Double-Take Software, Inc. Q1 2009 Earnings Call Transcript

Double-Take Software, Inc. (DBTK)

Q1 2009 Earnings Call

April 28, 2009 at 4:30 pm ET

Executives

Erica Mannion - Investor Relations

Dean F. Goodermote - President, Chief Executive Officer, Chairman of the Board

S. Craig Huke - Chief Financial Officer

Analysts

Tim Klasell - Thomas Weisel Partners, LLC

Walter Pritchard - Cowen & Company

Peter Bussi - JMP Securities, LLC

Jonathan Ruykhaver - ThinkEquity

Richard Sherman - MKM Partners

Presentation

Operator

Welcome to Double-Take Software’s earning conference call for the 2009 first quarter. The date of this call is April 28, 2009. This call is the property of Double-Take Software and any recording reproduction or transmission of this conference call will not be expressed written consent of Double-Take Software strictly prohibited. This call is being recorded. You may listen to a webcast replay of this call by going to Investor Relations section of Double-Take’s website.

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

Erica Mannion

Good afternoon. Thank you for joining us to discuss Double-Take’s financial and operating results. With me today are Dean Goodermote, President, CEO and Chairman of the Board of Directors and Craig Huke, Chief Financial Officer.

On the call today you will hear forward-looking statements about events and circumstances that have not yet occurred. Statements regarding projected financial results, statements containing words such as will, expect, believe and should and other statements in the future tense are forward-looking statements.

Actual outcomes and results may differ materially from the expectations contained in these statements due to a number of risks and uncertainties. Please refer to the Company’s recent SEC filings at the SEC’s website www.sec.gov for detailed discussions of the relevant risks and uncertainties. The Company undertakes no responsibility to update this information in this conference call under any circumstance.

The press release distributed today that announced the Company’s results is available on our website at www.DoubleTake.com in the Investor Relations section under financial press releases. The current report on Form 8-K furnished with respect to our press release is available on our website in the Investor Relations section under SEC filings.

In addition, in this conference call we will provide non-GAAP financial results. The reconciliation of these measures to GAAP measures is set forth in the tables that reconcile our non-GAAP results to GAAP results from the press release located on our website as I just described. Before I turn the call over to Dean I would like to mention that the Company will present at JMP’s Securities Annual Research Conference on May 19^th in San Francisco and Accounting Company Technology Media and Telecom Conference on May 28 in New York City.

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

Dean Goodermote

Thanks Erica and thanks to all of you who are listening and for your interest in Double-Take. The quarter just ended was the most surprising in my couple of decades of managing software businesses. We have a promising pipeline but for several quarters sales have been tempered at close and they have been in previous years, and this quarter was the worst.

For the most part, we did not lose sales and we were told the budgets were cut and the purchases were on hold. Instead we are given traditional buying signals. But as time went on we realized the financial managers of our prospects were holding up on purchases often without telling their IT counterparts. Presumably this is because they were unsure of their own firm’s performance in these tough times. While we are a ‘must have’ for some portion of our market, another part uses us an insurance policy and when cash is tight to that and hope they can leave another quarter without a disaster.

As logic would dictate, the larger deals in particular were the most susceptible to delay. Our average deal was about $8,100. Our median deal was about $4,200, both down from a year ago when they were about $10,700 and $6,200 respectively.

We believe these small customers can grow when the economy improves and budgets expand. We saw some stabilization in March and April, meaning the sales picked up in these months relative to January and February but it is not clear that secure predictable buying patterns have returned. This is why we remain cautious about Q2 and thinking forecasting for the full year of 2009 is not helpful until patterns stabilize.

As you might imagine almost no part of business grew in the first quarter so there are few positive trends. All regions were down year-over-year so the US is down the most 32% and at that is coming up of a strong Q1 in 2008.

Our virtual skews were down about 27% year-over-year. Sales for the emBoot products were about $140,000 and revenue from TimeData was the minimum. Though each result was due in part to the fact that we are integrating TimeData with Livewire for the backup market, and in the future there will be limited individual sales of TimeData.

Sales of our new product line Livewire were about $800,000. This product did not exist a year ago so there is no meaningful comparison. Its sales were down from Q4 by about 18%, but keep in mind Q4 is typically a much stronger quarter than our Q1.

So, these product lines are down. They still offer opportunity from market expansion beyond our traditional high availability in disaster recovery markets and will help us grow in a long term. I believe around the edges there are some competitive pressures contributing to our results that one end of the market our large competitors are always making some incremental improvements to their products and there are private companies that no doubt take a piece of what might be our business.

On the other hand of the spectrum SAN-based solution to become less expensive and sometimes a combination with virtualized data centers may take some of our market. Also, increasingly, backup and storage company claim they provide disaster recovery, which is only true in the sense of their transporting tool and storing data on disc more efficiently. However, they do not provide uptime disaster recovery as we do and then there have been more sources of confusion and than head to head competition.

Still all know we expect competition, we expected to evolve overtime and we do believe that if the global economic downturn that has hit our market segment hard and its predominant factor in our year over year decline in license sales this past quarter.

So, that is the bad news. There are worse than bright spots. Despite the downturn and sales we were able to produce non-GAAP operating income at the low end of our original guidance. We achieved this through cost control as I have said in the past; we are relatively highly leveraged to book bonuses and commissions.

Going forward in anticipation of a continued slump we have significantly reduced our budgets for discretionary spending, have a general hold on hiring and have cut 10% out of our employee costs. We will continue to innovate and deliver new products. We are fortunate to have a solid balance sheet with strong cash flow and I believe that with controlling costs and delivering new products we can emerge from this downturn with a stronger product portfolio.

We recently announced our workload optimization suites, which products that offer solutions in the network booting, migrations and backup markets to complement our core market of disaster recovery and high availability. This expands the total market potential served from approximately $1 billion to more than $4.5 billion.

In addition we believe that in the long term we will complement Microsoft’s virtualization play and be well positioned to interoperate between VMware, Microsoft’s Hyper-V, and the physical world, which will not disappear.

Finally, I would like to point out one last bright spot since I have frequently featured HP as a drag in our growth, this past quarter I want to note that it grew by 4% over the same quarter last year. This I believe was primarily due to a new program allowing our sales forces to work together on larger deals. We were able to implement this program through the cooperation of HP which gave us sufficient margins on these deals so that we could engage our sales forces. I am hopeful that this trend will continue.

Now, with that I am going to turn it over to Craig to give you more details.

Craig Huke

Thanks Dean. As we noted in our April 7^th press release, revenue for the quarter was below our original guidance and non-GAAP operating income and non-GAAP diluted earnings per share were within our range and the effects of our cost cutting initiatives resulted in expenses coming in less than we originally thought.

Our March 31^st cash position was strong at $79.1 million and we generated $6.7 million of cash from operations during the quarter.

Turning to more of the details, total revenue for the first quarter was $18.2 million, a decrease of 21% from $23 million in the first quarter of 2008. The stronger dollar against the Euro and the UK pound reduced revenue by approximately 8%. If the exchange rates have been constant, total revenue would have declined by 15% year-over-year.

Software license revenue was $7.7 million and professional services totaled $10.4 million. Software license revenue decreased by 38% from Q1 2008 but the decrease is 32% using constant exchange rates. Professional services decreased by 1% from Q1 2008. However, using constant exchange rates, professional services revenue would have increased by 6% over the previous year.

Maintenance revenue on a standalone basis grew by approximately 9% year-over-year on a constant currency basis.

During the quarter, our resellers generated 70.8% of our total sales. Distributors generated 14.1% and our OEMs generated 4.6% of sales. Overall, the indirect channel generated 89.5% of our sales in comparison to 91.9% in Q4 of 2008 and 87.4% Q1 of 2008.

Sales by Dell our largest reseller totaled 15.8% which is down slightly from the 16% in Q4 of 2008 and 16.1% in Q1 of 2008. Sunbelt continued to be a 10% plus partner and CDW was a 10% partner for the first time in the Company’s history.

As Dean already mentioned the average and median order sizes decreased during the quarter from last year’s levels. Throughout the quarter we saw our customers purchasing fewer licenses for their projects once they were approved and a number of larger deals that we closed were down significantly in the quarter.

The sale cycle on these deals, even though the dollar value is lower, has lengthened and more approvals are required on almost every deal than we saw previously.

The mix of sales between new and existing customers has stayed almost the same over the past three quarters with 51% coming from existing customers and 49% from new ones.

Breakout of revenue by region in Q1 2009 was largely the same as it was in Q1 of 2008 was 61% coming from North America, 32% from EMEA, and 7% from Asia.

Gross margin for the quarter was 88.2% compared to 89.5% last quarter and 89.3% in Q1 of 2008. On a non-GAAP basis, gross margin was 88.8% in Q1 compared to 89.7% in Q1 of 2008. The decrease in gross margin resulted from a change in mix between software and services revenue with services comprising a larger percentage of the total in Q1 2009 than in Q1 of 2008. Gross margin on software was fairly consistent at 98.9% in Q1 ’09 compared to 99% in Q1 of ’08. Gross margin on services increased to 81.3% in Q1 of ’09 compared to 78.7% in Q1of last year.

Similar to revenue, expenses were also affected by changing foreign currency rates. The stronger US dollar had the effect of reducing operating expenses by approximately 5% from what they would have been had the exchange rate stayed constant.

Additionally, during Q1, we took actions to reduce or eliminate costs where appropriate. We froze salaries at 2008 levels for virtually all employees and with a few key exceptions we froze hiring as well. Additionally, we eliminated the Company match for the 401k plan, curtailed travel, and reduced certain marketing programs. As a result, total operating expenses were $16.2 million for the first quarter which is a decrease of 4.8% from the first quarter of 2008.

Excluding the stock options expense operating expenses decreased by approximately 6% to $15.2 million in the first quarter of 2009 compared to the first quarter of 2008 even though our average headcount in Q1 of ’09 was 25 higher, our average headcount in Q1 of ’09 was 392 compared to 367 in Q1 of 2008.

Sales and marketing expense decreased by 8.7% to $8.2 million in the first quarter of 2009 from first quarter of 2008, excluding stock option expense sales and marketing decreased 9.9% to $8 million in the quarter. The decrease primarily resulted from less commission and bonus due to lower revenue additionally our efforts to control cost resulted in reduced travel and various marketing program expenses. These cost reductions were partially offset by increase salary expense related to higher headcount in Q1 of ’09 compared to Q1 of 2008.

Excluding stock option expense, sales and marketing expense increased to 43.9% of revenue in the quarter from 38.5% in the first quarter 2008. Research and development expenses decreased by 2.9% to $3.9 million of the first quarter compared to the first quarter of 2008. Excluding stock option expense, R&D spending decreased to 4.9% to $3.6 million.

The decrease is a result of continued cost control efforts including decrease third party costs used to supplement in-house development activity, decreased travel and bonus expense all of which we partially offset by increased salary expense due to increase headcount in quarter from the same period in 2009 and cost associated with the emBoot acquisition which closed in July of 2008. Excluding stock option expense R&D was 19.9% of revenue in the first quarter 2009 compared to 16.5% in the first quarter of 2008.

General and administrative expenses decreased 3.5% to $3.1 million in the first quarter of 2009. Excluding stock option expense, G&A was $2.6 million and Q1 of 2009 down 4.9% from Q1 2008. The decrease is a result of decreased bonus, travel, legal, and accounting expenses in the quarter compared to Q1 of 2008.

Excluding stock option expenses G&A was 14.5% of revenue in the first quarter of 2009 compared to 12% in the first quarter of 2008. Depreciation and amortization expense increased 23% to $1 million in the first quarter of 2009. The increase is a result primarily of amortization related to our acquisition of emBoot back in July of 2008, of the $1 million of depreciation and amortization in the quarter, $400,000 was amortization of intangible assets associated with acquisitions.

In the first quarter of 2009, we experienced a GAAP operating loss of $200,000 compared to operating income of $3.5 million in the first quarter of 2008. GAAP operating margin was a negative 1% in the quarter compared to 15.3% in the first quarter of 2008.

On an adjusted non-GAAP basis operating income was $900,000 in the quarter compared to $4.4 million in the first quarter of 2008, a decrease of 79%. Adjusted non-GAAP operating margin was 5.5% for the quarter compared to 19.2% in the first quarter of 2008. A reconciliation of these non-GAAP financial measures as well as other non-GAAP financial measures we referred to in the call are the most directly comparable GAAP financial measures as included in the Appendix to our press release that preceded the call and is also available on our website at DoubleTake.com.

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

Investment income decreased during the quarter by $500,000 to $132,000 in the Q1 2009. The decrease resulted from lower returns on our cash and short-term investments as a result of our conservative investment strategy to invest substantially in US Treasury notes and bonds and cash management funds. As a result, our interest income is dropped significantly.

Also in the quarter we incurred a foreign current exchange loss of approximately $63,000 compared to a foreign exchange loss of $345,000 in Q1 of 2008. As I mentioned last quarter, we reorganized the legal structure of our EMEA operations in the way that should reduce our exposure to fluctuating exchange rates between the UK pound and the Euro going forward.

However, from time-to-time, we may have some assets denominated in currencies other than the pound or the Euro. So, we may have some limited gains or losses in the future.

During the first quarter, we recorded an income tax benefit of $51,000 compared to an income tax expense of $1.6 million in the first quarter of ’08. The effective tax rate in Q1 2009 was approximately 53% compared to 43% in Q1 of 2008. The effective tax rate increase in the quarter over last year substantially due to the increase of stock option expense and the proportion of stock option expense with the total expense from 2008 to 2009.

On a GAAP basis we recorded a loss of $45,000 or $0.00 per share for the first quarter of 2009 compared to GAAP net income of $2.2 million or $0.09 per fully diluted share for the same period a year ago. The decrease in net income earnings per share was substantially a result of our decreased revenue in Q1 of 2009 as compared to the Q1 of 2008.

On a non-GAAP basis for the first quarter, net income was $1 million or $0.05 per diluted share compared to $3 million or $0.13 per diluted share in the first quarter of ’08. To get adjusted non-GAAP net income, we exclude only non-cash stock based compensation expense associated with stock options which was $1.1 million in Q1 of ’09 and $0.9 million in Q1 of 2008.

The effective tax rate in Q1 a non-GAAP pretax income was negative 5%. We had negative income taxes despite recording non-GAAP net income because we used the same tax expense recorded for non-GAAP purposes as for GAAP purposes since stock option expense was not adoptable for tax purposes. This can and has led to tax rates on non-GAAP income varying widely from quarter-to-quarter.

We ended the quarter with cash and short term investments of $79.1 million compared to $73.2 million at December 31^st, 2008 and $69.8 million on March 31^st, 2008. Cash from operations during the first quarter provided $6.7 million and we used $600,000 for capital expenditures in the first quarter of 2009.

Accounts receivable on March 31^st was $13 million which is a decrease from $19.6 million at December 31^st, 2008. Accounts receivable Days Sales Outstanding were 64 days at March 31^st, 2009 compared to 71 days on December 31^st, 2008 and 63 days on March 31^st, 2008.

Headcount was 392 at the end of the first quarter compared to 391 employees as of December 31^st, 2008. As we noted last quarter, we have been and will continue to be cautious regarding hiring during 2009 and as an added data point, our headcount today is 390.

Now turning to our guidance for the second quarter, as Dean mentioned, we are providing guidance for the second quarter of 2009 but we are not going to give guidance for the remainder of the year due to the uncertainty in the worldwide economies and their effects on the sales of our products. But we will continue to be conservative with the expenses and capital expenditures and I believe that we can continue to be profitable and generate cash in this period of uncertainty. In April, we reduced employee salary by approximately 10% and the effects of this reduction have been taken into account in our guidance for the second quarter.

So, for the second quarter, we expect total revenue to be in the range of $20 million to $22 million which implies year-over-year revenue decline of between 10% and 18%. The stronger US dollar compared to the Euro and the UK pound is expected to have approximately a 9% effect on revenue versus constant exchange rates.

Non-GAAP operating income excluding stock option expense will be in a range of $2.7 million to $4.4 million in the second quarter and includes the effect of amortization of intangible assets of $400,000. Non-GAAP income per share for the second quarter is expected to be in the range of $0.07 and $0.12 per share using a tax rate of approximately 38%.

The actual tax rate recorded in each quarter as I mentioned earlier is likely to vary based on the effective tax rate we actually see on a GAAP basis.

For the quarter, our cash tax rate though should be approximately zero. The weighted average diluted shares in the quarter are estimated to be between 23.2 million and 23.3 million shares.

So once again, thanks everybody for joining us today and we will now open up the call for questions, operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Richard Kugele - Needham & Company.

Richard Kugele - Needham & Company

Just a couple of questions, I guess, Craig, on the OpEx side. Can you just talk a little bit about the criteria for selecting the 10% figure on the headcount reductions and was this done with a certain operating margin target in mind or cash flow or is there any particular target there?

Craig Huke

Yes. We actually had come to the number based on our own internal forecasting for the year and what we felt necessary to get the certain operating margins. I will not go into the detail what that was, just because we did not give full-year guidance. But we felt like we wanted to cut to a level that generated certainly adequate income in the year on an operating income basis.

So, it is a lot of specificity but we did have a target in mind as we went at it and the 10% kind of got us there.

Richard Kugele - Needham & Company

And have you had to change your terms to any of your resellers or distribution contacts to be able to see the stabilization or has the stabilization and business volume has just been naturally occurring?

Dean Goodermote

It is just the environment. Things were bad in January and February and seemed to be better in March and April.

Richard Kugele - Needham & Company

Okay. I guess just lastly since it has been such a hot topic, have any of these recent M&A transactions and IT hardware or even the product announcements such as Cisco trying to put out some low end servers of their own have any impact on your business or any thing that you think might affect your business one way or another over the next six to 12 months?

Dean Goodermote

Yes. I do not know the specifics of the M&A. I guess you got some in Oracle.

Richard Kugele - Needham & Company

Yes, that one in particular, yes.

Dean Goodermote

So, that is not meaningful to us today. I will not say forever. It depends on what Oracle does there, but maybe that is an opportunity in the future if they do something with that. They spend some of that off some place who knows. So, that is a no change, and Cisco, I would say it is a major tech player. So we have to watch what is going on there but has been no feedback in our market, positive or negative neutral or otherwise from that as well.

Operator

Your next question comes from the line of Tim Klasell - Thomas Weisel Partners, LLC.

Tim Klasell - Thomas Weisel Partners, LLC

I know the macro probably had a majority effect on the license sales this quarter, but do you think there was any impact from all the introductions or maybe the channel and the salespeople got tied up in new product launches? Was there any impact from that?

Dean Goodermote

That is a bit subjective but I have not heard that if any thing I think it is almost the opposite of a channel based model and even one that is leveraged I think tends to be sticky with selling what it knows best. So, even though we have started this rollout you have to tell them and tell them again and then tell them one more time before it works.

So, I think the announcement is not that old. So, I do not think so.

Tim Klasell - Thomas Weisel Partners, LLC

Okay, good. It looks like the maintenance continued to grow on a constant currency basis but you did not mention I think about the maintenance renewal rate even qualitatively. Have you seen any changes in the maintenance renewals?

Craig Huke

Tim, I think the renewal rates are in the same range that we have been talking before. I think we have been saying the mid to high 70s. I think it is down a little bit from that maybe the low to mid 70s but it has not been a drastic change and a few large renewals coming in or out of that quarter changed that around. But for the most part that has been comparable to what we have seen last year.

Dean Goodermote

The difference has not been the rates as much or even the discounting. The only thing I have been saying is the larger; a lot of the larger customers do not want to pay just quickly sometimes. So they are slowed to maybe get the deal done, some of them, not so much of their payment terms are late but maybe they want to pay a little later so they are a little slower than they would have been a year or two in signing off.

Tim Klasell - Thomas Weisel Partners, LLC

Okay, good. And then one final on the guidance, I think you alluded to this on the call, but have all the expense reductions been done already for the June quarter or could there still be some additional reductions in operating expenses going into the following quarter?

Craig Huke

At least right now, we believe that all the actions have been taken. But to be honest, I do not know that we say that nothing else would be done if whatever reason revenue does not track to where we believe it will go.

So, within the realm of the guidance that we have given, I would say “yes” the expense actions have all been taken.

Operator

Your next question comes from the line of Walter Pritchard - Cowen & Company.

Walter Pritchard - Cowen & Company

I am wondering just as it relates to the salary reductions you noted, so it sounds like this is in a RIF because I feel like at the headcount numbers they are relatively flat over the last three quarters, just want to make sure I am not understanding this incorrectly.

Craig Huke

Yes. That is exactly, right Walter. So, it was a reduction in salary for the employees rather than a RIF.

Walter Pritchard - Cowen & Company

Okay. And then relative to the guidance, I guess I was a little surprised to see you guide what looks like a typical seasonality at least from last year after having negative surprise this quarter. I am just wondering you mentioned that this has stabilized in April but I am wondering if there is anything else that gives you the feasibility that would suggest and then may have follow up on that.

Craig Huke

I think Walter we got all of March and virtually all of April as the basis for the guidance that we gave. So, I think we have been cautious in a way we look at it. We are not necessarily assuming things get a lot better but as we said April is better than January was and which would lead to a little higher revenue.

So, I think we are just taking the trending of what we are seeing over the last couple of months.

Operator

Your next question comes from the line of Peter Bussi - JMP Securities, LLC.

Peter Bussi - JMP Securities, LLC

It sounds like things are improving with HP and I was wondering if you could just comment a little bit on what you are seeing in general in terms of why the business trends are improving, and then also maybe comment a little bit on the servers that come pre-installed with your software.

Dean Goodermote

This is Dean. One data point, I do not know if I want to call it a trend. It is just I think I had to give credit where credit was due, given the decline everywhere else. They were actually up. So, it was solid. So, I am hopeful that continues. I am fairly clear that that uptick occurred because we are able to make an arrangement with them that gave us better margin terms for deals over a certain size and with that we felt we could start engaging our sales force with them.

So, it just like with Dell or other resellers where we primarily are at work, often it takes both parties to work in conjunctions especially company like HP which might surprisingly be new to this business in some ways.

So, I think the uptick was entirely attributable to our ability to work together in most large deals and I am hopeful that will continue.

The ProLiant thing I think you asked about where we were on the ProLiant storage servers. Is that correct?

Peter Bussi - JMP Securities, LLC

Yes.

Dean Goodermote

Yes. So, we were grayed out option. I do not think that has had any meaningful and I am not sure that they are pushing and that was done. There was a change in management responsible for us and I believe that was done in the beginning of Q4 and I do not think it is viewed as important to this management.

Peter Bussi - JMP Securities, LLC

I got it, thanks, just one last question on the virtualization SKUs, what was that as a percent of revenue?

Craig Huke

Percent of revenue?

Dean Goodermote

Yes, percent of revenue, sorry, I did not calculate that.

Craig Huke

And net of bookings.

Dean Goodermote

Yes. We usually give that as percent of total sales, actually…

Craig Huke

Right, which is right about 12%, Peter?

Operator

Your next question comes from the line of Jonathan Ruykhaver - ThinkEquity.

Jonathan Ruykhaver - ThinkEquity

I have got a question around the Double-Take Flex product. I know at least from the period time that deal was announced, it seemed like somewhat of a departure from your historic focus on host-based replication and disaster recovery. Can you talk about the success you might be seeing with that product in the marketplace?

Dean Goodermote

Today, we acquired it because we have been talking about the ability to move stuff anywhere, any time, any place for any purpose and so booting from a SAN gives us that ability depending upon the customer and the fabric they are using.

What we have done is that was the original intention of the deal and we still have to work into that. We really have not integrated that fully at all yet. What we started to discover was a positioning within the desktop market to do desktop booting, and where this will differ from a BDI or at Citrix is that actually customers can use their current hardware to boot so you got a large support group coming in that the eight-to-four shift and then another one coming in after that. They can shutdown and then reboot the specific images for the next group.

Jonathan Ruykhaver - ThinkEquity

So, if I can ask another question, is that technology really what underpins this new optimization suite or workload management?

Dean Goodermote

No, it is a component of it.

Jonathan Ruykhaver - ThinkEquity

Okay. And is that optimization suite actually an integration of those technologies or more just kind of the way you market those four different products?

Dean Goodermote

Okay. So, it is the Flex is not fully integrated yet. It is partially integrated part branding and things like that and then the TimeData and Livewire in that backup space were increasingly integrated. The move now is more or less completely done and the availability is sort of rolling in all the virtual recovery staff to virtual products, the GeoCluster into a one availability product and that will be out product line that will be out by around the end of this quarter so in product mix to what is done and what is not. So, this is time development and some packaging.

Jonathan Ruykhaver - ThinkEquity

Okay. I guess I am just looking at that product. What is the value proposition because obviously your customers could go out and buy those separate products independent of one another? I would think in a tight IT spending environment that might be the preferred way the customers go about buying these capabilities. Can you just articulate to me where or how that plays more into driving a value proposition?

Dean Goodermote

Yes. I am not sure about the going and buying. If they are going to out and buy them then I think what we want to do is be one of the options. So, prior to these for instance we had companies using our Eval product for migrations, which is free.

Jonathan Ruykhaver - ThinkEquity

Alright.

Dean Goodermote

So, they were downloading and then using it or they would actually have a copy at Double-Take which is too high priced for a migration product and we would see selective movement of that.

So, by pricing this and then putting a frontend on it that makes it look like it is designed for a migration product or a move product. We actually I think we can capture what some of our customers were already using this for either by using evaluation products in a way we did not intend it or actually paying more than they needed to so as to use core Double-Take.

So, I think we had our toe in that game and we really think that we should play there that these are our customers and that they are doing if they have a respect and like Double-Take you will know that this product will work too. So, I would say if they are going someplace else; they just might as well come to us.

The backup thing is more of a play to extend from Livewire where we were initially after the second and third tier servers and we are finding that this is an excellent place to be. It is a crowded market so we do not think we are going to get all of that but very, very few backup vendors actually do continuous replication. So, there is a market where for some of these servers where they say, “Geez, I would like to make sure that within seconds or minutes that what has happened on these servers is backed up.” And at that the competitive market there is a much shorter list and I think we have had a push for that from our customers and our sales force for a long time. So, that is come from within.

Jonathan Ruykhaver - ThinkEquity

Okay. What does the pricing look like? Is it similar to the pro-license pricing to your core replication products?

Dean Goodermote

I am not trying to hide here because it is not quite announced.

Jonathan Ruykhaver - ThinkEquity

I know it is recent.

Dean Goodermote

But all of these things on the unit basis are significantly cheaper than double pay.

Jonathan Ruykhaver - ThinkEquity

Alright, okay.

Dean Goodermote

So, the extent they grow and I hope that they will you should see the average order size come down.

Jonathan Ruykhaver - ThinkEquity

Okay. Well, that is helpful.

Dean Goodermote

I am sorry; the unit of price is coming down.

Jonathan Ruykhaver - ThinkEquity

Unit price, so, any color on how Dell and Sunbelt did in the quarter?

Dean Goodermote

I think we gave Dell; do you want to repeat this?

Craig Huke

Yes. So, actually both of them were about the same percentage of the total that they have been in previous quarters. So, you can from that they were down about the same amount as the rest of the Company. So, that was like 15.8% of our sales. In Q1 it was like 16 over the past couple of quarters, so, very little difference.

Operator

(Operators Instructions) Your next question comes from the line of Richard Sherman - MKM Partners.

Richard Sherman - MKM Partners

My questions are about close rates. Dean, you mentioned like kind of a deteriorating close rate picture in the first quarter. Have you assumed a lower or stable close rate in your Q2 guidance?

Dean Goodermote

Well, lower.

Richard Sherman - MKM Partners

Okay. So, essentially, your pipeline coverage rate is a degree or two higher here as you have provided guidance for the June quarter.

Dean Goodermote

Yes and hopefully it is high enough. We had a very, very consistent approach for several years, a long time and we changed that late last year things since starting to deteriorate that we changed it more. So, we just plainly needed more coverage as I was saying in my remarks earlier. We are still seeing that the buyers exhibit typical buying signals. But the ability to get the PO has the sales cycle’s lengthened or it has deteriorated, projects get smaller and in by being channel base we are probably one step away from that financial buyer than we might be if we were entirely direct oriented.

Richard Sherman - MKM Partners

Understood, good, thank you, and then, one other question, is there a trade down play here from maybe higher end more expensive solutions? And are you experiencing any trade down maybe from more complicated complex and broader reaching products to a very discrete Double-Take solution? Are you experiencing that? And might be the gating factors on the trickledown or the trickle over maybe not down the trickle over affect? Will this starts to happen faster and if so, why, and if not, why not? I will take the answer offline. Thank you.

Dean Goodermote

So, just to be clear, are you talking about from one of our higher priced products to one of our lower?

Richard Sherman - MKM Partners

No, no, from the fan vendors and that kind of impact.

Dean Goodermote

I do not think I could say. One theory I have read is that companies like ours should benefit from the recession because we are relatively modest priced. I do not think I could actually say that we have seen a benefit yet of that. I suspect other companies like ours are experiencing the same issues. So, someone who is going to buy a really, really high end array for something and absolutely had to be protected, they are probably going to do it. So, what I think happened here is that part of the market where we offered an affordable solution from more complex high end solutions is still there and they were so spooked by the world coming to an end for their businesses, a little in the fourth quarter and a lot in this first quarter and I hope that that theory is gone. That group did not act. I do not think they bought a more complex. It is not like they did anything. They were our core customers that would come to us perhaps even in the poor times but not really, really poor times. They just held off on spending. That is the way it seems to be.

Richard Sherman - MKM Partners

So, it was really freezing rather than a trade down but now as we get into a recovery, I guess…

Dean Goodermote

Yes, I would hope we would see some benefit of that, yes.

Richard Sherman - MKM Partners

Okay, great.

Dean Goodermote

I really would and I think that is why it is important that we are trying to continue to expand our product line because these things are related. So, one can migrate something for a project and then they can protect it with Double Take or use a SAN-based replication if that the SAN-based booting to help them move or stay up and running most of their desktops and servers.

So, I would be hopeful that once this fear has gone out of the buyers that that movement from complex to expensive solutions will be better than ever.

Operator

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

Dean Goodermote

Thank you very much and thanks again for those of you who are listening in or maybe listening in at a later time. I appreciate your interest in Double-Take and I want to give special thanks again to the dedicated employees of this Company and to our customers. Thanks.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good-day!

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