Compellent Technologies Inc. Q3 Earning Call Transcript

| About: Compellent Technologies, (CML)

Compellent Technologies Inc. (NYSE:CML)

Q3 2009 Earnings Call

October 28, 2009 4:30 pm ET

Executives

Phil Soran - Chairman, President & Chief Executive Officer

Jack Judd - Chief Financial Officer

Jenifer Kirtland - Investor Relations, EVC Group

Analysts

Katy Huberty - Morgan Stanley

Troy Jensen - Piper Jaffray

Amit Daryanani - RBC Capital Markets

Aaron Rakers - Stifel Nicolaus

Alex Kurtz - Merriman Curhan Ford

Eric Martinuzzi - Craig-Hallum

Glenn Hanus - Needham & Company

Doug Reid - Thomas Weisel Partner

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Compellent third quarter 2009 financial results conference call. (Operator Instructions)

I would now like to turn the conference over to Jenifer Kirtland of EDC Group. Please go ahead.

Jenifer Kirtland

Thank you, operator, and thank you for joining the Compellent conference call and webcast to review financial results for the third quarter of 2009.

Before we get started, during the course of this conference call, we will make projections and may make other statements about Compellent’s business that are forward-looking and are subject to many risks and uncertainties that could cause actual results to differ materially from expectations.

A detailed discussion of the risks and uncertainties that affect our business is contained in Compellent’s filings with the SEC, including its quarterly report on Form 10-Q for the quarter ended December 30, 2009, under the heading Risk Factors. Copies of these filings are available online from the SEC or on Compellent’s website.

These forward-looking statements are not guarantees of future performance and speak only as of the date hereof; and except as required by law, Compellent disclaims any obligation to update these forward-looking statements to reflect future events or circumstances.

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

And now, I would like to turn the call over to Phil Soran, President and CEO of Compellent. Phil?

Phil Soran

Well, thank you, Jenifer; and thanks to everyone for joining us on our 2009 third quarter earnings call. With me is Jack Judd, our Chief Financial Officer.

Well, this is another exceptional quarter for Compellent. We had strong growth in revenue, profitability and cash generation. Our operating income on a GAAP basis was 6.5% of revenue. Excluding the effect of non-cash stock compensation, our non-GAAP operating income was a record 9.5% of revenue. This demonstrates the progress we are making in growing our profits. In fact, when you look at other financial measurements in Q3, we’ve once again delivered record results.

In the third quarter, revenue grew 31% from last year to a record $32.2 million. This represents a 12% increase from the second quarter and it marks our 16th consecutive quarter of revenue growth. Net income was $2.3 million or $0.07 per share. On a non-GAAP basis, excluding the stock compensation expense, net income was $3.2 million or $0.10 per share and we generated positive cash flow from operations of $5 million during the quarter.

We are really excited about these results and believe they reflect our focused efforts on meeting end-user’s need for storage efficiency. This is why you are seeing so much attention being paid to initiatives, such as virtualization and cloud computing. Simply put end users are striving to be more efficient. In our dynamic like architecture delivers this efficiency. Our storage innovation provides measurable results to IT departments around the world. Compellent’s method of fluid data management is gaining more and more industry attention and our financial results reflect this momentum.

Our strong performance was driven by the addition of 136 new end user customers as well as add on business and upgrades from our existing customer base. We now are the worldwide install base of 1,627 customers in more than 34 countries with increased attention from large enterprise users. As an example of our reach into the enterprise, Savvis has announced that it chose Compellent to provide the virtual storage foundation for its Project Spirit cloud computing platform.

Our selection was based on Savvis’s evaluation of our leadership and storage efficiency, ease of management and scalability and especially our ability to deliver automated tiered storage. Our data progression software will allow Savvis to offer its customers high quality service, based on a multi-tiered approach.

We are very pleased to be chosen by Savvis for cloud computing, which is an important emerging application. Cloud computing is all about flexibility. Flexibility in cost, flexibility in management, flexibility in quality of service, flexibility in geography. And our difference here in architecture supports these requirements efficiently. The driver for more rapid adoption of either private or public clouds is virtualized storage that enables fluid management and movement of data. We believe we are well positioned to win in this emerging category.

Some of our competitors are finally began talking about their planned approach to automated tiered storage, automated tiering is increasingly becoming a must have feature for storage providers as end user customers realize that storing data the old fashion way, doesn’t provide the flexibility that they need. So I thought to take a minute to highlight how we are differentiated in our approach. Balanced approach comes in the visibility to manage data at a more granular level, combined with our sophisticated data movement engine.

This architecture delivers a significant total cost of ownership advantage. Our patented automated tiered storage function is a fundamental feature that has been built into our dynamic block architecture from the beginning. This patent approach can decrease disk drive expenditures by at least 50%, and this is just one of the many efficiency features we provide. We also gain competitive advantage with our Thin provisioning, Thin replication, Fast Track and Replay technologies for snapshots, just to name a few. We simply deliver the total package to end users.

Well, let’s look at the current macroeconomic environment. We are seeing positive signs of improvement. It is significantly better than two quarters ago. At the same time, end users continue to watch the spin closely and deals are competitive. The good news for us is that end users can’t quit storing in their data, but they can store more efficiently with Compellent.

We are seeing momentum from enterprises of all sizes; in particular we are getting more medium of large enterprises choosing Compellent. We have a few examples of the new customers that joined the Compellent family entering the third quarter.

Digital Chocolate is a leading software developer of popular games for the iPhone, game consoles like the Xbox and other mobile platforms. The University of Wisconsin and Milwaukee has deployed Compellent at two sites for DR purposes and is using us for their e-mail and file storage needs.

Seven Medical Systems is a leading nationwide provider of on demand software technology and IT services to the healthcare industry, and the British Transport Police, is the national police force for the roadways in Great Britain. We also continue to be recognized by our customers and the industry for innovation and product leadership.

In October, Info World ranked Compellent number one over HP and Dell Equalogic and a review of SANs idea for server virtualization. We took top honors in this review that focused on virtualization interoperability, management performance, scalability, reliability and value.

We are also recently named a finalist for the best cloud solution by the Cloud Computing Journal, and we are pleased to be part of Deloitte’s 2009 technology fast 500 ranking. We are the 79th fastest growing company in North America overall and number three in our industry.

We are hearing consistently from customers that one of the key features they appreciate is that we provide them with the solution that has the Future Built In. Future Built In means our architecture is designed to allow them to upgrade the new industry technologies and new Compellent features without having to throw away their existing hardware and software investments.

We believe this advantage gives us the foundation for future growth. That is why you will see us guide for additional investment in sales and engineering to keep our lead in guide for our anticipated continued growth in revenue.

Our team is currently making plans for 2010. We see opportunity to increase our sales force and engineering teams at rates that are higher than 2009. We see improvements in sales opportunities and for continued strong growth in revenue.

Well, I would like to thank the Compellent team and our business partners for their hard work and dedication in helping us achieve this great third quarter performance. I would also like to thank our end user customers for their continued support and the confidence in Compellent.

Now I would like to turn the call over to Jack for discussion of the financial highlights of the third quarter and our outlook on the fourth quarter. Jack?

Jack Judd

Thanks Phil. During the third quarter, revenue grew $7.6 million to $28.7 million, or 31% from the prior year’s third quarter. Sequentially, revenue grew $3.5 million or 12%, our 16th consecutive quarter of sequential revenue growth. We continue to grow in international markets, international revenue increased to $5 million in the third quarter compared to $3.6 million in the year ago period. International revenue was 16% total revenue for the third quarter.

Our end-users, at the end of the third quarter, totaled 1,627 compared to 1,086 one year earlier, and 1,491 at the end of June. Measured on a year-to-date basis, our revenue from existing end-users was 50% of product revenue and new end-users made up 50% of product revenue, 50-50 split.

Our gross margin increased to 57.2% in the just completed third quarter of 2009, compared to 53.7% in the second quarter of 2009. During the quarter, product margin was 52.3% and support and services margin was 69.4%. The increase in product margin is a reflection of several strong margin deals versus margin improvements across all end users. The increase in support and services margin is two fold, an increase in sales of third party maintenance contracts; which are recorded at net and increased revenue in professional services.

Operating expenses increased to $16.3 million in the third quarter of 2009, from $13.4 million one year earlier as we continue to build infrastructure in sales and marketing and invest in our technology. This 22% increase in operating expenses compared very favorably to our 31% increase in revenue. This expense leveraging is possible because of both our business model advantages and our dedicated workforce that continues to deliver outstanding products to our business partners efficiently.

We continue to grow our employee headcount. At September 30th we employed 360 employees compared to 268 one year earlier and 340 at the end of the prior quarter. Since the 1st of the year almost 70% of our new hires have been in sales and engineering.

Net income for the third quarter of 2009 was $2.3 million or $0.07 per share, compared to a net income of $464,000 or $0.01 per share during the third quarter of 2008. Excluding the effect of stock-based compensation, our non-GAAP net income for the third quarter was $3.2 million or $0.10 per share, compared with net income of $1 million or $0.03 per share the previous year.

Our balance sheet remained strong. We ended the quarter with a $109 million in cash and investments, an increase of $9 million from the end of 2008. Our balance sheet includes $31.8 million of deferred revenue, an increase of $11.2 million from December 2008.

Our day sales outstanding increased by 6 days this past quarter, largely a reflection of the timing of sales and continued growth of prepaid maintenance contracts billed but not yet paid. Our actual ageing of receivables remains consistent with prior quarters.

I would now like to provide some guidance on the coming quarter. As Phil highlighted earlier, we see strength in our markets. We continue to see strong growth in our current pipeline and our registered deal activity. Our current forecast is for revenue to be between $34 and $36 million. This would mark our 17th consecutive quarter of revenue growth.

We expect to continue to invest in our technology and sales teams; so as a result, we expect our operating cost in the fourth quarter will increase from third quarter spending by 8% to 10%. We expect stock compensation cost to be approximately $1.1 million in the fourth quarter.

Again, please see the risk factors contained in our Form 10-Q for the quarter ended September 30th, 2009 for risks and uncertainties that effect our business and could cause our fourth quarter results to materially differ from our estimates.

That concludes our formal remarks. Phil and I would be happy to answer any questions. I would like to mention that we are on a tighter time schedule than usual today and we will try to take as many of your questions as we can, but we will have to sign off around 05:10 east-coast time.

Now operator, could you please open the call for Q&A.

Question-and-Answer-Session

Operator

(Operator instructions) Your first question comes from Katy Huberty - Morgan Stanley.

Katy Huberty - Morgan Stanley

Good afternoon guys nice to see the big margin up lift this quarter, and on that front maybe you can touch on not just in December, but over the next couple of quarters, will investments track ahead of revenue growth such that we wont see as much operating leverage or do you think you can manage investments more in line with the up tick in revenues?

Phil Soran

Well I think we see this thanks Katy, I think we see this is a really got time to invest in future growth. So I think you might see to a little bit ahead of the revenue in some of that but I think it’s really prudent, and we kind of proven that we know kind of want to put the pedal down and that’s the good time to do it.

Katy Huberty - Morgan Stanley

Then the other obvious question is whether you think the new level of product gross margins is sustainable given the pricing and competitive environment?

Jack Judd

Great question Katy, and I think I’m going to would encourage everybody to be a little more conservative than we were in this quarter, this was a really, really nice up tick in our revenue I mean in our growth margin on the product and I would say that we have a good chance that it will come back a little bit and I want to emphasize again as, that you know we go out there and compete everyday for deals and we are going to continue.

Katy Huberty - Morgan Stanley

Now longer term are you still thinking about 15% margin target I mean, you did 9.5 as stock option expenses quarter is that still the right goal to think about?

Jack Judd

I think they were still pretty consistent, so we think that when this business is fully leveraged which, yes that we are going to be in the upper teens for operating margin before Stockholm.

Katy Huberty - Morgan Stanley

Then lastly, any comment on the recent filing to sell shares?

Phil Soran

Well Katy, I appreciate the question but I got to tell you, I have been advised by the councilor that we are really unfortunately cannot discuss or answer any questions regarding the proposed offering, but I do appreciate the question.

Operator

Your next question comes from Troy Jensen - Piper Jaffray.

Troy Jensen - Piper Jaffray

Hey so a quick question here, I was wondering if you can expand a little bit on the Savvis, curious to know if there is any revenues in Q3 or was that a Q2 event and specifically like the number of data centers you are in or any disability into how that might grow over the next few quarters?

Phil Soran

First of all like we all are excited about the Savvis that really, we kind of look at what they are trying to accomplish with the Project Spirit, it kind of validates our architecture as some settlement benefits with tiering and quality of service and flexible location and that type of things.

There was some revenue in the third quarter there was some in the second quarters, we have been working with them for quite a while, I’m not going to get into how many data centers it has there, but it is a project that we’ll be rolling out overtime and as project sphere takes off, with their Savvis, we are going to win with them.

Troy Jensen - Piper Jaffray

Its okay success based, got it and then a quick one for Jack here. You just talked about the federal business in Q3, I was curious if that was up significantly greater than 10% of sales and then, what does it typically do in Q4?

Jack Judd

There was some federal business in Q3; I would not characterize it as greater than 10% of sales. You know we have some federal customers that came back to us for upgrades and for the federal government budget plus. We still have an off a lot of work to do as a company to gain traction in the federal space. I would not say that we have anything dramatic that we are expecting in the fourth quarter.

Troy Jensen - Piper Jaffray

Business as usual

Jack Judd

Business as usual and either way to characterize it

Operator

Your next question comes from Amit Daryanani - RBC Capital Markets.

Amit Daryanani - RBC Capital Markets

So I’ve just got a question here, with the TMC’s recent comment that, you know EMC is Dallas has been de-emphasizing their reseller relationship, have you seen a change in, on the competitive landscape or an increase from the channel and through the focusing mode towards Compellent?

Jack Judd

I can’t say I’ve seen a big difference there, a good question. One thing it’s really nice that we continue to hear from our business partners out there, is that they really do feel like our 100% channel model is a real differentiator for us, unlike others, they try to do a mix of direct and channel business and, they just have so many benefits for us, they are a lot more open with us, they allow us to sell directly with them more often, we have greater visibility to what they are working on and we are just seeing, frankly we are seeing ourselves able to gain more and more mindshare with the parts we have and that makes us excited.

We’ve also got some need, for our group called the CPACT, our channel partner advisory council that we meet with very frequently right now and frankly I have heard from them any change in the just the landscape out there, the bottom line is everyone wants to get much mindshares they can and I think we got some good strategies to get their mindshare.

Amit Daryanani - RBC Capital Markets

Fair enough and just so the follow-up of, I mean, you guys run a fairly virtual supply chain and I don’t think you typically carry a whole lot of inventory. So, given the 18% optical inventory, is that just sort of reflection of more demo boxes being out in the field which should result in possibly accelerated sales goods going forward, I am not just too optimistic of view on the inventory increase.

Jack Judd

A lot of that inventory increase was in spare parts, every time we open up in markets, we have to put parts in with our service provider Anacomp and we own those parts even though they are in their depots and they put them in for our customer’s warranty and posting the money.

Operator

Your next question comes from Aaron Rakers - Stifel Nicolaus.

Aaron Rakers - Stifel Nicolaus

Thanks guys and also congratulations. A couple of question from me, I think in your commentary you had mentioned, solid pipeline of mid-sized and larger deals, you know it seems like you might be at the cusp of may be even changing and moving up market a bit. Can you talk about that trend in what you are seeing from an average deal size perspective in whether or not, that’s been a key benefit to the gross margin line?

Phil Soran

Couple of things, so first of all, there’s a big need and a huge opportunity in the mid-size enterprise, which we’ve been targeting and, we are bringing the enterprise features to those mid-size customers. So, no change in strategy there and the instant thing about those midsize customers is they can be very large and very complex.

Sometimes those words with smaller and less complex which is not the case since it has been some of the most creative stuff of anyone there, but that being said is that our feature set is differentiated in some of the features we talked about with our dynamic block architecture is very attractive to large enterprise customers because they have a lot of these data management issues, that they need to help with.

Consequently we are bidding more and more of those and giving some nice penetration. You go into the enterprise, it’s not like you are going to see, and it may be a mid-size revenue opportunity as far as that you are in a big account. So, I am not sure you see initially a big change in the ASPs. But overtime, obviously it creates a lot of opportunity in those larger accounts.

Aaron Rakers - Stifel Nicolaus

Fair enough and if my mom was right, I think you have disclosed that there was a 50-50 split between new versus and existing customers, but I think you had said that, that was a year-to-date basis, is that correct?

Jack Judd

No we measure that on the interactive basis, so that we take our customers that we have on 1231 and you put an order in, we call that repeat orders. If you buy a system for the first time on January 15 and then by an upgrade three months later, that’s still Called business for new customers.

Aaron Rakers - Stifel Nicolaus

So is it fair if those metrics are right and that’s what you’ve disclosed in the past, that, that your new customer growth, had that slowed over the last couple of quarters on a revenue standpoint?

Jack Judd

No, I wouldn’t say that, I - that business from existing customers and from new customers, it’s kind of - it’s always meant to be shown that people are coming back for upgrades and then it shows the vibrancy of the business. It shows that people are using our product and then you put it in, conjunction with our maintenance renewal.

It really shows that our products being used and that it’s not being decommissioned and that really the strategy of putting systems out there, and then looking at that customer over a five year period of time like we do versus just initial sale, is a really great strategy that has lots of legs.

Anyway nice addition about the 136 new customers, I think was really good and then also that metric is not based on customer numbers but dollars of revenue.

Aaron Rakers - Stifel Nicolaus

Okay, fair enough. And then final question from me, any update on how we should think about the tax rate, next quarter and then looking into next year?

Jack Judd

Taxes, I believe are going to be on a yearly basis at the end of the year, around a million dollars in total. So that would mean that they are going to be $200,000 to $250,000 this quarter. So I don’t really look at them as a percentage or look at them as a dollar because of how the taxes come in. And so that’s how I would model them if I was anybody out in the street.

Next year we will continue to look at how taxes come back into our P&L next year as we get into 2010.

Operator

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

Alex Kurtz - Merriman Curhan Ford

Phil you guys put up a monster number last year as far as net new add, I think you added like a 190 in December of last year. Looking at the pipeline going into this quarter how do you feel about your pipeline to new customers and do you think you can even get close to that after putting up about a 140 in September here?

Phil Soran

We don’t really forecast your guide on the number of new customers and if you are a rep out in the field, if you got a big deal over an existing customer that may focus you on that for a while and it all mixes out and we are kind of looking at just the revenue growth and we will make sure we keep adding new users because there are future also. So like we said in the call, I think we are optimistic on the pipeline, but aren’t going to guide on the number of new customers.

Alex Kurtz - Merriman Curhan Ford

Then another question for you Phil. Taxes obviously have been still in market place right now by EMC obviously just release one, I think release two is expected some time early next year. Can you just give a little color on what your partners and your reps are telling, your business managers are telling you about how that’s impacting deal flow so far?

Phil Soran

It really doesn’t impact deal flow, but what it does impact is kind of architecture. Are you going to be able to support new technologies and one thing, I mean, I kind of hinted out there that customer is really excited about in my comments is that they tell more and more and more, the guy that bought our system three or four years ago is able to implement the new technology seamlessly without having to buy a new model or throw away old software or that kind of stuff.

Once again we will do that with the FAS drive technology and that we actually began shipping SAS technology last quarter, so in the revenue you see there is SAS technology in there. And once again our customers are going to able to implement it even though they bought their system years ago.

Alex Kurtz - Merriman Curhan Ford

So you haven’t seen a competitive issue yet around EMC starting to talk about FAS at all in your pipeline?

Phil Soran

Did you say FAS or SAS?

Alex Kurtz - Merriman Curhan Ford

Yes, FAS. So I didn’t, yeah its FAS, yeah, they are automated tiering.

Phil Soran

I am sorry, I heard you say SAS. So on the FAS side, it’s really good, kind of good validation for us that everyone is now talking about automated tiered storage and we began talking about it five or six years ago.

So, I think it shows our advantage. We are seeing them talk about it a lot and its, hey, we are going to have this in the future and customers give us a lot of feedback that they really like the fact that we do it at a block level and get the benefits at a more granular level. And just how we would leverage our data movement engine is real powerful. So we think more people talking about actually highlights our advantage and the return into that advantage.

Alex Kurtz - Merriman Curhan Ford

Okay. Last question for Jack here, just could you give a little more color on the product margin increase quarter-over-quarter sort of what were the drivers there and thanks again.

Jack Judd

On the product side, an I’ll go back to what we said when we did our talk is that we had several deals that were noticeably higher on margin that actually had some pretty good ticker size to them. It wasn’t as if you could go across all of our deals doing notice that each one of them was a fraction higher than it was in the previous quarter.

So I think it speaks well to our sales force and speaks well to having consistent customers coming back for upgrades and for new systems. And I think that the big popping up was more related to deals, some deals versus overall.

Alex Kurtz - Merriman Curhan Ford

Be able to hold a margin in a tough economic market is really positive.

Jack Judd

Right, really positive.

Operator

Your next question comes from Eric Martinuzzi - Craig-Hallum.

Eric Martinuzzi - Craig-Hallum

Nice work on the quarter guys. See, the headcount for fishing out Q3 you were at 360 employees. You are continuing to invest there. Where do you think you would finish out the year and what specific functions do those body come into?

Jack Judd

We don’t really much comment on what we are going to have for future hires besides that we say we are going to continue to hire. I think most of our hires are going to continue to be with people that touch end users and touch business partners and then our software engineers is going to be the majority of our hires.

Eric Martinuzzi - Craig-Hallum

Okay. And as far as, I know historically you had been, you definitely wanted to have the biz dev managers, the channel managers out there, but you were also emphasizing kind of national bar type relationships, do you feel like you are staffed up there or is there or is there additional effort there needed as well?

Phil Soran

You will see similar to our rendered commercial account channel or business development managers, similar type of growth in those national partners, we keep investing as it feels prudent there. And also there are some partnerships that keep helping the visibility of mindshare we get with those partners.

Eric Martinuzzi - Craig-Hallum

Okay and then lastly on that, the sales distribution side. Right now, 15% of revenue international, that’s terrific opportunity for you guys given the success you’ve had domestically. How are you going about and specifically I am looking for APAC, how are you penetrating Asia Pacific, on the distribution side?

Phil Soran

We, kind of highlighted early on the UK and the mainland Europe opportunity we had there, and then earlier this year we started our efforts into China, the number one in there, and then also Australia we’ve been doing for several years.

So, you are seeing this expand some of that focus, so we are trying to do it at a real timely basis, like when do you really dive and deep on marketing programs, trade shows, press, that kind of stuff we try to get to the point, we have a good base of referenceable customers and then go deep into our country. So, you’ll see that out over time for China and those areas.

Eric Martinuzzi - Craig-Hallum

Now there are no specific partners that you are in for, just so you can comment on?

Phil Soran

None I would comment live; it’s pretty early over there.

Operator

Your next question comes from Glenn Hanus - Needham & Company.

Glenn Hanus - Needham & Company

So, on the gross margin and great performance there, may be on the services side, you’ve also had demonstrated good leverage. Could you, I heard you had some more professional services. Could you talk about the sustainability as just kind of a steady state level we should think about going forward?

Jack Judd

I am glad you commented Glenn on our professional services because we have in past quarters talked about investing in professional services in this past quarter the team, delivered some noticeable revenue or more revenue on that upfront that we’ve had in the past. So it’s really nice that we are getting ourselves known for not just installations and training, but also the other professional services we offer.

So that was, one of the reasons why we ticked up as if we had more revenue against those costs we had in the past. I would like to think that we are probably going to add cost again, to keep growing that part and so that’s probably a little bit variable right now for our professional services at that margin.

The other part of the defected margin was how we record revenue on third party maintenance contracts and we have tried to really emphasize selling third party equipment with our systems because we tend to have responsibility for it. So why not sell it and so the third party maintenance contracts are recorded at net. So they tend to have a little bit of a higher influence on margin in the past.

Phil Soran

So Glenn, I think we should be able to continue the professional services revenue. I mean, that would be nice and we will keep investing there.

Jack Judd

Keep investing, I would say that it might be high by a point or two, from what it’s going to be, but I am pretty positive on the whole package.

Glenn Hanus - Needham & Company

Okay, great. How about if you start to look at into 2010, maybe just talk a little bit more what kind of feedback you are getting from customers on budgets and willingness to spend and tie that into your comments about expanding tax a little bit more aggressively?

Phil Soran

Yeah. For first well I think 2010 is a long way for end users still, but it’s still going to be a tight economic environment but the data growth is still growing people have delayed or not delayed very much longer, they are just going to need more efficiency and how they do it and that’s why you are seeing these initiatives like virtualization and cloud that kind of stuff here, but we just kind of look at the pipeline we see there.

It’s just getting to be a little bit more of a normal rhythm as opposed to what we saw especially in the first quarter of 2009. So that’s one of the reason why I feel a little bit better by this, the environment is a little bit more stable than it was a year ago.

Glenn Hanus - Needham & Company

Maybe lastly, Halem based server refreshes, have you seen that impacting your business and the pipeline any thoughts there?

Phil Soran

No, I wouldn’t say that the Halem necessarily has driven our revenue but we hear a lot of our customers are excited about it for the future I think it’s further out there and the nice thing about that technology is it does, it’s built for a lot of virtual machines being on it and that’s a nice wind in our back and that virtualization using means exterior storage and then what you want to have in is the best virtualized storage which we hopefully provide.

Operator

Your final question comes from Doug Reid - Thomas Weisel Partner.

Doug Reid - Thomas Weisel Partner

Sure just within the 136 new customers, I am wondering if you could comment on many particular strengths you are seeing by vertical?

Phil Soran

Yes, we kind of continue to do a cross vertical, some are there and no exposure in anyone, healthcare is still strong, financial services, Jack mentioned the rest in government business that helped. It’s pretty cross industry education, state local government. I mean, we had deals across the board there, so nothing there really stands out as different that in the past.

Doug Reid - Thomas Weisel Partner

Just as you look into your own product pipeline your launch timetable for the next year, is there any insight you can give into how R&D might ramp then over the next four quarters linear or perhaps not?

Jack Judd

I think R&D is going to be linear, we tend to hire all the time. It is we don’t tend to hire fix and then not hire for a while the people start all the time.

Operator

Thank you, ladies and gentleman that conclude our question and answer session for today’s call. I would like to turn the call back to Mr. Soran for any closing comments at this time.

Phil Soran

I just like to thank everybody for their support. We are excited about the quarter and it’s good to hear the positive comments and just once again I want to thank our team and our customers and our business partners for all the hard work they delivered this great quarter. So we look forward talking to you next quarter.

Operator

Ladies and gentlemen, this concludes the Compellent third quarter 2008 financial results conference call. If you would like to listen to the replay of today’s conference please 1303-590-3030 or 1800-406-7325 and enter access code 4166750 followed by the Pound sign. We thank you for your participation. You may now disconnect.

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