Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

[Rob Decker - Vice President]

Frank Slootman - President, Chief Executive Officer & Director

Michael P. Scarpelli - Chief Financial Officer & Senior Vice President

Analysts

Aaron Rakers- Wachovia Capital Markets

Brent Bracelin - Pacific Crest Securities

Katie Huberty - Morgan Stanley

David Bailey - Goldman Sachs

Walter Pritchard - Cowen and Company

Glenn Hanus - Needham & Company

Jayson Noland - Robert W. Baird & Co., Inc.

Mark Kelleher - Canaccord Adams

Rajesh Ghai - Thinkequity, LLC.

Douglas Reid - Thomas Weisel Partners

Shebly Seyrafi - Calyon Securities (NYSE:USA), Inc.

Data Domain, Inc. (DDUP) Q1 2009 Earnings Call April 23, 2009 5:00 PM ET

Operator

Good day, Ladies and Gentlemen and welcome to the first quarter 2009 Data Domain, Inc. earnings conference call. My name is Anne and I will be your coordinator for today’s call. (Operator instructions) As a reminder this conference is being recorded for replay purposes. At this time all participants are in a listen only mode and we will be facilitating a question and answer session towards the end of the presentation.

I would now like to turn the presentation over to your Mr. Roberts Becker in house Counsel. Please proceed, sir.

Roberts Becker

Good afternoon and thank you for joining on today’s conference call. This call is also being broadcast live over the web and can be accessed in the Investor Relations section of Data Domain website at www.DataDomain.com for 30 days. With me on today’s call are Frank Slootman, President and Chief Executive Officer and Michael Scarpelli, Chief Financial Officer.

After the market closed today Data Domain issued a press release with results for its first quarter ended March 31, 2009. If you would like a copy of the release you can access it online at our website.

We would like to remind you that statements made on this conference call that are not historical fact maybe forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

These forward-looking statement include among other things the continuing adoption of our technology and our increasing presence in large enterprises and our favorable competitive position, our continuing to expand our [1.35] market, our involvement, our expected growth, our expected financial and operating results and long term operating model, our ability to hire and retain employees in the US and elsewhere, our ability to expand our distribution and the ability of Data Domain to achieve its objectives.

Any words such as: may, will, expect, intends, plans, believes, targets, estimates and variations of these words are intended to identify forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause our results to differ materially from those expressed or implied by such statement.

The risks and uncertainties include the impact of continuing weakening of general economic and market conditions and customer budgets for information technology spending, our ability to react to trends and challenges in our business and the markets in which we operate, our ability to anticipate market needs or develop new or enhanced products to meet those needs, our ability to scale our distribution channels, our ability to recruit and retain personnel, our ability to compete in our industry and other risks and uncertainties described more fully in our documents filed with or furnished to the SEC.

All forward-looking statements are based on information available to date and we assume no obligation to update these forward-looking statements. Any future product, feature or related specifications that may be referenced in today’s call are for information purposes only and are not commitments to deliver any technology or enhancements.

Data Domain reserves the right to modify future product plans at any time. I would now like to turn the call over to Data Domain’s President and CEO, Frank Slootman.

Frank Slootman

Good afternoon and thank you for joining us at this call. We are reporting first quarter revenue with strong year-over-year growth, new customer wins in the enterprises. Revenues grew 50% year-over-year to $79 million. With these strong growth numbers we retained healthy growth margins in Q1. We had gross margins of 71%.

New customer adoption of our technology has continued through the quarter at a reasonable pace in light of the macroeconomic dynamics that preoccupied our industry. For the quarter we added 218 new customers for a new total of more than 3,100 that have purchased our products since 2004. Our customer base cuts across virtually all verticals with no significant industry customer or reseller concentration.

We saw the strength western US and European markets this quarter. We continue to mark an increased presence of large enterprises adopting our technology; you know that more transactions match our 1 million this quarter than any prior period. Scale and performance are important to reach these opportunities the [role] of software refreshed and [handful of platform] which features major performance schedule up to 100% of having a platform protocol. This offer upgrade is available to all Data Domain customers at no charge. Our customer responded by the global performance with great [4.22] in this economy. We also made announcements which highlight adoption of our products [ES400] mainframe [parts]. We have a lot of margin data in our customer who remained [4.32] toward the cost and management of the storage.

The competitive environment while intense continues to favor us from a bright perspective. The onslaught of new competitive entries last year is well on its way to being digested by the marketplace and we appear to be comparing favorably as this process runs its course especially the enterprises.

Recent reports from independent research and analyst firms such as Gartner, [IGC], and the InfoPro continue to document our market leadership. Well the economy spending continue to deteriorate as we entered January though the business began to grow and reform as we progressed to the latter part of March and we have changes continue until April. The Company invested with caution during the quarter while we will continue to invest with that [5.17] period. First we continue to expand our addressable markets to provide development to specialty and scale in the near-line storage.

Second the global expansion of our distribution infrastructure and third our administrative and operational infrastructure to support our growth. With that I would like to turn the call over to Mike Scarpelli to go over our Q1 financials in greater depth.

Michael P. Scarpelli

Thanks, Frank, I am very pleased to report that we produced increased year-over-year revenues healthy gross and operating margin. Total revenue for the first quarter with $79 million. This was an increase of 50% when compared with $52.6 million in the first quarter or last year and 10% sequential decrease from the prior quarter.

Product revenue for the first quarter was $63.9 million compared with $71.7 million last quarter was up 41% from $45.2 million first quarter of 2008. This year-over-year increase was driven by continued new customer wins, increased sales to existing customers and improved product mix.

For the first quarter the DD690 product line accounted for approximately 47% of our product revenue. We also benefited from the launch of our DD660 product line which began shipping this quarter. In the first quarter we added 218 new customers and now sold our product to approximately 3,100 customers since February, 2004.

Revenue from existing customers increased this quarter to approximately 57% while new customers contributed 43%. As with previous quarters this metric could be skewed fairly significantly up or down depending on the recognition of large transactions within a given quarter

This quarter called the [7.05] as we posted very significant yield for our existing customer base which broke the percentage up from the fourth quarter.

Support and services revenue was $15.1 million, an increase of 105% over the first quarter of 2008 and 11% over last quarter. The quarterly increase was primarily attributed to an increase in our installed customer base and maintenance revenue

For the quarter support revenue accounted for 19% of total revenue up from 16% the previous quarter.

Moving over to the average deal transaction side we saw this increase to $125,300 for the quarter up from $117,800 from the fourth quarter. For the quarter we had 11 orders greater than $1 million compared to 5 orders in the fourth quarter. As with other sales metrics the timing of large orders which tend to have a longer sales cycle skewed the results up or down.

Revenue from the North America and the European regions were very strong in the quarter and across a wide variety of verticals. The North America and European regions grew at 6% to 29% respectively versus the first quarter of 2008.

Approximately 79% of our revenue was generated by North America. Our EMEA region was 17% of revenue flat for the fourth quarter of 2008. No single revenues or customer or reseller accounted for more than 10% of revenue in the quarter. Approximately 75% of our revenue came from indirect channels in the first quarter of 2009. The remaining 25% were direct sales

This percentage of direct sales was up from 19% in the fourth quarter driven by few significant enterprise transactions. Sales through our indirect channels continue to be substantially assisted by our direct sales and accordingly we believe the addition and retention of sales personnel and the rate of productivity remains a key driver of our anticipated growth.

Let me shift over to the cost side. We are very pleased to report for the quarter’s GAAP gross margins of 71% roughly equal to the last quarter and excluding stock based compensation gross margins were 71% down from 72% last quarter. The decrease was primarily driven by product margins which were impacted by our continued investment in world class operations organization with skilled plan growth.

Although we did experience slightly higher discounting this quarter, this was completely offset by a reduced product costs as our operations continue to be focused on our moving cost out of our build material

For the first quarter 2009 we had GAAP net income of $1.3 million or $0.02 per share, this compared to a GAAP net income of $13.2 in the fourth quarter of 2008 or $0.21 per share.

Fourth quarter net income was positively impacted by the release of the $13.2 million deferred tax valuation allowance which resulted in a net $5.7 million tax benefit. Without this one time item, fourth quarter 2008 net income would have been $749,000 or $0.01 per share.

For the first quarter of 2008 GAAP’s net income was $2.7 million or $0.04 per share. On a non-GAAP basis excluding stock-based compensation and the related tax effects, net income was $4.9 million or $0.07 per share. This compares to the preceding quarter’s net income of $6.7 million or $0.10 per share which excludes stock-based compensation and the release of the valuation allowance in related tax effects.

Our GAAP tax rate for the first quarter was 61% and we expected the full-year rate would be fairly in line with our previous guidance at 65%. Our non-GAAP tax rate was 49% slightly above the 48% guidance we gave last quarter. To reiterate we expect GAAP and non-GAAP rate long-term to decline to approximately 20% by 2012.

Our estimated cash taxes for the quarter were approximately $1 million or 10% on a pro forma basis. This rate is impacted the most by a point [doc] option exercises in sale. We expect cash taxes on a pro forma basis to be 15% to 20% for the year.

On to the balance sheet, we have a very healthy balance sheet with $246.9 million in cash and short term investments with no debt. Our cash and short term investments increased $13 million in the quarter. In addition we have $30.9 million on our balance sheet classified as long-term investments.

Our cash flows from operations in the quarter totaled $12.2 million. For the quarter our cash, short term investment and long term investments increased approximately $13 million or $0.21 per share outstanding as of March 31st, 2009. We ended the quarter with $60.6 million of accounts receivable which represents approximately 69 days sales outstanding, an increase from 64 from the fourth quarter of last year. This is reflective of the fact that we did have a back end loaded quarter.

Tax collection on the first 3 weeks of April has been strong as we have collected approximately $18 million of this amount. Deferred revenue continues to grow, increasing $8 million in the first quarter over the previous quarter.

The majority of deferred revenue relates to the support contracts recognized rapidly over the support contract’s term. As of March 31st, 2009 we had $75.7 million of deferred revenue. Overall we were satisfied by our performance in the first quarter given the global macroeconomy.

Looking forward here is some guidance as we go into the second quarter of 2009 which takes into account our current outlook on the economy. For the second quarter we expect revenue in the range of $82 million to $87 million. Product revenue will comprise approximately $65.5 million to $70.5 million of the total while support and services should generate roughly $16.5 million in revenue. We reiterate our previous revenue estimate for the fiscal year 2009 will be between $365 million and $385 million

On the cost side we will continue to add headcount at a similar rate in the quarter compared to the first quarter of 2009 as our investments we make are long term focused even in a challenging economy. We continue to monitor our business trend and we’ll scale back hiring if we sense any deterioration in our business.

The main focus of our hiring plan will be to continue to add our sales and R&D organizations with selective hiring across all other functional areas. We will also continue to invest heavily in our direct marketing campaigns both domestically and internationally to drive share and customer lead generation which we feel is a key component to support our revenue growth.

As such we anticipate our second quarter of 2009 GAAP income loss per share will be approximately a loss of $0.01 to a profit of $0.01 which includes stock based compensation expense of $7.5 million to $7.3 million. On a non-GAAP basis excluding the impact of stock based compensation net of income taxes we expect income per share to range from $0.05 to $0.07.

The income loss per share projection for the second quarter of 2009 include an assumption that the GAAP and non-GAAP tax rates will be in the mid50’s or high 40’s respectively inline with our previous whole year 2009 estimate as discussed in our previous earnings call. The tax increases versus fiscal 2008 being driven by our new tax structure which was implemented December 1st of 2008.

In the short to medium term this will cause higher tax rates but in the long term will result in a GAAP and non-GAAP tax rate of approximately 20%. Our cash tax rates forecast to be approximately 15% to 20% of our pro forma income before taxes in 2009. As of March 31st 2009 we had approximately $61.1 million shares outstanding plus approximately $14.7 million stock options and restrictive shares outstanding. With that let me turn it back over to Frank.

Frank Slootman

Operator we can now turn it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of David Bailey with Goldman Sachs.

David Bailey- Goldman Sachs

I was wondering if you could talk a little bit about linearity in the quarter and what you have seen so far in the month of April.

Michael P. Scarpelli

Well, with regards to linearity as it mentioned it was probably one of our most active, back end loaded quarters ever. So in the last two weeks in particular were the majority of our March booking and we continue to see bookings flow through into April and we’re very pleased with what we have seen so far.

David Bailey- Goldman Sachs

Okay, and then one thing is I mean, EMC was pretty clear this morning that it initiated several pricing programs, what have you seen so far in that area?

Frank Slootman

David, this is Frank, and we were used to EMC thing. We were aggressive on price. I don’t think we have noticed anything different in this quarter so far on the last quarter. I mean that is not always the mode and can’t hold up without [17.45]. I hope that we will see noticeable differences from the level then.

David Bailey- Goldman Sachs

Okay. Thank you.

Operator

The next question comes from the line of Katie Huberty with Morgan Stanley.

Katie Huberty - Morgan Stanley

Just a quick follow up on the comment around April. Are you actually seeing the first couple of weeks this quarter improved from March or was late March a higher base and you’re just seeing the normal, typical pattern that you would see early in the second quarter.

Frank Slootman

Kay, this is Frank. In April, we saw the firm starts in second half of March and that really continued on to April, some of that is due because of [18.40] some of those business that did not make it into March into April but we’re now getting to May April end of this state [18.49] so we’ll try to have approximately got this stronger than the period that started in January towards April. April is like a whole lot better.

Katie Huberty - Morgan Stanley

Okay, and are you seeing any customers either come back and try to renegotiate maintenance contracts or any different behavior on new deals whether taking, either fewer years or spending more time trying to negotiate price on that front?

Frank Slootman

There is no doubt that customers are also sensitive to cost and customers are looking to renegotiate on maintenance but it has not been a widespread phenomenon,I would not say that this is big trend or big pattern in our business normal hold. I think the pricing environment is holding up.

Katie Huberty - Morgan Stanley

Okay, and then lastly the new customer [Winrey at 218] is a little below the $300 million or so over the last 3 quarters. Would you characterize this as a new level for the environment win or were there some timing or seasonal impact for that number?

Frank Slootman

No, the biggest difference there is that we saw a much bigger cease in customer spending around mid size enterpriseprice versus the larger enterprise. Now the larger enterprises continue to spend whereas the mid sized enterprise did not. And you see your big numbers in terms of new logos the customer coming along would see large enterprise with the big sized enterprise so that is a part of market that has active loss softer than the large enterprise. That’s why we view that number as being down incredibly.

Katie Huberty - Morgan Stanley

Given the direction of your product launches most recently moving upstream. Do you think there will be a secular trend in your business where the number of customers may stabilize or even fall on a quarterly basis but the deal, the average deal sizes continue to rise?

Frank Slootman

Yes, we believe that’s case and we’ve been signaling for the last 3 quarters that our business is shifting towards the enterprise and the quality of customers is a matter more important that the quantity of customers. So I think in the future we’re not going to attach as much value to the accounts but due to the quality customer that will bring it on.

Katie Huberty - Morgan Stanley

Got it. Thank you.

Operator

The next question comes from the line of Brent Bracelin with Pacific Crest Securities.

Brent Bracelin – Pacific Crest Securities

Frank, first question here, you had a record number of large deals in the quarter. I think it was like 11. What’s driving that? You know obviously, more than you had in Q4 which is typically is a stronger quarter I would assume for large deals. So could you explain what you’re seeing in the large deal front?

Frank Slootman

Okay, Brent, it’s really the maturing of the market, the market [21.55] as you look at appropriate options so I call the large enterprise take a lot more time to get comfortable and start walking through the door and adopt the technology, of course, we had to go bigger product and if we are bigger company to be able to serve those customers. So yes both are [at right] as well as the adoption cycle of technology itself is leave into you know much larger enterprise has been ready. They had this conversation in whether [in] or the right place or the right time to take advantage of that either that. As I said to Katie earlier, I mean we are definitely driving and focusing on the enterprise business in our overall model as I said in the previous call, in our sales organization now as they focus both from enterprise and for sure it got. So, we are really setting up ourselves up to drive business into the enterprise. So it is just the function of all those things that we expected to continue going forward.

Brent Bracelin – Pacific Crest Securities

So you know clearly having some success with larger deals as you think about the smaller deals what are the trends there, is it more competitive on somebody’s smaller kind of entry level kind of deals, what are you seeing on that front?

Frank Slootman

I think the smaller deals are closer where the market is going to commoditize. First, it is a market that is going to be more price sensitive. It is also a market that is going to appreciate much the specific product advantages that we offer so it is a natural progression. Again, if you look at the overall product adoption cycle, you expect the bottom of the market to start commoditizing and become more priced sensitive over time for this business; you know in large stock with transport enterprise this product is market go the way at it is.

Brent Bracelin – Pacific Crest Securities

Okay. Great and one last question from me Frank on this new revenue from the new customers that looks like it was down a little bit year-over-year as you think about what has transpired in March and in April, are you starting to see some better trends as far as getting revenue from new customers or what are the trends that you are seeing in April versus kind of what occurred if Q1?

Frank Slootman

I think it is a bit early to go trends going from what has happened in April in terms to be up taking in new customer versus the existing customers than that and so all we can say about April so far is that it started that well. We started the quarter and we’re placed for that but I was not sure trying to draw conclusion with our limited data that we have so far.

Brent Bracelin – Pacific Crest Securities

And then lastly, Mike real quickly on gross margins, would like it came in a little bit better than I would have thought particularly with large deals where I would expect there is a little more discounting. As you think about margin and how aggressive pricing was in the quarter, were you surprised that you are able to maintain margins above 70% and as expectation you will continue to see pressure there going forward?

Michael Scarpelli

I am pleased with our margins at 71% and I would, as I said I still think exiting Q4 will be in the year Q4 will be at 68% to 70% range. Obviously our goal is try to keep that across 70% and we are going to do whatever we can to keep that above 70% for as long as we can.

Brent Bracelin – Pacific Crest Securities

Okay. Thank you.

Operator

The next question comes from the line of Walter Pritchard - Cowen and Company.

Walter Pritchard – Cowen and Company

Hey, Mike, on the services gross margin that has been sort of I do not know from last few quarters now lower down to the low to mid 60s here, and I know you guys have been going through some processes internally to try to remedy that? I was wondering if you can give us an update on the services gross margin side.

Michael Scarpelli

Yes, so the services gross margin once again that is, let me just put to my page here and I apologize. You will see overtime I think our services margin will be normalizing in the low 60 long-term over the next few quarters as we are making investments or pushing off investments as we continue the scale, you will see some variability that could go up or down one or two percentage points with long-term I expect it to stay in the 62%, 63% range.

Walter Pritchard – Cowen and Company

And can you just, on the new product front, I know you are not announcing things today but as it relates to last year where you had a huge ramp in the third quarter and into the fourth quarter with the 690 which I think was probably the most successful new product in a couple of years. As I look at the guidance that you gave for the second, for this year and what it implies for the second half, how should we be thinking about the impact of any new products that would come out in the third quarter when you typically released?

Frank Slootman

Walter, this is Frank. We are counting on getting help from the product cycle that is going to start this year here and then we have every reason to believe because 5 years is running every year we have got and know yearly come a big high end refresh to product line and it is always driven our business. That has not happened yet but our operating assumptions are that we are going to get from them.

Any time we come out with much bigger, much faster product it opens up opportunity especially in the enterprise where we said earlier we are focusing more and more, more efforts but when I think Q4 over it is easier, so let us must wait and see when we get to midyear and we get the process [just wanted to field test] by the way, very recently. We will have good updates on that quarter from that.

Walter Pritchard – Cowen and Company

And then Mike, last question around cash flow. I understand the issue this quarter with the collections and the backend loaded nature of the quarter. Should we expect in general that for the year cash flow, operating cash flow should track right along with your change in operating profit from an income statement perspective or something that should swing it while they are on the annual basis?

Michael Scarpelli

On a GAAP basis, yes, excluding stock based compensation, it will track with operating profit.

Operator

The next question comes from the line of Jayson Noland - Robert W. Baird & Co., Inc.

Jayson Noland – Robert W. Baird & Co., Inc.

Just a question on the new product, first, I guess I have had a lot of questions on expectations around potential pause as some large enterprises await the big new box. Is that or did get that impact Q2 guidance, or do you guys expect the pause?

Frank Slootman

Jayson, it is Frank. We do not really expect a lot of impacts from it. First of all, we are not advertising after that we have a new product coming. We are disclosing this information really on a need to know basis. So, we have not announced it. It is not public information yet and the sales force is not getting paid on it as well as is not being sold out there.

So we do not expect to get materially affected in Q2 by that aspect. The second thing I will tell you is that this new system is going to be more compatible with the prior generation storage system that means that people can leave their storage sales infrastructure in place and just want to add so it is not going to be a forklift to upgrade for customers, not people really have that in the options as well as at any point in time and they really can move forward today with the data product system and then if in the future they want to swap hats and get a bigger faster infrastructure that can do that.

Jayson Noland – Robert W. Baird & Co., Inc.

That makes sense. And then Frank just an update on partnerships in Cisco, Oracle, VMware are all partners. There is a lot of strategic changes going on there I would not think that would impact Data Domain much but if you can comment there and then on any other partners, that would be meaningful.

Frank Slootman

In general, this is a sort of global comment. We see these hemispheric tectonic movements by HP, by IBM and by Cisco to sort of put themselves and also Oracle now that they are pending spending acquisition of Sun to really put them in a position to populate an entire data center and then went on for customers. They are coalescing of forces may be causing the sort of the NOI people out there to sort to look out more for each other.

So it brings us closer to people like Hitachi Data Systems. It brings us closer to people like Symantec, F5 and so on. So, what we are getting closer with these companies and I think that is the benefit of our business as well as theirs.

Jayson Noland – Robert W. Baird & Co., Inc.

Okay. That makes sense and then the last question from me on your business in Asia. It looks like it was down year on year and I know that it looks like some of the changes in EMEA have been successful, do you turn your sides now to Asia?

Frank Slootman

Yes, we are. We have fairly substantial boots strap going on in Asia at this moment in time and we actually have high expectations in the second half of what we are going to do there but Asia, the macro level was looked credibly weak very surprisingly for us that is gamble as weak as it was an effort from other companies that sells the data center that they experience the exact same thing. It is very; very uncharacteristic for that market and we just feel fortunate that we did not have a huge dependency on that market otherwise you would have seen a bigger impact on the overall on it.

Operator

The next question comes from the line of Glenn Hanus, of Needham & Company

Glenn Hanus - Needham & Company

Good afternoon. Just to drill down a little bit more on the strong, if we follow your guidance, some strong second half growth this year, is it more new product oriented or are you also factoring and feeling better about the macro or both?

Frank Slootman

Hi, Glenn, it is Frank. I would say it is both but obviously I am coming more on the product sector than on the macro because the latter we do not really control and if it shows up, great, and if it does not what we would have to do is that the product cycle is going to be happened and we know it matters. The good thing about our business is people have a few issues with their backup infrastructure, their disaster recovery infrastructure structure. They have to make moves. They can push up one quarter but all it does not go a lot more pressure to deal with the subsequent quarter, and we think that the second half looks good for us mostly because of product cycle then I think will cross on the macro continuing to improve especially seen from late March until the day after day.

Glenn Hanus - Needham & Company

And Frank, maybe you could draw down a little bit on the competitors over the last quarter, anything notable on changes in tactics, a more aggressive pricing because IBM has to move products out, make just kind to give us a review there.

Frank Slootman

On the competition, the themes that we have noted in prior quarters are continuing. It is very aggressive portfolio selling whatever the piece is that competes with Domain is always free or almost free from competitors but that is the light that we live and when we bring the conversation back to we need infrastructure that works and the biggest help that we get from our competition when we try to sell product because then we find out very quickly what works have been done. I mean get back to preliminary infrastructure that works and [33.56] as we have seen.

So I think there is a gap in product differentiation is actually opening up because I think customers are more and more becoming aware of what projections, what products work and what products do not work and I think with the product cycle that we go through here in the middle of the year. I think it is going to becoming more covariant and the difference exists what we are going to offer and what is going to be available as an alternative. So, I am looking forward to the way that trend is developing for us.

Glenn Hanus - Needham & Company

And Frank, any update on the initiatives in the near line archiving area. Have you reduced your emphasis anymore, any in that are just given the macro or increased it or about the same?

Frank Slootman

No, I would say it is about the same. One of the things I will not notice one of those million dollar transactions that we did during the quarter was an archive deal, which is something that we have never seen before people putting that kind of money down for a pure archive system.

So that certainly makes us feel like we are heading in the right direction. In an economy like this, people are really dealing with very, very acute problems and the backup we design fits in that category, a lot of archives in this are getting back burnered out there and people are about when we get to that because we are really dealing with the high priority items so I am hoping and trusting that archive will sort of get back on the front burner in the latter part of this year when things are starting to normalize and settle out.

Glenn Hanus - Needham & Company

And maybe lastly, sales productivity and the metrics there, last quarter you had some degree of turnover I think you disclosed in your comments last quarter. How are you feeling about the level of turnover this quarter and how you are coming along on the productivity metrics with the sales guys?

Frank Slootman

Well, obviously, this quarter was not as high on the productivity scale as we have seen in the prior quarters, but we were not that far either. The attrition that is going on is attrition that we initiate and we are driving very, very hard to make sure we get the right people on the bus and the wrong people were off the bus. This is a good time for us to do it. It has been going on for several quarters and I expect it to continue to go on. One of the hard things about growing a company as fast as we have is that you do not have fallouts on the hiring front and you do not have to reduce some of the hiring like you did. It is a fact of life which things slowing down a little bit. It is actually a really good time for us to make much better quality hires and not be as rushed as we might had been in prior periods.

Operator

Your next question comes from the line of Raj Ghai - ThinkEquity.

Raj Ghai - ThinkEquity

Thank you for taking my question. I had a question about the sales and marketing line, it has been flatted for the last three quarters and as you started selling to large enterprises and you have fewer deals, does that mean that your sales and marketing hiring is going to be less going forward or do you see investments in that line continuing to 2009?

Frank Slootman

Raj, it is not like [37.26]. We will continue to invest our sales and marketing lines in line with the guidance that I gave previously.

Raj Ghai - ThinkEquity

Okay. And as far as the software upgrade that you launched last month, have you seen any increase in the addressable market as a result of that increase in throughput speed given that you were able to increase the high end of the throughput from 1.4 to 2.7? Has that resulted in any new customers that have not looked at you in the past coming to you because of that?

Frank Slootman

Raj, it is Frank. Obviously, it helps in the relative comparisons whether we can attribute in adverse sort of customer went to, just at that software upgrade, I would not be wanted you to guess that but anything that we do to restack the deck in our favor obviously it helps. I mean we are really shaking our Company on the speed at which we duplicate data in line. It is getting faster and faster and faster and every time we have a cycle or we deliver those kinds of gains it makes a difference between us and the rest of the pack is very, very glaring.

So, it just benefits the overall business with existing customers, with new customers and all the partners and everybody that operates in our ecosystem.

Raj Ghai - ThinkEquity

Okay. And the release of new product that is supposed to come out in the middle of the year is that still on track? Do we expect it in the middle of the year or is it going to be earlier than that?

Frank Slootman

Well, we expect from a revenue standpoint in Q3.

Raj Ghai - ThinkEquity

Q3, okay, thank you so much.

Operator

Your next question comes from the line of Brian Marshall - Broadpoint AmTech.

Brian Marshall - Broadpoint AmTech

Question with regards to your verticals, I was wondering if you could comment on the relative strengths and weaknesses outside of the federal arena.

Frank Slootman

Brian, it is Frank. We are very broadly distributed and others were still plenty of spending going on in big finance, in big aerospace, in big retail. I was very, very well distributed and always asked. We are very rarely concentrated in one vertical or another, which is one of the major parts about the makeup of our business. Federal is as we would expect for this time in their cycle.

Brian Marshall - Broadpoint AmTech

Okay, thanks. And you mentioned that you have one archive deal that was north of $1 million, are you seeing that as a general trend in terms of prioritization of data being in that segment?

Frank Slootman

Well, one data point does not make a trend. What I do think that is going to be a trend going forward is that people who will be conjoining backup in archive data on a single platform because it deals with a lot of the same data. It just makes a lot of sense for customers to have one type of storage that deals with all backup and archive sort of data.

So, we obviously are driving that pretty hard without positioning our product lends itself extremely well to that kind of combined use. So you can definitely expect that from us. We do have customers that are archive only that are not back of customers, but for the most part it is really in the combined use that we see out there.

Brian Marshall - Broadpoint AmTech

I understood thanks. And final question is there any general trend that you see in historically when you bring a new high end system to the marketplace? Is there a typical ASP bump that you typically enjoy?

Frank Slootman

Yes, there is a very significant ASP bump. Mike, do you want to try and characterize the size of it?

Michael Scarpelli

Well, you have been seeing the pricing on this new product will be a little more than double the DD690 as you saw how the DD690 quickly became our biggest revenue generator and we fully expected our new high end products would become our biggest revenue generator so you would expect it to have a big impact. I am going to quantify where the ASP is going to go up but we fully anticipated it will go up.

Brian Marshall - Broadpoint AmTech

Okay. And said you would expect that within this year that the new product would be the majority of the product sales as we have seen in the past.

Michael Scarpelli

I expect usually it takes a couple of quarters over the last. You will see that DD690 was 53% of our revenue in Q4 which was introduced in May of 2008 but generally the second full quarter of the block that it becomes the biggest revenue item.

Brian Marshall - Broadpoint AmTech

Okay. And list price on average on a DD690 now is at kind of $400,000 and $500,000 more or less.

Michael Scarpelli

Fully configured, the Street was priced at around $450 with various options.

Operator

Your next question comes from the line of Brian Freed - Morgan Keegan & Company.

Brian Freed - Morgan Keegan & Company

Two quick questions. One, could you give a little kind of color on the mix between backup primary and archive maybe as a percentage to your business, this is the best you can gauge that? And then second, within your distribution, can you talk a little bit about your two-tier versus your direct channels and how that is going about what your thoughts are on two-tier distribution relationships?

Frank Slootman

This is Frank, Brian. Just to be clear, 95% of our business is backup and disaster recovery. In other words, it is on site disk back up and then the replication of that data offsite from disaster recovery purposes that is really the way it has been. Archive is a small component but a growing component of that. We are not for all intents and purposes in the primary space. I know that gets confused in the market research reports here, there and other places. But we know we really should not to categorize in that marketplace at this time.

Yes, in terms of your second question about what our distribution is like. One of the things that we saw in this quarter is that 75% of our revenue went through resellers as opposed to direct sales. It is actually a very low number. Historically, it has been in the 80s and the 90s that is because again the large transactions that dominated our business, more of those are going direct versus going through the channels. We are slowly but surely also beginning to bring second-tier distribution into our business. Historically, it is played a very minor role but we are with the number of resellers that we have out there second-tier distribution is going to play a bigger role going forward in terms of how our business goes up. So probably we will be reporting on that in the future quarters.

Brian Freed - Morgan Keegan & Company

Okay. And as a follow up for the first question, to be effective in the primary storage area, do you think that you could leverage the duplication on Flash to bring yourself into that market in the future?

Frank Slootman

Well, it is total different marketplace and then the reason the primary storage [44.35] that is characterizes to random IO, in other words there is a kazillion transactions coming at the storage very minor small reads and writes, whereas the type of work load that we are optimized for this is what we call a sequential transfer data. Basically you hook up a fire hose to our storage and you are driving immense amounts of data and you are streaming it for hours and hours on end into our system.

So, it could not be more polarized in terms of type of work loads that we are optimized for it. So, we are really storage platform for sequential file data. We have never positioned ourselves as a random IO storage system that you could run or work alone or exchange or anything like.

Other opportunities for us to move in that space, we think there are but that is a much longer conversation on how we might go about doing it. It will involve different design centers than the one that our current technology is based on.

Operator

Your next question comes from the line of Richard Sherman - MKM Partners.

Richard Sherman - MKM Partners

Just one real quick question. Of the incremental new hires this quarter, can you give us a relative percentage or the number that were dedicated to the sales and marketing? That is all the question I had. Thank you.

Michael Scarpelli

With regards to the hires that we had this quarter in sales and marketing there were 16 people that went into sales and marketing area this quarter net hires out of the 50 that we hired in total.

Operator

Your next question comes from the line of Mark Kelleher - Brigantine Advisors.

Mark Kelleher - Brigantine Advisors

Most of my questions have been asked and answered, but just one thing for Mike. Could you just touch on the tax structure again? I hate to do to you, but can you tell us where the break point is? Remind us again where the break point is between the short term tax rate and the long term tax rate and the triggers that go between those two? Thanks.

Michael Scarpelli

By 2012, we expect the tax rate to get down to 20% and that is we able get a convergence of the GAAP and non-GAAP tax rate. It is off by a couple of points but pretty much 2012 is when you will get it down to 20% and as I mentioned the actual forecast of cash taxes on a pro forma basis for 2009 this summer between 15% to 20% in Q1 and went approximately 10%, go on for that.

Mark Kelleher - Brigantine Advisors

And just one quick one numbers’ question, the other income had a nice jump up from the fourth quarter, anything unusual going on in there?

Michael Scarpelli

No, there is nothing unusual. You just did not see the FX losses that you have to ask going through that.

Operator

Ladies and gentlemen, that ends our question-and-answer session. We thank you very much for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a great day.

Frank Slootman

Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Data Domain, Inc. Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts