Compellent Technologies, Inc. Q4 2008 Earnings Call Transcript

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 |  About: Compellent Technologies, Inc. (CML)
by: SA Transcripts

Compellent Technologies, Inc. (NYSE:CML)

Q4 2008 Earnings Call

February 11, 2009 4:30 p.m. ET

Executives

Jenifer Kirtland - EVC Group

Philip Soran - President and CEO

Jack Judd - CFO

Analysts

Katy Huberty - Morgan Stanley

Troy Jensen - Piper Jaffray

Mark Kelleher - Canaccord Adams

Alex Kurtz - Merriman Curhan Ford

[Ryan Hudgenson]

Eric Martinuzzi - Craig-Hallum Capital

Glenn Hanus - Needham & Company

Rajesh Ghai - Thinkequity Llc

Operator

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to the Compellent fourth quarter 2008 earnings conference call. (Operator instructions).

This conference is being recorded today, Wednesday, February 11, 2009. I would now like to turn the conference to Jenifer Kirtland with the EVC Group. Please go ahead Ma’am.

Jenifer Kirtland

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

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

And with that, I will turn the call over to Phil Soran, President and CEO of Compellent. Phil?

Philip Soran

Thank you Jenifer and thanks to everyone for joining us today for our fourth quarter earnings call. With me on the call is Jack Judd, our Chief Financial Officer.

Compellent reported an excellent quarter and a strong finish to 2008. We’re very pleased with our results across the board, revenue growth, market expansion, increased profitability, and cash generation. Just to highlight a few specific financial results: Net income increased to $1.3 million or $0.04 per share on a GAAP basis. This is a nice improvement from the third quarter results of $464,000 in net income or $0.01 per share. Excluding stock compensation expense, fourth quarter net income was $2 million or $0.06 a share.

Revenue continue to grow on the fourth quarter setting another record of $27 million. This represented a 10% sequential and a 60% year-over-year increase. This is our 13th consecutive quarter of revenue growth in a significant milestone to achieve a $100 million plus revenue run rate as we exit 2008. We ended the year with $100.3 million in cash and investments on the balance sheet, which is $5 million higher than at the end of the third quarter. So I refer to this quarter as the 100 by 100 quarter where we achieved the $100 million run rate on the revenue side and a $100 million in cash.

Our performance is the result of the market trend I call, Flight to Efficiency. Companies cannot quit storing data but they can reduce the total cost of the storage spend. End-users reduced this cost to innovations such as our Automated Tiered Storage, Thin Provisioning and Replay Technologies.

We have observed the shift in end-user decision making. They now deal much deeper in the storage feature sets to determine the impact of the storage maintenance versus (inaudible). This has been a really positive shift for us as customers are increasingly turned to Compellent for our cost effective solution. And this shift is allowing us to take market share from larger incumbent storage providers.

While the economy is a concern, we remain optimistic. We entered the first quarter with strong momentum, while some perspective end-users have experienced budget sways, our mind share with strategic business partners and end-users continued to grow. According to recent report published by Gardner, spending on IT harware in the US is expected to decline 8.8%, but at the same time Gardner also reports that US storage budgets are expected to increase in 2009.

54% of the survey respond had stated their storage budget will increase this year and 37% expect them to stay the same as 2008. Although they set the expected increase, more than half expect to increase to be from 10% to 19% higher than 2008.

Another study, Enterprise Strategy Group recently published the survey of 504 global storage professionals that shows budget conscious storage purchases who emphasized efficiency in 2009. The survey data confirms that technology is the component (inaudible) such as data reduction, automated tiered storage and storage reservation are the top storage initiatives that end-users will focus on over the next 24 months.

Our discussions with our channel our partners and end-users customers confirm that there’s a flight to efficiency in today’s storage market. Many IT departments are searching for new innovative ways to store data and reduced waste. Gardner has been telling their clients that this is an opportune time to include some alternatives storage companies on the short list as default into legacy storage vendors. Many analysts believed that there are improved ways of storing data that can significantly lower cost during time of tightening budgets. This helps open the door for Compellent. Once in the door we can show end-user our unique abilities to automate the movement of data to lower cost, tier as storage and many other efficiency features that stretched their budgets further than they thought possible.

As customers look for efficiency they also want a strong provider; our healthy balance sheet, customer references, profitability, and the replication of our Copilot’s report as a final ingredient in customer lands. Work where our end-user counts.

During the fourth quarter, we ended 192 new end-users, bringing our total end-user customers to 1,278. These are some example of recent new customer wins and upgrades. We have good success with service providers like Center 7, MaximumASP, Muffet (ph), Celetrix (ph), and Data393.

Healthcare continues to be strong first with customers like Kansas Pine Hospital and Pacific Hospital in Long Beach. Our presence internationally continues to grow. Some recent international wins are IPER , a large (inaudible) retailer in the city of Amsterdam, the Ramstedt (ph) group which is a multi-billion dollar global HR service provider with offices in 50 countries, New Zealand police and the Australian aerospace.

We also received an upgrade order from Toll Brothers, the leading US builder of luxury homes. This is a good example or even in tough economic times, storage facility are necessary expenditure for companies as they find ways to lower their IT cost.

Our targeted end-user customers continues to be the mid-sized enterprise. We also continue to track large enterprise accounts. A good example of this is Travellers Insurance, number 83 on the Fortune 100. Obviously we closely watch our revenues and customer counts. At the same time we closely monitored the impact of our business model. As we benchmarked ourselves, we see continued advantages of our virtual manufacturing differentiation resulting in significantly lower inventories and improved cash flows. Our 100% channel models and the leveraging of our off-to-shelf harbor is showing up in our profit and cash flows. We made significant progress toward target models in 2008.

Our technology bench continues to get stronger. We continued to invest in R&D to ensure our ability to provide our customers the most advanced solutions. During the year we introduced a number of new software and hardware features and upgrades. In total, we have to make the base on varying workloads that have the potential to deliver performance increases up to ten times greater as compared to the end of 2007.

The industry continues to recognize our products, customer benefits, in all channel models. In 2008, we received 15 industry awards including Microsoft Storage Partner of the Year, the Best of VM World 2008 for virtualization hardware, the British Computing size 2008 award for our customer GM2 Logistic as the Green Organization of the Year, Inside Enterprises 2008 Partner of the Year, and InfoWorld 100 awards three of our customers won among the top 100 IT projects of the year.

So, in summary, the fourth quarter provide a great strong finish to 2008. For that, on behalf of the Board and behalf of the team, I would like to express our sincere appreciation to our employees. In addition we want to thank to our Channel partners and our end-user customers for their ongoing support. It is appreciated more than ever. As we look at, we have strong momentum going to the first quarter. While we continue to evaluate the prospects for 2009, we are confident that data storage needs continue to grow and that Compellent demonstrate a feature resolution to the more efficient and cost effective and competitive alternatives. I’m proud of our accomplishments in 2008 and look forward to another good year in 2009.

Finally, before I’ll turn the call over to Jack, I’d like to mention that Compellent has scheduled May 21st as the date for our annual shareholder meeting. Now, I’d like to ask Jack to provide a more detail look at the fourth quarter and full year 2008 and our general outlook on the first quarter of 2009. Jack?

Jack Judd

Thank you Phil. I’m excited about taking everyone through our fourth quarter results. During the fourth quarter, revenue grew $10.1 million to $27 million or 60% from the prior year’s fourth quarter. Compared to the third quarter of 2008, revenue grew $2.4 million or 10%. We continue to grow in our international market. International revenue increased to $4.7 million in the fourth quarter comparing to $2 million the previous year.

Our end-users at the end of the quarter totaled 478 compared to 741 the year earlier. Our revenue from the 15 end-users measured on the year to date basis was 37% of product revenue and new end-users made up 63% of product revenue. This combination of new end-users and our current based coming back for upgrades and additional systems makes the Compellent story exciting.

Our gross margin increased to 54.9% in the fourth quarter of 2008 compared to 51.4% in the same quarter of last year. For all of 2008, gross margin was 53.8% compared to 49.3% in 2007. Our margin increase is driven by leveraging our product (inaudible) cost and our Copilot’s support services.

Operating expenses increased to $14.1 million in the fourth quarter of 2008 from $11.4 million one year earlier as we continue to build infrastructure especially in sales and marketing and research and development. Our total employee count at the end of December was 290 compared to 212 at the end of 2007.

We continue to leverage our business model advantages which are clearly seen in a quarterly and yearly net income figures. Net income for the fourth quarter of 2008 was $1.3 million or $0.04 per share compared to a net loss of $1.8 million or $0.06 per share during the fourth quarter of 2007. For all of 2008, our net loss was $416,000 or $0.01 per share versus a net loss of $7.8 million of $0.77 per share in 2007.

Especially pleasing are our results excluding the effect of stock based compensation. Excluding this non-cash expense, increases our net income to the fourth quarter to $2 million compared with a net loss of $1.5 million the previous year. For all of 2008 our net income before stock based compensation was $1.8 million compared with a net loss of $7.1 million in 2007.

Our balance sheet again in December shows significant accomplishments. We ended the quarter of $100.3 million in cash investments. Our balance sheet includes $20.6 million deferred revenue, an increase of $3.2 million from September and $10.1 million from December 2007. The growth in deferred revenue reflects both the increase in new endusers choosing three of our maintenance contracts and the almost 100% real rate of our current enduser base.

Our aging and our accounts receivable 0:17:59 quarters. I want to make a special point of highlighting the limited growth in our balance sheet especially in accounts receivable and inventories. Both of these balances are significantly leveraged compared to a year low numbers and are actually lower than September amounts.

Now I’d like to provide our thoughts and guidance for the first quarter of 2009. Our momentum and pipeline remains strong. We therefore forecast another quarter of sequential growth. We currently expect revenue to increase to approximately $28 million in the first quarter of 2009 compared to $18.3 million in the same quarter of 2008, a forecast of growth rate of 53%. We project our quarterly non-GAAP EPS to be between $0.02 and $0.04 per share. The non-GAAP adjustment is due to 0:18:47 back of stock based compensation from net income. With the uncertainty of the global economy, we currently will not provide any further guidance on 2009.

That concludes our formal remarks. Now operator, could you please open the call for questions and answers.

Question-and-Answer Session

Operator

Thank you sir. Ladies and gentlemen we will now begin the question and answer session. (Operator instructions)

Our first question comes from the line of Katy Huberty of Morgan Stanley. Please go ahead.

Katy Huberty - Morgan Stanley

Good afternoon and congrats on the quarter, guys.

Philip Soran

Thank you Katy.

Katy Huberty - Morgan Stanley

One of your competitors is talking about a slowdown in January tonight, what’s does your pipeline look like at the end of December and have you seen any change in your business in terms of new deals coming into the pipeline or close rates in January and February?

Philip Soran

We don’t (inaudible) our business is (inaudible) here now Katy but I would just say that the comment in the earning call here that we kind of—I have stated in the quarter was some strong momentum so if you’ll read about that, I think we’re going through a little bit of the budget but normally January is a slow down as people look to their budget cycles and this year is especially more focused on budget cycles as part of that but in general, we can see demand and opportunities and mind share like we said with our business partners and end-users.

Katy Huberty - Morgan Stanley

Why do you think that Compellent’s gross margin are increasing as margins at the competition are falling? Are the incumbents having their price more aggressively again your more efficient platform and do you think that your margins trajectory is sustainable?

Philip Soran

We’d forecast that these margins were kind of above our target models so we’re happy there. But in general, I agree with some advantage in the purchasing power that has helped us a little bit here and also we’re able to amortize the cost to some of our Copilot’s services over a large install basis helped. But in general, Compellent’s competition, I think the customers’ reactions are giving us much more credit now for our features (inaudible) for that same features had a couple of years ago and that they’re actually bigger and deeper to understand the impact of their environment on our feature set and that maybe it played now even stronger to our advantage than it was in the past.

Katy Huberty - Morgan Stanley

And then lastly, Jack when do you expect to recognize income tax expense in your GAAP model? One of your peers is indicating that the tax rate will be well above 35% or the normal 35% corporate tax rate before it normalizes, is that something that you’re working through now and could be a headwind in the near term?

Jack Judd

A great question, Katy. We currently don’t expect any GAAP taxes the next couple of years as we start to ease through our net operating loss carry forwards. But saying that is that I would expect that without some large tax strategy, which we currently are not forecasting, I would expect that our go forward tax rate could be approximately at 37%, which would be both federal and state and I would say that over the next 12 to 18 months we will look more closely at our tax strategy and will update if we have anything to pass on to everybody.

Katy Huberty - Morgan Stanley

Great, thanks much.

Operator

Thank you. Our next question comes from the line of Troy Jensen of Piper Jaffray. Please go ahead.

Troy Jensen - Piper Jaffray

Congratulations on the nice quarter, gentlemen.

Philip Soran

Thanks Troy.

Troy Jensen - Piper Jaffray

Hey, just a quick one for you two guys. I start with Phil. Phil you’ve stated publicly that you believed you could double revenues just by (inaudible) mind share with your channels, I’m curious if you could give us maybe an information, you know, out of the mind serious comments now or maybe (inaudible) if your channels going less than your revenue growth rate?

Philip Soran

In my understanding your questions Troy now is the revenue growth we showed there, did we, you know let’s say, it has increase 60%, did our channel partners increased 60%? The answer will be no. The number of discrete channel partners, but it does show that the mind shares increased in those partners. So, I think we made significant progress on that front last year and actually it’s one of our key initiatives for this year. We have a pretty big investment going into channel development, so we can keep that mind share with those business partners growing here. And we got a lot of business partners that even today we have another key partners for us, we have a lot of room for growth to get a larger percent of their mind share and their market share for our storage processes.

Troy Jensen - Piper Jaffray

I got it. And then a quick for Jack. DSOs have dropped materially the last two quarters, if you can give us a sense of what been it already it is, looks like the last couple of quarters or this quarter specifically?

Jack Judd

Our calculations internally have our DSO almost the same from quarter to quarter. I think what you might be seeing depending upon how you calculate it. It takes to defect some of the linearity between the months within our quarter. And so, I don’t think anything really dramatic or significant in our AR aging right now.

Troy Jensen - Piper Jaffray

Okay, perfect. Keep up the good work guys.

Philip Soran

Thanks Troy.

Operator

Thank you and our next question comes from the line of Mark Kelleher with Canaccord Adams. Please go ahead.

Mark Kelleher - Canaccord Adams

Thanks. Let me add my congratulations as well. I want to just touch quickly on the competition. Could you give us who you’re seeing the most in competitive bidding?

Philip Soran

The competitive for really hasn’t changed much, you almost see EMC which has a great sales presence out there. Very frequently, (inaudible) is number two competitor we’ll see and probably maybe a little more than we used to is HP (inaudible) assisted is some of the business partners we have and also from the international business we have. So, those are the top three we see on a very frequent basis.

Mark Kelleher - Canaccord Adams

Alright, and how about vertical market strength in the quarter? Was any particular verticals that were noticeable?

Philip Soran

It was a pretty simple quarter from what we’ve seen in the past where we have a vertical concentration or that’s a bit some of the vertical (inaudible) one were strong was by (inaudible) you know in the 10% range or slightly right around there would be the healthcare financial services, government, education, low types of verticals, tend to be the strong ones, but once again, no concentration or reliance on anyone of them.

Mark Kelleher - Canaccord Adams

Okay, great. Thanks.

Philip Soran

Thanks Mark.

Operator

And the next question comes from line of Alex Kurtz with Merriman Curhan Ford. Please go ahead.

Alex Kurtz - Merriman Curhan Ford

Thanks guys. Great quarter again. If you look at your deals in Q4, could you say that the mixed of deals say over $250,000 to $300,000 increased sequentially? There’s a lot of evidence that you guys are getting into larger deal as you mentioned at the beginning of the call. Can you tell us some kind of contempt behind that and why are getting into bigger deals? Are partners bringing you into those or you guys finding those deals?

Philip Soran

Very good question. Normally, we poured all the number deals over certain dollar amount or whatever, but I would tell you, in general , we do see more deals at that size than we might have in the past. I think it’s a combination of a couple of things. Some of our business partners are very good at those sized accounts and we got a lot of mind share from some of those that maybe we didn’t have in the past. Second of all, I think either the end-user or we find it. If the end-user finds out, so we find the end-users. So I find the predominant feature that allow those larger customers are find us for as our data progression with the automated tiered storage, they can’t find that from anyone else and so consequently we tend to get a little more (inaudible) to those kind of customers.

Alex Kurtz - Merriman Curhan Ford

The content of larger deals this quarter was roughly the same as last quarter. Phil?

Philip Soran

We have a report on it, but this similar (inaudible).

Alex Kurtz - Merriman Curhan Ford

And then Jack, can you just give us a directional feel on OPEX going into Q1 and (inaudible)?

Jack Judd

We are going to continue to spend to develop our business and to grow our business, so I have to expect that operating cost will increase in the first quarter and I think that it’ll increase in some where amounts to kind of how we have in the past. We’re continuing to hire. We’re hiring at all levels without filling in wide spaces in the United States and internationally and we’re going still to try to take advantage of our feature functionality and gross business.

Alex Kurtz - Merriman Curhan Ford

Okay, thanks again.

Operator

Thank you. Your next questions comes from the line of Ryan Hudgenson (ph) (inaudible) Capital Markets. Please go ahead.

[Ryan Hudgenson]

Good afternoon. A couple of questions here. First, that’s a follow up to that past question on OPEX. Can you talk to why G&A was down over $750,000 and how should we think about that next quarter as well?

Philip Soran

Well, Jack?

Jack Judd

The G&A number had a lot of lower legal expenses ending in the fourth quarter than it had in the third quarter. And so the number was down quite a bit. I would expect that G&A will not have a benefit like that again in the first quarter.

[Ryan Hudgenson]

Okay great. And then as it relates to the services line continues to strengthen here, in terms of thinking about on the quarter-over-quarter growth rate in Q1, how should we think about that as you weigh that against the $28 million in revenue guidance you provided? And then, just in general how should we think about the services business growth over the remainder of 2009?

Philip Soran

I would say, Jack you can (inaudible) in another city and I’m here, but—I would say the similar type of trend is on the fourth quarter on the services line and if it will increase it could be a large dollar amount. I think the percentage it would change that much, but on the dollar matches because of a penetrational increase. Jack, any else you want to add?

Jack Judd

In addition to what Phil said, I think that the service is a professional services component of that number will increase as we go through 2009 and in the future as we continue to emphasize professional services besides just the installation and training that we have starkly and provided in the past. But I agree with Phil as that the percentage overall revenue will remain relatively consistent as we continue to selling our primary products every quarter.

[Ryan Hudgenson]

So, just a follow up on that—assuming you know you hit the $28 million basically, that implies it got sluggish product revenue growth and then the (inaudible) is the strength in the current quarter. Is that fair?

Philip Soran

I think, I prefer just to stay with the guidance that we gave which would be revenue at $28 million.

[Ryan Hudgenson]

Perfect. Okay. And then just finally on stock based comp expectations as well for the quarter?

Phillip Soran

The stock based comp is going to be higher in 2009 than it was in 2008 as we continue to give out stock grants to employees and as we have the effect of fourth quarters of expense to grant that might have been given out in a partial year in 2008. I would say this number overall maybe in the year could be as much as double or it was in 2008.

[Ryan Hudgenson]

Great, thanks guys.

Operator

Thank you. Your next question comes from the line of Eric Martinuzzi from Craig-Hallum. Please go ahead.

Eric Martinuzzi – Craig-Hallum

Thanks. My question has to do with the maturity of your channel. 2008 results were terrific. The channels adapting to their learning you – you learning about them and they’ll learning about you. Talking about were you see the channel changing both from the perspective of national versus regional here domestically and then internationally. Where we’re a year from now?

Philip Soran

So, first of all, like when the earlier caller’s question there, you know and to double our revenue in 2009, we do not need to double the number of partners that we have. What we need to do is double the mind share of the partners especially domestically that’s true. You are seeing a larger mix come from national resellers. You know that is a trend we have here, but along with that, we’ve seen some our regional players to have significant growth in their business with us and that’s kind of attributed to what used to Eric, where there is getting much better at the play bulk and a lot more exposure to us than they get better each deal they do. So, I think it’s really kind of combination of all those that the tough economic times, we’re going to have to go through it by getting a larger mind share from both the regional players and the national players. On the international front, that’s a little different. I can see a lot more of the growth coming from new partners that we either have just signed up or we’ll sign up as the year goes on. There’s a lot more opportunity for new partners as we go international.

Eric Martinuzzi – Craig-Hallum

Okay. And then on the order pattern, is that we’re exhibiting Q4 and thus far in Q1, did you see any change from the install based, you know, you talked about in the press release that it is a challenging economic environment despite that you guys obviously putting up terrific numbers, but did you see things that had you not seen, you know, things would have been even better had not these folks that we’ve been counting on for follow on orders than pushing things out. Have you seen that crossing sole based?

Philip Soran

I’ll be with you as much of a pushing of upgraded orders. The one that receive other system is you kind of grow as you need capacity and like I said earlier, the data needs continue to grow. So the upgrade are seen to come. While you may see us maybe a new project or a new competitive lean back in case you’ll see us slipped or delay of a quarter, as they try to evaluate their budgets, but you really don’t seem to go away. They may delay a little bit, but they’re going to come back in the future because they got to find a more efficient way to store the data. So, I think if I can see more of the economic effect in the new orders as opposed to upgrades.

Eric Martinuzzi – Craig-Hallum Capital

Thanks.

Operator

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

Glenn Hanus - Needham & Company

Good afternoon. Congrats from here as well.

Philip Soran

Thank you, Glenn.

Glenn Hanus – Needham & Company

I think you have some new products coming in the SST realm and Live Volume in the second quarter. Maybe just give us an update on new product introduction plans for the coming year.

Philip Soran

Yes, we kind of broke range from we normally do last Fall. In kind of talking about futures, which is the SST and the Live Lines something. We usually do that as just one was just so our customers could plan and anticipate those kind of features and then also you have logged the virtualization announcements that we’re going on last Fall. We want to make sure people are aware of the impact of something like a Live Line could have on that. So, first of all the SST, things are going well in the development front there. It’s a very exciting technology. I would say it’s a very expensive technology so customers tend to get very excited until they see potential cost of (inaudible) drives and then luckily they get excited again when they realized that with us they can tie that into a tiered storage with their automated tiered storage. So, we think we can do implement solid state architectures for about 10% of the cost on what a competitive offering could. The reason being is we can only put the active blocks of data on the solid state and keep inactive down on spinning media, which is a lot more efficient. So, I hope it will see a nice acceptance of customers of that. I think, the price are going to have to continue to drop before you see a mass exodus to solid state, but that’s an exciting one. And then on the Live Line front, it’s a really enterprise feature for us. It’s really can be exciting than the continuous operations arena and it really ties right in to all the virtualization players be able to kind of dynamically and automatically move the data along with moving applications and servers with the server virtualization partners. It’d be very, very exciting. So, we think its this one more of those features that moves us up in the enterprise even higher.

Glenn Hanus - Needham & Company

Are those both on track for Q1 and Q2 this year?

Philip Soran

Yes. We talked about those rough time frames and that’s the time frames rather that’s come on in engineering and once again you’ll find this to our announcements after we have a lot of customers that can reference and talk about those. So, we get to our key customers in those time frames.

Glenn Hanus - Needham & Company

And Jack maybe for you, just on the service gross margin, tremendous expansion there this quarter, I know you mentioned the Copilot, should we look for some pull back in that 67% margin going forward or is that as sustainable kind of level?

Jack Judd

It was quite high during the quarter and it probably is not sustainable. But I can give you a little bit of color as to some of the reasons why that can go off in a quarter and it’s harder to reach. Very much a reflection of how we allocate discounts to deals. Is that our revenue recognition policies without giving too much detail have us take all of our product discount and we charge it to the product. And so we really record the revenue for our maintenance services at a 100%. And so if emergency room sell a lot of three-year maintenance programs, it can tend to bump the margin a little bit on our maintenance services. So it’s really a reflection of several things. One is a major one which is how many three-year deals we do on maintenance versus one year.

Glenn Hanus - Needham & Company

Okay, thank you.

Operator

Thank you. Your next question comes from the line of Rajesh Ghai with Thinkequity Partner. Please go ahead.

Rajesh Ghai - Thinkequity Partner

Hi good afternoon. Congratulations from my side.

Philip Soran

Thank you.

Rajesh Ghai - Thinkequity Partner

I just want to (inaudible) your international business. There was a significant growth in this quarter. How much do you expect the international business to contribute going forward?

Philip Soran

Go ahead, Jack.

Jack Judd

I think during the past quarter, international business was approximately 17% and for the year it was around 15%. We think that our national business will continue to grow as we go forward. I don’t think it is going to jump dramatically in any one year, but it will be a steady growth toward probably 25% over the next couple of years.

Rajesh Ghai - Thinkequity Partner

And as far the performance during this quarter concern the – how many of your customers or what percentage of your customers were first time SAN buyers or how many were displeasing and existing SAN solution?

Philip Soran

We’re really overboard that Rajesh but just to give you a feel for their—I just want to say that about third of our business is people that mind about direct attached stores in the past and now applying of virtualization platform, which is there are going to an extra storage buy. Another third might be displacing competitive installations and then the last third is probably a new project or something like that they maybe pick a SAN vendor for the new data or else an application or whatever they might be doing.

Rajesh Ghai - Thinkequity Partner

Okay. As you move up market, can you give us a sense of what you’re working as the largest installation is right now in terms of terabytes?

Philip Soran

So, I would just say our largest customers in the mobile petabytes. So they’re way beyond the terms of terabytes.

Rajesh Ghai - Thinkequity Partner

Okay, great. Thanks.

Operator

(Operator instructions). And it looks like there are no further questions. And Mr. Soran, I’ll turn it back over to you for closing comments.

Philip Soran

With this, we really appreciate all these report. We’ve run on the street and once again thank our customers, our business partners, and especially our employees who worked really hard this past year and we’re excited and we are looking forward to have another good successful quarter ahead. Thanks again for all your support.

Operator

Thank you. Ladies and gentlemen that will conclude today’s teleconference. We do thank you again for your participation and at this time you may disconnect. Have a nice day.

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