Quest Software Inc. (NASDAQ:QSFT)
Q1 2009 Earnings Call
May 11, 2009 5:00 pm ET
Steven Wideman - Treasurer
Douglas Garn – President, Chief Executive Officer
Vincent Smith – Executive Chairman
Scott Davidson – Senior Vice President, Chief Financial Officer
John Difucci – J.P. Morgan
Abhay Lamba – UBS
Brian Denyeau – Oppenheimer
Tim Klassel – Thomas Weisel Partners
Brian Swartz – Piper Jaffray
Derek Bingham – Goldman Sachs
Walter Pritchard – Cowan and Company
Gregg Moskowitz – Auriga
Welcome to the Quest Software first quarter earnings release conference call. Today's conference is being recorded. With us today are Vinnie Smith, the Executive Chairman, Doug Garn, Chief Executive Officer, Scott Davidson Senior Vice President and Chief Financial Officer. At this time I would like to turn the conference over to Mr. Steven Wideman, Treasurer.
Welcome everyone to our first quarter call. Scott, Doug and Vinnie will offer some thoughts on the quarter that ended March 31, 2009 and then we'll open up the call for Q&A. Our call is being webcast from our investor relations website. You can get a copy of our press release issued just a short while ago on the website as well. A replay of the call will be available on the site for the instructions noted on our release.
At this point let me turn briefly to our Safe Harbor statement. Some of the statements we make today may be considered forward-looking including statements regarding our anticipated revenue and operating margins in future period or statements about our plans, prospects or strategies. These statements involve a number of risks and uncertainties which could cause actual results to differ materially. Please also note that these forward-looking statements about our opinions, reflect our opinions only as of the date of the presentation and we undertake no obligation to revise or publicly release the results of any of these forward-looking statements in light of new information or future events.
Please refer to our SEC filings included in our annual report on Form 10-K for the year ended December 331, 2008 as well our Q1 earnings release for a more detailed description of the risk factors that may affect our results. Copies of these documents can be obtained from the SEC at SEC.gov or by visiting the investor relations section of our website.
Also please note that certain of the financial measures we use on this call such as EPA, net income, operating margin and operating income are expressed on a non-GAAP basis and have been adjusted to exclude various charges including the after tax effect of amortization and intangible assets acquired with business combinations, share based compensation expenses and expenses associated with our stock option investigation. We report of GAAP results as well as provide a GAAP to non-GAAP reconciliation in our earnings press release, a copy of which is available in the investor relations are of our website at quest.com.
With that, it's my pleasure to turn the call over to Doug.
Good afternoon everyone and thanks for joining us today. I would like to start with some high level comments and then provide perspective on the first quarter.
Overall I believe we are executing well against what has been a similar set of challenges across all companies including delayed purchase cycles, tighter IT budgets and cautious buyers. With that being said, I was not pleased with our license revenues in Q1.
We are a very goal oriented goal company and we did not meet our Q1 targets. Despite these significant headwinds including the stronger U.S. dollar and the economic environment, we expected to perform better than we did.
Let me give you some very high level financial results which Scott will provide far greater detail on here in a few minutes. Our total revenues came in at $165.6 million for the quarter which was a 4% decline year over year. Our license revenues were at $62.4 million in Q1 which was a 21% decline. Services revenues increased 10% to $103.2 million for the quarter.
On a very positive note though, our pro forma operating expenses decreased 11% to $133.6 million, allowing us to deliver a pro forma operating margin of 19.3% as compared to 13.5% in the year ago quarter which frankly, that's a very strong performance in that regard.
We delivered operating income of $32 million in the quarter, a 38% increase over operating income of $23.2 million in Q1 of '08. Our Q1 of '09 operating cash flow was also strong at $48.2 million. These are core signs of financial and operational health and we are committed to delivering strong operation margins and cash flow on a go forward basis.
In response to Q1, we are focusing on our blocking and tackling to improve our results going forward. We have gone through detailed operational and sales pipeline reviews and are optimistic that markets have begun a process of stabilizing and our results will improve.
Similarly while we have been successful in managing our costs, we will continue to be diligent and wise in our investments to position us for the upturn when it does occur. I do not believe our Q1 results reflect any material changes from our competitors or the fundamental demand for our products.
I also believe our broad product portfolio and balanced mix of customers from large enterprise customers to small and medium sized businesses provides us a very solid platform to build upon on a go forward basis.
We have a reputation for treating our customers fairly and for going the extra mile to support their efforts. As an industry analyst recently said, there's another reason to buy Quest technology that should not be underestimated, he said. That is, you bought it before and it works well. You're familiar with Quest. Your IT staff knows the products well and you're comfortable with your chances of success with the Quest products.
In our core markets of windows, data base and virtualization management, we continue to be recognized as the leader in each one of those spaces. We have achieved these leadership positions by delivering technically deep products that deliver quick value to our customers.
As a matter of fact, if you look back over the last five years, a number of our key competitors like Mercury, Precise, [Embarkadero] and Net IQ have been merged into much larger organizations or have gone private while we have benefited from this trend and are proud to have delivered 22% compounded annual growth in total revenues from 2001 to 2008 a period that included another major tech spending slowdown back in the 2001, 2002 period.
We did this by staying very focused on our business, focused on our customers, and focused on our employees and we will continue to do that now.
Now let me give you some details in regards to geographic performance. Our North American operations contributed 61% of total revenues and the rest of the world contributed 38% as compared to 58% and 42% split last year.
License bookings were down consistently in most geographies year over year with several significant exceptions. The United Kingdom, our largest geographic market outside the United States saw flat year over year license bookings despite a terrible financial and economic environment and it needs to be noted that that's quite a strong performance considering the economy that they're in.
Our Public sector group in the United States which is a separately organized field operation delivered an extremely strong performance as well in license bookings year over year and contributed materially to our total revenues.
We have invested heavily in our public sector customer and partner relationships over the last five years and are continuing to get terrific results. As we sit here today, we have more seven figure deals lined up within our Public sector organization than we ever have before.
Now let's move on to some brief information with regards to our transaction data. In Q1, 2009 we did 121 deals over $100,000 as compared with 142 deals in Q1 2008, a 14% decrease. The average deal size of over $100,000 deals was $239,000 as compared to $229,000 last year. We did four deals over $1 million in this quarter versus one deal of $1 million in the year previously. International entities contributed 27% of the deals over $100,000 compared to 49% in Q1 last year.
When you look at another area of our business that we've made a huge commitment to, it's our partners and our channels. We have raised our commitments to our alliances and our indirect channels significantly over the last three years. Our Script Logic and Vision Core products are sold predominantly through channels and we have designated our Quest branded windows products at 10,000 employees and below as channel only, that we distribute them only through channels in North America.
For example large global system integrators and value added resellers are standardizing their solutions and service offerings on Quest identity access management and windows infrastructure management solutions.
We are investing in partner programs in emerging markets such as Eastern Europe, the Middle East and South Africa just to name a few and are experiencing very positive growth from those regions as well.
Now let me talk briefly about support renewals. Support renewals, Quest continues to show great strength in its ability to collect its ongoing renewal revenue and support renewal rates remain high for the quarter. I'm not going to spend a ton of time on this since Scott will give you a lot of detail into the percentage performances and how we did in each category there.
Let's talk about the demand environment, our customers and our budgets. This is actually a very interesting component of the discussion today. Interestingly, as I mentioned earlier, we had four deals over $1 million for the quarter as compared to the quarter previously last year where we only had one.
But we saw our small license transactions slow down markedly in Q1 in most but not all of our market sectors. This is not the data we would have expected given the difficulty in generally securing larger transactions. After much investigation we have drawn several conclusions.
First, we believe the small transaction increase is primarily attributable to extremely tight budgets. In Q1, customers did not buy anything they did not feel absolutely compelled to buy right then. We do not believe these deals went to competitors, we just believe that the acquisitions were just not made.
Second, when companies truly needed our products, we are still able to establish a strong ROI and get the sale if the customer is able to purchase at this time. However, customers are not purchasing software unless it is tied to a specific project, so I want to be very clear that we had a lot of situations where customers were looking and very excited about our products and went well through the selling cycle, but if they could not attach the acquisition to an actual project itself, then very often the actual acquisition was delayed or denied.
Those projects have usually be budgeted for in 2009 but this year, many of the budgets in 2009 had not been set in Q1 so we're dealing with many situations where customers had not had firm budgets through the course of Q1.
Third, many of our smaller deals are actually credit card transactions. For instance when somebody buys a small copy of Toad, or our LiteSpeed for sequel server and we believe that many procurement departments completely locked down incremental purchases within the organizations including freezing credit card transactions for anything other than the most specific needs.
When customers can't buy or won't buy, we are making every effort within Quest to understand what is driving their behavior so that we can offer solutions to address the immediate needs. During the quarter, we launched a specific program which is called, internally we called it our Seeding program and the Seeding program is an offering in which we provide certain products to customers to customers at no cost for the license of the product, and it's a full production ready version of the product.
We did an incredible number of those transactions and the expectations is that those seeds and the good will in which we've earned as a result of those seeds will begin to turn into positive revenue opportunities when the market begins to turn around.
The deals that are getting funded now are high priority one or things that can provide hard dollars very near term ROI, as in, if I spend this amount, I will not have to make a larger purchase of something else in the very near term. Our products generally deliver a high ROI to customers who need to run their business today and tomorrow.
The customer objectives and pain points we are focusing on with our products, there's really four that I want to focus on. First is the cost reduction across the board which for the customer means optimizing existing investments and servers, software, networks and personnel. Some of our products help them with coping with rapid organizational changes from consolidation, divestitures and head count reductions which you've seen a huge amount of this in the financial community of companies merging together and using our migration products to help in that regard.
New forms of doing business where we've provided flexibility for Cloud computing, software service and managed service provider types of outsourced management has become an opportunity as well.
Meeting major requirements to measure service levels of application and SOA arrangements in a meaningful way in addition to performance of system which is obviously one of the key tools and key benefits that our Foglight product will provide.
Let's talk a little bit further about some of our products. In the Microsoft market, we have a broad set of products for managing user accounts in Microsoft active directory from migrating to active directory in other systems. Because active directory controls user rights to applications and data within an organization, its security is critical.
Various Quest products enhance directory security. For example, our Intrust active directory product gives immediate alerts when access rights to critical data or systems are changed and provides for rapid remediation. We are finding security remains a very high priority for customers and our pipeline is very solid in this product area.
Our active directory management set drove a $1 million purchase in Q1 by a large State Agency. Security priorities are also driving high interest in our Quest line identity management product which facilitates authorization of end users via active directory which is basically our whole process for provisioning users and de-provisioning users.
Customers are continuing to consolidate their email infrastructure to fewer servers to achieve lower capital and operating costs as well as higher performance. We are seeing significant levels of merger acquisition and divestiture activity during email migration and consolidation projects. Quest has a very strong set of email migration tools which enabled us to win a $1 million plus exchange migration purchase by a very large telecommunications company in Q1. We believe exchange migrations will continue to be an area of strength throughout the year.
We work continually hard to enrich our Toad family of Oracle development and DVA tools as well. We encourage customers to standardize on our Toad expert product which combines our market leading sequel development tool with sequel tuning capabilities enabling customers to both write and tune sequel statements from one tool.
Standardization on full feature Toad Expert and our Toad DVA suite saw a number of large transactions in Q1, including two transactions. Both of those were greater than $1 million in size.
We did see individual small purchases of Toad decline in the quarter which we attribute to more of the restrictive corporate purchasing policies, really surrounding the whole credit card payment trend and not necessarily around the trend of people wanting to use the product, because we saw the download of our free product continue to increase for the quarter.
Our SharePlex product has always excelled at Oracle database replication but at stages SharePlex had difficulty to deploy and manage and sometimes faced stability issues in certain times of deployment. Over the last couple of years we have invested quite a bit in SharePlex and it made it a much improved product, provided a much improved user interface and provided far greater stability.
As a result of some of these enhancements and these changes, we are actually very excited to see in Q1 the uptake and the increase in both the license sales of SharePlex as well as growth in the pipeline of SharePlex and this is the first time we've seen that trend occur in the last few years, so this was a very positive trend for us.
As I discussed on the last earnings call, we are continuing to build on our Foglight application management product set. After a complete re-architecture and re-writing Foglight it is essentially a new product now. We believe Foglight delivers unique capabilities especially in end user transaction monitoring.
We have more dedicated executive and sales focus on Foglight than ever before and customers are buying into the new high end levels of value Foglight is delivering. We closed 14 Foglight deals over $100,000 in Q1 and have a tremendously strong pipeline going forward. We actually closed a deal in Oslo which was kind of fun.
On a completely separate note and one of the real positive aspects of Q1 was the strength of our Script Logic division which now offers a broad set selling a greater range of our Windows management products within the industry to the small and medium size businesses. We set a threshold of 2,000 users and below.
Script executed extremely well in Q1 despite the difficult economic environment and closed many smaller deals that more than offset the softness in the larger transactions and so we're very pleased and proud of the job that our folks in Florida and the Script team across the globe did.
On the SharePoint front, we saw a significant increase in activity and interest around our solutions. While purchasing of products was flat in Q1, activity levels were way up indicating that people are still learning what SharePoint can do for them, what pains they will solve and what tools they will need to manage those pains.
We are very encouraged by the interest levels but we realize that SharePoint during a very difficult economic time would not be a priority product to purchase at that point which is one of the reasons why we believe it will remain flat during Q1.
From a virtualization point of view, Vision Core, our server virtualization market began to show some very small signs of being effected by the economy. Q1 bookings were below plan. The quarter started slow, but the March bookings were solid. It was one of the strongest quarters they've ever had but the volume of orders was strong and up year over year, but did see a delay in larger transactions.
They added close to 2,000 more customers in Q1 and saw nice growth from some new emerging markets in Latin America, Asia and Southern Europe. We continue to have a strong relationship with VMware and will be expanding our solutions to support Microsoft centrics as customer demand increases.
Our virtualized desk top product family, real simply put, I've made quite a few sales calls over the course of the quarter in Q2 and throughout Q1 and I cannot think of a single sales call where the whole discussion of virtualized desk top DDI was not a topic of interest. Now that has not yet translated into the revenues that we would like to see so we've definitely got work ahead of us to begin to see the revenue growth in DDI, but we know that as the market matures and as we continue to position ourselves well, that if we do it right, that market will prove to be a very significant opportunity for Quest and our product and when we do compete head to head with others, actually shows very well and we are winning many deals when we are in those competitive situations.
So all in all we managed to get through Q1 and generate a strong cash flow. We continued to build our customer base. We delivered great solutions and we plan to keep on focusing on our core markets, keeping a close watch on expenses. We have been within Quest almost obsessed on our expenses. Vinnie in a bit will talk about some of the other expense measures that we've put in place in trying to drive our new license revenues up throughout the rest of the year as well.
While these are clearly challenging times for everyone, the most important thing I'd like to do is thank our employees within Quest. Both Vinnie and Scott and I have made a huge commitment to our employees. One of our major priorities is to work hard to get through this difficult time and get through it together.
We've all had to make some hard choices as a group, yet those choices are the right choices which have allowed us to keep the teams together, to keep us tight and keep us focused. And we have a great company and a group of people and we just need to continue to fight through this difficult time.
With that, I am going to pass it off to Scott who will now review the financial results with you.
Good afternoon everyone. Doug touched on some of the high level financials so I'll go through this and then get into the detail right after. As he said, total revenues were $165.6 million for the quarter. The non-GAAP operating income was about $32 million which was a 38% increase over Q1 of last year.
Cash flow from operations was $48.2 million. Deferred revenue was approximately $329 million which is a $34.4 million or 12% increase over last year. The non-GAAP diluted EPS was $0.22 per share.
We acquired 342,000 of our shares at an average price of $11.37 under the $100 million share repurchase authorization that was announced in March. We will continue to evaluate opportunities to be buyers of our stock at this point. During the quarter we also finalized the $100 million credit line that we spoke about previously.
Now I'll get into the quarter in a little bit more detail. This quarter revenues were impacted from both the macro economic environment and currency. Total revenues were approximately $165.6 million which was $7.2 million or 4% lower than Q1 of 2008. On a constant currency basis, total revenues would have been down 1%.
As Doug mentioned, we had four deals over $1 million compared to one deal in Q1 of 2008. This increased the average deal size for all deals over $100,000 to $239,000 this quarter versus $229,000 last year.
Conversely though, we had a significant decrease in smaller deal sizes which is our historical run rate business where today purchasing decisions are being more scrutinized than ever before. Q1 license revenues decreased 21% year over year to $62.4 million or down 15% on a constant currency basis.
Along with the impact from smaller deal sizes mentioned previously, we saw noticeable increase in the volume of term license deals at the high end. Had these term deals been structured as perpetual licenses as most Quest deals historically are, Q1 license revenues would have been approximately $4 million higher.
In this environment, we're trying to accommodate the needs of our customers while still driving good economic deals for the company. In certain cases, this leads to a term deal structure. It should also be noted that term deals while recognized over time to the income statement, has similar characteristics to perpetual deals from a cash flow perspective in that we essentially collect the cash upfront.
So taking into account currency and the effect from the term licenses, license revenues would have been down approximately 10% during the quarter versus the 21% as reported.
Services revenues were up 10% in the quarter to $103.2 million and services revenues on a sequential basis declined due to some back maintenance that was recognized in Q4. Excluding that impact, services revenues would have been close to flat.
Along product lines, we saw declines in license revenues across most major product categories with the exception of virtualization which grew nicely. Our maintenance revenue growth was driven primarily by the Windows and virtualization management products.
Looking at the revenue mix for the quarter, license revenues represented 38% of the total revenues while services generated the 62% balance. This compares to a 46% license, 54% services mix in the first quarter of 2008.
Geographically, North American operations generated 67% of the total revenues in the quarter. The rest of the world operations generated the remaining 33%. This compares to a 62% North America, 38% rest of world mix in year ago quarter.
Moving to the expenses, I'd like to remind you that Q1 2009 non-GAAP results presented excluded the after tax effect of amortization of intangible assets acquired with business combinations, share based compensation expenses and expenses associated with the stock option investigation. Our earnings press released includes a reconciliation of the difference between the reported GAAP and the non-GAAP financial results.
Total non-GAAP expenses in the quarter were down 11% on a year over year basis to $134 million or 3% on a constant currency basis. We continue to manage head count, discretionary expenses and also benefited from the strength in the U.S. dollar.
During the quarter our expenses were approximately $11 lower due to the impact from foreign exchange. This represented approximately 70% of the reduction in total expenses. The remaining 30% was related to tighter management of head count and other discretionary spend.
Average Q1 year over year head count was flat including the impact from NetPro and the associated head count from four smaller acquired companies which closed during 2008. However, we significantly reduced contract and temp labor across all functions within the company. Excluding NetPro average Q1 '09 head count was down about 2% compared to Q1 '08.
Turning to the expense line items, sales and marketing expenses for Q1 were $65.3 million or 29% of total revenue compared to $74.6 million or 43% of total revenue in the same quarter of a year ago. In the aggregate, the year over year change is related to reductions in travel, reduced commissions on lower bookings and the benefit from foreign exchange. This was slightly offset by the impact of NetPro.
Research and development expenses in the first quarter were $36.2 million or approximately 22% of total revenue. This compared to expenses of $36.6 million or approximately 21% of total revenue in the year ago quarter. Increases in core labor costs including the head count associated with NetPro specifically were offset by the benefits from foreign exchange.
General and administrative expenses were $16.8 million or 10% of total revenue in the quarter as compared to expenses of $21.1 million which was 12% of total revenue during Q1 last year. The reduction is G&A was related to broad based reductions in contract labor coupled with the benefits from foreign exchange.
Looking at income, GAAP operating income margins were 11.3% for the quarter and GAAP operating incomes was $18.7 million. The non-GAAP operating income was $32 million during the quarter generating operating margins of approximately 19.3%.
Q1 non-GAAP operating income was up 38% as we benefited from a reduction in our expenses of approximately $11 million mentioned previously compared to the negative impact of $5.5 million in our revenues. In addition, margins were positively impacted by the prudent expense management mentioned before.
Other income and expense net in the quarter was a net expense of $4.1 million versus a positive $7.9 million Q1 '08. The primary driver of the year over year change was related to the strength of the U.S. dollar which generated a negative currency impact of about $5 million compared to Q1 '08 where we had a gain of $4.7 million. Other income was also affected by lower reinvestment rates on our investment portfolio.
The income statement reflects a re-measuring our non dollar balance sheet items this quarter including those denominated in off shore operating currencies such as the Pound Sterling, the Euro and the Danish Krona resulted in most of the year over year change in other income.
In the final month of the quarter, we initiated a balance sheet hedging program which is designed to limit some of the currency volatility on a go forward basis.
That GAAP effective income tax rate for Q1 was approximately 32% compared to 24% in Q1 of '08. The comparative difference primarily relates to acquisition related adjustments and the enactment of legislation in California which discretely impacted Q1 of '09 and the actual mix of net income before taxes between jurisdictions for the period.
The Q1 non-GAAP tax rate was 22.7% compared to 28.7% in Q1 of '08 primarily due to the result of changes in the projected mix of net income before taxes and high and low tax jurisdictions.
The GAAP net income for the quarter was $9.9 million and the GAAP EPS was $0.10 on a fully diluted basis. Non-GAAP net income was $21.5 million and non-GAAP EPS was $0.22 on a fully diluted basis. The fully diluted weighted average shares outstanding was about 96 million shares.
Now turning to the cash flow statement and the balance sheet, as of March 31, cash and investment balances were approximately $311 million. Capital expenditures for the quarter was $2.4 million. Cash flow from operations was $48.2 million in the quarter compared to $55 million in Q1 of '08.
The day sales outstanding was 55 days, a three day improvement over the 58 days in Q1 in 2008. Deferred revenues increased 12% to approximately $329 million, up $34.4 million year over year. 11% of the increase is related to NetPro.
So as we look forward, while we're not going to provide specific guidance, I'll follow on what Doug mentioned at the outset; specifically markets appear to have begun the process of stabilizing which is expected over time to positively affect the demand environment. In the interim, we'll continue to focus and be vigilant on managing the expense side of the business and those things that we can control.
Accordingly, while we can't predict the precise timing, we would expect to see things move back to a more normalized pattern for the model as the year progresses.
So that concludes my remarks, and I'll turn it over to Vinnie.
Let me take a moment and just step back. I want to try to give a reference for what we do and our markets and then perhaps shed some light on what our future opportunities look like.
First of all, we have three types of products that we sell to our customers. They're either monitoring performance tools, administrative tools that include migration, reporting, compliance, general IT automation and provisioning, and recovery tools which can be replication or backup or fine grain recovery solutions.
Those three product categories again, monitoring, administration, recovery is what we sell into our markets. What we do is take a subsystem like an Oracle data base or exchange and we wrap our products around that subsystem to deliver a much more cost effective, easier to manage the subsystem in a more professional manner, and we also tackle the difficult problems.
These are problems having to do with many users. In Microsoft's case, sometimes we know customers with over 100,000 users, or many transactions or both. So when reliability, performance, security, compliance and cost to deliver counts, we've got solutions that wrap around these subsystems.
So we provide the same products whether it's Microsoft or database or EFX management and so those are our product categories and then we have these subsystems. We have the data base business which is the classic Oracle or Siebel business which is how the company got started.
The second subsystem category is Windows infrastructure which is now graded in 50% of the business, and that includes active director exchange, SharePoint and client management solutions.
The third category or market position is virtualization which is predominantly EFX today and in the future we see that going to hyper V.
So again, we have three types of products that we offer to the market in three particular markets; Windows infrastructure, data base and virtualization. And in each area we have market leading products. We'll win numerous product awards in each product category or each subsystem, and we also go to market in different ways depending on how the platform vendors go to market.
In some cases we'll be relatively light with partners and maybe only doing 20% of our revenue. In other cases, we'll be up to 100% of our revenue, we'll go through partners. And that's totally dependant on the market situation.
In the case of VMware, we'll go to market very partner bound, very partner friendly and that's how VMware attracts business. So we do a great deal of business through partners; in fact 100% of our business is through partners in that area.
There are other areas where a platform vendor might be more direct like in Oracle's case. We will mimic that and go direct.
So that's our business, and we've created a nice business. Over $700 million in bookings last year, generated a lot of cash and so when I think about what we're doing when we go forward, first of all I think about where can we get revenue growth and then where can we get cash growth in the current markets that we serve.
So as far as revenue growth, when we think about how business moves forward with our current position, we think we're going to get good growth, at ViaTex management, VDI, Identity management, SharePoint, exchange and application monitoring. Those are the areas we feel we can seriously enhance our revenue from where they are today.
In other areas like AD management and our data base business, we have large businesses there. They have lots of scale. They're difficult to grow as fast as the other areas but they can grow cash flows faster because of the scale they've reached. So when we think about growth we think of it in two lights. One is revenue and the other is cash flow.
And as you'd expect, each of these businesses is different depending on how long we've been in the market and how mature the market is, we'll either be looking to grow cash flows or we'll be looking to grow revenue.
So I think we've done a nice job of balancing those two objectives and as we move forward, I wanted to just keep that in mind; that we have cash generators and we have revenue opportunities.
Going forward, market trends and what's going on in IT in general and how we might fit in it, I see several trends coming into play with force. The first is one that we're a couple of years under foot with and that is the server virtualization wave, and it's not going to slow down. Today, if we did a sampling, we might have 5% or 10% or 15% of your servers in IT are run with a Hyper driver on top of them or underneath them.
In the future that's going to double or triple, so that's a great opportunity for Hyper V or VMware or ViaTech, but it's also a great opportunity for us to serve those subsystems as Hyper V with a nice product family and then as that virtualization solution hits into the server, there's going to be numerous areas around storage management that are going to open up for us to hit. So that's a major wave that's occurring that our products are playing into.
The second theme that I think of in IT is there's got to be a better way to manage the client end point. Right now when you see these survey announcements with management end point, I think that's an understatement to the true cost. I know myself personally, and our management team at Quest, we all have to self manage our PC's and if you would count our hourly cost, it would be ridiculous what it would cost to manage a PC.
So there's another wave that's going to occur. It's a couple of years behind the server virtualization and that is new ways to do client, to deliver the end point to the user. And virtualization is likely to be the primary way to drive up intellectual property protection, drive up virus protection and general manageability and hopefully driver down costs.
So those are two kind of fundamental trends under foot. As far as Quest and what we can do with those trends, not only can we bring in VDI solutions and Hyper V solutions, but we've got an opportunity to take our products that manage data bases or exchange or AD or SharePoint and enable them to take our customers so that they can manage those environments in a virtualized world.
Right now, people don't know how to take their sequel, physical data base and move it into a virtualized world. There's plenty of got ya's and problems with that and as we can evolve our products to handle it initially and then enhance your ability to move into a virtualized world, we will do a great service for our customers.
So I think that's a great growth opportunity and the same is true for Cloud computing. Cloud's are going to provide the opportunity for us to move all your applications, a portion of our application, a portion of your infrastructure or possibly all your infrastructure into a third party Cloud or possibly going to try to turn your computing environment inside your company into a personal or private Cloud.
So for us to have the opportunity to assist there, to take the environments that we manage today and enable you to move them into a virtualized world or move them into a Cloud and then move them back or change Clouds, and so I see a lot of opportunities for us in our current product portfolio as far as being able to evolve those products to be able to help customers deal with virtualization, deal with Cloud, deal with third party style providers.
So we are pushing as hard as we can in our R&D spend to meet these new trends and help our customers embrace and get the benefits of these IT trends.
As far as the current economic climate, we have been in a mega IT slowdown before. Doug and I, Scott, we've all seen it. We saw it in '01 and '02 and so it's tough because we do a lot of business at the end of the quarter and these are not normal times so you don't know how the buyer is going to respond at the end of the quarter so it's very difficult for us to forecast revenues and then forecast profitability.
So what do you do in that climate? Well the natural thing we've done is we've been squeezing out as much cost out of the business as we can, but we don't want to lay off a bunch of people. We do not want to do that and there's a couple of reasons why.
One is, it would be very difficult to push a lot of people into the job market as it is today and say, "Go find a job," because it's not like a lot of people hiring. So we're sensitive to our employees needs there.
We also know that as things turn, we want to be ready to move and we're doing out best to run this company well and see the forward trends and build products that our customers need. And we thing we're property staffed to do that and what we've been doing is just squeezing the heck out of every cost we can in order to provide for our staff to be able to stay with us and we've been trimming in some places, but not a lot.
And another thing that we've been doing is saying, "You know we generated a lot of cash last year in '08. We should strive to do that again in '09." So we're doing that. And we're doing that possibly less revenues on the year. We don't know for sure.
And so with that, we have got to raise our margins to be able to generate a like amount of cash. And so that's what when we thing about how we're driving this business, that's what we're driving to. Hold on to staff where we can, don't be a big layoff for a variety of reasons. Be prepared for the future, but generate a like amount of cash which would be a fantastic result I think in '09 relative to '08 given the economic backdrop.
That is what we're managing to and Q1 results were tough on the revenue side, but really impressive on the expense reduction side. And also, without cutting into the meat of the company, so we're prepared to move into hopefully later in '09 or in '10 a more dynamic buying environment where we'll have some good products and we'll have the staff in place to move forward.
So that's in a nutshell how I see the current economic climate. And we're not going to be any wiser than the 25 articles in the Wall Street Journal about when things are going to turn around, so I don't think it's really wise for us to speculate on that, but to adopt the business strategy we have seems prudent and hopefully we'll see it turn around in second half, a little bit more demand improvement and we'll get a little bit more activity.
With that let me open to questions and answers and we've got Scott, Doug and myself in the room to try to do our best to answer questions.
(Operator Instructions) Your first question comes from John Difucci – J.P. Morgan.
John Difucci – J.P. Morgan
It sounds like the smaller deals were the weakest this quarter and I would assume that they're more linear, that run rate business is more linear throughout the quarter than the rest of your business, so I'm curious what was, you have a month, a full month and almost a month and a half behind you now in this quarter. I'm just curious, what was April like as far as a normal April for that business versus January or into February.
We've seen a little bit of an uptick but it hasn't been substantial so we're still seeing a little bit of a decline. It's a little bit better than it was in Q1 but it's not anything like it was last year in the quarters when we were performing really, really well.
To put a little color in this, this caught us off guard. We saw that when we started doing an analysis of our product revenue and first it came in one product, then another, and then another.
Literally we were going through these revues and there was this one chart that went up and we said, "Stop. Put that one back up."
So this did catch us off guard. I don't know if it's consistent within the industry but we went and looked of why. And we turned to our CIO and then talked to some other people, and these were the easiest purchases to postpone because basically the IT managers have said, "No purchases unless I approve it."
And they're not going to approve a $5,000 order because they're not going to be a part of it. But they'll approve a $200,000 order that they're working on if it's a little more strategic. And so I think that can go on for a brief period of time but I don't know for how long because you need to do the nuts and bolts too.
These buyers are typically in the thousand, two thousand, five thousand user communities where budgets are a little bit more loose. When you're dealing with a company with 50,000 users, 100,000 users, they have projects that have been agreed to at the beginning of the year, and they're going to continue to fund them unless it's just a really, really bad scenario.
So we found that even though it was very hard to get to those dollars, those dollars we were still able to get to. It was the ones where it was a 2,000 user place; it went up to the CIO or the CEO. The CEO just said, "Listen, we're not prepared to spend $8,000 right now. Let's just hold off and see how this quarter ends up."
John Difucci – J.P. Morgan
It's interesting. It almost sounds like it's the opposite at least what I understood, the last downturn, Vinnie you mentioned 2001, 2002 and 2003 and Quest actually performed better than most of software as far as the license revenue. Where most companies were declining 25% to 30% license revenue in 2002, Quest decline was I think 7%.
So it almost sounds like, and back then I thought anyway that part of the reason why was a lot of those small transactions just flew under the radar. Do you think people are doing, it sounds like your customer base is doing kind of what you're doing and that's trying to hang onto the people you think are what you need to do for the long term strength of the company but at the same time just cutting back anywhere they can that makes sense.
I think that's fair. I think the one think to think about with us anyway is back in the 2001, we had a very high growth rate that actually mitigated down to about zero growth. So we went from hyper fast to lower and so now we're not nearly as fast growing and now we've come back down.
So I think when you look at the Delta, we haven't actually run this number. It might be more similar than you think. But your statement about just being able to say no so semi discretionary purchasing is the easiest answer.
I did a poll of CIO's last week, a bunch of them and they said absolutely cut out all spending unless I approved it which was like then elevate, and the big deals would close.
I was out making a bunch of calls last week and in every call I went on I asked whoever it was that I was meeting with, and they said it was literally the $5,000, $10,000, $15,000 order that was sitting on the CIO desk. Those were the ones that were kind of not planned but kind of the nice to have. They were the ones that didn't get done.
In fact if you were to ask Scott which were the ones around here that he sat on, those were the ones he sat on.
John Difucci – J.P. Morgan
I have a follow up for Scott and it has to do with maintenance. Nice growth year over year but actually it was down sequentially by 3%. I would assume that foreign exchange has some effect and also that back maintenance that was paid last quarter. But I was curious, it sounds like renewals were strong, but can you just verify the renewal rates were about where you normally see and if they were or weren't and also if you've seen any pricing pressure on renewals.
The renewal rates have been pretty consistent. If you back out the maintenance related to back maintenance and the impact which is small, essentially you're flat sequentially. So the renewal rates haven't really changed that much. In the aggregate they've been consistent.
The other question you brought up which is sort of a look forward is what are we seeing on new maintenance. And I would say generally customers are coming back and asking for lower maintenance rates. We've been able to sort of hold ground there for a bunch of reasons. Most importantly is because we have contractual terms in some cases. In other cases it supports your VSOE so you don't really want to change that consistently. But in certain cases customers are asking for it, but it really hasn't been bad at all.
I can tell you over the last six months, our renewals teams have gained a great appreciation of how important they are to the long term health of our company and myself and the guy that runs that, we talk every week virtually. And we certainly get the questions always being asked. We're getting the push. But if we hold strong and are able to resist the temptation to give in, we're still getting our renewals at pretty much a similar rate as we've been getting in the years past. We did not see a big push down or discounting on renewals at all.
The other thing I'll point out there, on a year over year basis, one of the impacts is that the piece, from a booking a piece that gets peeled out attributed to the first year license, if the Q1 '08 booking number in the aggregate was higher than Q1 '09, that element that's tied to the maintenance piece specifically, if that delta on the bookings is high enough, that will also decrease the line item of maintenance revenue. So there's a little bit of that as well on a year over year basis.
But we were very pleased with how our renewals held up and continues to hold up. And this is a weekly, every two week conversation, I can promise you.
Your next question comes from Abhay Lamba – UBS.
Abhay Lamba – UBS
When you laid out some of the important items of your business, looking forward are there any specific upcoming products from Microsoft and new products that are going off of maintenance? That could act as a catalyst for some of your products. Anything specific that you can talk about?
As far as what's coming off of maintenance, that tends to just keep our migration business which is pretty sizable flowing when things are end of lifing. But probably a bigger driver isn't what's retiring, but what's coming that's new.
So what we have that's driving some revenue is we have a lot of consolidation going on in lots of different industries like banking which is going to drive a great deal of need to blend IT systems together, so we've got a big opportunity because the macro business situation of consolidation.
The other thing that's coming is a big exchange release that's coming up in another couple of months, and if that takes hold that's going to be significant. So those are some external drivers as well as the adoption of virtualization on the server and also people also wanting to experiment with Cloud. That will be a more forward driver for us.
Abhay Lamba – UBS
In terms of virtualization you mentioned that a lot of the deals you went in as a partner with VMware which you're working in conjunction with them. Should we expect some correlation of your license revenues with VMware's license revenues that they've been posting?
There certainly will be but we have a lot of VMware market place to sell into that we haven't penetrated because we have a great deal of VMware customers. We're up over 15,000 customers now. They I think will say they have about not quite 10 times that but maybe eight times that.
So we've got a lot of market to sell into but if they're market slows down it will over time become a dampener on us as we won't have as much opportunity to sell into. But I think it's fair to say or forecast that it's going to be a great deal more server's percentage wise until the numbers that are going to have a Hyper V.
Microsoft is looking to get their share of that market. VMware is looking to hold onto theirs and frankly with Citrix making some plays to change the licensing practices, maybe they're be able to get some share. They don't really have much now but they're going to try to make a play for it as well.
So we know there will be two Hyper Visors that are prevalent out there and we're not sure what happens with Citrix's.
Abhay Lamba – UBS
With the sequential downtick that we saw in Q1 in your license sales, going forward in 2009 should we expect a nominal sequential seasonality in the quarter or should we expect it to be more muted than it historically is.
We didn't provide specific guidance on that but I can tell you if you look back historically we have shown down sequential Q2's off of Q1 so you'll also want to revisit that. Just the history will show that.
Your next question comes from Brian Denyeau – Oppenheimer.
Brian Denyeau – Oppenheimer
If we could talk about expenses and your hope to not to have to cut heads, how much longer do you think you can go through the year before you might have to take a look at that?
We just announce probably two weeks ago an employee furlough program and it's worldwide. It's a voluntary furlough program which has allowed us to make it so that everybody across globally can participate. That program alone will save us upwards of $6 million.
We're looking at some other expense, travel expense areas. We're hopeful that we can continue going through the rest of the year holding off. I'm not going to give a number or give an indication of what that might be or where it would happen, but if we drop so low, then we don't have a choice.
But right now we don't feel like we're there and it's kind of one of those principal things that Vinnie and I and Scott are really trying to hold true to, to the best of our ability is to try to look at other ways.
We cut out all recognition events that we had last year, like a kick off which is going to save us another $3 million. We're seriously thinking about not having a, and this will be a good announcement on this one, a 100% club next year which would save us another $3 million. So we're really looking at all the avenues within the business that I'm going to say nice to have as compared to letting people go.
But if we had a horrible Q2, then we would certainly be pressured into having to make that kind of a decision. It would certainly staring at us pretty hard.
Brian Denyeau – Oppenheimer
On the sales and marketing side, this quarter is the second time in four quarters that you spent more on sales and marketing than you brought in in license revenue. If you look at the efficiency of your go to market strategies, where do you think you are in that and how do you think you get that to improve as you go through the year?
That's probably the number one line items that we look at outside of your typical cost measurement that you have is, what is the productivity of every single one of our sales organizations that we have and are we getting the most out of it. Right now our quota assignment to what we need to deliver in the field is right at the levels that we want it to be at.
So right now, we really do want to avoid cutting reps because if this thing turns, which we are very hopeful that in Q3 or Q4 it turns, that we will have the perfect number of reps on board to really execute and run strong into the upside market.
That's what happened when we went through the 2002 deal, we were able to hold onto most of our reps and when it turned around, we ended up having one of the strongest years we'd ever had in 2004 and 2005 because we held onto those people.
That was the first year we implement the seeding program that I mentioned, and the seeding program, it is like an obsession of Vinnie and mine that if you're not selling anything, then you better be giving away something because you'd better be positioning yourself for when this market does begin to turn that we've got customers that are in love with us and who are getting value from products and they'll then be willing to pay for them.
But right now, it is one of the biggest things we do look at is the productivity we're getting and right now we're okay.
One thing I'd add to that too is, your math is correct but in this particular quarter, if you're really going to evaluate that metric, you need to look at the deals that ended up in deferred so as I said there was $4 million in license deals that ended up in deferred that were related to term deals. So if you add that back in assuming that they were license revenues that were booked in the quarter, that percentage doesn't look as you pointed out.
But obviously when we talk about a productivity number, those are the things we're paying attention to. That's one issue.
Your next question comes from Tim Klassel – Thomas Weisel Partners.
Tim Klassel – Thomas Weisel Partners
First question has to do with SharePlex, getting back to growth in this environment sort of flies into the face of common sense. With the new product enhancements and what have you, do you think growth there is sustainable?
What we did, I'm not sure if you were on our last conference call or not, one of the things we did coming into this year, we did a lot of product striking with our sales reps so we have sales reps very dedicated to our data base tools, those being SharePlex. We have a bunch of reps dedicated to Foglight and selling that higher end application.
We have reps dedicated to selling our identity and access management portfolio of products and the area we saw probably the quickest uptick and acceptance in that model change was in people getting excited about SharePlex and the quickest area that we saw.
You also need to understand that in Asia, in Korea, China, some of our Asian countries, SharePlex is still doing quite well. But what we really encouraged about is in some of our other markets in Europe and in the U.S., we saw SharePlex actually show an uptick and then the real encouraging part was the pipeline really grew.
So I attribute it entirely to the sales model change that we made and that we now have. Last year selling SharePlex to a rep was an option among 200 other products potentially where this year to roughly 30 reps, it's almost the primary product that they have to sell.
Tim Klassel – Thomas Weisel Partners
On the Vision Core products as Hyper V comes to market, I know you partner very well with VMware in the channel, what are you going to do different to address the Hyper V crowd?
We faced this before with Microsoft. They'll provide different opportunities than the other platform vendors. For instance the product portfolio we bring to market is different than in Oracle and I think the same will be true in Hyper V. We're going to get a different set of weaknesses and strengths in the platform and so it won't be uniform in how we get revenues and solve problems with the Hyper V, but there will be hopefully plenty of opportunities.
We're bringing product to market now. We've got our first product released earlier in the year. We've got another two or three that will be in the market this year. So we feel like we're timely and we're meeting the market as people are beginning to try Hyper V.
Tim Klassel – Thomas Weisel Partners
What should we be thinking for currency impact both revenues and expenses. I know you're not giving actual guidance but currency right now versus where it was last year.
Within the last month or so we've seen a little bit of a turn. The dollar hasn't been as strong. So if that continues the impact on the revenues will be less than the $5 million we saw this quarter and the impact on expenses will probably be higher in that environment. But we're only roughly a month into it, so it's hard to say.
On of the things we started to do and I talked about this below the line in other income and expense, we started to lay in some hedges from some of our balance sheet exposure. So we got those out actually for the month of March but most of the currency impact that we saw on the negative side was January and February.
So below the line we should be able to slow down some of those wild swings that we've seen under line E. I think above the line the currency impact should probably, it's moved around a little bit but at this point it seems a little early to call.
Your next question comes from Brian Swartz – Piper Jaffray.
Brian Swartz – Piper Jaffray
I wanted to follow up on an earlier question, you gave some comments into what you've seen over the last month of April and half of May on the smaller transaction side, I wonder if you could give us some color on what you're seeing on the larger transactions if they're kind of trending the way they did in Q1 for you.
The truth is that April is shown to be on the medium to the higher end transactions okay. We had a fair amount of deals that pushed that came in and we were looking forward to getting. There were a few deals that I thought we were going to get a little bit sooner than now and they have not come in.
The good news is that none of those were in our current forecast so they're all upside. But the month of April, we had a little bit of softness in both the upside and the higher end as well.
The one thing that I'll add to that as well what we've seen which has been strange and we pointed out is that in this environment you would have expected the run rate or the smaller deals to be there and the larger deals to be more difficult. So we talked about some reasons why.
But what I'll add to Doug's comment is, you know if you look at April or a couple of days in May, I don't know how indicative that is because the last couple of quarters, either because they're larger deals or because of the environment, the quarters have tended to be very back end loaded and things have moved significantly in the last couple of weeks or the last week of the quarter.
We've always had some large deals happen that way but it seems in Q1 in particular that that was an issue that we had. So I don't want you do sort of look at any indicative views these days and say it's going to stay that way for the quarter because it seems like in Q1 it was a lot different than what we expected so who knows what Q2 will do.
There's one other piece of color on April that you need to be aware of. We had our 100% club which was the first week and a half of April. It essentially started the day after the quarter ended and went another week and a half after that. So we did see a little bit more out of field impact of our reps not making stuff happen, so I'm going to be real curious.
We get a pretty regular update on how our revenues are tracking for the quarter and I would be real interested to see how it looks in another week or so.
Brian Swartz – Piper Jaffray
I know you're not giving guidance here on the call but just wondering for you internal planning, irrespective of FX are you planning for the top line to grow this year?
There's a variation of outcomes at this point. I think frankly we've got a couple of different scenarios but presently we don't have a plan that shows top line growing right now.
Your next question comes from Derek Bingham – Goldman Sachs.
Derek Bingham – Goldman Sachs
One question related to the large deals, you have more large deals than you had a year ago, your four large deals which is kind of remarkable. Does that make it more of a difficult comparison into June where you've been able to close some of those big guys?
Say that again.
Derek Bingham – Goldman Sachs
Does that it make it a harder comparison in terms of you were able to close a fair number of million dollar plus deals in Q1 just comparing the June quarter what that looks like with the first quarter. Is that a reason why June might be down sequentially?
If you go back and you look at as far back as 2006, Q1 to Q2 shows that it historically has been down sequentially.
Derek Bingham – Goldman Sachs
That's definitely clear in the numbers. I was just wondering if that surprised you that number of million dollar deals in Q1.
I guess what you're saying because of the four deals in Q1 which were larger, would that give us a different read on Q2 specifically. No, I don't think so.
Derek Bingham – Goldman Sachs
Related to costs, you've done a remarkable job on controlling that in Q1. Is that kind of the same base in terms of, sometimes people they'll kind of push out or delay some costs and you might have to end up paying those next quarter and Q3. Can you keep that OpEx cost kind of at a similar level?
On the cost side, one of the things to keep in mind is 75% of the costs are head count associated so as we have people that normally leave the business or come into the business, we're only back filling critical need and we're only hiring in very specific areas. For example one of the areas that we're hiring, small but we are hiring is some of the virtualization business. But generally speaking, we're trying to maintain flat to down from where we are now. So we're going to try to hold the line on new hires.
The thing that you're asking about that you can push out, there are things in and around projects, like we're rolling out the next version of Oracle for financials and things like that where you may be able to move it a quarter, but those things are capitalized upfront anyway.
But generally the plan has been and we said this after Q1, while the visibility on the revenues is clearly something that we don't or anybody else has at this point, the things that we can control are the expense side. So we're not adding headcount. To the extent that currency benefits us, we'll continue that. But I don't see any dramatic shift on the expense side.
There's not going to be any surprised in Q2 with an expense hit that should have been in Q1 or could have been in Q1 that we deferred. Nothing like that.
The only thing that has dramatic effects sometimes is if you see a huge change in currency on a sequential basis. That would change it, but there's nothing like that at this point.
Derek Bingham – Goldman Sachs
On the buy back front, you've got obviously a lot of the authorization left over. How are you thinking about how you might attack that?
Once we got the approval from the Board we initiated, we were actually in a quiet period at the time, so we initiated a 10B5. That was sort of on auto pilot during the quiet period. Now that we're coming out of the quiet period, we can reevaluate going into the open market and buying back stock. Clearly there's enough of the authorization left to be able to do that, so we'll move on that when we have an opportunity.
Derek Bingham – Goldman Sachs
And that window is open already, you're saying, right now?
It will open in two days after we report today.
Your next question comes from Walter Pritchard – Cowan and Company.
Walter Pritchard – Cowan and Company
I'm wondering if you could clarify a couple of things related to the deferred revenue and the maintenance. You mentioned there was some back maintenance in Q4. Could you quantify that and then on the deferred revenue, it declined I guess more than I expected and you mentioned that there was $4 million of term license revenue in there. I just wanted to clarify that those deals are in there and maybe just some commentary on why the more than usual sequential decline of deferred revenue even with those items.
The deferred revenue on the back maintenance was about $3.5 million. There was also some maintenance one time impact from NetPro, the closing of that deal which was the tail end of Q3. But it was about $3.5 million.
In that deferred number of the balance that you see today that does include the term deals in there, but deferred came down because we recognized more out of deferred that went into it because the bookings number, two quarters where bookings had been lower than previous quarters so we haven't been able to build up deferred.
Maintenance hasn't been recognized as it normally would out of deferred and now that it has come out of deferred, has not been replaced by anything going in, i.e. lower bookings and the term piece was not enough to change that from being down.
Walter Pritchard – Cowan and Company
In terms of, you talked about seeing some signs of stability. I'm just wondering is that based on what you are seeing in your business or is that based on broader macro signs that you're watching. Maybe help us understand what you look out for in that sense.
It's a little bit of optimism in the sales force, and it's a little bit of customers getting more comfortable with the situation. First when you go through these demand crunches where they come down, everyone is like wide eyed and everyone is paralyzed.
Then you have to start to get through the fog. I can tell when I've been out with different people that they're starting to get their feet on the ground to what they should do and our sales force is also beginning to acclimate.
So that's where we're a little bit more confident that we'll do better than Q1, but I personally think that Q1 is going to be not just at Quest but generally a tough quarter because any company is still going to wait another quarter to see what they've got to spend and how good they feel about spending it.
Your next question comes from Gregg Moskowitz – Auriga.
Gregg Moskowitz – Auriga
I wanted to follow up on virtualization. I'm wondering if you could talk about Vision Core possibly moving beyond backup recovery for virtualized servers and getting into more management and orchestration. And wondering if you had a chance to evaluate a state of recovery product and if you had any thoughts on that.
I've gotten a couple of brief on the data recovery and fortunately it seems pretty basic which gives us lots of room. We have a major release in our backup recovery product coming out in September that's going to really elevate what we can do for our customers and forward customers so we think we'll have a multi-year window from VMware. And it remains to be seen whether they want to chase it as much as cover the basics.
As far as your question about the orchestration layer, what we're trying to do is provide the building blocks that you would put an orchestration layer on top of and that requires not just backup and recovery of a logical guess, but things like P to V and V to V and V to P movement tools, compression tools to just be smarter around storage allocation and recovering wasted storage space.
And then we're releasing, it just went into the production this week or next week, a product call V Control. It's the first true provisioning product we have around Hyper V management. So we're going to have a variety of point solutions that you would build a provisioning orchestration layers on top of and we're building out market position in the core products and we're working on building the orchestration layer that will span Hyper V and ESX.
Gregg Moskowitz – Auriga
What was the average length of these term deals and is there particular product area that you saw that in mostly?
They were a shade under 40 months I believe. There were a couple in the Toad arena but I'd say other than a few in Toad, they included a bunch of other products as well. From a rev perspective they'll be over the term, but we have the cash upfront.
That concludes the question and answer session. At this time I'd like to turn the call back to Mr. Garn for any closing remarks.
Again, I want to thank everybody for taking the time to listen to the call and I think as always we want to thank our shareholders and the investors that are out there, but first and foremost from Scott, Vinnie and I, we want to genuinely thank our employees and our customers. This has been one of the more interesting times we've ever had to go through and I am just continually amazed and deeply appreciative of the resilience and the teamwork that everybody is collaborated and coming together to fight through this interesting time.
So to all of you thank you so much. I know Vinnie feels much the same way and Scott does as well.
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