Compellent Technologies, Inc. Q1 2009 Earnings Call Transcript

Apr.30.09 | About: Compellent Technologies, (CML)

Compellent Technologies, Inc. (NYSE:CML)

Q1 2009 Earnings Call

April 30, 2009 16:30 pm ET

Executives

Jenifer Kirtland - IR

Phil Soran - President and CEO

Jack Judd - CFO

Analysts

Katie Huberty - Morgan Stanley

Aaron Rakers - Stifel Nicolaus

Troy Jensen - Piper Jaffray

Glenn Hanus - Needham & Co.

Ryan Hutchinson - Lazard Capital Markets

Mark Kelleher - Brigantine Advisors

Amit Daryanani - RBC Capital Markets

Rajesh Ghai - ThinkEquity

Doug Reid - Thomas Weisel Partners

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Compellent First Quarter 2009 Earnings Call. (Operator Instructions). This conference is being recorded today Thursday, April 30th, 2009. I would now like to turn the conference over to Ms. Jenifer Kirtland with EVC Group. Please go ahead.

Jenifer Kirtland

Thank you, operator, and thank you for joining the Compellent conference call and webcast to review financial results for the first quarter of 2009. Before we get started, during the course of this conference call we will make projections and may make other statements about Compellent's business that are forward-looking and are subject to many risks and uncertainties that could cause actual results to differ materially from expectations.

A detailed discussion of the risks and uncertainties that affect our business is contained in Compellent's filings with the SEC including its annual report on Form 10-K for the year ended December 31, 2008, under the heading Risk Factors. Copies of these filings are available online from the SEC or on Compellent's website. These forward-looking statements are not guarantees of future performance and speak only as of the date hereof, and except as required by law, Compellent disclaims any obligation to update these forward-looking statements to reflect future events or circumstances.

In addition, during today's discussion, management will comment on both actual results and certain non-GAAP results. Reconciliation of actual results with these non-GAAP results are provided in today's earnings release, which is available on our website at compellent.com.

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

Phil Soran

Thank you, Jenifer and thanks everyone for joining us on our first quarter 2009 earnings call. With me on the call today is Jack Judd, our Chief Financial Officer. We reported another record breaking quarter results for the first three months of 2009. Revenue was $28.1 million, an increase of 53% from the first quarter of 2008. This represents a 4% increase over Q4 of 2008 and is our 14th consecutive quarterly revenue increase.

From talking with many of you and listening to previous earnings calls I think there is appreciation of the difficulty in showing sequential revenue growth in this economic environment. This performance is significant and is a real testament to the Compellent team, a team that is as good as any in the industry.

GAAP net income totaled $1 million, or $0.03 a share. Our non-GAAP net income excluding stock compensation expense was $1.8 million or $0.06 a share exceeding the top end of the range we guided to during the fourth quarter call. I am pleased with how we have managed expenses while still being able to make strategic investments in the business. And we delivered continued profitability. Finally, we also generated positive cash flow this quarter.

These results are impressive and are a testament to the innovative cost effective storage solutions that we offer end user customers as well as our efficient way of running the business. Well, let me give you a rundown on how the quarter played out. This quarter was unique in many ways as compared to historical results.

We entered the first quarter with strong momentum from fourth quarter of 2008. Like many of our peers, at the early momentum, business is very slow. We finished with a strong end of quarter push. We grew revenue by hitting lots of singles, leveraging the advantage of our marginal architecture in mid-sized enterprise target markets.

We did not have large revenue deals to get us to this revenue growth. We believe the unique dynamics of the quarter were a result of the economy and not so much competitive pressures.

End users are watching their IT expenditures very closely. There is definitely a mentality to buy just what is needed for the short-term. This means purchases are delayed but not eliminated. In general, we are finding longer approval cycles and additional sign outs before purchase orders are issued. This environment makes short-term forecasting the guidance more difficult.

Early Q2 trends are more positive than the tough months of Q1 but slower than the final weeks of March which would be typical. Our plans remain solid. The key challenge our industry faces right now is the longer sales cycle. We continue to benefit from a slight efficiency in the marketplace. Data storage requirements continue to increase and IT managers are seeking ways to reduce their storage spend are attracted to our energy efficient, easy to use storage technologies. This enables them to realize savings in hardware, software, power, cooling and operational costs.

We are hearing from end users that they just can't afford to keep client storage the old way and that our innovative approach is compelling.

During this tough quarter we also made significant progress in many areas of our business. (inaudible)big payback when the economic environment improves. Areas of major progress include investment in channel development. This includes hiring dedicated geographically based channel development managers, education and certification of our channel partners, recruitment of significant new business partners and the delivery of a variety of lead generation programs and strategies.

There is also a significant advancement in enhancing our technology, innovation and differentiation. Some of these are announced, others are only visible in the future. We also had progress with technology and industry vertical alliances and finally our visibility with the media is gaining momentum and we are quickly becoming recognized as the breakthrough storage brand.

During the first quarter we began shipments of our solid state solution to early adopter customers. We believe that Compellent's unique data progression technology our block-level Automated Tiered Storage is the killer app for solid state devices.

By leveraging our dynamic block architecture users can implement an SSD based solution while using 80% fewer drives than competitive alternatives. With data progression we can virtualize the superior I/O capabilities of solid states across multiple applications.

Then our software automatically moves these less frequently access blocks of data from the solid state device to less expensive storage media such as fiber channel or the Serial ATA Drives.

This can be accomplished without any intervention from IT personnel. A task which is time consuming and prone to human error. This killer app lets you just purchase significant fewer SSD drives of Compellent but receive all the performance benefit they demand.

Let's talk about our end user customers, our customers represent a variety of industries. The health care industry continues to be a leader for us. For example Kansas Spine Hospital provides world class spine surgeries and other orthopedic procedures and it is one of the first fully digital hospitals in the country. They required a cost effective system that can be relied upon to run 24x7 because downtime could impact patient care.

Compellent was chosen as this solution and today everything from the hospital's electronic medical records system to its radiology images are stored on a Compellent system. The other updates, this month we're very pleased to receive a top green IT award from IDG's Computer World. We are honored to be one of the top 10 organizations recognized for its environmentally friendly technology.

Next week we'll be hosting our third annual C-Drive worldwide partner end user conference. Two days of C-Drive are for our channel partners and two days are for our end users and they include detailed updates on our products and services as well as technical and sales training.

This year in addition to proving attendees with valuable information on data storage trends and an opportunity to network with each other and Compellent employees. We will debut and give attendees hands on exposure to new innovative features that will be available for sale later this year. In total we have over 400 people registered from 17 countries. This attendance number is 25% greater than 2008, evidence that there is growing excitement about our company, our products and the end user community that we're building.

We continue to get overwhelmingly positive feedback on this annual conference. We think it is a differentiator to invest in programs like this while competitors are canceling similar events. I believe this is a good example of small investments and tough times. Investments will have big long-term paybacks.

Before I turn the call over to Jack, I'd like to congratulate the Compellent team and our business partners for their superb execution in the difficult quarter. This environment was definitely challenging. I'm very proud the Group are working so hard to execute and deliver another strong quarter for the company.

Compellent will continue to innovate and introduce new features that allow our end user customers to more efficiently and cost effectively manage their data storage. We have demonstrated that our team can execute during tough times and we look forward to our continued progress. The motto (inaudible) now at Compellent is, let's screw up the recession.

Now I'd like to ask Jack to provide a bit more detailed look at the first quarter and our outlook for the second quarter of 2009.

Jack Judd

Thanks, Phil, I'm excited about taking everyone through our first quarter results. During the first quarter, revenue grew 9.8 million to 28.1 million or 53% from the prior year's first quarter. Sequentially, revenue grew 1.1 million or 4%, our 14th consecutive quarter of sequential growth. We continue to grow in international markets. International revenue increased to 4.4 million in the first quarter compared to 2.8 million the year before.

International revenue was 16% of total revenue in the just completed quarter. Our end users at the end of the quarter totaled 1,376 compared to 829 one year earlier and 1,278 at the end of December. Our revenue from existing end users was 55% of product revenue and new end users made up 45% of product revenue.

This metric shows the value of our product scalability that our end user so value. The professional nature of our software and industry standard hardware results in the use of upgrades and confirms to our end user the value of our software and hardware platform.

Our gross margin increased to 52.8% in the first quarter of 2009, compared to 52.2% in the same quarter last year. During the quarter, product margin was 49.1% and subordinate services margin was 64.3%. Our margins reflect some competitive pricing pressure and order mix and these gross margins are within our target model.

Operating expenses increased to 14 million in the first quarter of 2009 from 12 million one year earlier as we continue to build infrastructure in sales and marketing and research and development. This 17% increase in operating expenses compares very favorably to our 53% increase in revenue. This expense leveraging is possible because of both our business model advantages and our dedicated work force that continues to deliver outstanding products to our end users efficiently.

While the economy has forced other technology companies to resort to layoffs, furloughs and pay cuts, Compellent continues to invest in targeted areas. At March 31st, we employed 317 employees, an increase of 27 from December 31st and similar to previous quarters the vast majority of our hiring supports our product channel and end users.

Net income for the first quarter of 2009 was $1 million or $0.03 per share compared to a net loss of $1.6 million or $0.05 per share during the first quarter of 2008. Excluding the effect of stock based compensation, our non-GAAP net income for the first quarter was $1.8 million or $0.06 per share compared with a net loss of $1.2 million or a net loss of $0.04 per share to previous year.

Our balance sheet at the end of March showed significant accomplishments. We generated over $3 million in cash from operations and ended the quarter with $103 million in cash and investments. This was our third straight positive cash flow quarter. Our balance sheet includes $24.2 million in deferred revenue, an increase of $3.6 million from December 2008.

Our day sales outstanding improved by four days from December 2008 which is especially positive news in this economy. The advantages of our virtual manufacturing model are again evident by our inventory balances being lower in March than in December 2008.

I would now like to provide some guidance on the coming quarter. Looking ahead we anticipate the economy will remain challenged. We do see strong pipeline but the new approval cycles make it more difficult to forecast. While our order flow this April is stronger than the middle parts of the first quarter, the current economic environment makes us hesitant to make bold predictions.

Our current forecast is for revenue between $27 million and $29 million. We expect to continue to smartly invest in our technology and sales teams so as a result our operating costs in the second quarter will increase approximately 10% to 15% from quarter one spending. While we're currently not providing annual guidance we remain very optimistic about our 2009 opportunities.

That concludes our formal remarks. Now operator, could you please open the call for Q&A.

Question-and-Answer Session

Operator

Thank you sir. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from the line of Katie Huberty with Morgan Stanley.

Katie Huberty - Morgan Stanley

On the product growth margin pressure, can you just help break down how much of that was mix versus pricing and then what are your expectations for pricing going into the June quarter?

Jack Judd

I think its both items and I think it could be viewed as quite equal between the two. There was definitely a little more pricing pressure in the quarter as I think would be expected when the sales become a little bit tougher to come by. The product mix I think would be that we had more smaller dollar sales of products and upgrades which tend to have a little bit lower margin on them. So I think that its both but I think we remain very positive that the product margin will bump back up in the future.

Katie Huberty - Morgan Stanley

Jack what areas were –

Jack Judd

That will be slightly higher the remainder of the year.

Katie Huberty - Morgan Stanley

What areas will the 10% to 15% OpEx increase go to, is that largely so in R&D?

Jack Judd

I think it will mostly be felt in the sales and marketing line and in the R&D line.

Katie Huberty - Morgan Stanley

So you expect a higher sequentially going into June?

Jack Judd

Yes, now the second quarter is always a heavier spending quarter than the first quarter especially in the marketing area and so that's always going to be a fact and we want to empathize. We are still hiring people right now. We're still doing very targeted smart hires.

Katie Huberty - Morgan Stanley

Lastly, would you characterize the April down tick from the strong end of quarter as normal or was that a little slower than normal?

Phil Soran

No, I characterize it more as normal, the end of March was a very busy time and we have successfully executed on it but I had characterize it more as normal.

Operator

Next question comes from the line of Aaron Rakers with Stifel Nicolaus. Please go ahead.

Aaron Rakers - Stifel Nicolaus

Congratulations on the good quarter. A couple of questions from me. I guess you're talking about channel progress and even it sounds like accelerating some of your programs. May be you could help us understand the strategy with regard to building out your channel presence here going forward. Is there an absolute number in terms of what you expect to be at from an absolute channel perspective exiting year?

Phil Soran

Aaron, one of the things we do on the channel thing is the quantity of channel presence is not, what's important. Its the ones we have with the mind share. The offer we are going to get from each of those channel partners. So if you look at some of the things we are doing with the channel development managers being in the field and last summer doing with the we call it Topgun training and those types of things.

It's all meant to try to increase that mind share and the skill level on those channel partners with our products. I mean I was really pleased. We made a lot of progress on that in the first quarter. The other thing is that they kind of hit there too. We did sign up some major partners that could also help long-term sales offer during the quarter and that could be a real positive driver of revenue in the future.

Aaron Rakers - Stifel Nicolaus

When you look at the gross margin line again seems like you are managing that fairly well in this environment. Can you update us again on what your longer term target is and is there situations where you would actually walk away from deals from a pricing perspective?

Jack Judd

Very good question, it's got two very different parts. I think our long-term model is in the range of what it did this quarter to what it has been in the third and the fourth quarter of last year. So in that 2%, 3% range maybe more upwards from where we were in the first quarter. I think that's important to realize that we are trying to grow sale and yes there would be something we would walk away from. We generally always find even in a tough environment that we find ways to sell value when we get deals done.

Aaron Rakers - Stifel Nicolaus

Final question from me is that when you look at kind of the road map here going forward from a product perspective and I know you have talked about live volumes going into the back half of the year. Can you kind of walk us through what we should be looking at from Compellent in terms of the product story here as we develop over the next couple of quarters to 12 months?

Phil Soran

I am not going to go too far answering it, because we kind of pre-announced in the product. I will just kind of give you a general feel for it. First of all on the hardware side, what I would call dynamic hardware architecture which really gives our users and us a lot of flexibility in that we can implement new technologies kind of seamlessly and do it and know that existing customers and new customers will be able to benefit from that. So if you kind of look at that as a summary that is we are kind of technology agnostic and that means there is a lot of things coming on with server connectivity technologies and then also different drive technologies. You got to assume that we are going to be able to incorporate any and all of those because of this dynamic hardware architecture.

On the software side a lot of the software functionality be tied into high end enterprise type features and its something we would like to see fit endeavors such as cloud computing and disaster recovery replication, feather techniques that might help lower costs and also give more flexibility to users. A lot more virtualization type things and integration with other alliance partners' products. So a lot of type of areas that we got there and I kind of hinted at the C-Drive event. Usually I should be able to see some of the futures and at least we'll hear about some of the ones who are doing fine in the more short-term but its some exiting stuff we've got coming.

Operator

Next question comes from the line of Troy Jensen with Piper Jaffray. Please go ahead.

Troy Jensen - Piper Jaffray

So following up on Aaron here, product roadmap stuff, did you ship any systems in the first quarter with SSDs?

Phil Soran

Yes we did. We shipped it. We'll do a pile, a larger process announcement here in the future but we kind of went back to our old strategy of let's get some end users that will talk about it, their experiences with it. In fact at C-Drive we'll have, I don't know if its one or two customers that have had their hands on, talking in front of the rest of the group there so, yes we did ship some in the first quarter.

Troy Jensen - Piper Jaffray

Then is fast track also on track for a Q2 launch?

Phil Soran

Yes, fast track was when we announced over a year ago. I think our guys have a live volume trend. Live volume is more of a, we've been up for the Q2 and its on track to come out in June the second quarter. You'll see us have more [dribble] out drills on that in the third quarter but that is one the features we will demo in the C-Drive event.

Troy Jensen - Piper Jaffray

Two for Jack, following up on Katie's question. How about April over January? Did you see the April business track above the January levels?

Jack Judd

If you exclude the first week and a half or so of January where we had some momentum carried forward still from December. April was a better month or it maybe a better month than January and February.

Troy Jensen - Piper Jaffray

Last question for you Jack, tax rate guidance. I think you said previously 37%, while you're well below that this quarter so what should we model for the rest of the year?

Jack Judd

This year, we're going to have taxes less than 37%. The taxes that are reflected on the income statement tend to be in states that tax and level that's based upon assets rather than income. Then believe it or the federal tax court includes alternative minimum tax that we have found ourselves having to pay. So we still have not taken our NOL back into income which again will be discussed or be available to us more at the end of this year or early next year. For the tax rate, I doubt on the cash side it wouldn't be 37% this year, more than 25.

Operator

Next question comes from the line of Glenn Hanus with Needham Company.

Glenn Hanus - Needham & Co.

On operating expenses, you came in a little bit under what I was expecting for the March quarter and then you have the 10% to 15% growth in the next quarter. Can you just try and help me understand have you accelerated or decelerated OpEx spending versus a couple of months ago? How should I think about that and leverage in the model over the next couple of quarters on the operating income line?

Jack Judd

I hope I can answer the question right. The majority of our operating costs relate to hiring people; putting people in the field, putting people in marketing department, hiring engineers et cetera. So while it's not always exactly even month-to-month and quarter-to-quarter we are continuing to hire. So the expenses going up in the second quarter over the first is very much here towards higher employee counts. Then on top of that even if you have had the same number of employees you most likely would spend more money in the second quarter because your marketing programs are accelerating compared to the first quarter.

Phil Soran

Now this is kind of trade show season and you see a lot of that happen.

Jack Judd

And C-Drive.

Phil Soran

Yes.

Glenn Hanus - Needham & Co.

You mentioned vertical alliances briefly filling your intro there. Could you elaborate what you are getting out there?

Phil Soran

Glenn, can you say it one more time?

Glenn Hanus - Needham & Co.

You mentioned vertical alliances I think in your intro briefly. Could you get at maybe what you are getting at in more detail there?

Phil Soran

I can't announce some of the formal alliances here, but I will give you kind of a general feel for it Glenn. What we are talking about there is that there are some partners we can sign up and work with in certain industry verticals. So that where they have solutions that are targeted towards an industry vertical and we put investment in the first quarter. They go and try to get much [tied] on those, leveraging our end user customers that use part of their solutions and also get them to kind of endorse our products there. So those are the kinds of areas we are talking about.

Glenn Hanus - Needham & Co.

On competitive engagements during the quarter, its always been NetApp number one, EMC number two, HP number three, and perhaps Dell, EqualLogic a little bit in there. Can you give us a flavor for anything new or different in the nature of the amount you are running into different players and tactics?

Phil Soran

It was real similar to previous quarters, who, we run into? I think in the past I put it in a different little order than you have by EMC will be number one and NetApp will be number two. Its like what we have said in the past and I don't think that makes who we are going after but the nice thing is against all those competitors the story still rings true that customers are finding we are the most efficient storage solution. They are able to do with a lot fewer disk drives with us, while they had to buy a lot more with others and there is a lot more, operational efficiencies where, one person can manage a lot more and get a lot more done with our solutions.

Glenn Hanus - Needham & Company

I think, you mentioned HP became a little more visible last quarter. Is that trend continued?

Phil Soran

I wouldn't say it increased but I'd say that they have stayed at the same level we've seen them in the past, yes. (inaudible) the past, by that last quarter, the increase we saw in the last quarter.

Operator

Next question comes from the line of Ryan Hutchinson with Lazard Capital Markets.

Ryan Hutchinson - Lazard Capital Markets

A few questions, first, just to back to Troy's question on the taxes can you clarify that, could you say above 25% for Q2?

John Judd

No I think that they're going to be around 25%.

Ryan Hutchinson - Lazard Capital Markets

For the remainder of the year?

John Judd

Right, it's going to be the cash that we have to pay so its cash taxes. We really don't have any effect again of bringing the NOL back in or having to recognize taxes at a normal rate. That's still in the future.

Ryan Hutchinson - Lazard Capital Markets

On the services growth, you demonstrated about 14% sequential growth. Is that a level that we should expect moving forward in terms of looking at that versus the product growth which I guess as I back into it looks to be about flat for the quarter?

John Judd

No, product growth, product sales were higher than they were a year ago.

Ryan Hutchinson - Lazard Capital Markets

Understood, but for Q2?

John Judd

For Q2, yes. More flat. The product support and services represents both our maintenance programs and our professional services offering. Our professional services offering would have had a higher growth rate this past quarter and will have a higher growth rate going forward than the maintenance programs. They are very much both going up and they should have nice growth rates going into the future because again we get really, really great renewal rates on our maintenance and as we get more systems out there that maintenance number just keeps building every year.

Ryan Hutchinson - Lazard Capital Markets

Then on the customer adds in the quarter, you've shown a nice ramp over the last several quarters, obviously its Q1 but it was down sequentially quite a bit. So just can you help walk us through that and then what your expectations are for Q2?

Phil Soran

Yes, first of all, there is a little bit of seasonality there and the fourth quarter is a real good season for us frankly when people out there at the end of the year budget. So I guess for us first quarter is a real tough to do it. I would also say there's a little bit of the economic stuff. If you are holding back capital and you are going to the new vendor that may be a lot little longer sales cycle when you do that with. You might see a little bit affect there. If you look at our pipeline, some of that, I know we don't see changes there that would say we can't keep adding customers on.

Ryan Hutchinson - Lazard Capital Markets

So probably higher than the 98 you posted in Q1.

John Judd

Yes.

Operator

Next question comes from the line of Mark Kelleher with Brigantine Advisors.

Mark Kelleher - Brigantine Advisors

Just wanted to ask a couple of quick things, just on the guidance. You seem to be indicating that the pipeline is pretty strong or stronger than it was in the previous quarter. What are some of the puts against that that's giving you flat guidance for revenue? Is that just conservative on the economy?

John Judd

We kind of put it in the comments there that it is just tougher to forecast with the longer approval cycles and that type of things. So that's kind of we see as more economic uncertainty that makes it tougher to get bold on the predictions.

Mark Kelleher - Brigantine Advisors

The gross margins on your new products on the SSD side, are those higher than average?

Phil Soran

Yes, and you know frankly the price of solid state is a little bit flux right now and stuff too but its inline with what we normally get on disk drives maybe a little bit higher.

Operator

Next question comes from the line of Amit Daryanani with RBC Capital Markets.

Amit Daryanani - RBC Capital Markets

Just a question. Can we talk about sort of you see a little bit of stability in Q2. Is that just sort of reflection of I know you sunk some large deals that are going through the pipeline, are you seeing some pricing stability versus the peers?

Phil Soran

Say it one more time.

Amit Daryanani - RBC Capital Markets

You talked about, you're starting to see stability in Q2 right now and this is the month of April right? So I am wondering is that just – are you seeing some deals that are getting done a little quicker? Are you seeing pricing ease up a little from a competitive perspective?

John Judd

No I think its just a little bit more. In the first quarter you saw a lot more, people didn't have their budgets done. They are trying to spare what they could spend, how bad the economy is going to deform in the second quarter you see a little bit of ease in there. We are not out of this economic malaise right now but we have a lot of time before that happens I think.

So I think you said some people are now feeling hey, I kind of looked at my budget I know I can get down in there. They are doing things, while you still see those longer approval cycles kind of employees there. So, but the pipeline is solid and growing so that's not just how quick you closet the people.

Amit Daryanani - RBC Capital Markets

Is pricing competition, is that easing up a little bit at this point since or is that still remains at the same level as you saw in Q1?

John Judd

I think similar to Q1 maybe a little less because at the end of quarter pushes by some vendors at any time but most of them are maybe a little bit better.

Amit Daryanani - RBC Capital Markets

You could get something a little better without suggesting gross margins could actually inch up a little bit sequentially?

Phil Soran

I would expect that there will be some improvement in product margin in the couple of quarters going forward. So I think that it is going to inch its way back to what we have experienced last year at the end of the year.

Amit Daryanani - RBC Capital Markets

Just finally from me guys I just was wondering, on the international business you had some pretty good growth over there. How do you see that shake out in Q2 and what sort of the longer term plan there?

Phil Soran

Well its certainly early to the quarter. We had some recent nice successes international and stuff which is I think [hardy]. I think for a while that in international someone has got hit, the other we also do we put a lot, couple of these investments we made in the first quarter. I'll give you the example. We just had Bruce Cornfield, our VP of Marketing in France and Italy where we kind of did our, first Compellent launch of the company in those two environments. Now we've been selling in those environments but because of the launch with actual end user customers we have a large retailer in Italy that services both. We had 16 press in the audience for our launch which is really impressive for a company at our stage to get that kind of attention. So I think some of the efforts we're doing to invest in those countries will also pay off in the future too.

Operator

Next question comes from the line of (inaudible) with Craig-Hallum. Please go ahead.

Unidentified Analyst

You talked a little bit about, you had a health care win during the quarter. Can you give us some insight into, any of your top five verticals you had in the quarter and if maybe if that's changed over time or since say Q4?

Phil Soran

Yes, I don't have it right at the tip of my fingers what the five verticals were but there is really nothing different there and we still also can do not to have an industry vertical concentration. So that of minimizes the risk I think for the results will be all posted and so that but in general the top ones end up being health care, government, education, finance.

John Judd

Those are the top four and they all are give or take a point off of 10%.

Unidentified Analyst

CapEx spending in the quarter was about $1 million and which is, and the most you've had in quite a few quarters, can you give some color on why there was the uptick in CapEx spending?

John Judd

It's a good question always for capital because it helps us point out some of the investments we make. Most of that money gets spent in our R&D labs and its for systems so that we can support our customers and that we can test out new functionality.

Phil Soran

The (inaudible) about that too is, there is a lot going on the technology fronts with the server connectivity and disc drives and something which I highlighted earlier our advantage there with our dynamic hardware architecture which we think will really play out well in the future. You are seeing some of that in the capital line and that you also have to test all those before you ship them customers. So you see a little bit of that and then also there is a little bit of investment also with alliance partners where you are seeing some capital or do somethings with key industry players. Who do some unique things that kind of give us advantage on the virtualization front, and database front, those types of areas.

Operator

Next question comes from the line of Rajesh Ghai with ThinkEquity. Please go ahead.

Rajesh Ghai - ThinkEquity

Couple of questions on the international expansion now that you are in 34 countries. How long does it typically take for you to start seeing material revenues, after you enter international market? Related to that, now that you have to address 34 geographies, how do we think of sales and marketing expense going forward in 2009?

John Judd

Yes, couple of answers there so first, how long do we kind of see results. Honestly it's a little bit dependent on the team we have there and also the country. Some are a little quicker than the early adapters, others move little slower till they see a lot more references in country. So it kind of varies there and once again, what we do is we just drop by for the launch we did in France and Italy. We been in there for months and quarters for quite a while.

So to give you an example like in Italy we buy out 14 or 15 customers, that kind of stuff. So examples and the customers we had in there in France has pretty clear the big publishing empire there, and the that (inaudible) of the big retailer in Italy itself for the [ones and spokes], that was the real need.

So in general its little dependent on the country but you can kind of figure that out, if you put something in country, and three to six months later you are going to start seeing some results and it doesn't get material until couple of quarters into their longevity because its pretty natural there.

Rajesh Ghai - ThinkEquity

If you look at your OpEx, resource and development was down sequentially and you spoke about seasonal marketing being down. I know that you didn't make out any layoffs but how was R&D done and how much leverage do you have in that line? Can you control that costs, keep it at that level?

John Judd

The R&D line reflects people costs and certainly equipment and materials that are expensed rather than capitalized. So if you see that down it would reflect that we did not have as much expensed prototype type material that are uneven in their flows through the quarters.

Phil Soran

So in the quarter we invested in more engineers as opposed to get rid of anyone.

Operator

Next question comes from the line of Doug Reid with Thomas Weisel Partners.

Doug Reid - Thomas Weisel Partners

Just wondering if any of the new competing products you are seeing out there are playing any role in the extension of sales cycles or is it all just macro?

Phil Soran

No I would say its more macro. I mean some of the others have come up with product announcements and in some ways its been kind of interesting to watch the results of those products announcements. So I will give an example, Thin Provisioning is one that we had for many years and a lot of vendors for many years said it was bad, or they didn't think you should do it or its going hurt you or whatever. Now they have offerings that includes Thin Provisioning. What we have found with the end users is that this actually caused them to evaluate at a much deeper depth your technology and that's actually been a positive.

Because we have got more financial benefit in their cost analysis because of how we implement our Thin Provisioning. So I don't see any of the new announcements slowing any sales cycle down. I really do think it's more economic and the nice things about those is that the customer will go a little deeper into how we have put our technology to understand the benefits of them of that technology. So that's been a positive for us I think.

Doug Reid - Thomas Weisel Partners

Turning to SSDs, I was wondering if you could, health care drives what you see the opportunity to be say one year out, what percentage of revenue, ballpark if you will do you think of what percentage of Compellent systems you think would ship with SSD?

Phil Soran

Yes I'd have trouble doing a percentage of revenue but I'll try to give you a feel for it. I think for the near-term it's going to be more talk than implementation. They're expensive. People want to understand how to use them, they want to understand the technology, that type of thing. Then I say, we're going to just (inaudible) watch what happens with us because you can start with just a couple of two SSDs and actually start get going with us. Whereas with others you've got to start with a much larger number that really kind of implement a SSD technology with the different grade levels you have, that type of things. So I think it's going to be slow before it really starts to become a significant part of the revenue just because of the cost equations.

I'll tell you on the Mindshare and their criteria for evaluation they want to make sure that what they buy will support it. They don't have to throw away what they've brought which will be another advantage with us. They can simply slide in a couple of SSD drives right into our solution after they have implemented if any of the ones earlier. So I think it will be a little bit slow uptake and some of the economics could sink in there then you'll see it take off and unfortunately I don't control the cost of the SSDs and we (inaudible) there.

Doug Reid - Thomas Weisel Partners

Jack could you share the percentage of revenue from repeat customers during the quarter?

Jack Judd

55% and it was 45% from new customers. Keep in mind that the two things together are what's important that you get both of them at the same time. I think when you see repeat customers it would indicate that customers are more willing to add to their system or buy upgrades maybe then point out in finding brand new systems in some of the trash.

Operator

Thank you. (Operator Instructions). I'm sure there is no further questions in the queue. I turn it back over to management for any closing comments.

Phil Soran

I appreciate the positive comments. I am really proud of the team and we feel real good about that. I just want to thank everyone for their support for joining us today. We look forward to update you on the second quarter call in a couple of months here. Thanks a lot.

Operator

Thank you. Ladies and gentlemen, to listen to a reply of today's call, please dial 303-590-3000 or 800-405-2236, enter the pass code 11130338. Once again both numbers are 303-590-3000 or 800-405-2236, enter the pass code 11130338. Thank you for your participation. You may now disconnect.

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!