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Sourcefire Inc. (NASDAQ:FIRE)

Q2 2009 Earnings Call

July 30, 2009 9:00 am ET

Executives

Tania Almond – Investor Relations Officer

John Burris – Chief Executive Officer

Todd Headley – Chief Financial Officer

Tom McDonough – President and Chief Operating Officer

Analysts

Adam Holt – Morgan Stanley

Rob Owens – Pacific Crest Securities

Todd Weller – Stifel Nicolaus

Katherine Egbert – Jefferies & Company

Aaron Husock – Lanexa Global

Operator

Welcome to the second quarter 2009 Sourcefire earnings conference call. (Operator Instructions) I would now like to turn the presentation over to our host for today's call the Investor Relations Officer with Sourcefire, Tania Almond.

Tania Almond

Joining me today on the call is John Burris Sourcefire's Chief Executive Officer, Tom McDonough Sourcefire's Chief Operating Officer, and Todd Headley our Chief Financial Officer.

Before we begin, I must remind you that statements made in this conference call and in our public filings, releases and website which are not historical facts maybe considered forward-looking statements that involve risks and uncertainties and are subject to change at any time. We caution investors that any forward-looking statements made by us are management's belief based on currently available information and should not be taken as a guarantee of future results or performance, which may differ materially as a result of a variety of factors discussed in our earnings release that was issued today and in our latest Form 10-Q filed with the Securities and Exchange Commission in May 2009.

We disclaim any obligations to update any of these forward-looking statements or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments. There is more complete information regarding forward-looking statements, risks and uncertainties in the company's filings with the SEC available on our website www.sourcefire.com.

In addition, we may discuss non-GAAP financial information on the call. This information is reconciled to comparable GAAP financial information in the earnings release. The full earnings release can be found on our website. An online replay of this call will be available on the investor section of the website for at least 90 days.

With that, I'll turn the call over to John Burris Sourcefire's CEO.

John Burris

This is the first time we're having a morning call in response to feedback we received, so hopefully this is a more convenient time for everyone.

Let's start today's call with a brief review of the quarterly results, we'll highlight some of our accomplishments in the second quarter, and provide an update on trends in the business. I will then conclude with our financial guidance for the third quarter of 2009.

As we announced in our press release earlier today, total revenues for the second quarter of 2009 were $22.2 million that's 38% above second quarter of 2008 revenues. GAAP net income was $0.6 million in the second quarter of 2009 that's a positive $0.02 per share compared with a loss of $3.1 million or a loss of $0.12 per share in a year ago period. Adjusted net income was $2 million in the second quarter of 2009 or a positive $0.07 per share.

Earlier this month I marked my one year anniversary as CEO of the company. Upon joining Sourcefire, I publicly stated four central areas of focus for the company, growing revenue in the low double-digit range, controlling operating expenses, leveraging our channel relationships, and attaining full year profitability on an adjusted basis.

We had very strong results on all key financial metrics in the second quarter exceeding the top end of our previously announced expectations for revenue, net loss which actually became income, and adjusted net income. Given the challenging global economic environment and mixed results from other public companies this earning season, I am delighted with continued improvement in Sourcefire's bottom line and the fact that on a GAAP basis we were profitable in the second quarter.

Besides the revenue growth, we achieved this profitability by improving our operating expense margin versus the same quarter last year. I believe we are working all the right levers and can now make a few opportunistic investments in the business without compromising profitability.

Our international business is up 23% year-to-date versus the same period of 2008. Overall look at our second quarter '09 shows revenues of $4.2 million down slightly from $4.5 million in a year ago quarter. Included in international revenue is the vast majority of our OEM business.

A year ago we had active revenue producing arrangements with both Nokia and Nortel. Today, both of those arrangements are no longer active. Nokia's security group was acquired by Check Point in April of 2009 and Nortel has ceased activities around their security product line and incorporated Sourcefire technology.

We're disappointed with the turn of events we have deployed those resources to other areas of our business with very positive results. Our EMEA business has grown nicely over the past year, while our Asia Pacific business has been softer than expected due higher discounting practices from aggressive competition and a pronounced economic downturn. We'er committed to expanding our presence in Asia Pacific and in other international geographies and believe overtime that our international channel initiatives have the potential to grow to a much larger percentage of our total revenue.

We have recently appointed a managing director of Asia pacific operations in order to help us take advantage of the opportunities we see in the region. A sampling of additional investments and accomplishments in this area during the second quarter include the closed two transactions in EMEA greater than $500,000. We achieved EMEA channel end business of 58% of total revenue in the second quarter.

We added six new EMEA partners located in Germany, Finland, Poland, Denmark, Oman and Israel. We won our first six figure win in India, booked a strong quarter in Australia with multiple six figure transactions, expanded our sales force and a new person for the Middle East based in Dubai, and most recently we named a security industry vice president of worldwide channel sales.

U.S. federal sector performance remained strong in the second quarter with revenues of $6.9 million or 31% of total revenues versus the year ago period revenues of $2.1 million or 13% of total revenues, that's up 233%. We announced that Sourcefire signed an agreement with SRA International Incorporated to resell the Sourcefire 3D system to federal government customers. The Sourcefire 3D system will now be available to federal customers as a component of SRA's comprehensive cyber security offering SRA One Vault, and as part of its leading managed security service.

As we've been talking about for a couple of quarters, the CNCI that's Comprehensive National Cyber Security Initiative the economic stimulus package and the fiscal 2010 federal budget all contain incremental investments in cyber security initiatives within the federal sector. We expect these factors, in addition to our normal federal sales opportunities, to continue to positively influence our federal business throughout 2009.

On the U.S. commercial cyber business, we grew revenues 18% over the second quarter of last year and 16% year-over-year. This team, our largest, continues to perform solidly in the face of the worst U.S. economy in decades. In the quarter, we also announced the Sourcefire 3D System 4.9 with the new Sourcefire Virtual 3D Sensor and Sourcefire Virtual Defense Center. These new virtual appliances will enable users to deploy the company's leading security solutions within their virtual environments increasing protection for both physical and virtual assets.

Available during the fourth quarter of 2009, the Sourcefire 3D System 4.9 also features the industry's first policy layering capabilities that deliver increased customization for large or multi-organizational networks, including cloud or virtual implementations. Additionally, we engineered the new 3D6500 Sensor offering up to 4 gigabytes of IPS inspection in a 2U form factor appliance while providing the ability to interface with 20gig fiber networks.

We will continue to invest in research and development as we believe innovation is a top requirement in order to remain in a leadership position in this industry. We continue to receive accolades in terms of third party recognition. During the quarter, we received the following awards. We were recognized with the Reader Trust Award in the 2009 SC Awards. Snort was named Best Intrusion Detection Prevention Solution. We were also named one of Network World's 2009 Best of Tests winners. The Sourcefire 3D System was the sole winner in the security category.

The Sourcefire 3D System was recognized for its ability to make network protection easier and more effective. Sourcefire also awarded our own scholarships this quarter recognizing use of Snort as an educational tool. We announced the winners of our fifth annual Snort Scholarship Program. Two $5,000 cyber security scholarships to deserving university students using Snort to provide real-world experience in network security. We think it's an important investment to support the open source community and the future Snort leaders of the IT world.

Now, regarding our outlook for the third quarter of 2009, we expect revenue in the range of $24.8 million to $26.3 million. We expect net income per share in the range of $0.03 to $0.06 and on an adjusted basis net income per share in the range of $0.8 to $0.11. Our expectations regarding adjusted income per share, excludes stock-based compensation expense in the expected range of $1.4 million to $1.7 million.

Based on our year-to-date performance, we now anticipate full year 2009 revenue growth in at least the mid-20% range. As far as spending is concerned, we want to make sure we find the right balance between prudent expense management and smart investing to support our future growth.

In this regard, we think we've arrived at a more predictable run rate for the G&A line, while we plan to invest more aggregate dollars in R&D to support our product innovation and in sales and marketing to support our plan market expansion. We anticipate profitability on both an adjusted basis, as well as a GAAP basis for the full year of 2009.

With that, I'll hand it over to Todd Headley Sourcefire's Chief Financial Officer for a more detailed review of our performance for the second quarter.

Todd Headley

Starting with the statement of operations, as John noted, in the second quarter of 2009 we achieved a 38% increase in total revenues over the second quarter of 2008. We segment our revenues into two categories, products and services. Total product revenues for the second quarter of 2009 were $12.3 million up 42% from $8.7 million in a year ago period. As John noted, earlier this year we released a multi-gig sensor with 10 gig interfaces. Uptake of this product and sales of our other high performance 3D center products in both federal and commercial accounts led to the majority of the product revenue increase.

Service revenues in the second quarter of 2009 were $9.9 million compared with $7.3 million in the year ago period or an increase of 35%. The increase in service revenue primarily resulted from providing technical support to an expanded install base of 3D customers. In the second quarter of 2009, our revenue composition yielded the following, 41% from existing customer product sales, 15% from new customer product sales, 40% from technical support services, and 4% from professional services and training. This compares with 38%, 16%, 40% and 6%, respectably in the year ago period.

A nice attribute of a typical Sourcefire customer is that they have several locations and centers, and once we win the account they tend to buy our products over multiple quarters as they deploy our technology. During the quarter, our sales force and partner channel closed 41 six figure transactions, 18 of which represent new Sourcefire 3D product customers. Seven transactions were in excess of $500,000. This compares to 33 six figure transactions in the year ago quarter, none of which were in excess of $500,000.

Additionally, revenue distribution by fulfillment method yielded 71% through partners while 29% was taken directly. This waiting towards indirect distribution is a result of our continuing efforts to leverage our go-to-market strategy on a global basis.

Turning to cost of revenue, the total cost of product revenue in the second quarter of 2009 was $3.7 million, which compares with $2.5 million in the year ago period. The increase in product cost of revenue was primarily driven by the higher volume demand for our sensor products for which we must procure and provide the hardware platform to our customers, and a write-off of excess inventory of 833,000 due in part to the new products we introduced.

In the second quarter of 2009, our product gross margin was 70% down slightly from 71% in the year ago period. While we did experience some additional product discounting in the second quarter due to competitive and global economic factors and also recorded the write-off noted above, this was positively offset by lower unit costs on our new sensor models.

Cost of services revenue in the second quarter of 2009 was $1.4 million, which compares to $1.2 million last year. The increase in our service cost of revenue was primarily attributable to an increase in the amount we pay to third parties to manage and service the hardware component of our products for expanded install base of customers and our hiring of additional personnel to the customer support team.

The service gross margin in the second quarter of 2009 was 86% up from 84% in the year ago period. Thus while we increased our spend to better service our install base of customers, the addition of new customers and our high customer support renewal rates led to the improved margin. Total blended gross margin in the second quarter of 2009 was 77% identical to that experienced in the second quarter 2008. Given today's more difficult global environment and the write-off I noted previously, we are pleased to sustain gross margins in line with our historical experience.

Regarding operating expenses, John already touched on the company's ability to better manage them while still investing in areas of the business that more directly impact our top line growth. Our research and development expense increased to $3.4 million in the second quarter of 2009 from $3.1 million in the second quarter of 2008, and decreased as a percentage of revenue to 15% from 20%.

As mentioned on previous calls, we continue to invest more aggregate dollars in driving product innovations and enhancements, primarily through the hiring of additional engineering personnel. We are also seeing leverage in our business model in that as a percentage of revenues this metric is now more in line with our peers.

Sales and marketing expense totaled $8.4 million in the second quarter of 2009 up from $7.9 million in the second quarter of 2008, and as a percentage of revenue totaled 38% compared to 50% last year. The increase in the amount of sales and marketing expenses was primarily due to the hiring of additional international and federal sales personnel, better throughput from our channel, and additional incentive compensation due to the achievement of a higher sales volume.

In line with John's previous comments regarding our focus on international expansion and better leveraging our growing channel, we anticipate making incremental investments to additional international sales personnel and channel partners and programs throughout the rest of 2009.

General and administrative expenses were $4.0 million or 18% of revenue in the second quarter of 2009 compared to $4.5 million or 28% of revenues in the year ago period. As stated on our last few calls, we anticipate lower G&A expenses in 2009 compared with that experienced in 2008 and a corresponding reinvestment of those dollars into research and development and sales and marketing.

Total operating expenses for the second quarter of 2009 were $16.6 million, which compares to $16.2 million in the second quarter of 2008, an increase of only 3%. This modest increase in operating expenses coupled with double-digit revenue growth resulted in second quarter 2009 operating income of $500,000 compared with an operating loss of $3.9 million in the second quarter of 2008. Again, this reflects the company's better expense management while still focusing on key top line growth drivers.

In the second quarter of 2009, the company's GAAP net income was $600,000 or $0.02 per share compared with a GAAP net loss of $3.1 million or $0.12 per share in the second quarter of 2008. The average basic shares outstanding in the second quarter of 2009 were 26.2 million, and on a diluted basis were 27.6 million. While for the second quarter of 2008 the corresponding figure was 25.2 million on both the basic and diluted basis.

Included in GAAP net income for the second quarter of 2009 was a non-cash stock-based compensation charge of $1.4 million. This compares to non-cash stock-based compensation charges of $0.9 million in the year ago period. Excluding non-cash stock-based compensation expense, our adjusted net income for the second quarter of 2009 was $2.0 million or $0.07 per share. This compares to an adjusted net loss of $1.9 million or a loss of $0.07 per share in the second quarter 2008, which excludes non-cash stock-based compensation, as well as CEO transition expenses.

As of June 30, 2009 cash, cash equivalence and investments totaled $108.3 million, as such we believe that Sourcefire's adequately capitalized to execute on our strategic initiatives. Reflecting the global economic challenges in tighter credit markets, a portion of our customers and partners are paying us a few weeks beyond terms or are asking for extended terms. Our terms typically span from 30 to 60 days.

Given the annual seasonality of our business towards the second half of the year and the spike in our billing the last two weeks of a typical quarter, a linear calculation of our day sales outstanding exceeds 90 days. Our AR balance spikes at the end of each quarter and then dips markedly intra-quarter as we get the vast majority of collection within terms only to spike again at the end of the subsequent quarter. We continue to monitor our credit and collections closely.

All investments held by the company are executed by experienced investment managers and are made in compliance with the company's investment policy. As of June 30, 2009, no investment had an Other Than Temporary Impairment or OTTI and all maturities of our investments during the quarter occurred at their full par value. Thus while our earned interest income is down significantly from the year ago period due to the general decline in interest rates, we believe that our current portfolio remains unimpaired.

With that, operator, we would now like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Adam Holt from – Morgan Stanley.

Adam Holt - Morgan Stanley

A couple questions about the top line. You had a particularly strong federal quarter, I was wondering, with the aggregation of large deals particularly good in the federal quarter and would you expect to see the normal uptick into the federal year-end spend in September even off of such a good second quarter for you all?

John Burris

We want to know how you like this morning time slot by the way. I'm going to hand this over to Tom McDonough our COO.

Tom McDonough

To answer both of your questions, yes, Q2 we saw the same seasonal deal flow in the federal space that we historically have, and Q3 we expect it to perform in accordance with the way we performed in other prior Q3s in the federal quarter in the fiscal federal year. It's a great space for us. We provide a great solution to the federal government and we see that business continuing to grow at a pretty rapid rate.

Adam Holt – Morgan Stanley

A quick follow up if I could, as you look in the back half, obviously, you're feeling better about G&A. You talked about investments in sales and marketing. Can you update us on where you are in terms of your sales headcount and how you're thinking about capacity as you look at a pretty strong pipeline to the back half?

John Burris

Well, this is John. I'll let Tom comment on it, but we're doing this with basically a flat headcount this year, so we know we can't do that forever. So we want to make sure that we were hitting all of our goals and objectives and we are. So we want to now start going to modest investments particularly in sales and marketing, but more importantly in our R&D. We want to make sure we're doing some things there too.

The channel leverage that we were so focused on is definitely helping us. We wouldn't be able to do this any other way with that same fixed headcount, because if you look at our headcount, we're up like 10 people this year or something like that, it's really small. So, Tom, any color on the sales thing?

Tom McDonough

Yes, Adam, from a headcount perspective, as John said, we've been relatively flat. We've added sales headcount in security engineers on a pretty tactical basis. But, as you heard in John's comments, we're planning on adding headcount both internationally and in the U.S. and we're going to start to add some of that headcount here in Q3 and Q4, primarily focused around federal business. And we're going to add headcount into Asia, as well as into EMEA. And then in Q1 of next year we'll continue to add headcount and probably expand having some direct headcount in Latin America.

Adam Holt – Morgan Stanley

I'll just ask one more because you brought up the hiring internationally. The international business was not quite as strong as the U.S. Do you think that that's a sales issue or is that really a question of continue to gain scale?

Tom McDonough

Yes, I think it's the latter. It's an issue to continue to gain scale. We saw some softness in southern Europe, but the other parts of Europe were strong for us. And, like I said, we're going to continue to add sales and security engineering headcount into that region.

John Burris

Yes, we probably have suppressed that business a little bit by not hiring faster because of the environment, and we want to take advantage of what we see there. I wanted to make sure in my prepared comments no one was confused because what we were trying to explain is the OEM business in the past we tried to normalize that out to show you the growth because the channel business itself is doing very well in Europe.

And because of the Nortel and Nokia takeout it made our numbers look a little bit weird there, but are very, very confident in what's happening in EMEA and we do think we have execution upside in Asia PAC for sure and that's part of why we had changed that.

Todd Headley

Well, we're up 23% year-to-date internationally and if you stripped out the OEM business, which we've told you has basically gone to zero because those relationships have basically ended, it's up a lot more than that. So just wanted to make sure we clarified if you look at it year-over-year Europe definitely is up sequentially.

Operator

Your next question comes from Rob Owens – Pacific Crest Securities.

Rob Owens – Pacific Crest Securities

Couple of questions, first of all on SRA, how long does it take to get a partner like this spun off and when do you think it will start be additive to the federal side?

Tom McDonough

Rob, this is Tom. It took us about a year to formalize that relationship with SRA. And actually it's interesting that they approached us as opposed to us approaching them initially because of the activities that they saw us conducting with the government. But we do have other conversations going on with other comparable partners out there, and I think you're going to see some formalized relationships being announced here in the next couple of quarters as well.

Rob Owens – Pacific Crest Securities

Given that they're building [knocks] across a lot of the government, does that potentially impact revenue right away given some of those schedule, because I would assume that since you've been in discussions for a year with these guys, everything's baked at this point and they have projects that they're ready to roll forward with?

Tom McDonough

Yes, absolutely, they're baked into a number of different programs and frankly that's the reason that they formalized the partnership with us.

Rob Owens – Pacific Crest Securities

Secondarily, on the revenue strength that you guys are seeing are these green field opportunities? Does this increase network security capacity or competitive replacements? Can you just give us a little color there?

Tom McDonough

Yes, frankly it's a little bit of both. Its tech refreshes, which are basically competitive replacements. We're growing at about 2.5 times the market rate right now and when you do that, obviously, you're replacing your competitors. Some of the other opportunities that we're winning are new opportunities within large global enterprises where we hadn't already established a base. So it's really a combination of the two.

Rob Owens – Pacific Crest Securities

And which competitors do you think you're displacing the most?

Tom McDonough

I would say that we're displacing IBM the most right now, ISS.

Operator

Your next question comes from Todd Weller – Stifel Nicolaus.

Todd Weller – Stifel Nicolaus

Just a couple of questions, certainly the government business continues to be strong, just talk about kind of any new projects you see on that horizon and maybe any commentary around the RFIs out of DHS and [DSA] as far as kind of whether your products are suitable for those kind of projects there?

Tom McDonough

Todd, we can't really comment specifically on customers or projects. I think the best way for us to address it is that we know that we're benefiting from CNCI, as John alluded to in the script, but we're also benefiting from the normal organic network security requirements that are being driven out of the federal agencies. And to me that's a big positive for the company because it means that we're not just seeing business that's going to be a spike. It's organic run rate business as the agencies deploy more security technology to protect their networks.

Todd Weller – Stifel Nicolaus

Tom, could you comment broadly on those RFIs that are out there whether intrusion detection solutions would be a component or likely component of those solutions that the DHS and [DSA] are looking for? One of those I think is to protect the dot gov domain?

Tom McDonough

Right, yes, Todd, the answer to the question is yes.

Todd Weller – Stifel Nicolaus

Then second question just around your margin trajectory and goals. Could you talk about how you guys are thinking about kind of where this business goes long-term from a margin perspective?

Todd Headley

Todd, its Todd Headley. Again, we're really pleased as we've kind of transitioned to a couple of new high end platforms and we've been able to maintain our historic gross margin percent. The economy feels like it's in recovery. Some of the news out there is starting to get better, but maybe the worst isn't over yet. So we're seeing more significant discounting.

I think Tom talked about that in Asia Pacific most specifically. And so there's a lot of factors that weigh into that margin, including the cost of our platforms, which we've been able to reduce on some of these higher end platforms that have been introduced over the last two quarters.

So long-term we think if we can stay here, this is a really good spot for us. If we come out, when we come out with the virtualized product, obviously, that would be software only. That will be much more margin friendly so there could be some upside there, but it's a little bit too early to see it at this point.

Operator

Your next question comes from Katherine Egbert – Jefferies & Company.

Katherine Egbert – Jefferies & Company

Just to follow on the question about SRA, how big can this relationship be? Can you give us a sense of the scope and the ones you're looking at in a follow-on that would be similar in scope?

Tom McDonough

Well, SRA last year, Katherine, if I remember correctly they did about $1.5 billion in revenue and they're focused on different aspects of the federal business, but they have a pretty strong security practice. And as a result of that, they recognized that we were best in breed technology. I think wherever there's a network security opportunity using IDS or IPS they're going to lead with us. So from that perspective it really depends on the opportunities that they get baked into.

To answer the second part of your question, all the big integrators out there now have very active cyber security practices, and they recognize the strength of our value proposition and we're having conversations with. And as I said earlier, I think you're going to see some more announcements here in the next couple of quarters. It's good for Sourcefire.

Katherine Egbert – Jefferies & Company

Are there specific targets or commitments that they've made to you as part of this deal or is it just best efforts?

Tom McDonough

I can't answer that question.

Katherine Egbert – Jefferies & Company

Tom, can you tell us how federal did in past June to September periods, what the percentage uplift was?

Tom McDonough

I think Todd's got the stats for that one.

John Burris

Yes, we have that.

Tom McDonough

For the last four or five years, Katherine, just off the top of my head I know we've had a pretty sizable spike in terms of Q2 to Q3 business, because it's the end of the federal fiscal year.

John Burris

Snort's pervasive in the federal government so it's all a lead for us. So Todd's got it.

Todd Headley

Katherine, Q3 '08 federal as a percentage of our total revenue was 37%. And in our prepared script I think we, at least in the presses, we talked about it being 31% of our revenue here in Q2. The comparable number for last year was only 13%. So, yes, some of the business came in a little bit earlier but, as Tom talked about earlier in the Q&A session, we're in a number of opportunities and believe there's a lot of runway in Fed and we should see our normal consideration rate. So we certainly anticipate having a pretty significant Q3 for us in the federal space in line with what we've seen historically.

Katherine Egbert – Jefferies & Company

Last one, you've got it to a good level of profitability for the year, do you think you can sustain profitability from here on out or is profitability still seasonal?

Todd Headley

Yes, we will definitely sustain profitability here on out. It's not going to be seasonal. And we're just hitting the size of the company that, honestly, is when I would've liked to have seen us go public. And that's why most companies wait until they're approximately this size as kind of run rate, and I believe we can sustain profitability.

Operator

Our next question comes from Aaron Husock - Lanexa Global.

Aaron Husock – Lanexa Global

Just a housekeeping question, can you tell us what the impact of the declining in OEM business had on your international sales quarter-over-quarter in Q2? How much business were you still doing in Q1?

Tom McDonough

It's not material. It was between $500,000 and 600,000 approximately, year-to-date that number's about $1.2 million. So, again, it wasn't a significant driver of our top line, but when you just focus on international and growth there, it obviously had an affect. So, again, when you strip it out, we did grow quarter-over-quarter international, excluding that OEM business.

I'd like to remind everybody we had a similar event happen to us over about a year and a half ago when IBM bought ISS and we were in a partnership with IBM at that time, and IBM was contributing roughly the same amount of revenue to our top line, again, not significant.

It impacted us a little bit but those resources then and the resources now have been focused on other business development opportunities. And our business development group is getting in some key accounts and driving a lot of business to our top line. So overall we're realizing the benefit from those efforts just a little bit magnified in the international view, if you don't look under the covers.

Aaron Husock – Lanexa Global

So since your last call, we had the completion of Obama's review of the state of federal cyber security and his speech on the topic, which basically said we have a problem and we haven't fixed it but was short on specifics. As you've seen that translate down and as you've actually started to kind of make some changes, what's changing? Or is it basically just business as usual along the same lines of CNCI as we've had going for a year or two at this point?

John Burris

This is John. I was listening to the radio when I was driving to work yesterday and threats are up in the hundreds of percentage on the federal government networks, but also on major business. So people can see this. So we're under attack. It's like the new terrorism. Obama's got a really good handle on it. He's been briefed properly. He knows there's issues. He's a savvy user himself of IT. And I really think that being so contemporary in what's happening, I think he's been out front driving that because he knows that it's one of the biggest risks he has.

It definitely helps us from a focus standpoint, and we don't think this is a one-time blip. We think this will continue to be a growing threat. And we feel good about the space we're in. And we knew that someday this would probably come about. And that's part of why we've developed the awareness technologies that we have in place, which differentiates us. I don't want to say that the market's coming to us, but the threats out there are definitely making some additional opportunities for us for sure.

Aaron Husock – Lanexa Global

Just one more from me, as you rollout your virtual product it's a pretty different way of doing things verses what's on the market today. Do you think that is getting you into opportunity you wouldn't have been considered for before? And then just because it is a different way of doing things, how long does that take for that to actually become a meaningful revenue contributor?

John Burris

Virtualization is definitely a market disrupter just in general. It's a different way of thinking about computing. And we want to a part of that because no one's really sure of what kind of threat dynamics virtualization presents. And people honestly want to run as much technology on their own hardware as they can. So you couple all that together we think this is the right way to go.

With that said, we have several large venders trialing our virtualization software right now to try to figure out how could they use this in either cloud or software service capabilities. And we feel really good that the way our technology is built lends itself pretty easily to running on hyper visor. So we're excited about that. It comes out in the fourth quarter. We've received a lot of inbound questions about this because of our announcement. I come from a company that specializes in virtualization, and we're going to definitely drive hard in that space. Any of you guys want to add color?

Tom McDonough

Yes, just a couple of other comments. I believe it's going to be a new revenue driver for the company because it's different than just the perimeter or core defense. The other thing is that we're doing data testing right now on the product and we've had three times the number of companies volunteer to beta test this version of our product than we've ever had before. So I think it's a huge opportunity for the company and we're very excited about introducing a product like this, because it contains all of the same functionality that our platform base product does today.

Operator

And at this time we have no further questions available. Ms. Almond, you may proceed.

Tania Almond

Since there are no further questions, we'd like to thank everyone for your continued interest in and support of Sourcefire, and we look forward to speaking with you again next quarter. Have a great day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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Source: Sourcefire Inc. Q2 2009 Earnings Call Transcript
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