Good day, ladies and gentlemen. And welcome to the First Quarter 2009 Sourcefire Earnings Conference Call. My name is Erica and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions).
I would now like to turn the presentation over to your host for today's call Ms. Tania Almond, Investor Relations Officer with Sourcefire. Please proceed.
Thank you Erica. This is Tania Almond, Sourcefire's Investor Relations Officer. I want to thank you for joining our first quarter 2009 earnings conference call. Joining me today on the call is John Burris, Sourcefire's Chief Executive Officer; Tom McDonough, Sourcefire's Chief Operating Officer; and Todd Headley, our Chief Financial Officer.
Before we begin, I must remind you that statements made in this conference call and in our public filings, releases and website, which are not historical facts maybe considered forward-looking statements that involve risks and uncertainties and are subject to change at any time.
We caution investors that any forward-looking statements made by us are management's belief based on currently available information and should not be taken as a guarantee of future results or performance which may differ materially as a result of a variety of factors discussed in our earnings release that was issued today and in our latest Form 10-K, filed with the Securities and Exchange Commission in March 2009.
We disclaim any obligations to update any of these forward-looking statements or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments. There is more complete information regarding forward-looking statements, risks and uncertainties in the company's filings with the SEC available on our website, www.sourcefire.com.
In addition, we may discuss non-GAAP financial information on the call. This information is reconciled to comparable GAAP financial information in the earnings release. The full earnings release can be found on our website. An online replay of this call will be available on the Investor section of the website for at least 90 days.
With that, I'll turn the call over to John Burris, Sourcefire's CEO.
Thanks Tania. And thank you for joining us for our first quarter 2009 earnings call. We appreciate you joining us for this call as we realize this is a very busy time slot for tech companies to report. We're considering changing the time of our call next quarter to enable more live participation and be happy to receive your feedback on this.
We'll start today's call with a brief review of the quarterly results, highlight some of our accomplishments in the first quarter and provide an update on trends in the business. I will then conclude with what I know you are all waiting for, our final guidance for the second quarter of 2009.
As we announced in our press release earlier today, total revenues for the first quarter of 2009 were 18.6 million, 36% up above first quarter 2008 revenues. Gross profit for the quarter increased 36% also to 14.5 million or 78% of revenues. GAAP net loss narrowed to 1.1 million in the first quarter of 2009 compared with 3.5 million loss in the year ago period. Adjusted net income was 0.1 million or breakeven on a per share basis.
We had very strong results in all key financial metrics in the first quarter exceeding the top end of our previously announced expectations for revenue, net loss and adjusted net income. Given an increasingly challenging environment and that the first quarter has historically been seasonally weaker than our later quarters I am very pleased with the marked improvement in our bottom-line and the fact that on an adjusted basis we were modestly profitable in the first quarter. This marks the first time in a company's history as a public company, this has occurred in the first quarter of the fiscal year.
We also improvement in our operating expense margins in Q1 '09 versus Q1 '08. And we will continue to focus on the absolute dollars we're spending on all areas especially in light of the macroeconomic environment. We are keenly focused on leveraging our business model to reach and sustain profitability. As I mentioned last time, this is a top priority for the company to make progress on in 2009 and I think we're off to a great start.
We continued our expansion of our international business delivering revenues of 6.4 million this quarter up from 4.1 million in the year ago quarter for an increase of 56%. One notable factor in our success abroad is that our investments in our international channel initiatives are continuing to post returns as sampling of these accomplishments during the first quarter include, Sourcefire being selected by leading international IT security solution provider for their managed services, winning business for the leading telco in Thailand, wining the IPSPs of a large Australian power company project, signing an entirely on a new distributor in Germany, as the new distributor in Germany and signing up a distributor in Cambodia.
As I stated before, international expansion is the focus growth area for us in 2009. I'm pleased with the progress we are making. U.S. federal sector performance further strengthened in Q1 '09 with revenues of 2.6 million or 14% of total revenue versus a year ago period revenues of 1.1 million or 8% of total revenues, up a 143% year-over-year.
The CNCI, Comprehensive National Cyber Security Initiative continues to be a positive driving force for our business. Additionally, the recently approved economic stimulus package and the fiscal 2010 federal budget, each contained incremental investments in cyber security initiatives within the federal sector. We expect these factors in addition to our normal federal sales opportunities to positively influence our federal business throughout 2009.
The commercial side of our business in U.S. remains steady with revenue growth in the low double digits over the first quarter of last year. We continue to monitor all sectors as the world works it way through the effects of this historic global economic crisis.
We have seen some green shoots of recovery in a sense that we won our first cloud computing deal this quarter at a leading provider of infrastructure technology. In terms of our channel development, we recently announced that Sourcefire was chosen by Symantec for their managed services -- managed security services offering. We've seen the commitment by both companies to this partnership yield very positive traction which had several transactions in the first quarter and we're encouraged by the pipeline.
As a reminder, the way these deals are structured Symantec's MSSP customers are offered Sourcefire's products and services on a leasing format. This allowed customers to make purchases from their operating budget versus being the capital expenditure which is helpful in this economic environment. For Sourcefire it brings us additional channel access and repeatable revenue stream since the deal is recognized ratably over the life of the contract, a win - win.
As it relates to innovation in Q1 Sourcefire's Vulnerability Research Team or VRT remained at the forefront of the industry, protecting users from the latest threats and vulnerabilities. In February the VRT outpaced the entire industry when they not only announced new rules as well as existing protection against the closed Vulnerability and Adobe Acrobat but they went even further releasing a software patch, that Adobe users could download for free to help protect themselves.
What makes this even more impressive is Adobe wasn't to scheduled to release the patch until several weeks later. The VRT also published new IPS rules and advanced of the first Conficker Outbreak. These new rules were supplemental for similar rules that VRT published two years ago that are also triggered by Conficker.
These are just a couple of recent examples as to the type of dedication and protection coming from the Sourcefire VRT everyday. I really hope that they can do something to help us with this swine virus as well.
Additionally, during the quarter, the engineering for Snort version 2.8.4 which brings improved performance, manageability and extends our ability to detect IPv6 exploits, the capability critical to U.S. federal government users was completed. We also released the 3D 6500 sensor, a latest entry to the 3D family that provides up to 4 gigabytes of IPS inspection in a 2U form factor appliance and provides the selection of copper, one giga fiber and 10 giga fiber connectivity options to the customer.
We also just recently announced a strategic relationship with Microsoft and with Sourcefire is integrating our Defense Center eStreamer interface with Microsoft Forefront Stirling which by the way is currently available for pubic beta testing to offer customers interoperability, context and improved insight to their network security environment.
We could continue to receive accolades in terms of third party recognition. Since the beginning of this year some of these awards include. Sourcefire is named a Finalist for Network Products Guide's 2009 Hot Companies award. Sourcefire is named to the SmartCEO Future 50, Sourcefire is highly recommended by SC Magazine Award 2009 Europe for Best Network Security overall. Gartner positions Sourcefire in the Leaders Quadrant of their Magic Quadrant for Network Intrusion Prevention System Appliances report for the fourth year in a row. And Snort was just named Best Intrusion Detection Prevention Solution at the 2009 SC Reader's Awards.
I'd like to extend my thanks and congratulations to all Sourcefire employees who contribute daily to our success and recognition in the marketplace.
Now, regarding our outlook for the second quarter of 2009, we expect revenue in a range of 18.7 million to 20.2 million. We expect net loss per share in a range of $0.04 to $0.01 and on an adjusted basis net income per share in a range of breakeven to positive $0.03.
Our expectations regarding adjusted net income per share excludes stock-based compensation expense in expected range of 1.2 million to 1.3 million.
With that now I will hand the call over to Todd Headley, Sourcefire's Chief Financial Officer for more detailed review of our performance for the first quarter. Todd?
Thank you John. Starting with the statement of operations, as John noted in the first quarter of 2009, we achieved a 36% increase in total revenues over the first quarter of 2008. We segment our revenues into two categories, product and services.
Total product revenues for the first quarter of 2009 were 9.9 million, up 44% from the 6.9 million in the year ago period, mostly driven by increased demand for a higher performance at the 3D sensor products, which in the first quarter included a newly released more sensor with 10 gig interfaces.
Service revenues in the first quarter of 2009 were 8.7 million compared with 6.8 million in the year ago period or an increase of 28%. The increase in service revenue primarily resulted from providing technical support to an expanded installed base of 3D customers.
In first quarter of 2009, our revenue composition yielded the following, 41% from existing customer product sales, 12% from new customer product sales, 43% from reoccurring technical support services and 4% from professional services and training. This compares with 33%, 17%, 44%, and 6% respectively in the year ago period. During the quarter our sales force and partner channel closed 27 six figure transactions, 11 of which represent new Sourcefire 3D product customers.
We had six transactions in the quarter that were in excess of $500,000. Additionally revenue distribution by fulfillment method yielded 71% through partners while 29% was taken directly. This waiting toward indirect distribution is the result of our continuing efforts to leverage our go-to-market strategy on a global basis.
Turning to cost of revenues. Total cost of product revenue in the first quarter of 2009, was 2.8 million which compares with 2 million in the year ago period. The increase in product cost of revenue was primarily driven by higher volume demand of our sensor products, for which we procure and provide the hardware platform to our customers.
In the first quarter of 2009, our gross product margin was 72% up slightly from 71% in the year ago period. While we did expand some additional product discounting in the first quarter due to both global economic factors and some competitive repriced opportunities. This was positively offset by lower unit cost on certain sensor models.
Cost of services revenue in the first quarter of 2009 was 1.4 million which compares with 1 million last year. The increase in our services cost of revenue was primarily attributable to an increase in the amount we pay to third parties to manage and service the hardware component of our products. For an expanded installed base of customers and our hiring of additional personnel to support our customers in the field.
The service gross margin in the first quarter of 2009 was 84% down slightly from 85% in the year ago period. As we increased our international capability to effectively service the hardware component of our products.
Total blended gross margin in the first quarter of 2009 was 78%, identical to that expense in the first quarter of 2008. Given today's more difficult global economic environment, we are pleased to sustain the gross margins in line with our historical experience prior to the economic downturn.
Regarding operating expenses, John's consistent message to the team of spending wisely, managing our budgets, and investing in areas of the business that more directly impact our top-line growth has fully taken root.
Our research and development expense increased slightly to 3.3 million in the first quarter of 2009 from 3.1 million in the first quarter of 2008 and decreased as a percentage of revenues to 18% from 23%. As mentioned on previous calls, we continue to invest more aggregate dollars in driving product innovation and enhancements, primarily through the hiring of additional engineering personnel. We're also seeing the leverage in our business model and that as a percentage of total revenues, this metric is now more in line with our peers.
Sales and marketing expense totaled 7.9 million in the first quarter of 2009, up from 7.2 million in the first quarter of 2008 and as a percentage of revenue, totaled 42% compared to 53% last year. The increase in the amount of sales and marketing expenses was primarily due to the hiring of additional federal and international sales personnel, better throughput from our channel and additional incentive compensation due to the achievement of higher sales volumes. In line with John's previous comments regarding our focus on international expansion and better leveraging of our growing channel, we anticipate that incremental investments and additional international sales personnel and channel partners and programs will be made throughout the course of 2009.
General and administrative expenses were 3.8 million or 21% of revenues in the first quarter of 2009 compared to 4.4 million or 32% of revenues in the year ago period. As stated on our last call we anticipated lower G&A expenses in 2009, compared to that experienced in 2008, and a corresponding reinvestment of those dollars into research and development and sales and marketing.
Last year we invested in several areas of the business that caused G&A to exceed our original plans. The full effect of external cost for the first year implementation and testing of our internal controls under section 404 of Sarbanes-Oxley which cost the company approximately 1.5 million in direct cost over that we experienced in 2007.
Training and documentation cost for the implementation of our ERP system, the expansion of our Board of Directors, the transition to a new CEO, and the incremental hiring of finance and legal staff to meet the growing obligations of a pubic company requiring to file, do tax planning, and support our international operations.
With those investments behind us, we expect our quarterly G&A spend in 2009 to remain at levels lower than that experienced in 2008.
Total operating expenses for the first quarter of 2009 were 15.9 million which compares to 15.3 million in the first quarter of 2008, an increase of 4%. This modest increase in operating expenses coupled with double-digit revenue growth resulted in a first quarter 2009 operating loss of 1.4 million compared to 4.6 million loss in the first quarter of 2008. Again this reflects John's message of better expense management, while still focusing on key growth drivers.
In the first quarter of 2009, the company's GAAP net loss was 1.1 million or $0.04 loss per share compared with a GAAP net loss of 3.5 million or $0.14 per share in the first quarter of 2008. The average outstanding shares in the first quarter of 2009 were 25.9 million on both the basic and diluted basis, while the first quarter of 2008, the corresponding figure was 24.8 million.
Included in GAAP net income, for the first quarter of 2009 was a non-cash stock-based compensation charge of 1.2 million, this compares to non-cash stock-based compensation charges of 0.9 million in the year ago period.
Excluding non-cash stock-based compensation expense, our adjusted net income for the first quarter of 2009 was 0.1 million or breakeven per share. This compares to an adjusted net loss of 2.3 million or a loss of $0.09 per share in the first quarter of 2008 which includes non-cash stock-based compensation as well as CEO transition expenses.
As of March 31, 2009, cash, cash equivalents and investments totaled to 105.3 million. As such we believe that Sourcefire is adequately capitalized to execute on our strategic initiatives. Reflecting the global economic challenges and tighter credit markets, a portion of our customers and partners are paying us beyond terms or asking for extended credit terms.
Our terms typically spans from 30 to 60 days. Given the annual seasonality of our business towards the second half of the year and the spike in our billings, the last two weeks of the typical quarter, a linear calculation of our day sales outstanding exceeds 90 days.
Our AR balance spikes at the end of each quarter and then this intra quarter as we get the vast majority of collections with in terms. Only to see AR spike again at the end of the subsequent quarter.
We continue to monitor our credit and collections closely. Over the last nine months we have experienced less than $25,000 in receivable write-offs, but have prudently increased our accounts receivable allowance as a reflection of the slower payment experience due to the macroeconomic environment.
All investments held by the company are executed by experienced investment managers and are made in compliance with the company's investment policies. As of March 31, 2009, no investment has a maturity date beyond 13 months and the average dates to majority of our portfolio was approximately 60 days.
Additionally, all maturities of our investments during the first quarter of 2009 occurred at their full par value. Thus while our earned interest income is down significantly from the year ago period due to the general decline in interest rates, we believe that our current portfolio remains unimpaired.
And with that operator we would now like to open it up to any questions.
Thank you, sir. (Operator Instructions). And our first question comes from the line of Todd Weller with Stifel Nicolaus. Please proceed.
Todd Weller - Stifel Nicolaus
Thanks. Congratulations, guys. Just had a couple of questions first on the cyber security front, how do you think of the kind of duration of that as to grow a catalyst? And then any comments on, there used to be some assertions that historically the government has bought a more of a centralized approach and that might be transitioning to more of a decentralized approach overtime?
Yeah, hey Todd. This is Tom McDonough. I'll take that question. We're continuing to see good growth in the government space as John alluded to, the cyber, the CNCI is really an initiative and the key is to be the part of the programs. And currently we're involved in programs that are funded across multiple agencies within the U.S. government, most of them and we believe that there's going to be a continuing trend that those programs are going to be funded on a multi-year basis.
Todd Weller - Stifel Nicolaus
Great. And then John in the last quarter, you commented qualitatively on kind of the annual consensus estimates any kind of updated thoughts there?
Yeah, we're not, I won't give annual guidance but we saw that, we expect it to grow in the double-digit range and where we're standing by that. Visibility is tough in this environment right now and even though we had a really good quarter, it's hand-to-hand combat out there for our partners and our employees. Lot of deals require multiple signatures that didn't in past, lot more people are looking at it. We are very fortunate that our products stay in demand and we think that's lower double-digits that we said last time as what we would stand by for this year. Because we had a strong second half last year too so, and we still got a lot of work in product.
Todd Weller - Stifel Nicolaus
Our next comes from the line of Katherine Egbert from Jefferies. Please proceed.
: Yeah, hi, this is Ignatius Njoku (ph) actually for Katherine. I just had a question that just on the pipeline front if you guys are seeing any improvement, we've heard some companies are actually seeing some improvements in the quarter in terms of -- it sounds like you're speaking about a little bit of bottoming?
Yeah, we're actually continuing to see good pipeline extension. It's a little bit slower than it was this time last year and I think that's because of the economic backdrop that we're all familiar with. But we're continuing to find new opportunities in that, new pipeline across the board both domestically and internationally.
Okay. And you made some comments that given those projects (ph) requiring multiple signatures, has there been any change in the closure rate or is it about the same?
It's about the same. And I think we stated after our Q4 earnings call that it's really on a case-by-case basis, it's really not by industry per se it's more by the particular account.
Okay. And then final question if I can? Just on the competition front is there anything you guys are seeing that's new there?
No, it's pretty much the same. It's typically the same players, usually two or three in every deal. So the competitive landscape really hasn't changed that much.
Okay, thank you.
(Operator Instructions). Our next question comes from the line of Keith Weiss with Morgan Stanley. Please proceed.
Keith Weiss - Morgan Stanley
Thank you. It's a very nice quarter. I was wondering if you could just get a update on the fibers you guys are making and the improvement in the channel? And also last quarter you mentioned a little bit about how SI started to come to you guys on to talk about relationships, any progress on that front?
Well, the channel is one of our major initiatives, but we talk about getting more leverage out of our channel and everything we do and everything we say, we talk about it and you could see that in our results. And because the number of people who we have in the company has stayed relatively the same but our sales continue to grow. So that's starting to show of our leverage or that we actually report on the channel growth differences that we actually say that number. But it's pretty impressive that year-over-year the amount of -- the growth in the channel business. Should we get that number out?
The channel business grew 65% in Q1 '09 over that experienced in Q1 of '08.
All right. So we feel like that. They had a good thing going when I got here and I think what we've done is made a good thing a little bit better, a little bit more focused and without going into more specifics than what I said really in the script that we're seeing a lot of response really to us talking to channel, we do a lot of training right now particularly the international channel. And we think that we have good opportunities in the North America channel which has probably been the least focused on area by design for channel the way we restructured originally. So I feel really good about it and Tom you want add some additional?
Yeah, the only thing I'd add John, is the fact that on a percentage basis, we had more channel inbound business this quarter than we had in any previous quarter. And so I think that validates what's John saying the channel is actively out there promoting our solutions and driving demand for the company.
Keith Weiss - Morgan Stanley
Excellent. Thanks for the color.
Our next question comes from the line of Rob Owens with Pacific Crest. Please proceed.
Hey, guys this is Chris actually filling in for Rob.
I wanted to touch a little bit more back on the federal sales, would still feel like you said you grew personnel what is the total now?
Right now we have about 10 people on our federal team.
And that's a mix of sales people and SDs.
Okay. And in terms of the CNCI, do you kind of see that as just tip of the iceberg you see more money pouring in through those budgets, kind of shift more towards cyber security?
Yes, it's like I said earlier, it's really CNCI is like umbrella initiative. The real heart of the initiative that was license the programs that the individual agencies have. And we've been very fortunate. We're playing in all the major agencies today and the both the civilian space as well as the DoD and intel. And just a lot of opportunities going into the pipeline. So we continue to see very bullish on our federal business.
Is there any agency that's spending more than the rest?
Yes, I can't disclose that.
But there are certain agencies that are--
Okay, that's it. Thanks guys.
Our next question comes from the line of Aaron Husock from Lanexa Global. Please proceed.
Aaron Husock - Lanexa Global
Great, thanks for taking my questions. So there is -- the government just concluded a 60-day review of cyber security initiatives and how they are doing overall, can you tell about what you are expecting and understand when there is the still results of that review and what we should look for as to what that means for your business?
I think some of the information is probably already out on the street and I think the information basically indicates that the Feds know that they have problems in their networks, that's they're vulnerable and that they are committed to storing them up and I translate that as a huge opportunity for Sourcefire. I'll be very interested to see what the actual results are from the report but the feedback that we get is basically that.
Aaron Husock - Lanexa Global
Okay. Do you think that it will essentially take the form of second CNCI program, with a dollar number attached to it or will it be more just renewed focus on the kind of existing structure of the CNCI?
I think it's just -- it's going to continue to be funding through the programs that are in off shoot from CNCI.
Aaron Husock - Lanexa Global
Okay, great. And then just to talk a little bit about your full year commentary. Again your guidance for this quarter pretty manually you've seen strength in the June quarter, the midpoint of your guidance they're going 28% year-over-year in the first half, to get a low double digits we're really talking about a flat second half year-over-year, are you actually seeing anything in your business that suggests that or are you're just thinking it's a room?
I think we're being smart and this environment is unlike anything I've ever seen and I am old and have been seen it for a long time. And I think that I wouldn't want to use the word conservative even though I know some people have pushed through that around but we're trying to be smart and guide to the next quarter where we have way better visibility we're doing in the second half.
There's no specific feature, threat, item, scene or anything else that I think is particularly negative in the second half that would cause us to give any kind of different color to our guidance right now. But we're just trying to guide a quarter at a time because I just think its prudent and I think it's smart right now and visibility out there is as not as good.
We see our funnels building nicely everything looks normal but, I saw what's happened to so many other companies in this environment, maybe not this industry but in this environment and I am just very respectful of not being too optimistic.
Aaron Husock - Lanexa Global
And then just along on those lines the other part of your annual commentary in the last call, you were talking about flat operating expense dollars at a maximum with the revenue upside you have seen and have the growth how do your, are you sticking to that part as well?
Yes. We are to the most part until we really see the full rays of sunshine that the full growth is going to be there, we have got the controls in place to be very prudent on the spend, the key component of that was the number of unusual G&A expenses that we had last year. And just the repatriation of those amounts towards our international operations, our federal team, additional marketing and increasing our engineering team helps us get more leverage on that top-line and that's kind of at a minimum.
If we see some of those rays of sunshine, I think you'll see a slight incremental spend, if we can get leverage out of those incremental dollars. But we want to be conservative and prudent and try to keep our expenses contained, because we are supremely focused on getting to and sustaining profitability.
Again, here is the first quarter of our fiscal year and we're breakeven on an adjusted basis. This is a pretty historic moment for us, we're very proud of that accomplishment and we want to keep moving forward and improve that. And the only way to do that is to be very mindful of our spend at this point until we see the macroeconomic environment kind of brighten up a little bit and go from there.
Aaron Husock - Lanexa Global
Great, thanks for taking my questions.
Next question please.
We have follow-up question from the line of Katherine Egbert from Jefferies. Please proceed.
Katherine Egbert - Jefferies & Company
Hi, can you here me?
Katherine Egbert - Jefferies & Company
Hi, John, how are you. I just stepped on the call. I apologize if this has been already asked but, could you talk about up sale rates or sort of what the overall list ASP is when saw RNA and RUA and just kind of through metric if you can around the success of those new product? Thanks.
No, we have not talked about that.
Yeah, we have not talked about it and that's one of the areas of our business that we haven't provided a ton of granularity because of the way our customers buy our product. Again this is not a transaction where we have one say and we're done with that customer.
Once we gain a customer account and traction or they tend to buy from us over a series of succeeding quarters and they may put up their budgets such that they buy our central product in one quarter and RNA in another quarter. And so when you look at us any one given quarters some of those percentages can get a little skewed. What we can say is that RNA is clearly a defining factor in winning accounts because of how compelling that technology is versus our competition. And the take up rate has been very solid more so, on the RNA side, growing on the RUA side. And Marty has been talking about things like RDA which is Real-time Data Awareness is something where the company could head in that direction to offer even more visibility to the customers with regard to what's on their network.
Katherine Egbert - Jefferies & Company
Okay. Is it so fair to say that you guys have been able to offer your types of technologies have anyone else caught out?
Yeah. Hey Katherine this is Tom. To my knowledge yes we are. There is no other vendor out there that provides the same capabilities as RNA and RUA in the marketplace today. And it's clearly one of the technological logical advantages that we have in and why I believe we are winning so many opportunities.
Katherine Egbert - Jefferies & Company
Yeah. Okay, good job guys.
There are no further questions. I will now turn the call over to Tania Almond for closing remarks.
Okay great. Since there are no further questions, we like to thank everyone for your continued interest and support of Sourcefire. And we look forward to speaking with you again next quarter. Have a great evening.
Thank you for your participation in today's conference. This concludes the presentation. Everyone have a great day.
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