Netezza Corporation Q4 2008 Earnings Call Transcript

Netezza Corporation (NZ)

Q4 2008 Earnings Call

March 3, 2009 4:30 pm ET

Executives

Jim Baum – Chief Financial Officer

Patrick Scannell – Senior Vice President, Chief Financial Officer

Analysts

Alex Kurtz – Merriman Curhan Ford

Scott for Kathryn Huberty – Morgan Stanley

Bill Shope – Credit Suisse

Nabil Elsheshai – Pacific Crest Security

Glenn Hanus – Needham & Co.

Brian Denyeau – Oppenheimer

Nathan Schneiderman – Roth Capital Partners

Rajesh Ghai – Thinkequity

Jayson Noland – Robert W. Baird

Presentation

Operator

Welcome to the fourth quarter fiscal 2009 Netezza Corporation earnings conference call. (Operator Instructions) I would now like to turn the call over to 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 fourth quarter and full year of fiscal 2009 which ended January 31, 2009. Speaking today will be Jim Baum, Chief Executive and Pat Scannell, Senior Vice President and Chief Financial 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 the growth of our business and other financial expectations. Actual results may differ materially from those indicated by these forward-looking statements as a 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, forward-looking statements represent our views only as of today and should not be relied upon as representing our views 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 call we will be referencing both GAAP and non-GAAP financial measures. We provided GAAP and non-GAAP reconciliation information in the press release we issued earlier today announcing our Q4 and full year results. The press release is available on the home page of the investor relations section of our web site at www.netezza.com. The web cast of this call will be archived in the same section.

I would now like to turn the call over to Jim.

Jim Baum

Good afternoon everyone. Thank you for joining us on our Q4 2009 and fiscal year 2009 conference call. Overall it was a very strong year for Netezza. Things we measure like growth rates, cash generation, operating income, gross margins, new customer adds, repeat customer orders and other important indicators of our progress are all very positive for the year.

We're very pleased to end the year with these results. I do have a few comments on the quarter and the environment that I would like to make before we dive into the financials.

First, regarding our market, it continues to be robust. While many sectors of the IT industry have experienced significant downturns, the data warehousing and analytics market continues to grow. In fact Gardner, IDC and Forester have been revising their IT spending forecast downward for 2009, yet they do state that business intelligence and data warehousing appear to be holding steady or poised for growth.

We believe that the importance of the capabilities that organizations achieve through these technologies and business processes only increase during difficult economic times. We find that our customers and prospects need to know now more than ever, exactly how their customers, suppliers and partners are behaving.

They need to understand in great detail the opportunities and costs in their businesses. They need to be able to decisively act to improve their own chances of flourishing in tough economic times. It is these types of analysis that are enabled by our technology and we continue to see customers buying into this need.

Netezza continues to be very well positioned in our market. We compete on the principals that we have outlined before; cost of ownership, performance and time to value. It turns out that if a vendor truly can deliver on these promises, they are powerful characteristics during recessionary times.

Of course, the recession provokes certain behaviors amongst most of our customers and prospects. Generally, we see companies driving to reduce costs, minimize disruption and get back to basics. Projects that are approved in this environment must meet these criteria and must produce rapid time to value.

Some of our recent customer wins demonstrate exactly these phenomenons. For example, a business line inside a large health care customer has grown tremendously over the last few years. This company has struggled to keep pace technically with that growth, especially in the area of data warehousing and analytics.

They were facing scalability and performance issues in their incumbent Oracle environment; specifically, analytic queries which comprise only 3% of their overall queries were consuming 30% of that company's compute resources to run on the Oracle operational data store.

As a result, they were only able to run a set of key financial reports monthly. With the Netezza system, they can run weekly and will be running daily over the next several months. Through the elimination of complexity and the value they gain from timely decision making, they fully expect their Netezza investment to be paid for in less than six months. This example of fast ROI is typical of what our customers experience with our platform.

Another of our customers provides direct marketing and online advertising services for a wide range of consumer products and services companies. It has more than eight million members in its opt in data base and operates a rewards web site where members can gain loyalty points for shopping online. Registered users can redeem their points for gift cards and merchandize.

This client is deploying Netezza for targeted marketing campaigns, customer analytics, profiling and behavioral segmentation to improve its customer relationship management. Since its business is based on giving people points for clicking on ads, it needs to be sure that it is sending relevant promotions to its audience in order to prevent click fraud that would in turn, destroy its profitability.

If this company were to send irrelevant ads to its customers, to its members, they may still click on them to get points, but they wouldn't be generating any revenue for the ad provider because the user actually wouldn't have any interest in the product being promoted.

The client was struggling in its previous environment with basic IT pains, low times, aggregates and dealing with sliced views of the data instead of the whole footprint with the inability to run flexible and large scale queries, this customer was limited in its ability to deliver the right promotion to the right consumer which is a huge risk to its business.

Now with Netezza, this client can keep click stream, email, profile and all other data sources in one location, allowing for the most complex and questioning the company has ever been able to execute. Netezza is the core to their profitability and success, and they are also a great example of fast time deployment.

The company had its Netezza systems in production within a couple of weeks within just days of completing the P.O.C. Overall, this client validated its Netezza purchase with annual revenue increases and significant cost savings over their existing Microsoft environment.

And another of our clients in the transportation industry truly experienced minimal disruption from the deployment of their Netezza system. In this account, we competed against Oracle and IBM. During the testing phase, we had a Netezza server installed and up and running in 48 hours. Data was then loaded and access was set up for all users within those first three to four days.

We provided access to the business community at the end of our first week. Users started to use the system as if it was in production with over 300 users and over 132,000 queries run since the platform was turned on for the test. It was in production before the contract was even executed.

During this test, Oracle brought three to five people versus our one in to configure their data base, set up the servers and storage and tune the system for the query they knew the prospect would issue. Ultimately, they created over 47 indices and over 70 materialized views on the Oracle system to try to match the performance that Netezza was displaying, all to no avail.

The number index has actually hurt them. The customer's sole main focus was ad hoc, not tuning for the perceived answer. So here's another example of the power of simplicity and performance, allowing our customer to minimize disruption to their business while gaining the benefits of reduced operating costs and greater flexibility.

All of these examples point to the fact that Netezza is different. From a fundamental business model perspective, Netezza is very different than the competition. We focus our efforts and products and product revenue, not professional services and professional services revenue.

This creates an organization that is inherently committed to delivering an appliance that is highly performant that substantially reduces total of ownership through the elimination of service and administrative overhead, and one that produces rapid time to value.

Our customers frequently remind us how powerful this business model is in their eyes. We are confident that we are positioned for significant growth as the economic climate improves. We maintain our investments in product development and sales expansion, our engineering team is busy working to deliver exciting new products and extensive upgrades to our existing products this year.

Our sale team now consists of 48 quota carrying teams and we continue to be able to attract the best sales talent in the industry. We believe that our execution remains simply outstanding.

We are broadening our product line through opportunistic acquisitions like the one we just complete with Tizor Systems. Tizor enables Netezza to participate in the enterprise data auditing market, a natural extension of the data base and data warehousing market.

They have a unique approach to auditing access and use of enterprise data that is both differentiated from their competitors and fits well with Netezza's appliance strategy. Their system is simple to install and administer and provides rapid return on investment. We have begun to integrate the Tizor appliance into the Netezza sales force since the buyer for the Tizor appliance is part of the IT ecosystem we call upon today.

You can expect us to continue to engage in opportunistic acquisitions like this when they help us broaden our product portfolio, fit our appliance standards and can be sold into our current customer and prospect base.

Competitively, I'm sure most of you want to know about Oracle. We have now competed against them in several opportunities with their new Exadata product, none of which have closed yet. Our experience is that we continue to outperform their new data base machine by a substantial margin, and we have seen that our appliance is far easier to install, administer and maintain.

Like the example I cited from our transportation customers, the new Oracle database machine is still Oracle 11-G with all its complexity and cost of ownership. That said, they are present in many accounts and appear to be getting attention just because of their existing relationships which could delay certain sales cycles for us.

As we look forward, we feel very well positioned to take advantage of this growing market and to accelerate our own growth when the economic conditions improve. We are financially strong. Our product and technology are advancing at a rapid pace. We will continue to broaden our product line. Our distribution investments are in place. The management team is solid and our market remains robust. With that said, Pat, over to you.

Patrick Scannell

Revenues for the quarter were $54.6 million representing an increase of 28% year over year. Revenues for the year were $188 million, representing an increase of 48% year over year.

Q4 product revenue of $38 million increased 18% from last year's Q4 while service revenue of $12.5 million increased 70%. 58% of our revenue in the quarter came from the install base and 52% from the base for the year demonstrating the strength of the recurring revenue engine from our install base.

We brought in 22 new customers this quarter for a total install base of 248 customers. Our average deal size for the quarter was just north of $1 million. Geographically, 67% of our business was in North America and 33% was international which represented a solid rebound for our international business across both Europe and Asia. On the year, North American business represented 78% and the international business was 22%.

Vertically, our top four segments were financial services, digital media, telecom and the Federal Government, making up 77% of our business for the year. In the fourth quarter, our top four segments were financial services, digital media telecom and retail.

Our value prop continues to drive business from all three dimensions; performance cost of ownership and simplicity. We continue to see this as the driving force of our business as we compete for every one of our deals. Our business remains and has always been a business of solving critical business problems with a clear sense of urgency with 100% of our prospects and customers.

To date, that phenomena has helped us weather this economic storm even in a beaten down financial service and retail arenas who look to us to assist them in gaining a competitive advantage in these difficult times.

As Jim mentioned, we entered the quarter with 48 quota carrying sales teams. These direct teams accounted for 76% of our business in the quarter, and we will continue to add reps opportunistically throughout the course of this year.

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

Gross margins for the quarter were 64% with product margins at 61% and service margins at 72 %. The margin profile a year ago for Q4 was 61% gross margin, 59% product margin and 71% service margins.

Gross margins for the year were 63% with product margins of 60% and service margins of 74% compared with a year ago where we reported 61% gross margin with 59^ product and 68% service margin.

Operating expenses for the quarter were $25.6 million which increased 22% from Q4 last year, and was up slightly by $400,000 from this past Q3. We added five personnel during the quarter and today, we are operating with 401 individuals including the Tizor acquisition which closed just two weeks ago. This head count level of 401 is up from 276 a year ago.

Operating income for the quarter was $6.5 million or 13% of revenue, up from $3.1 million a year ago or 8% of revenue. For the year, operating income was $20.8 million or 11%, up from $4.7 million or 4% of revenue evidencing great leverage in our operating model over this past year.

Interest income is down sequentially as a direct result of our decision to place all of our excess cash in U.S. Treasuries. Interest income in Q4 was $420,000, down from $845,000 last quarter and down from $1.5 million in Q4 last year. While our investable cash position has increased over these periods of time, from $137 million a year ago to a balance today of $161 million, our over arching investment objective continues to be preservation of capital.

We recorded $1.6 million in tax expense for the quarter and our non-GAAP effective tax rate was 23%. We released the valuation allowance on our deferred tax assets during the quarter resulting in a significant tax benefit for GAAP purposes of $20.8 million.

Net income for the quarter was $5.3 million or 10% of revenue, up from $4.6 million or 12% of revenue a year ago. Net income for the year was $20 million or 11% of revenue, up from $6.3 million a year ago or 5% of revenue.

On a non-GAAP fully diluted earnings per share was $0.09 on the quarter and $0.32 on the year, up from $0.07 on the quarter and $0.18 on the year a year ago.

Turning to the balance sheet, we exited the quarter with $161 million in cash and marketable securities. Our cash balance includes $49 million of liquid auction rate securities net of impairments of $5 million. We do not anticipate any near term relief on the these auction rate securities given the magnitude of the other issues that Congress and the Senate are dealing with today.

Accounts receivable ended the quarter at $34.5 million with a DSO of 61 days, well within our target DSO range. Inventory ended the year at $18.4 million, down from $24 million in the last quarter and $32 million at year end last year. This is simply better inventory management between our contract manufacturers and us, and better management of the flow of goods.

Deferred revenue was approximately $58 million this quarter, made up of $47 million in deferred maintenance revenue and $11 million in deferred product revenue. This declined approximately $2 million from last quarter.

We have been extremely debt careful in managing our incremental investments yet we have also been opportunistic in expanding our offering and our install base with acquisitions like Tizor. As Jim mentioned, Tizor is an audit and security appliance that monitors data base intrusions. This will fit nicely along side of our standard offering.

We continue to look at other opportunities that would co-exist with the traditional Netezza solution which will also expand our technology footprint and our install base. It's important to note that Netezza was born in a recession during the 2001 to 2003 telecom meltdown with many Telco's signing up at that time as our very first customers because of the near term return on investment that they realized with our solution.

First, the traditional solutions in the market like IBM and Oracle. We win because of performance, cost, simplicity and time to value, and in this market at this time, those propositions become that much more important in allowing our customers to deploy leading edge technology fast, simply, seamlessly while also reducing their IT spend.

Today, all of those value propositions persist. From a guidance perspective, while our very near term visibility remains solid, we are not in a position to comment on the full year outlook for our business given the macro economic uncertainty. We prosecute and vet our pipeline with the same rigor that we have since the outset.

As we expand our footprint on a world wide basis, we see our opportunity base increase. The major element that has changed is the economic uncertainty that has been showered on all of us and the effect that it has on potentially stalling investment. Our teams are fully engaged. Prospects are still calling and we are still winning in the trenches against Oracle.

In our short history, we have built a strong financial foundation that will allow us to continue to deliver state of the art technology in support of our growing customer needs in their enterprises and we'll continue to invest in our technology as we are confident that this is a strong and growing market.

I think it's important to recap the financial highlights for the past 12 months as key takeaways. We are extremely well positioned in the market place. Our revenue growth rates have been consistently above our plan. Our gross margins are above our plan.

We continue to generate cash even having made a strategic acquisition during last fiscal year and Tizor most recently. We added 88 new customers over the course of the year. We have a clean balance sheet that has $161 million of cash and securities with no debt.

We have a $44 million annual maintenance stream with 99% of our customers on maintenance. We continue to gain market share. We continue to make incremental investments in R&D and our sales channels, and we will continue to look for acquisitions to broaden the product portfolio of the future.

And finally, we believe that we have positioned the company for substantial growth when the external macro conditions improve. I'll now turn the call back over to Jim for some final comments.

Jim Baum

Just in summary, fiscal year 2010 is a year for us to continue making investments. We will continue to invest in our products. We will continue to invest in our distribution in spite of the difficult economic environment. We believe that these investments are the right investments and that these investments will leave us very well positioned for substantial growth when the economic environment returns to a state of normalcy.

Now, I'd like to open the call up for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Alex Kurtz – Merriman Curhan Ford.

Alex Kurtz – Merriman Curhan Ford

I think the first question is, it sounds like you've got a lot of confidence in your business but why not give one quarter guidance if you have that much visibility near term?

Jim Baum

Our policy as a company has been to give annual guidance and we felt that we're not in a position of giving annual guidance so we don't want to go off that policy of giving annual guidance to now suddenly change and give quarterly guidance.

Alex Kurtz – Merriman Curhan Ford

But as far as your momentum, as far as adding new customers and wins in the market, as you move into the first part of the new quarter here, has that dramatically changed from what you saw in January?

Jim Baum

No, I wouldn't say it's dramatically changed. I would say that the environment, it's undeniable that the environment is a bit more challenging, right? And I think what we're seeing in some of the large accounts, we have seen situations where large enterprise data warehousing projects, sort of the big bang approach, the major EDW projects have been slowed or stopped.

We've seen also many situations which tend to be the ones that we're engaged in that are more tactical in nature where they move forward, but they move forward with a bit more scrutiny. So I think our hesitance to provide guidance now is the uncertainty. There are situations where we see pipeline there, but we simply don't know what will happen with it.

Alex Kurtz – Merriman Curhan Ford

Congratulations on the gross margin and operating margin improvement. How should we think about that heading into the new year? Obviously that would imply some kind of revenue guidance, but do you think you'd fall below the 10% range going into the Q1, Q2 time frame?

Patrick Scannell

I think our guidance that we've given since we've been public has been the guidance that you should think about at the gross margin level is roughly 60%. We'll have to see how the rest of the P&L shakes out as we see how the top line revenue, as that starts to form itself. It would be inappropriate for us to comment on that without giving guidance.

Operator

Your next question comes from Scott for Kathryn Huberty – Morgan Stanley.

Scott for Kathryn Huberty – Morgan Stanley

Can you just talk a little bit about the linearity you saw in the quarter, especially how did November and December and what did you see differently in January.

Patrick Scannell

The linearity in the quarter was 14, 27, 59 in terms of the revenue distribution over the quarter, so there was a push towards the end of the quarter but I mean our quarter, that linearity has bounded around from 50% in the first half to 50% in the second half. I'm not sure that there's anything to be read into that linearity because we still have as I've said, as we've said all along, we still have a nine to12 month sales cycle.

The good news is that the nine to 12 months sales cycle, the bad news is we can prosecute and see those things as they mature, as they go along that sales cycle. We're not a typical software company where we're seeing orders coming in over the transom the last day of the quarter.

Scott for Kathryn Huberty – Morgan Stanley

On the international mix, that's come back nicely this quarter. Can you tell us what you did there to correct that or is it just a matter of timing where some deals closed in the quarter?

Jim Baum

I think it's a little bit of both. We did make a management change in our international sales organization and so we brought in a new person about six months ago to manage for us, and he's an outstanding sales manager and I think it's made some very positive impacts. It also has been some timing, some things that have been in the pipeline that came to fruition.

Scott for Kathryn Huberty – Morgan Stanley

You touched on the inventory. Is that a sustainable level that we can continue to see? Is there any way I can read into it with that you have fewer trials going on so your inventories are a little lower? Is there any correlation that way?

Patrick Scannell

The piece of the inventory that represents our proof of concept has stayed relatively flat and because those are systems that are used, reused, people dial in for tests, so that's not really an indicator of trials in the marketplace. With the inventory value, it really represents us managing that down and staying down to our contract manufacturer with out forecast etc. So it's not a leading indicator of pipeline activity.

Operator

Your next question comes from Bill Shope – Credit Suisse.

Bill Shope – Credit Suisse

I was wondering if you could talk about your ability or your message for attracting new customers and whether or not they've changed in this economic environment. Obviously you did a great job this quarter of attracting the 28 new customers, but when you actually get in front of these new customers is pricing more of an issue, are you getting more questions on the competitive landscape? I'm just trying to understand how a typical deal with a new customer is closing in this environment.

Jim Baum

I think that much of the messaging remains largely the same. I think that there's a very strong focus in the prospect community around ROI and tying to ROI as well as overall cost reductions. In many cases, during the negotiations some of that does translate into further negotiations on price, although we haven't seen substantial erosion in pricing as evidences by the ASP's from last quarter.

I think that the messaging to the customer though, it gets very, very tactical. Here's how we're going to create an ROI with you. Here's how we're going to measure it in your environment. Here's how you're going to sell it internally within the context of your own financial and economic metrics. So our sales team has been very focused on those tactics.

One other comment I would make is, we've also starting last year, we probably talked about this on an earlier conference call, we have begun, last year we began the process of focusing our sales organization on business value selling and selling not just to IT with our better, faster, cheaper messaging that we used historically, but also complementing that with the messaging that's appropriate to the business side of an organization by industry vertical.

So we have people in the organization now who are experts in Telco, experts in retail, experts in financial services, experts in digital media, health care, etc., and so we also work to tailor the message in those prospects to messaging that's appropriate to the business mission that our customer is undertaking.

So we find that helps as well when we can tie the purchase not just to an IT ROI but also to a business critical message.

Patrick Scannell

The other thing to add to that is that with all of our customers, there is a clear sense of urgency and there is a compelling need, and that's a huge qualifier for our sales teams when they identify an opportunity that this is not a nice to have. It's there's a problem and they need to fix the problem and that's how we're able to go through that qualification process.

Bill Shope – Credit Suisse

Can you also give us an update on the progress of the MC partnership and are you seeing any immediate benefit in the sales process or the pipeline?

Patrick Scannell

I think the MC partnership continues to move. It's kind of a more of the same from the last call we had with respect to what we're doing with them. It continues to be field engagement as appropriate. We do now have the EMC content embedded in our product, the Clarion disk arrays are now available, so we're actually able to go out and jointly sell with them.

I would say we've seen some lead flow from it although certainly not a dramatic inflow into the pipeline from the partnership, but we do have several joint engagements with them that seem to be working fine.

Operator

Your next question comes from Nabil Elsheshai – Pacific Crest Security.

Nabil Elsheshai – Pacific Crest Security

You said you competed with Oracle but none of them closed. Does that mean that you have either gotten a technical win or verbal win or are they still open deals?

Jim Baum

I think by the ultimate measure, meaning a signed contract for either us or Oracle, they are still open deals so there are things that are still in play. What we have found in competing with them is, a few comments I'll make.

Number one is, we've seen situations where they've been disqualified fairly quickly because of their apparent inability to deliver the system in a timely manner. We've seen situations where they've been unable or refuse to engage in an onsite POC. The POC's tend to always, they tend to always draw the prospect back into their POC labs where they have complete control.

And we've also seen situations where they've not looked a lot like an appliance, meaning the set up and administration of the environment has been very complex and its continued to drive kind of Oracle like total cost of ownership. There's lots of admin, lost of DVA's, lots of tuning, so it really behaves just like the Oracle data base always has.

And then the final point I'll make is on performance. They've also seen that our performance continues to be dramatically better. So I think the net of it is, Oracle is definitely there. They're definitely a factor. Their sales teams are engaged and introducing this product into their customer base. When we've seen them head to head, we've technically compete very, very well against them.

Nabil Elsheshai – Pacific Crest Security

What have you seen them doing on pricing if anything at this point?

Jim Baum

In general what we've seen is that the pricing that was sort of advertised in the launch year, people are finding that the appliance is more expensive, or the data base machine I should call it is more expensive than they had anticipated. So I haven't seen them implementing heavy discounts yet, but we're just sort of getting to that stage in some of these head to head opportunities we're in.

Nabil Elsheshai – Pacific Crest Security

You've got a full quarter I guess now against new Teradata appliances. Have you seen any impact or if you track it this close, do you have a sense of maybe you're getting less opportunities with Teradata install base because of it?

Patrick Scannell

Although we've seen the product in more instances I think its business as usual, and that's the only way I can characterize that.

Jim Baum

I think the deal that we've seen Teradata do with their product line is they have some tools in the selling process to start out at very low price points and kind of work the deal usually up from there. So I don't think we're seeing fewer opportunities because they have it, but I think they continue to be aggressive on pricing in places where they compete with us.

But that's not a new phenomenon. That's how we've competed with them really for the last year and a half.

Nabil Elsheshai – Pacific Crest Security

Obviously you don't have much visibility on the full year revenues, but could you at least give us some color on how you're thinking on cost. Are you going to continue to hire? Are you more focused on maintaining or expanding margins? How are you looking at that?

Patrick Scannell

This is a new world here, but we will continue to invest opportunistically and our goal is to continue the initiatives that we've set out and to continue to invest as we see those opportunities present themselves in front of us much like the Tizor acquisition.

Jim Baum

I think the answer is that we will invest opportunistically. We certainly don't anticipate growing expenses at any great rates. We're working hard to hold expenses as tightly as we can. That said, we want to be prudent yet we want to be thoughtful in the context of implementing our strategy given our belief in how well it sets us up for future growth.

Operator

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

Glenn Hanus – Needham & Co.

Maybe you could talk about on the sales cycle time, I think last quarter you saw some extension of sales cycles for new business, but repeat business was pretty steady. Are you now kind of seeing that on both repeat and new and how is that looking?

Patrick Scannell

To reflect on what we might have said last quarter, I think we did say our sales cycle on new business is different than repeat business in that the new business is a nine to 12 month sales cycle, and that the repeat business can be as short as 90 days or three to six months. That really hasn't changed for the most part, and I think that comes back to what identifying those opportunities where there's a critical need. So we haven't seen sales cycles get protracted extraordinarily.

Operator

Your next question comes from Brian Denyeau – Oppenheimer.

Brian Denyeau – Oppenheimer

The meaningful amount of sales capacity that you hired throughout 2009, where do you think you are in terms of getting them productive and with the environment the way that it is, have you changed expectations on their ability to ramp this year?

Jim Baum

I think our typical expectation on getting a sales team up to full productivity has been historically in the nine to 12 month range. That doesn't mean they do zero for nine to 12 months, but we expect them to be at productivity after a year.

I would say though that there's no doubt that market conditions are difficult right now and so as we look at the productivity of these sales teams, we're applying a little bit looser filter on that nine to 12 month discipline we've used because we do believe it may take them longer, especially in cases where they're in new territories to build their pipelines and become productive.

Patrick Scannell

To look specifically numerically at the 48 quota carrying reps that we have and the maturity they have we're at probably the most mature as it relates to their experience in the box as we've ever been as we enter this fiscal year.

So of the 48 reps, I would say there's probably 34 to 35 reps that have greater than nine months experience and that said, they're on their ramp, if that gives you any more color.

Brian Denyeau – Oppenheimer

Conceptually, 2010 should we see that 70% sales back in the install base continue to trend up this year and at a certain point would be a little bit like getting blood from a stone? Are you going to put more resources to try to go back into the install base this year?

Patrick Scannell

The service margins?

Brian Denyeau – Oppenheimer

No, I'm just talking about product sales in general. 70% of it is going back to the install base. Should that number pick up this year as it's easier to do those types of sales?

Patrick Scannell

The rhythm that we've had is 50% to 60% is coming from the install base and I think that's the same rhythm that you'll see going forward.

Jim Baum

But make no mistake about it. In a difficult market environment one of the things companies do, Netezza included is you go get very close to your customers because those are places where you can find new revenue opportunities. So we are doing that. I don't think we've modeled any great change in the percentage of revenue coming from the customer base, but actively we are making sure we remain very close to our customers.

Operator

Your next question comes from Nathan Schneiderman – Roth Capital Partners.

Nathan Schneiderman – Roth Capital Partners

I was hoping your could clarify your earlier comments, you said the near term visibility was solid, it was good. What exactly do you mean by that? Were you speaking about the success you've had in February or your confidence in what you'll achieve during the April quarter? Can you clarify what you mean by that?

Patrick Scannell

What we mean by that is we've gone through and described what our vetting process is in our pipeline and as we look at our business for this quarter, next quarter etc., when we talk about near term visibility, we're saying that what we can see that will take shape over the next 45 days, that's where our visibility is. It's pretty good.

Because we're at the end of those sales cycles and much as I said before, where it's a nine to 12 month sales cycle, we're at the end of those sales cycles. They have a natural life. So that's what we mean by it's pretty good. It's difficult for us to go beyond that.

Nathan Schneiderman – Roth Capital Partners

Going into Q1 with $11 million if I calculate right, of product revenue in deferred. The year ago period you went into it with $9 million so you're up a couple million year over year. Does that give you confidence that the product revenue in Q1 should be nicely above the year ago levels or not necessarily?

Patrick Scannell

Not necessarily. The product revenue swings, and it goes up and down depending on as we said before, depending on whether there is acceptance, whether there is product deliverables or whether there is credit risk that's in the deferred revenue. So that moves around and is timed out over the course of time. So that's not really an indicator.

We look at a number of factors and that may be one of those factors, but it's not the leading indicator.

Nathan Schneiderman – Roth Capital Partners

If deferred product revenue is not a helpful indicator, are you willing to help us with do you feel comfortable that the product revenue will be up year over year in Q1 or do you not even want to go there?

Patrick Scannell

No, we're not going to go there.

Nathan Schneiderman – Roth Capital Partners

Can you speak about the changes in the pipeline? I gather close rates have declined somewhat but anything qualitative or qualitatively you could share with us on pipeline and close rates?

Jim Baum

I would quantitatively suggest that we've seen a couple of things. One I mentioned earlier and these aren't necessarily pipeline opportunities for us, but in the marketplace at large, we have seen some of the larger big bang data warehousing projects either slow down or stop in some of the global 1,000 kinds of companies.

We tend to focus our efforts on the more tactical opportunities where we go in and co-exist with Oracle or other solutions and we've seen the tactical opportunities by and large continue to progress. But I would say that pipeline is elongated. There's a certain degree of additional scrutiny that's applied and there's a certain degree of uncertainty that's applied as well because we have seen situations where projects are cooking along just fine and then it gets on somebody's desk and funds are not appropriated for it.

So I think that's what creates some of our uncertainty around what the pipeline can actually be boiled down into producing.

Nathan Schneiderman – Roth Capital Partners

Has the overall size of the pipeline meaningfully changed? Are you getting a lot more opportunities in there or not necessarily?

Patrick Scannell

I think the opportunity flow has been good. We continue to see opportunities that exist. I would say it's probably not growing as fast as it had, but I don't see a dramatic decrease in it either.

Nathan Schneiderman – Roth Capital Partners

Just hoping you could give us additional detail on metrics, maybe over $5 million of product revenue and perhaps the number over $1 million.

Patrick Scannell

I don't have that off the top of my head but the average deal as we said in the quarter was $1 million with 22 new customers. There were no 10% customers, and that's all I can say at this point. I don't have the details in from of me.

Operator

Your next question comes from Rajesh Ghai – Thinkequity.

Rajesh Ghai – Thinkequity

On the international revenue it was up pretty nicely sequentially over the last quarter. Just wondering if the demand environment you mentioned, is that a little different from the U.S. because if I back out the North American contribution that was down pretty significantly over the last quarter. Could I get some color on that?

Patrick Scannell

We don't see the demand environment is any different in Europe or Asia as it is here in the United States. And in fact if you read the papers, they say it's much worse in Asia and Europe if you believe what you read. So we have not seen that.

We do think it's better execution based on new management that we put in place and for the most part, that's it.

Rajesh Ghai – Thinkequity

Can you give us some color on the progress in ramping distribution basically with respect to the BI appliance space strategy that you have talked about in the past? Are we going to see any more announcements beyond that announcement or has that strategy been abandoned for the time being.

Jim Baum

Clearly the strategy remains intact and we're continuing to invest in it. It's an area that we've actually put great focus on this year because we do believe that there may be some interesting opportunities for us to produce substantial leverage through partnering and OEM'ing or reselling opportunities.

So the answer to your question is yes. It remains a strategic focus for the business. We continue to have a team of professionals inside Netezza that focus on finding and executing those kinds of opportunities.

Rajesh Ghai – Thinkequity

Deferred revenue was down, what do you attribute that to?

Patrick Scannell

Deferred revenue as we said before, moves around depending on product deliverables. If we had deferred the revenue because we hadn't completed the delivery or if we had a credit issue that had cured itself with the receipt of cash. That will move around based on those facts and circumstances and it's not an indicator of business health.

Operator

Your next question comes from Jayson Noland – Robert W. Baird.

Jayson Noland – Robert W. Baird

Just to follow up on OpEx, is it fair to assume that OpEx would trend up sequentially in absolute dollars?

Patrick Scannell

It may be fair just in terms of inflation and what have you, yes.

Jayson Noland – Robert W. Baird

On the tax rate, I believe you said 23% on a non-GAAP tax rate. Is that pretty good to use going forward?

Patrick Scannell

Yes it is.

Jayson Noland – Robert W. Baird

On verticals, I may have misheard. It seems like may retail fell off in the second half of the year which wouldn't be a surprise. If you could talk about that and then maybe the strength in financial services. Is that something that can be maintained?

Jim Baum

I'll comment on what we've seen in financial services. We've certainly see some opportunities in financial services that fit into the tactical model that I described earlier where we've been able to drive our solution really around some of the cost cutting initiatives that we've seen. Is it sustainable? We certainly see opportunities still in our pipeline for financial services. It has not dried up. There are opportunities that we're working on right now in financial services. It continues to be very interesting.

On the retail front, retail continues to be one of our initiatives, one of our strategic markets that we focus on. I mentioned the focus on business value selling and retail is one of those areas where we are focusing on business value selling. And actually the pipeline there has been developing reasonably well.

Again it comes back to creating business value and being able to demonstrate a meaningful ROI, so I don't expect that retail will be a very bad vertical for us this year. I think we have some momentum there.

Patrick Scannell

In fact, retail was up in the fourth quarter. The way I characterized it was for the year, the top four segments were financial services, digital media, telecom and Federal Government and in the fourth quarter it was financial services, digital media, telecom and retail. So retail was strong in the fourth quarter.

Jayson Noland – Robert W. Baird

Could you talk a little bit about longer term strategic, industry standard hardware versus proprietary hardware. Would it ever make sense for Netezza to offer maybe a second or complimentary product based on industry standard hardware?

Jim Baum

It's something we look at all the time in our engineering and development group here. We are very much in tune in what's happening in the industry standard hardware from storage perspective as well as a compute perspective. We're very familiar with all the vendors and all of their solutions, and we constantly benchmark it against what we've done.

We are convinced that there is tremendous value both in the IP as well as in the performance advantages that we've got in an element of our system which is the field programmable gate, the FPGA. It's a part of our proprietary blade. We're completely convinced that the differentiation that we can achieve with that either on our own proprietary blades or industry standard blades remain significant.

So I think you should expect us to continue to look at this and whatever you see going forward on a platform from us will certainly have that element of intellectual property that we currently contain in the FPGA.

Operator

We have no further questions at this time. I'll now turn it back to Mr. Baum for closing remarks.

Jim Baum

I think just in summary, I'd like to just highlight a couple of the key points that we made today. First of all, we're obviously very pleased with our Q4 and our fiscal year '09 results. I think the company was able to produce outstanding results through really excellent execution on the part of just an outstanding team here at Netezza and we're very proud of the team and what they've accomplished, and looking forward to their contributions as we go forward into fiscal year '10.

I do think it's important to keep in mind that the market that we service remains an important market. While many IT markets, many sectors of IT are hurting and in fact suffering from cuts, we do think that the business intelligence and data warehousing and analytics markets will continue to be important and we'll continue to benefit from ongoing investments in the prospect base.

We feel very well positioned to continue the story here at Netezza. We feel very well positioned with the investments that we continue to have in place to realize substantial growth as market conditions return to some sense of normalcy.

We are certainly in a difficult market environment, but our strategy and our perspective on this is that we will keep our investments in place. We will stay the course and be very well positioned as the economy returns to some sense of normalcy.

So thank you all very much for taking the time to listen in. We appreciate your support and have a great day.

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