Changing foreign currency rates did have an effect on our revenue. The U.S. dollar was stronger against the Euro and the U.K. Pound which reduced revenue by approximately 2% from what it would have been had exchange rates stayed constant. For the full year, total revenue grew by 16.4% to $96.3 million from $82.8 million in 2007. License revenue totaled $52.9 million for a 7.6% increase from 2007.

Maintenance and professional services revenue totaled $43.4 million for an increase of 29.1% from the fourth quarter 2007 and for the year the change in foreign currency exchange rates did not have a significant impact on revenue one way or the other.

Regarding our distribution channel, in the fourth quarter our resellers generated 72.6% of our total sales, distributors generated 14.2% and OEM’s which is virtually all HP generated 5.2% of our total sales. Overall our indirect channel generated 91.9% of sales in the quarter compared to 90.5% in Q3 and 90.1% in Q4 of 2007.

The break out for the full year isn’t much different with resellers generating 72.4%, distributors generating 12.7% and OEM generating 4.4% of total sales.

For all of 2008 our indirect channel generated 89.5% of total sales compared to 90.6% last year. Dell and Sunbelt continued to be our only 10% plus partners with CDW continuing to do well. Dell contributed 16% of sales in the fourth quarter which is lower than the 19.1% delivered in Q3. Some of the drop in the percentage generated by Dell was due to growth in sales by some of our newer partners, particularly Tech Data and Alternative Technologies.

Sales from HP increased by 49.1% in the fourth quarter compared to Q4 of 2007. Year-to-date sales generated by HP are up only 3% for the year but as Dean mentioned we continue to work with HP to make the partnership work more effectively and we think we might be seeing the positive results from those efforts.

Gross margin for the quarter was 89.5% compared to 89.6% last quarter and 90.5% in Q4 of 2007. Excluding stock option expense gross margin was 89.9% in Q4 2008 and 90.8% in Q4 2007. The slight decrease in gross margin resulted from a change in mix between software and services with services comprising a larger percentage in 2008 than in 2007. The gross margin on software was essentially unchanged and the margin on our services increased slightly during the year.

Total operating expenses were $17.1 million for the fourth quarter and $68.5 million for the year, an increase of 7.8% for the quarter and 18.2% for the year. Excluding stock option expense operating expenses increased 6.7% to $16.2 million and increased 16.9% for the full year.

Sales and marketing expense increased 5.4% to $8.6 million in the fourth quarter and excluding stock option expense sales and marketing increased 4.7% to $8.4 million from the fourth quarter of 2007. The increase resulted from higher headcount in both the United States and Asia, increased marketing spending and the reallocation of certain resources in EMEA from general and administrative duties.

Excluding stock option expense sales and marketing expense decreased to 33.8% of revenue in the fourth quarter from 34.2% in the fourth quarter 2007. Research and development expenses increased 29.3% to $4.1 million in the fourth quarter 2008 from the fourth quarter 2007. Excluding stock option expense R&D increased 24.2% to $3.8 million. The increase was due to increased headcount, the increased third party costs to supplement our in-house development activities and expense related to the TimeSpring and emBoot acquisitions which totaled $600,000 in the fourth quarter. Excluding stock option expense our R&D was 15.1% of revenue in the fourth quarter of 2008 compared to 12.9% in the fourth quarter 2007.

General and administrative expenses decreased 12.5% to $3.4 million in the fourth quarter 2008 from the fourth quarter 2007. Excluding stock option expense G&A expenses were $3 million for the fourth quarter, down 13.5% from Q4 of last year. The decrease is a result of decreased public company costs being incurred in the quarter compared to last year and the reallocation of certain resources in EMEA offset slightly by the addition of several headcount during the year.

Excluding stock option expense G&A was 11% of revenue in the fourth quarter 2008 compared to 14.6% in the fourth quarter 2007. Depreciation and amortization expense increased 55.9% or $1 million in the fourth quarter 2008 from the fourth quarter 2007. The increase is a result of depreciation of capital expenditures made in the past year and the amortization of $200,000 related to the technology and related intangibles from our acquisitions of TimeSpring and emBoot.

Of the $1 million of depreciation and amortization in the quarter $400,000 was amortization of intangible assets associated with all acquisitions. GAAP operating income for the fourth quarter was $5.3 million compared to $5.5 million in the fourth quarter of 2007 or a decrease of 3.6%. For the year, GAAP operating income was $17.6 million, an increase of 6.1% from 2007. GAAP operating margin was 21.1% in the fourth quarter and 18.2% for the year, both down slightly compared to 23.3% in the fourth quarter of 2007 and 20% for all of 2007.

On an adjusted non-GAAP basis operating income was $6.3 million in the fourth quarter of 2008 compared to $6.2 million in the fourth quarter 2007, an increase of 1.1%. While our revenue was up at the low end of our guidance our adjusted non-GAAP operating income exceeded the top end of our guidance by $300,000. For the year, adjusted non-GAAP operating income was $21.5 million, an increase of 12.2% over $19.2 million in 2007.

Adjusted non-GAAP operating margin was 25.1% in the fourth quarter, 22.3% for the full year 2008 compared to 26.3% in Q4 of 2007 and 23.2% for the whole of 2007. A reconciliation of these non-GAAP financial measures as well as other non-GAAP financial measures we refer to in this call to the most directly comparable GAAP financial measures is included in the Appendix to our press release that preceded this call and is available on our website.

We also included in that release an explanation of how we use non-GAAP measures and the components of these measures and we urge you to carefully read those disclosures.

Turning to other income, investment income decreased by $600,000 to $200,000 in the fourth quarter 2008 compared to last year. The decrease resulted from lower returns on our cash and short-term investments which matured during the year and were reinvested at much lower rates than what we saw in the previous year.

In the fourth quarter of 2008 we incurred foreign currency exchange losses of approximately $400,000. The exchange loss is higher than the $200,000 we lost in the fourth quarter 2007 as the U.K. Pound weakened significantly against the Euro in the fourth quarter 2008. Because a significant part of our EMEA assets are denominated in U.K. Pounds we incur losses if the Pound weakens against the Euro. If the Pound strengthens against the Euro we then would record gains.

Effective December 31 we have reorganized our legal structure in EMEA so that the P&L effect of these exchange rates should be minimized in 2009 and beyond.

Income tax expense in both 2008 and 2007 includes the effect of adjustments related primarily to the utilization of net operating loss carry forwards. The adjustments were made in the fourth quarter 2008 and in both the second and fourth quarter of 2007. In 2007 the company reversed the valuation allowance on $8.1 million of deferred tax assets expected to be used in 2007, 2008 and 2009 thereby putting $8.1 million on our balance sheet as an asset. 5.7 or $0.25 per share of the total was recorded in the second quarter and $2.4 million or $0.10 per share was recorded in the fourth quarter.

The asset amount specifically relates to the amount of net operating losses we expected to be able to use as I said in the years 2007, 2008 and 2009 and that amount was limited to $7.1 million per year by section 382 of the IRS code. In the fourth quarter of 2008 we analyzed the 382 limitation again using additional information taken from completed tax returns and concluded that the amount of net operating loss carry forward that could be used in each year was almost twice as high at $15.2 million instead of the $7.2 million we had originally calculated.

Basically we determined we were able to use NOL’s much more quickly than we originally thought. The impact of this information had no effect on 2007 but did have a significant impact on 2008. We were able to utilize net operating losses to offset virtually all of our taxable income in 2008 and reduce our cash tax rate effectively to zero. Additionally, we utilized all of the deferred tax assets that remained on the balance sheet at the end of 2007 and 2008. We also made the determination that it was more likely than not that we would generate sufficient income in 2009 to utilize a portion of the NOL’s that were available.

Therefore in the fourth quarter we reversed the valuation allowance on the deferred tax assets that we now expect to actually utilize in 2009 and also made other tax adjustments as we closed out the year. The net impact of these adjustments reduced income tax expense by approximately $7.4 million. The impact on GAAP diluted earnings per share in the fourth quarter and full year 2008 was $0.32. The impact on non-GAAP diluted earnings per share for the full year was also $0.32 but the impact on the fourth quarter of 2008 by itself was $0.31 per share and that difference of $0.01 per share resulted from there being more fully diluted shares outstanding in the fourth quarter than on a full year basis.

Overall this was a long winded way of saying the income taxes in both 2007 and 2008 were impacted by these entries and I wanted to quantify that impact before going forward.

So during the fourth quarter of 2008 we recorded an income tax benefit of $5.1 million compared to an income tax benefit of $300,000. The effective rate excluding tax adjustments increased in the fourth quarter of 2008 over 2007 due to the non-deductibility of the stock option expense in 2008. In 2007 a portion of the stock option expense was tax deductible because it was identified as disqualifying dispositions. The number and amount of those disqualifying dispositions in 2008 was minimal.

Including the effect of the tax adjustment I just discussed we recorded GAAP net income of $10.2 million or $0.44 per fully diluted share for the fourth quarter 2008 compared to GAAP net income of $6.3 million or $0.27 per diluted share in the same period a year ago. The decrease in net income and earnings per share that we would have reported without the positive impact of the tax adjustment is primarily related to increased costs associated with increased headcount and costs associated with TimeSpring and emBoot acquisitions.

On a non-GAAP basis for the fourth quarter adjusted non-GAAP net income including the effect of the tax adjustments was $11.2 million or $0.48 per share compared to $6.8 million or $0.29 per diluted share in the fourth quarter 2007. To get to adjusted non-GAAP net income we excluded only non-cash stock based compensation expense associated with stock options of $1 million in Q4 2008 and $500,000 in Q4 2007.

For the full year 2008 adjusted non-GAAP net income including the effective tax adjustments was $21.6 million or $0.93 per diluted share compared to $22.0 million or $0.95 per diluted share in 2007. Excluding the effect of the tax adjustments adjusted non-GAAP net income was $14.2 million or $0.61 per diluted share in 2008 compared to $13.9 million or $0.60 per share in 2007. Non-cash stock based compensation expense excluded from these numbers was $3.9 million in 2008 and $1.9 million in 2007.

We ended the quarter with cash and short-term investments of $73.2 million compared to $67.9 million in September and $64.7 million at December 31, 2007. Cash from operations during the fourth quarter provided $5.2 million and we used $300,000 for capital expenditures in the fourth quarter of 2008 and $2.5 million for the year. For the year cash from operations totaled $21.5 million, an increase of 4.8% over the $20.5 million generated in 2007.

Accounts receivable at December 31 was $19.6 million which is an increase from the $17.6 million at the end of September 30. Accounts receivable DSO was 71 days compared to 66 days on September 30 and 70 days at the end of last year. So this number has stayed relatively constant over the past year and while our customers have started to extend the amount of time that they take to make payment on purchases we don’t believe we have any significant uncollectible invoices as of the end of the year.

Headcount was 391 at the end of the fourth quarter 2008 compared to 388 employees at the end of September 2008 and for the year we added 43 employees worldwide.

Now turning to our guidance for 2009, as we said in our press release our sales pipelines currently are robust and support us meeting the guidance that we are giving. However, visibility in specific deals and our ability to forecast when they might close it is the worst that it has been in the company’s history. As you can imagine this makes giving specific guidance especially by quarter very difficult and we therefore have widened the range from the low point to the high point of our ranges.

However, we feel that it is helpful to provide this information so you can see how we are currently planning for 2009. With that in mind the company expects revenue for the first quarter 2009 to be in the range of $20.6-22.5 million. Revenue for all of 2009 is expected to be between $96-104 million. These numbers assume the U.S. dollar to be stronger against the Euro and the U.K. Pound in 2009 which has the effect of reducing revenue by approximately 7% in the first quarter and 6% for the full year than what they would have been in a constant currency basis.

Non-GAAP operating income which excludes the impact of stock option expenses will be in the range of $500,000 and $2 million for the first quarter and between $14 million and $20 million for the year. These numbers do include the effect of the amortization of intangible assets which we expect to be between $400,000 in the first quarter and $1.6 million for the year. Non-GAAP income per share for the first quarter 2009 is expected to be in the range of $0.02 and $0.06 per share and between $0.39 and $0.59 for the full year.

The effective tax rate on non-GAAP net income is expected to be approximately 38%. However, the rate recorded in each quarter is likely to vary due to the fact that we compute and report taxes based on GAAP income at a constant rate and then apply those taxes to non-GAAP income. The computed tax expenses apply to non-GAAP income but the effective rate tends to vary.

Our cash tax rate though should be between 0% at the low end of the range and 10% at the upper end of the range. Weighted average shares for the first quarter is estimated to be 23.2 million shares and 23.3 million for the full year.

So once again thank you everybody for joining us today and we will now open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Walter Pritchard – Cowen and Company.

Walter Pritchard – Cowen and Company, LLC

If I look at the guidance it looks like you are guiding that your Opex is going to grow faster than your revenue. You didn’t say exactly what your amortization assumption is there but I gather your Opex still grows faster than revenue in 2009 and I’m just wondering if that is the case. If so, why would you be hiring like that into a more uncertain environment?

Craig Huke

The amortization I did give is about $400,000 a quarter for the intangibles. I think it is safe to say the operating expense will grow a little bit more than revenue but as I think Dean said we are looking at relatively muted headcount growth and I would expect us to keep an eye on that as we see where the revenue comes in. A lot of the expense growth through the year is really getting a full year effect of the headcount increases we had from last year. We are not looking at a lot of headcount certainly not in the first half of the year.

Walter Pritchard – Cowen and Company, LLC

Related to the maintenance revenue it looked like it was down sequentially. I’m just wondering how much of that was FX and what that number looks like if you normalize?

Craig Huke

The FX had about 2-3% on maintenance revenue. It is a little bit tougher to measure that based on how it comes out of the deferred revenue but it was a little bit of an impact at 2-3%.

Walter Pritchard – Cowen and Company, LLC

How much of your business is denominated in Pounds because this quarter the Euro and Pound were pretty different actually.

Craig Huke

EMEA was in total about 30% of our sales and of that about 40% give or take a little bit is in the U.K. So that is where we had the impact.

Walter Pritchard – Cowen and Company, LLC

Dean, on the positioning it seems like moving more into the back up space. I’m just wondering it is a bit more crowded than the market you are in today and I’m wondering what the angle is there in terms of differentiating from the bigger guys like Symantec and [inaudible] and others there?

Dean Goodermote

That is primarily the Livewire product particularly combined with the TimeData back end and the product positioning is simply really very efficient replication with the ability to again relatively quickly recover. It is not the same type of fail over we have that Dell will take but particularly with virtual machines out there we effectively put the continuous replication into a holding pattern and then are able to launch either physical or virtual servers for that back up. So it is still some of the same differentiating factors. What we probably missed by not sort of declaring we are in that space is customers not looking at us that way. Plus it has been confusing by saying here is Livewire and here is Double-Take.

So it is a big market, you are right with established players but I think in certain places where we are looking for cost effective products like ours and server based products like ours we think we will do well and I think with very little push into that space we did do about $1 million last quarter.

Operator

The next question comes from Rich Kugele – Needham & Company.

Rich Kugele – Needham & Company

First, in terms of the HP side I know you were going to be preloaded on some servers. Was that in any way part of the year-over-year increase in the fourth quarter or is this more blocking and tackling just with the sales force?

Dean Goodermote

I don’t have any way to know that because I don’t have a report on what they did on those pro-line servers but I suspect that it is more as I mentioned before that we were now starting able to help sell with them on larger deals. We have improved margins on those and I think that was probably the almost entire reason for that. We had improved margins so we were able to joint sell the bigger deals.

Rich Kugele – Needham & Company

Lastly, just to understand the whole distribution channel side of this we know from our discussions there have been some instances where the channel has actually been going back to OEM’s especially on the hardware side and asking for some help with some vendor financing to get some of these deals done. Have you seen that impact you as you get pulled through or do you find that maybe in this environment you are being sold stand alone? Any color on how you are being sold.

Dean Goodermote

I don’t have any color on that specific aspect. We did think we got benefits from and I’m not sure if this is what you are asking but we did get benefits from Microsoft’s financing program which they started I think some time in the third quarter and from what you are describing as I mentioned our pipelines are large but the closure rate has declined somewhat so that could be affecting to some degree that. I don’t have any specific instances of what you are talking about.

Operator

The next question comes from Tim Klasell – Thomas Weisel Partners.

Tim Klasell – Thomas Weisel Partners

My first question is on Livewire. Obviously that is getting some traction. Are you seeing any cannibalization from the core product with Livewire or are you seeing customers use that just to extend to lower tier servers? Is that being mostly complementary or is there any cannibalization going on?

Dean Goodermote

Anecdotally I am sure there is some cannibalization but if there is then we have to do it to ourselves before somebody else does. But here is what we are starting to see as I think we go into the early part of this year is quotations now where people are saying yes I would like to protect my 4-5 critical servers with Double-Take and here is another 20 Livewire’s. Then maybe something in emBoot for the desktops. So by trying to reposition it I think it more often than not it expands rather than cannibalizes.

Tim Klasell – Thomas Weisel Partners

A question on the guidance it looks like Q1 domed pretty sharply on a year-over-year basis and then for the full year some growth. It looks like we have to put in a fairly steep ramp throughout the year. What are you guys thinking about the macro or the new products? Help us sort of think about what we should model in the ramp.

Dean Goodermote

The exchange rates are having some impact there and then secondly the comparisons for right or wrong we thought we had a very strong quarter last Q1 and we did not think that quarter four was as strong this past year. So if we just look at what we think we are set up to do yes it is stronger growth in Q4 and Q3 but particularly Q4 this year we think we are set up to have a better year with this product line.

As far as the roll out of this positioning some of it is occurring right now. Our sales force has been educated on all this and we are talking to customers now but we are thinking that this gets really leveraged beyond Q1 with less impact this quarter.

Tim Klasell – Thomas Weisel Partners

How did maintenance renewals do in the quarter? Were they sort of running at what you have been seeing in the last few quarters?

Dean Goodermote

One thing that is going on, as we said we had a couple of things going on over the last year. One is from the previous year that effective 15% price increase, the 5% and then 10% increase and that works its way through. It runs through ratably. Then the one reason we raised rates is we started bundling in technology particularly the full server capability. That raised the renewal rates, the rate of renewal because people said gee I can get a lot more. That really played itself out around Q4. Not that is bad. It is not that people are still in renewal but the rate of growth encouraged by those two things, price increases and substantial new functionality played itself out.

Craig Huke

Just to rehash a bit of what Dean said the impact of what he just said and the impact from last year’s price raise was that the dollars that were renewing in Q4 and the growth rate from the previous year was down quite a bit and it was really because the previous Q4 was so strong. We are seeing a renewal still happening and the gross dollars renewed are growing but we have seen cases where the larger renewals are taking a little bit longer to get done just like the license. But we still haven’t seen a lot of cases where the customers just aren’t renewing.

Operator

The next question comes from Rob Owens – Pacific Crest Securities.

Analyst for Rob Owens – Pacific Crest Securities

You mentioned that Dell represented a lesser portion of sales for the quarter and I was wondering if that is something we can anticipate going into the future?

Dean Goodermote

I don’t think so. I mean if it is Craig pointed out probably why. Growth in Tech Data and ATI which in some places have very similar customers so that is attractive for us some. I think if you look back over the years it has typically varied between like 15-20% or 16-19% so this is at the low end. If it is there two more quarters then I would say it is a trend but it has been there before.

Craig Huke

Real quick, if you look at the last four quarters it is like Dean said it was 16%, 17% and 19% and then 16% again. So it has bounced around a little bit but generally in this range.

Analyst for Rob Owens – Pacific Crest Securities

Could you give me a sense of the linearity for the quarter?

Dean Goodermote

No, we never do that.

Operator

The next question comes from Peter Busey – JMP Securities.

Peter Busey – JMP Securities

I just wanted to get your take on what the customer is saying in terms of IT budgets and how confident you are going to be able to capture dollars with the reduced budgets that are out there?

Dean Goodermote

Can you repeat the question?

Peter Busey – JMP Securities

I was just wondering how confident you are you will be able to capture IT dollars within the budgets that are out there and how you are going to…just a comment on how you think you are going to be able to close deals compared to other companies in IT?

Dean Goodermote

I think some of this still has to go on. Does everybody absolutely have to have this? No. But it is generally being able to recover is an important part of business. It may get slowed in the sense that people say we haven’t had a failure recently but there will be failures that will continue to drive it. Secondly, and I think this got masked a bit particularly with some of the SAN players but I think will come back we really do offer a very affordable alternative even leveraging SAN now with emBoot but through our software approach I think we will continue to look like a good option for this as we go forward.

I think the first part of your question was if we are hearing anything. I don’t hear…our sales discussions aren’t about oh my god budgets are being cut and the economy is bad. Our sales discussions are people still feel like they are buying from us but clearly they are either being forced to delay or getting a little bit of cold feet and they delay with us more than they did a year ago and a lot more than they did two years ago. But they are the same types of discussions and same types of documents going back and forth so we are just not hearing that this is just a project that has moved out for higher priority. I don’t feel like we are losing…anecdotally it does not seem like we are losing share. If IT budgets just plummet then I think we will suffer. I think they have gone down and we have suffered some. We have not been increasing our position because budgets have gone down.

Peter Busey – JMP Securities

Can you give any color on your thoughts with regard to pricing moving forward? How you look at it when things are contracting.

Dean Goodermote

I think it is pretty much as we said. We always said we were able to increase prices on the core Double-Take but in the future we would be offering product lines that were less expensive. That is effectively what we did with Livewire. So we started executing on that last quarter. It is not like it is a price reduction it is just simply a new product which we always felt we would introduce into the existing market and so far that is working.

The other aspect is something we didn’t talk about because it is something we just acquired in August would be the emBoot impact and that on a desktop is a relatively modest priced product. Of course there is a lot of desktops out there. So no price deductions that we are planning on. Just entering new markets, some of which are for less expensive software.

Operator

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

Joel Fishbein – Lazard Capital Markets

I just want to follow-up on Walter’s question again in terms of the maintenance revenue. I know you have gone through it a little bit but I didn’t expect it to tick down sequentially. Maybe just give us a little feedback going forward into 2009 how we should be looking at that and modeling maintenance going forward. That would be great.

Craig Huke

Keep in mind and we covered the fact that the renewal growth rate in Q4 leveled off or what was certainly less. The exchange rate impacted the maintenance revenue from Q3 to Q4. But also remember you look at our license revenue growth over the last couple of quarters that impacts maintenance in the following quarters because we un-bundle the maintenance out of the deal. So all of those come together to a flat net out and caused it to go down a little bit. For 2009 we are expecting the maintenance revenue to kind of get I’d say of the range that we are looking at I think you are still looking at the 55% or 45% break out. The growth is going to be slowed in the first part of the year as the license revenue slows down as well and it is probably going to take the same type of seasonality as we have seen in the licenses just until we get back to a more normal level of growth for the licenses. The two do play together.

Joel Fishbein – Lazard Capital Markets

Let me ask a different way and maybe make it a little bit clearer. So to get to the low end of your guidance, the $96 million, which would imply flat year-over-year you could either model software and maintenance for that or you could model software licenses to be down year-over-year and maintenance to grow slightly? I just want to make sure I am thinking about this the right way. I was assuming that you would see maintenance grow a little bit and professional services grow a little bit even if software licenses are flat. I just want to make sure that is the right way of thinking or should I be thinking flat/flat?

Dean Goodermote

We don’t have a crystal ball. We don’t know what we are going to sell. But the logical scenario is that low end guidance did come in it would imply some down licenses to growth in maintenance.

Craig Huke

We are looking at the maintenance to keep ticking up a little bit yes.

Dean Goodermote

Remember even with that down there is a 7% currency impact too. So there is still unit growth within that but if it were flat considering the currency part that is the logical way to look at it. You would see some slowness in licenses and still increases in maintenance.

Joel Fishbein – Lazard Capital Markets

On emBoot I understand you have TimeData and you pulled back that a little bit. Was that macro environment related or was that relative to what is going into Double-Take and when do you think the market is going to be right for emBoot and when should we start to get more comfortable with starting to see some revenue from that?

Dean Goodermote

I think those were entirely internal oriented. If things are great we would see pull through but both were entirely internal. Hopefully you will see some emBoot impact this quarter and TimeData next.

Operator

The next question comes from Jonathan Ruykhaver – Thinkpanmure LLC.

Jonathan Ruykhaver – Thinkpanmure LLC

Did you mention virtual SKU’s as a percent of sales?

Dean Goodermote

I did. Were you not paying attention? Yes, together because we talk about what is called the Double-Take VMware infrastructure and then the Double-Take Virtual Systems, they were up a little more than 40%.

Jonathan Ruykhaver – Thinkpanmure LLC

They increased 40%?

Dean Goodermote

Quarter-over-quarter. Quarter 4 over quarter 4 of 2007.

Jonathan Ruykhaver – Thinkpanmure LLC

So they increased 40% year-over-year and what were they as a percent of product shipments?

Dean Goodermote

I did not give that.

Jonathan Ruykhaver – Thinkpanmure LLC

I think it was 13% last quarter so I assume based on that growth it increased as a percent of shipments.

Dean Goodermote

It should be more because it increased better than the license growth. Yes.

Jonathan Ruykhaver – Thinkpanmure LLC

I can get that later.

Dean Goodermote

You are right. I always quote that and I’m sorry I didn’t add that up.

Jonathan Ruykhaver – Thinkpanmure LLC

Are you seeing that you are being pulled into deals by the VMware channel or is that not the case yet?

Dean Goodermote

I think that varies by region. As you recall we really struggled in Europe because we were almost out of the VMware loop and that has improved. So I think it is sort of regional or geographic where we have gotten in close with the local people or the local market is working for us. It varies.

Jonathan Ruykhaver – Thinkpanmure LLC

I just asked that because I think you are working more closely with some of those same channel partners that VMware does.

Dean Goodermote

That’s right. Certainly it is not like we are excluded but some places it works better than others.

Jonathan Ruykhaver – Thinkpanmure LLC

Are you seeing anything yet related to the Microsoft Hyper-V or is it just too early?

Dean Goodermote

I did mention that in my talk. That is still an opportunity for us and it could be substantial over the next couple of years. We don’t have our full product capabilities out there yet although that should be soon but we do have some. I don’t think we have seen Microsoft take off yet either.

Jonathan Ruykhaver – Thinkpanmure LLC

So that could be an opportunity down the road?

Dean Goodermote

Right.

Jonathan Ruykhaver – Thinkpanmure LLC

Regarding the business through HP has there been any kind of restructuring of that deal so it is not as much of an OEM deal but more along the lines of what you do with Dell?

Dean Goodermote

Not enough. I mentioned last quarter that we did get a better margin arrangement for what I call big deals. When a package is over a certain size. That is probably almost entirely what drove the increases last quarter.

Jonathan Ruykhaver – Thinkpanmure LLC

Is that your sales organization that is pushing that through or is it pull through the HP channel?

Dean Goodermote

It is probably cooperation. There are some cases where we helped and some cases where we led it. But we are definitely involved and encouraged this to happen so I hope that keeps going. But the situation is the margin like a true reseller? No. Is it double pay? No. It is something else. At least as of today they still take the support. All three of those things are different for everybody else.

Jonathan Ruykhaver – Thinkpanmure LLC

Those are opportunities you saw in the December quarter with HP do you think that is recurring or do you think you would see a tick back in terms of contribution to overall sales?

Dean Goodermote

I think our sales force would say they feel that this is on the rise. That will keep going.

Jonathan Ruykhaver – Thinkpanmure LLC

You commented on the weakness in North America relative to Europe. What do you think is behind that? Is it execution or budget related where you are developing the respective markets?

Dean Goodermote

No I really feel like the same things that were done and said in the sales processes and the document exchanges or whatever is required to get the deal were done the same as they always have been done in the past. The buyers didn’t execute in the way that we thought they would in the past. I think we think that could deteriorate further but I think we think that is going to continue for the year. Hence our caution.

Jonathan Ruykhaver – Thinkpanmure LLC

Do you see the quarter more back end loaded in North America because of that and then deals just didn’t close at the end of the month of December?

Dean Goodermote

I think that is what we talked about last time. The same things were said and done before and we called it deal slippage. I probably want to say that is a fact of life now. That is a fact it is a tougher sales environment for all companies. I don’t want to make that as an excuse. That is the environment we are in. The answer is yes, for our individual sales guys they would all say oh we thought that was going to come in. But I think that is probably at least for this next quarter and I would suspect probably for most of the year that is going to be a fact of life for us is that we have to have bigger pipelines and probably more product opportunities which I really think we do.

When I said we were enthused I really do feel like the company is very, very enthused about the long-term positioning because we have got more capabilities now to go into our accounts. We are very, very related to storage. So we are just going to have to really build these things up to have a larger pipeline to close upon because the closure rate is reduced.

People who think they have budgets apparently are pushed back on. They don’t go away but they are pushed.

Jonathan Ruykhaver – Thinkpanmure LLC

So you still see the opportunity you just don’t have any visibility into closure.

Dean Goodermote

They are less predictable. The deals we were tracking from the third quarter I was watching 16 of them. Only one went away. Most closed in some fashion. The big issue is that they got reduced which means we still have this customer. They said let’s do it in this one department and then we are going to roll it out in the ten departments we were originally intending to have it done in. So they still like the stuff. They still have the intentions. It just got pushed back.

Craig Huke

The answer to the question on the virtual SKU’s they were about 12% of the total in Q4. Not quite as much as we thought but I think that is because Livewire and the success there kind of rebalanced what we had a little bit.

Operator

This concludes our question-and-answer period for today’s conference. I would now like to hand the conference back over to Mr. Dean Goodermote for any closing remarks.

Dean Goodermote

Thanks a lot for your attention again. We really appreciate all those who have joined in the call and are following the company. We do feel although it was a challenging environment that the company is committed to earnings, innovation and long-term growth and I want to give a special thanks to the employees and customers that made it happen. Thank you.

Operator

Ladies and gentlemen thank you for participating in today’s conference. This concludes our program for today. You may now disconnect.

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