Netezza Corporation F1Q10 (Qtr End 04/30/09) Earnings Call Transcript

Netezza Corporation (NZ)

F1Q10 Earnings Call

May 27, 2009 4:30 pm ET

Executives

Deb Murphy – Vice President & Corporate Controller

James P. Baum – President, Chief Executive Officer & Director

Patrick J. Scannell, Jr. – Chief Financial Officer & Senior Vice President

Analysts

Kathryn Huberty – Morgan Stanley

Bill Shope – Credit Suisse

Nabil Elsheshai – Pacific Crest

Glenn Hanus – Needham & Company, LLC.

Alex Kurtz – Merriman Curhan Ford

Brian Denyeau – Oppenheimer & Company

Jayson Noland – Robert W. Baird & Co.

Nathan Schneiderman – Roth Capital Partners

Rajesh Ghai – ThinkEquity

Presentation

Operator

Welcome to the first quarter fiscal 2010 Netezza Corporation earnings conference call. My name is [Naquisha] and I will be your operator for today. At this time all participants are in listen only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Deb Murphy, Netezza’s Vice President and Corporate Controller.

Deb Murphy

Thank you for joining us on our earnings release conference call for our first quarter of fiscal 2010 which ended April 30, 2009. Speaking today will be Jim Baum, President and Chief Executive Officer and Pat Scannell, Senior Vice President and Chief Financial Officer.

Before we begin I’d like to remind you that some of the statements made on this call may be forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to differ materially. These risk factors are described in our most recent annual report on Form 10K which is on file with the SEC.

In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views at any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change.

On this conference call we will be referencing both GAAP and non-GAAP financial measures. We provide the GAAP and non-GAAP reconciliation information in the press release we issued earlier today announcing our Q1 results. The press release is available on the homepage of the investor relations’ section of our website. The webcast of this call will be archived in the same section.

I would now like to turn the call over to Jim.

James P. Baum

Thank you all for joining us on our fiscal year ’10 Q1 conference call. I have a few comments I would like to make before I turn the call over to Pat. We’re pleased to announced today our fiscal Q1 results. We produced revenue of $45.4 million and non-GAAP EPS of $0.03. Our review represents a 15% increase over the same period last year and we added 14 new customers in the quarter across our target industries. This brings us up to 285 customers with a continued strong repeat order rate. We competed well to win and close this business against our usual set of competitors.

During the quarter we experienced new customer wins with major names in digital media, retail, telecommunications and government. These companies represent leaders in our target industries and in all cases we had to win the business from one of our larger competitors. It is encouraging to see that even in a recession some companies continue to proceed with their plans to enhance their business analytics and data warehouse environments suggesting that these initiatives remain essential investment areas.

For example, a tier-1 telecommunications carrier in the US can now capture and store 24 months of detailed network usage data on Netezza, enabling a complete end-to-end view of every call that hits its network. As a result, financial analysts have deep insight in to inter carrier activity and in its first 10 months of using the system this customer estimated $25 million in cost savings. This type of analysis could not previously be carried out at a price point that made it feasible.

As you are all aware, the economic climate continues to be very challenging. Our customers and prospects are clearly feeling the pain of reduced revenues, budget cuts and headcount reductions. Some of our customers and prospects have reported that they expect to continue to experience the negative effects of this economic climate through the rest of 2009. This created a very difficult selling environment in Q1 and this phenomena is visible in our pipeline as we now see the effects of deferred or loss budget for data warehousing and business intelligence projects.

Where companies are spending money on these initiatives we continue to win our customers to our rapid time to value coupled with our comparatively low total cost of ownership. The simplicity of our appliances means we don’t rely on large complex professional services engagements helping the business champion purchasing our systems to have confidence that ROI will be realized over a short period of time. In fact, we regularly hear of customers exceeding their ROI justifications not only in time to value but also in the absolute value of the ROI.

For example, one of our larger digital media customers has deployed Netazza to solve the problem of understanding which elements of their marketing campaign has the most impact on the buyers ultimate behavior. Netezza’s platform allowed this company to develop complex analytical models that capture all the granular information on more than a year’s worth of market click stream data and then compute how to attribute buying results to each campaign element. This makes their system far superior to the other solutions that limit analysis to sample subsets of recent data, a much less precise approach. In one usage case of this system they were able to look beyond the traditional click stream, last click methodology and gain insight from their Netezza powered solution that resulted in a 25% conversion rate improvement and a 33% lower cost per action on their campaign.

We saw two primary competitors in the quarter, ORACLE and Teradata. Our experience with Teradata remains consistent, they have introduced new product offerings to the market and have used this multiproduct line strategy to fit their solutions to the customers’ pricing requirements. While this approach has been effective in some cases, we still find their primary strength in their install base and we compete effectively against them on our time to value simplicity and performance advantages.

We are also competing effectively against ORACLE. In previous calls we mentioned that we were engaged in several competitive opportunities against their new product. Some of those engagements have now come to a close and we are pleased with our win rate. We are still engaged against them in several additional opportunities, at least one of which will certainly close in our favor in Q2.

We remain enthusiastic about the long term opportunity for Netezza and we continue to invest to position Netezza for substantial growth as the economy recovers although our near term visibility is weak. Our investments in R&D will produce new products this year that we believe will extend our competitive advantage. Our investments in distribution continue to mature promising enhanced productivity and new distribution opportunities. We continue to believe that we are making the right investments to place Netezza in a very strong position once the economic climate improves.

Now, I’d like to turn the call over to Pat Scannell, our Chief Financial Officer.

Patrick J. Scannell, Jr.

Let me give you some more color on the financials. Total revenue reported of $45.4 million increased 15% from Q1 of ’09, that revenue of $39.6 million. Product revenue increased 4% from a year ago and service revenue increased 54%. Product revenue was made up of approximately 35 deals where the average deal size was $1 million. 72% of the revenue came from the install base and we secured 14 new customers this quarter with 23 customers added from the Tizor acquisition bringing our total customer count to 285.

Let me give you a little bit more detail here. So, our average deal was $1 million, our average new business deal was $1.1 million and our average recurring buy this quarter was approximately $930,000. Let me give you three examples of our recurring revenue just from this quarter, one of our long standing customers in the digital media space purchased additional capacity on two of their seven systems along with compression for an add on purchase accounting for $1.6 million.

Another existing customer who is a healthcare provider purchased our 5200 model and compression for another system that they own that was originally purchased 18 months ago for about $510,000. The third example is a larger hotel chain that came back and purchased more equipment for $865,000 to add to their original investment that they made two years ago. The simplicity of implementation and operation as well as the time to value, that is the time that it takes a customer to get the system up and running are the hallmarks of this repeat business and demonstrates the strength of this recurring revenue model.

80% of our business came from four vertical markets: digital media; telco; government; and financial services. The domestic international split of our business was 75/25 with a relatively even distribution between Europe and Asia. Our direct business was driven by 50 quota carrying reps that drove 76% of the business. We had one 10% customer for the quarter and our revenue distribution over the three months of the quarter was 20% in the first month, 30% in the second month and 50% in the last month of the quarter.

I’ll be referring to non-GAAP figures on the call. Unless I specifically state I am referring to GAAP figures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in our earnings press release issued earlier today which is also posted on the investor relations section of our website.

Gross margins for the quarter were 66% with product margins of 62% and service margins of 74%. The positive gross margin bump was mostly attributable to the fact that we had minimal charges and product costs for inventory revaluations on the basis of lower cost or market. As inventory levels are low and component pricing has been relatively stable. Operating expenses were $28.1 million up sequentially from Q4 of $25.6 million primarily as a result of R&D spend which increased $2.6 million. Most of this increase was attributable to prototype expense that was incurred in the development of our new products.

You should expect to see R&D spend normalize in Q2 with the only significant change being the addition of the Tizor spend which is a recent acquisition we made representing an incremental $600,000 per quarter. All other operating expenses were essentially flat from Q4. Our total headcount at April 30^th was 409 people which was up from 400 people at year end and 294 from Q1 a year ago.

Operating income for the quarter was $1.7 million or 4% of revenue which was down from $2.8 million or 7% a year ago. As we indicated in our last conference call, we’ve continued investing on all fronts and we will stay the course on these initiatives with some exciting product announcements coming later this year.

Interest income declined sequentially to $310,000 from $420,000 in Q4 and decreased $1.4 million from a year ago. We recorded a $600,000 provision for income tax representing a non-GAAP effective tax rate of 27% and a GAAP effective rate of 23%. We expect that the Q2 through Q4 rates will be in the 25% to 26% range for both GAAP and non-GAAP. Net income for the quarter was $1.6 million or 3% of revenue down from $3.8 million or 10% of revenue in Q1 last year. Fully diluted earnings per share was $0.03 versus $0.06 a year ago.

If you step back and compare the performance year-over-year, on an after tax basis the interest income decline that I talk about and that was from $1.7 million last year to $300,000 this year or a decline of $1.4 million, that decline accounted for a $0.02 decline on an after tax basis and the Tizor acquisition accounted for a $0.015 decline or a combined $0.035 decline year-over-year.

Turning to the balance sheet, we ended the quarter with $156 million of cash and investments, down from $161 million in cash and investments at year end. This decrease in cash was principally the Tizor acquisition of $3.1 million and cap ex of approximately $2 million. Cash includes $49 million of auction rate securities net of impairments of $3.5 million. We had one liquidation during the quarter of these auction rate securities of $1.7 million which was liquidated at par.

Accounts receivable DSO was 54 days, well below our target range of 60 to 75 days and inventory decreased again to $17.4 million this quarter from $18.4 million at year end as a result of continued inventory management. Deferred revenue was $49.5 million at the end of the quarter, down from $58 million at year end. Product deferred revenue declined $6.8 million and maintenance deferred revenue declined $2.1 million and maintenance deferred revenue declined as the number of three year maintenance contracts has decreased substantially over the past year and is being replaced by one year contracts. This was simply a function of a change in our compensation plans for our sales reps. We still get, which is the more important point, we still get 100% attach rates on our maintenance contracts with the products that we sell.

So, the environment for our customers and prospects continues to be difficult which translates in to more uncertainty for our near term business. From a guidance perspective, we are not in a position of commenting on the year given this continued uncertainty in the economy. However, we are firmly committed to continuing to invest in our strategic initiatives to further strengthen the long term prospects of the company once the economic conditions improve.

I’d like to turn it now back over to Jim for some closing comments.

James P. Baum

In closing, I would just like to reiterate that while our customers and prospects are feeling pain in their own businesses and that pain is translating in to a lack of visibility for us, we are staying the course with our investments. We believe we’re making the right investments to build the right foundation to strengthening Netezza and put Netezza in an excellent position in the market over the longer term.

Now, we’d like to open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Kathryn Huberty – Morgan Stanley.

Kathryn Huberty – Morgan Stanley

I understand that near term visibility is low but we’ve now seen customers delay or slow spend for several quarters so just logically I’d curious what your thoughts are around how long companies can put off these projects just given how imperative this data is to running their businesses and making smart business decisions?

James P. Baum

I think from our sense what we’re seeing in the climate out there is I think during the first quarter we saw a fairly large number of transactions slip from Q1 into the future. In some cases that future is somewhat indeterminate but in most cases, in fact the vast majority of them they’re not transactions that have gone away so we look at that as a leading indicator. They’re not killed projects but projects that have been deferred.

I don’t think that our pipeline shows the data right now to support this statement but we do hear some anecdotal statements coming back from the field that say there appears to be kind of an uptick in activity in the back half of the year. Like I said, I couldn’t prove that to you quantitatively right now but qualitatively we are hearing that.

Patrick J. Scannell, Jr.

But, let me add to that and that is that as you know the base line of our business is the compelling need the customers have to fix a burning problem that they have or something that’s on fire that they have. So, even when we look at the 14 new customers as well as the repeat customers they’ve got this critical need and this problem and it’s a question of where this gets prioritized in the stack. We’ve heard that for those that are buying, it gets prioritized pretty high up in the stack. As Jim said, we do have some evidence that the back half of this year that this trend looks more favorable.

Kathryn Huberty – Morgan Stanley

Then, do you feel like you need IT budgets to really loosen up to reaccelerate revenue growth or are there other scenarios whether it be new products coming to market, new distribution channels that could allow you to reaccelerate growth earlier than the overall IT market?

James P. Baum

My sense is that as we look through the rest of this year our revenue will come largely through our additional channels, through our direct sales force and that direct sales force as you know is dependent on IT budgets. So, I think as we look forward sort of through the near term and the rest of the year, we don’t see any big changes in the selling model. We do have new products coming later in the year but they will be products that will be datacenter oriented products that address similar products to those that we address with the current product line.

Kathryn Huberty – Morgan Stanley

Then just lastly, Pat I understand that you don’t want to preannounce new products but from a big picture perspective, what’s new or different with the upcoming product launch that would drive such a large bump in R&D? I mean, it’s much larger than any bump we’ve seen sequentially in past product cycles. Does that speak to the breadth of the products, does it speak to the difficulty in new technology or is there something else?

Patrick J. Scannell, Jr.

It speaks to the breadth of the product offerings that are coming to market in products. That’s precisely it.

Operator

Your next question comes from Bill Shope – Credit Suisse.

Bill Shope – Credit Suisse

Looking at the deals that slipped, did these deals slip before you won the deal or was it still in the bidding process or did it slip after you had already beat out the competition?

Patrick J. Scannell, Jr.

I would say mostly they have slipped before a decision has been made on the vendor. There are a few that have slipped where we had won the deal technically but that’s the strong minority.

Bill Shope – Credit Suisse

Then looking a bit longer term, looking at ORACLE’s planned acquisition of Sun, how do you think that changes or doesn’t change the competitive landscape for you guys?

James P. Baum

I think that’s a complex question and I don’t think we can speculate too much on what ORACLE will do with Sun but I think there are a couple of factors to consider one of which is as you know, ORACLE database machine product is based on a partnership between ORACLE and Hewlett Packard and so I think this pending acquisition does call in to question the future for that partnership and I don’t think we have any real clarity yet on what it means but I think it certainly raises a significant question around it.

I think the other interesting observation is the idea of ORACLE creating appliances from the combination of Sun hardware and ORACLE software which has been to a large extent their stated strategy which in many respects we consider to be a fairly positive thing because it does once again, kind of drive some additional credibility in to the appliance approach in the market which is one where we’ve been kind of standing out alone for a while. So, it gives some additional creditability to that delivery mechanism.

Operator

Your next question comes from Nabil Elsheshai – Pacific Crest.

Nabil Elsheshai – Pacific Crest

If you really step back and kind of since last year a lot of things have changed both in competitive and macro, if you look out and look at kind of your steady state gross rate when things return to normal, do you have a sense on what you guys think you can grow at a normalized IT environment even with the changes in the competitive landscape?

Patrick J. Scannell, Jr.

If you strip out the economic uncertainty and where we’ve been, and we go back a year ago, we would have been talking about growth rates in the order of 25% to 30%. Given the current economic uncertainty that we have today, that’s all off the table. It would be irresponsible for us to project and to say any type of growth rate in this environment because of the lack of visibility and because of the uncertainty and because decisions, buy decisions that get taken off the table mid sales cycle. So, as we are sitting in this economic stuff today, it’s difficult for us to project. We think when this rebounds, whenever that may, that we’re positioned very nicely to take advantage of that.

Nabil Elsheshai – Pacific Crest

Then if you just look at the ORACLE competitive landscape it sounds like some of the deals that maybe had been delaying have at least closed, I’m assuming though that it’s still delaying some deals. Can you talk a little bit about those types of customers, I presume that they’re within the ORACLE install base and the fact that the customer would have to switch off of ORACLE tilts things in the favor of ORACLE with the new solution in some cases?

James P. Baum

What we’ve seen, we seem to be calling on obviously many ORACLE customers and we have been calling on them for some time and we do see the ORACLE [inaudible] data solution there, it clearly has visibility. I would say that in our immediate pipeline we haven’t see it slow up too many of the deals that we’re directly working on. I would suggest though that there are plenty of places where ORACLE is that we are not.

So, we know that in our customer base and in our prospect base it’s visible and prevalent and there are a few cases I can point to where they’ve slowed it down. Outside of our customer base we know that they’re involved in opportunities that we’re just really not seeing.

Operator

Your next question comes from Glenn Hanus – Needham & Company, LLC.

Glenn Hanus – Needham & Company, LLC.

Maybe you could give us an update on the EMC partnership and what’s happening out in the field, how it might be benefitting the pipeline and to the extent that there are some joint engagements?

Patrick J. Scannell, Jr.

I would say that the EMC partnership it remains intact but it has not proven to be a large driver of lead flow in the pipeline. We continue to engage what I would consider tactically in the field as appropriate but it’s not been a major driver of new opportunities for us.

Glenn Hanus – Needham & Company, LLC.

How about internationally, last quarter you had some management changes, sales changes in the EMEA area. It sounds like the percent of sales, it’s been fairly stable. Maybe talk about progress internationally and demand trends you’re seeing by region?

James P. Baum

The change actually was the beginning of September that change was effective and I think we’ve stabilized and have got excellent leadership both on the European front as well as on the Asian front. I think we’re seeing the same trend there internationally as it relates to economic uncertainty that we have here in the United States. But, we believe that we’ve got the right teams in place and are positioned again, when this thing rebounds to take advantage of that.

Glenn Hanus – Needham & Company, LLC.

How about on the sales force productivity, I think last quarter you mentioned 34, 35 of the guys had been there for nine months or so and were presumably pretty much at full productivity. How do you feel you’re coming along there with the current 50 group?

Patrick J. Scannell, Jr.

So the math today is that we have 50 on board and of those 50, 36 are at a year or more of Netezza experience. So again, from an engine standpoint, that capacity is really going up the curve and gain, we’re positioned when this thing comes back for those reps to take advantage of that.

Operator

Your next question comes from Alex Kurtz – Merriman Curhan Ford.

Alex Kurtz – Merriman Curhan Ford

Jim, can you talk about either the 2550 from Teradata and sort of how that’s trending competitively against what you guys are putting out there? Have you seen changes quarter-over-quarter where that’s getting a little bit more in to the market and you’re seeing it on a more regular basis?

James P. Baum

What we’ve seen from Teradata is they have a lower end product now below the 2550 and the 2550 and the 5000 series product line and they’re competitive strategy has been one of being able to move the customer around in these product lines to kind of meet customers’ pricing objectives. In some cases they’ve been able to move the customer up from the 500 series in to the 2550 and in some cases from the 2550 up to the 5000 and in some cases they’ve sold the product.

So I can’t say that competitively we’ve seen anything really different in terms of the 2550 specifically but we’ve seen them certainly deploy this selling strategy and as I mentioned in my prepared comments, in some cases somewhat effectively. I think the other comment I would submit regarding competitive with Teradata in this environment is that we have seen Teradata be very aggressive on pricing in several opportunities.

Alex Kurtz – Merriman Curhan Ford

Then a couple of questions for Pat, with the new product due out later this year, what happens to pricing in the near term and sort of how are you communicating that to customers?

Patrick J. Scannell, Jr.

As we go through any introduction of new products we take advantage of that and perhaps would offer a discount but, no discounts that are greater than any discounts that we’ve offered previously. I think that we’re just in the mode of trying to look at our install base and take advantage of the buying patterns of our install base to go back and sell to them existing technology.

Alex Kurtz – Merriman Curhan Ford

As a follow up then Pat, on the gross margin line, how should we think about that going in to the next couple of quarters here? Do you sort of see what you guys did in the April quarters as somewhat sustainable or going back to more traditional levels?

Patrick J. Scannell, Jr.

I think it would be more going back to the traditional levels and as I said in my prepared comments, the 62% gross margin was because of the fact that number one, we have relatively reducing inventory and the second piece of that is very little component pricing changes. I think as the product line expands, you’ll see much more movement in pricing therefore, much more accounting impact on that such that you’ll see the gross margin come back to the 60% which we guided all along.

Alex Kurtz – Merriman Curhan Ford

Just last question for you Pat, on the deferred revenue line obviously down quarter-over-quarter. Can you just give us a sense, a little bit more detail about the breakout of that and sort of where you were hit hardest on the current and long term deferred revenues?

Patrick J. Scannell, Jr.

So deferred revenue was down $9 million, $6.8 of that was product and the balance was maintenance. Now, Alex is there something more that you wanted to know besides that? I’m not sure I’m answering your question.

Alex Kurtz – Merriman Curhan Ford

Just as a leading indicator of just sort of demand going in to next quarter.

Patrick J. Scannell, Jr.

Deferred revenue as we’ve said all along moves based on us fulfilling customer demand and as we deliver the customer goods or complete acceptance or feel that the credit is worthy, we’ll score the revenue and it’s not a leading indicator.

Operator

Your next question comes from Brian Denyeau – Oppenheimer & Company.

Brian Denyeau – Oppenheimer & Company

So if we could just talk about the demand environment for a second, as you look out for the rest of this year are you anticipating it getting status quo, getting worse, getting better? I’m just trying to figure out if this is as bad as you think it’s going to be this year?

James P. Baum

I think as we look out Brian at the demand environment, as I mentioned to Katie in her question earlier, we’ve heard some anecdotal evidence in the market that activity near the back half of the year seems to be picking up a bit but I can’t prove that quantitatively when we do our pipeline analysis. So, my perspective on it is that we don’t see it markedly improving through the rest of the year and I wouldn’t say that we see it getting substantially worse either. So, I guess the short answer is kind of status quo from where we are today.

Brian Denyeau – Oppenheimer & Company

So I mean would it be fair to say that given where you are today that you still feel that the environment doesn’t change from where you are today that you could potentially still grow product revenue this fiscal year?

Patrick J. Scannell, Jr.

It’s difficult to say that Brian.

Brian Denyeau – Oppenheimer & Company

Well, put it this way, would it be unreasonable to think that?

Patrick J. Scannell, Jr.

You have to draw your own conclusions based on the fact that we’ve said no guidance.

Brian Denyeau – Oppenheimer & Company

Then on the R&D thing were you anticipating all along that level of spend in terms of prototypes in terms of getting the new products out?

James P. Baum

The effort to get the new products out is substantial. We expected to incur the level of spending that we incurred and how it ends up on the P&L and balance sheet is a function of where we are in that product development cycle. That was all planned spend.

Operator

Your next question comes from Jayson Noland – Robert W. Baird & Co.

Jayson Noland – Robert W. Baird & Co.

Regarding the new products and I recognize there’s only so much you can say but is this something that would be an evolution of your current portfolio or is there something larger that we should expect?

James P. Baum

We’re really not in a position now where we want to preannounce new products. What I would say to you is that we have as you can see in the R&D spend on the P&L, we have a very significant effort underway internally around new product offerings and you can expect to hear a lot more detail about that over the next several months.

Jayson Noland – Robert W. Baird & Co.

A couple of questions on pipeline, I guess are you talking Jim specifically about fewer projects or just simple more uncertain close rates?

James P. Baum

I would say that the aggregate sort of top line value of the pipeline, we haven’t seen a significant decrease in it. What we are seeing are some real challenges around timing. In Q1 we saw more of our pipeline slip out of the quarter than we’ve seen historically. When we do a deep dive analysis of that pipeline and the slippage trends and the causality behind it, what we see in that pipeline is that it’s based on deferments that are typically budgetary in nature so that’s what creates a lot of uncertainty for us in the near term.

Jayson Noland – Robert W. Baird & Co.

Then last question for me, I believe Pat had mentioned 100% maintenance attach, have you had to offer concessions against that maintenance just given macro related issues?

Patrick J. Scannell, Jr.

No, we’re fortunate in that regard.

Operator

Your next question comes from Nathan Schneiderman – Roth Capital Partners.

Nathan Schneiderman – Roth Capital Partners

Jim, I was hoping you could clarify the comments you made on the pipeline hit and weak visibility. Perhaps, can you compare the pipe you have running in to Q2 with that you had running in to Q1 just to give us a better sense of how things have changed?

James P. Baum

Nate, I think the primary distinction is the one that I’ve mentioned and it is one of timing uncertainty. We’ve seen when we look internally at our pipeline and our visibility and we look at reasons why things are slipping, they’re typically slipping based on budgetary deferments. We have seen some percentage of the pipeline in a category of went away, in other words projects were killed by the prospects but that’s not the majority, that’s the minority of the pipeline. So, generally the challenge we have with the pipeline now is one of timing more than quantity.

Nathan Schneiderman – Roth Capital Partners

I gather though by your comment that the aggregate value did not decline significantly, that it did decline though?

James P. Baum

How do you get to that conclusion?

Nathan Schneiderman – Roth Capital Partners

Well, let me ask it this way, do you feel the aggregate value of the pipeline grew?

James P. Baum

I would say the aggregate value of the pipeline has remained relatively flat Nate.

Nathan Schneiderman – Roth Capital Partners

Then, a question on seasonality of the business, are you expecting normal seasonality going forward which I understand as Q1 is the low point and then every quarter thereafter is sequentially up?

Patrick J. Scannell, Jr.

Nate, the only comment we make on seasonality is the Q4 to Q1 and outside of that we talk about just annual guidance which we’ve opted out of that given the economic uncertainty. So, there’s really no answer to that.

Nathan Schneiderman – Roth Capital Partners

Do you feel that Q2 revenue will be up sequentially?

Patrick J. Scannell, Jr.

This is a difficult year, this is difficult times, this is different times and again, it’s inappropriate for us to comment on that when we’ve seen we’re not given quarterly or annual guidance.

Nathan Schneiderman – Roth Capital Partners

Can you clarify, I was a little confused on your comment about how to think about R&D going forward. So, versus the $11.6 number for Q1 what sort of levels are you expecting in Q2 and beyond just on a dollar value?

Patrick J. Scannell, Jr.

[Inaudible] is the GAAP number and what I was talking about was non-GAAP which was the $10,976,000 number. What that $10,976,000 on a non-GAAP basis is, $2.6 million in that number and if you look at the Q4 number which is $7 million in change and you look at the increment off of Q4 which is roughly $600,000 that’s your baseline going forward and that will increment slightly from there. That’s what I meant.

Nathan Schneiderman – Roth Capital Partners

Final question, you alluded to some deals closing already during the second quarter, I was just hoping you could characterize your month one start? Has it been fairly typical versus past years or do you feel you’re off to a stronger or weaker month one start than recent Q2s?

Patrick J. Scannell, Jr.

Nate, I think what I said in my prepared comments was in the context of competing against ORACLE and mentioning that there were a number of opportunities where we are still competing against them and we were confident that at least one of those would close in our favor in the quarter, I didn’t say in the month.

Operator

Your next question comes from Rajesh Ghai – ThinkEquity.

Rajesh Ghai – ThinkEquity

Just one clarification on the comment you made about pickup in activity, is that in terms of close rates or in terms of new sales cycles getting initiated?

James P. Baum

I don’t recall us talking about that.

Rajesh Ghai – ThinkEquity

The anecdotal evidence you said is the back half of the year?

James P. Baum

I would say what we’re seeing again, our perspective on this is that our anecdotal evidence is sort of what we’re hearing in some cases in the marketplace is that customers are seeing that some of these deferred projects could come back on the docket in the back half and later back half of the year. What I would also reiterate with you though is that we haven’t seen good solid quantitative evidence in the pipeline to support that. So, my take away from that is to the question earlier of do we see the market getting worse, or getting better, or remaining status quo my perspective on that is that we see it remaining status quo with perhaps some anecdote showing a slight uptick in the back half of the year in activity.

Rajesh Ghai – ThinkEquity

Given though your typical sales cycle is about nine months, is it safe to assume that any product revenue that you book in the next couple of months is going to be corresponding to sales cycles that were initiated in the second half of the last calendar year?

James P. Baum

No, that varies. Some of the sales cycles for our install base are shorter and perhaps are sales cycles that get initiated this quarter and close this quarter and some sales cycles do in fact have been going for and been prosecuting for a year. So, it’s a mixed bag there.

Rajesh Ghai – ThinkEquity

If my math is correct, your North America revenue was actually flat with respect to the last quarter. Is there a relative stabilization in demand in North America, can we read anything from that or too premature?

Patrick J. Scannell, Jr.

No, I wouldn’t draw any conclusions from that given the economic backdrop that we have. I don’t think that there’s enough of a data set there for us to do that.

Rajesh Ghai – ThinkEquity

One last question, on the product roadmap there’s been a lot of buzz surrounding cloud computing and related to that is the buzz around leveraging commodity hardware for large systems which has actually become stronger over the past few months. Has that in any way impacted your business given that some of your smaller private competitors seem to be going the route of offering pure software and leveraging [inaudible] hardware? Do you in the future [inaudible] a pure software solution which leverages commodity hardware?

James P. Baum

We don’t think it has, as I mentioned, our competitive landscape in the quarter and frankly typically is ORACLE and Teradata and to a lesser extent IBM. We have seen some of the smaller companies and startup companies in the market and we’ve seen some of them really struggling in the market. Cloud computing as you say has a fair amount of buzz around it and we’re obviously very familiar with cloud computing and sort of where databases in the cloud stand and it’s an area of research interest for us that clearly is not something that’s yet gone mainstream so it’s something that we look at as a future roadmap possibility.

Operator

There are no further questions. I would now like to turn the call back over to Mr. Jim Baum for any closing comments.

James P. Baum

Well, I just wanted to thank you all for participating in the call. As I said earlier, we do remain very enthusiastic about the long term opportunity here at Netezza. We believe that we are making the right investments in product, technology and distribution to position the company in a very strong position in the marketplace as the economic situation begins to right itself. Although, as I mentioned and we talked quite a bit about, we do remain somewhat challenged here in the near term with shorter term visibility.

Thank you all for the call and we appreciate your comments.

Operator

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

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