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Executives

Jim Baum - President & Chief Executive Officer

Pat Scannell - Senior Vice President & Chief Financial Officer

Deb Murphy - Vice President & Corporate Controller

Analysts

Katy Huberty - Morgan Stanley

Bill Shope - Credit Suisse

Alex Kurtz - Merriman

Doug Reid - Thomas Weisel Partners

Nabil Elsheshai - Pacific Crest Securities

Glenn Hanus - Needham

Brian Denyeau - Oppenheimer & Co.

Jason Nolan - Robert W. Baird

Nathan Schneiderman - Roth Capital

Mark Kelleher - Brigantine Advisors

Rajesh Ghai - ThinkEquity

Bhavan Suri - William Blair & Co.

Netezza Corp. (NZ) F3Q10 Earnings Call November 24, 2009 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to the third quarter fiscal 2010 Netezza Corporation earnings conference call. My name is Stacy and I’ll be your conference moderator for today. At this time all participants are in a listen-only mode and we will be facilitating a question-and-answer session towards the end of the conference. (Operator Instructions)

I would now like to turn the call over to Deb Murphy, Netezza’s Vice President and Corporate Controller. Please proceed.

Deb Murphy

Thank you, Stacy. Good afternoon everyone and thank you for joining us on our earnings release conference call for our third quarter of fiscal 2010, which ended October 31, 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 maybe 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 Quarterly Report on Form 10-Q, which is on filed 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 as of 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 provided GAAP and non-GAAP reconciliation information in the press release we issued earlier today announcing our Q3 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.

Jim Baum

Thank you, Deb. Good afternoon everyone and thank you for joining us on our Q3, 2010 earnings call. We are pleased with the results for the quarter. This was a major transition quarter for us as we migrated from our 10000 Series products to our next generation, the TwinFin family of appliances.

During the quarter, we transition all of our selling, manufacturing, supply chain and delivery processes to the next generation product line and we were able to remain aggressively focused on our business and our customers. In fact the introduction of the TwinFin has been very well received an adoption of the products has been out standing at par.

This transition is note small feet for any appliance company and we are very proud of the fact that we were able to expertly manage this transition with no disruption to our business. This speaks to the value of the experience we have in managing the appliance business, it is a core competency that we view as a significant asset to Netezza.

We launched the TwinFin product line during our worldwide NZ universe road show where we also set out our 2010 roadmap for delivering a complete portfolio of integrated appliances. Our strategy of taking the event to the customers proved successful, as we were able to bring more than double the number of people we saw at last year NZ universe conference, a record number of attendees and a significant up tick in prospects.

This event is a major pipeline development tool for us, as it gives us a chance to bring our very enthusiastic customers, together with our prospects to share Netezza experiences. Along with some of you on this call, we witnessed strong enthusiasm from our customers, partners, prospects and industry analysts with the TwinFin product and for our vision for advanced analytics. The TwinFin is a major technological jump for Netezza. The system is five times faster than our prior generation for sequel processing and orders of magnitude faster for complex analytical processing.

We have built the TwinFin in collaboration with IDM’s engineers to create a system that retains all of the ease of use and simplicity characteristics of our prior generation products, while taking advantage of the technology investments and roadmaps of the large systems vendors.

While we built our new architecture on commercially available blade, storage and network technology, we also turbo charged this architecture with our own FPGA database acceleration, bringing this core component of our IP and price performance differentiation to a standard platform.

The new product is allowed us to shed the proprietary hardware label in the market and we have found that this fact alone has given us access to opportunities where we were previously not considered. Another benefit of this architecture is that, it allows us to quickly create various configurations of the platform, enabling an aggressive new product introduction road map that will allow us to bring new products to market faster than before.

Adoption of the TwinFin over its short two and a half month life span has been strong. Nearly 100% of our new transactions today are for TwinFin and we have delivered a large number of systems to support both customers and proof of concept activities. We recently announced Epsilon InterContinental exchange and Marshfield Clinic as TwinFin users. We have also delivered a system larger than data biting capacity to another customer.

That system was deployed in running in this customer’s datacenter in just a matter of weeks. Many other customers remain unannounced, as we do not have their permission to publicly name them and reports from the field have been very positive, reporting performance as advertised with the high degree of reliability.

At our NZ universe road show, long standing customers Catalina marketing, NYSE Euronext and Nielsen spoke enthusiastically about their experiences early in the TwinFin program and those of you looking for more details can watch the video posted on our home page at www.netezza.com.

During the quarter, we continued to invest in our strategic initiatives, including our product road map and distribution efforts. The product road map is robust and you will see new products and new TwinFin capabilities being announced over the coming months. TwinFin is just now at the beginning of its lifecycle and there is considerable room to innovate on performance and scale characteristics. This release is just the beginning.

Given this new architecture, we also plan to deliver additional new products to address more of the data warehouse and analytics opportunities in the market. We believe that this road map is very well positioned to create further opportunity for Netezza. As our competitors are still working toward their own vision of appliances, we continue to progress on our strategy to position ourselves as the enabler for advanced analytics.

Our vertical solution strategy is allowing us to expand our dialogue with our prospects and widening our view into the market by offering a broader set of solution to specific business problems beyond those just in the data center. A recent example is the large Telco, where we are able to partner with the technology provider that offers an application that can substantially enhance this prospect’s marketing campaign effectiveness.

We’re able to market this combined solution now to not just the IT department, but to the business owners in this account, substantially increasing our footprint in this account. To facilitate this, we are forging critical partnerships that we expect to provide us with additional leverage in the marketplace, as we integrate third party technologies with the TwinFin, bringing the benefits of the appliance its performance and simplicity to the end-to-end solution.

We made good progress on this strategy, as evidenced by the recent announcement we made with SAS, a leader in business analytic software and services, and we have integrated their scoring accelerator technology into our platform. We believe this partnership will provide opportunities in the SAS customer base, as well as providing our mutual customers with dramatically improved SAS system performance.

Overall, we do see our pipeline improving, as we reach the end of an economically challenging year. We see an up tick in the metrics we use to evaluate the amount of potential business in our pipeline. We believe this improvement is related to our new products, as well as the visibility Oracle is creating for this market as a whole, and to a stabilization of the environment.

One metric we track closely are POC levels have jumped dramatically since the announcement of TwinFin, suggesting to us that demand is improving. All of these factors combined to give us confidence in our near term visibility. Competitively, Q3 was really no different than any other quarter. We primarily competed against Oracle and Teradata. We still a very little IBM in spite of their recently announced smart analytic system initiative and our win rates remain at their historically high levels against each of our competitors.

I’m sure many of you’re interested in the effects of Oracle’s Exadata 2 announcement and thus far we have not encountered the products in the market. We have seen Oracle aggressively promoting and marketing Exadata 2, but we still have no head-to-head experience against it. In fact, we did see slightly less Exadata than we have seen historically likely due to Oracle’s own transition in abrupt departure from HP.

In closing, we feel that Q3 was a very good quarter for Netezza, given our strong results and successful transition to the TwinFin family of appliances. We’re very pleased with the strength of the adoption of the product in the market and feel that our product’s competitive positioning, increasing pipeline, and strategic initiatives position us well for future growth.

Our partnerships with our customers continue to earn Netezza a reputation for being an easy to do business with vendor, something that we continue to focus on as our customers increasingly turn to us for their strategic initiatives.

Now I would like to turn it over to Pat Scannell for further commentary on the business. Pat.

Pat Scannell

Thank you, Jim and good afternoon everyone. We successfully managed our product transition over these past two quarters. With the announcement and release of TwinFin and our beginning to see demand pickup across the board, although spending has not completely returned to normal, we are seeing infrastructure investment decisions for analytics rising to the top of company’s priorities.

Now turning to the financials, total revenue for the quarter was $47.7 million versus $50.6 million in Q3 ‘09, or decrease of 6%. Product revenue for the quarter was $33.3 million versus $38.9 million a year ago, or a decrease of 14%. While service revenue for the quarter was $14.4 million versus $11.6 million a year ago, or an increase of 24%, 59% of total revenue came from the installed base.

We added 16 new customers this quarter, with eight of those adopting TwinFin as their data warehouse analytics engine. Nine of our existing customers also adopted TwinFin during the quarter. TwinFin represented 55% of our product revenue and our average deal size was $1.2 million. The domestic international split of our business was 84%, 16% respectively versus a year ago where the split was 92% versus 8%.

As we’ve indicated all along, we believe that the international portion of our business will continue to grow as we expand our footprint internationally throughout Europe and Asia. On a year-to-date basis, international represented about 20% of our business and its flat with last year’s performance, approximately 36% of our sales and resources are deployed internationally.

Today, we have 43 quota carrying reps and we are aggressively expanding that channel over the course of this quarter and next. As we indicated last quarter, our goal is to have our quota carrying rep count in the mid 50s by year end and we are moving aggressively toward that objective.

Our direct reps contributed 93% of the business this quarter and it is that channel that will carry the TwinFin message, as we continue to find that when we get the opportunity to demonstrate our solution, our win rate remains very high against Oracle and Teradata. The top five vertical markets this quarter represented 84% of our business and they are digital media, retail, financial services, government, and telecommunications.

If we looked at these verticals on a year-to-date basis, we would find that it is the same five verticals with growth in the government sector, financial services, and the Telco sectors year-over-year. We had one 110% customer in our retail business, which was a significant competitive win over Teradata and one where we cannot give the details of the account because of our confidentiality agreement with the customer.

Our revenue distribution over the quarter was 15/30/55 over the quarter. I’ll be referring to non-GAAP figures in this call unless I specifically state that I’m referring to GAAP figures. A reconciliation of these non-GAAP 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.

Total gross margins for the quarter were 67% versus 62% a year ago. Product gross margins were 63% versus 60% a year ago and service margins were 76% versus 71% a year ago. We had total operating expenses of $28.2 million, up from $25.2 million a year ago or a 12% increase.

The company’s operating with 408 people up from 376 a year ago. We made significant investments in R&D headcount and marketing programs associated with the TwinFin introduction. We will continue to invest in R&D and in our go-to-market activities to exploit the significant technology lead that we have over our competitors, with TwinFin.

Operating income for the quarter was $3.9 million or 8% of revenue, down from $6.2 million, or 12% of revenue a year ago. Interest income declined to $164,000 down from 845,000 a year ago, as the average yield on our investable cash declined significantly from that which was a year ago. We recorded a provision for income tax of $1.1 million or 27% versus 1.3 million a year ago, or 19%. Net income for the quarter was $3 million or $0.05 per fully diluted share versus $5.7 million, or $0.09 per fully diluted share a year ago.

Turning to the balance sheet, we exited the quarter with $152 million in cash and investments down from $159 million last quarter and relatively flat year-over-year. The decrease in cash in the quarter is primarily the result of our investment in TwinFin inventory to receive the proof of concept pool that we maintain.

Cash includes 49 million of option rate securities, $15 million of which have been classified as short term investments, as UBS has confirmed at these will be liquidated at par in June of 2010 or within the next 12 months. Accounts receivable ended the quarter at $39 million, with a DSO of 72 days, within our target range of 60 days to 75 days.

Inventory closed at $23 million up from $17 million from last quarter, as we began to build our new TwinFin pool that will be available to partners, prospects and customers for demonstration. 60% of this inventory balance represents TwinFin, with the balance representing our previous generation that is part of our proof of concept pool that will be redeployed as replacement sales, spare parts, or other opportunities for this product. Deferred product revenue declined $4 million from last quarter, while deferred service revenues stayed constant at $43 million.

Turning now to our outlook and guidance, as we have stated in prior quarters, we are solidly positioned to take advantage of the economic recovery that we are beginning to experience. We have invested heavily throughout this past year in our technology and have delivered a leading edge product and solution in TwinFin.

Now, our goal is straight forward and that is to accelerate investment in our go-to-market channels directly, through partners and through indirect channels so that the TwinFin solution can be seen and demonstrated throughout the market. Finally, although we are seeing a return to normalcy and we are seeing increased demand to the TwinFin product, we are not in a position as yet to offer guidance on future quarters.

I would now like to turn it back over to the moderator to open it up for questions.

Question-and-Answer Session

Operator

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

Katy Huberty - Morgan Stanley

If you think about the prospective customers and inquiries that came in around the user events in late summer in falls, what inning do you think you’re in terms of converting those to revenue?

Jim Baum

Katy, we’re in the first inning. I mean new prospects who would have met us on the road show throughout September are clearly at the very early stages of their evaluations. So we’re clearly in the first inning here.

Katy Huberty - Morgan Stanley

How would you characterize where you are with the current customer installed base that you came into this product cycle with? Are they further along in terms of the transition?

Jim Baum

Some are. I mean I think we still have a very good opportunity next year and the year after to migrate customers from the Mustang systems, the 10000 Series systems to our new generation systems. We saw a small amount of that in Q3. We have many other activities helping customers migrate to get the benefits now and going forward, but we’re in the early innings of that transition as well.

Katy Huberty - Morgan Stanley

So if you think about the improving economy, the larger pipeline that you discussed and some conversion of those new perspective customers. Why wouldn’t we see a handful of quarters of sequential growth as you go through this product cycle?

Jim Baum

That may convert and while we see our metrics all looking positive with respect to pipeline metrics as well as POC metrics, we’re not going to comment on the guidance at this point.

Katy Huberty - Morgan Stanley

Then just lastly on partnerships, you mentioned the SAS partnership that was announced recently. Would you expect that these new partners with the TwinFin product are incremental versus partnerships you had with the old generation of product? In other words, are you expanding points of distribution in the near term or are you just refreshing partnerships that already existed?

Jim Baum

I think we would expect that the larger partnerships that we talk about are incremental. For example with SAS, we’ve announced a technology partnership and we’re already seeing very good engagements in the field. We have many joint customers with them and they also have many customers who could have interests in our products.

There are other relationships that essentially are just continuing as they were, right. There’s not a big difference between 10000 Series and TwinFin in terms of the customers or the partner’s ability to support it, but in some cases like with SAS, we’ve gone deeper than that and we’re actually embedding software from SAS into our platform and taking that to market.

Operator

Your next question comes from Bill Shope - Credit Suisse.

Bill Shope - Credit Suisse

Can you walk us through, where you’re seeing the greatest TwinFin acceptance in terms of verticals? There are specific vertical you’re seeing side traction or is it really across your normal spectrum of customers?

Jim Baum

I think overall, Bill, it’s across our normal spectrum of customers. TwinFin, like the 10000 Series, is applied across verticals and there’s no distinction in one vertical versus another. However, if you look at the quarter and the year-to-date history, we have seen some positive results in our largest verticals, financial services. For example, Retail has been very good, Telco has been very good. We’ve seen growth in healthcare, but I don’t think that those are specifically related to TwinFin.

Bill Shope - Credit Suisse

Sort of related to that, but more of a macro question, within those verticals you mentioned. Are you seeing any difference in terms of rate of recovery in terms of willingness to spend IT budgets right now?

Pat Scannell

So I think as I mentioned in my prepared remarks, what we have seen is that we saw the government, financial services and Telco sectors snapback so to speak, much faster than the other two, but that’s not to say that the other two are lagging far behind.

Jim Baum

I would characterize it as we’ve seen stabilization, right and I think that’s continued. I know we talked about that theme in the last call, where there are fewer surprises, selling processes, tend to move as a more normal pace and they tend to come to a more normal close as opposed to earlier in the year where it was more difficult to predict whether or not a selling process would even continue.

Bill Shope - Credit Suisse

Then my final question, recognizing that you guys are still seeing the same historically high win rates versus the traditional competitors. Are you seeing any federal changes, whether better or worse in the pricing landscape and in particular, have you seen any unique competitive responses to the TwinFin products from your traditional competitors?

Jim Baum

In terms of competitive response to it, I mean we’ve certainly seen a response in the form of people trying to latch onto the idea of us having a new product in the market. We’ve seen a couple of vendors come out with their Cash for Clunkers program to try to find ways to upgrade people away from Netezza, although that’s been unsuccessful, but that’s been the only sort of difference in the competitive landscape.

From a pricing standpoint, it really hasn’t changed. We still see, as you can see by the quarterly results, the average selling price has held. The gross margins have held and so in general, we’re seeing pretty much the same kind of pricing characteristics in the market that we’ve seen historically.

Operator

Your next question comes from Alex Kurtz - Merriman.

Alex Kurtz - Merriman

Jim, on the POC improvement quarter-over-quarter, could you just give us a little bit more detail. Were a lot of those existing customers or a lot of those new customers, and if they were existing customers, do you think the sales cycle on those POCs could be shorter because, you have the end of year spending coming up here and people want to use their budgets?

Jim Baum

I think in terms of the POCs that were out there, there’s a nice healthy mix of existing customers and new customers in that. You saw in the quarter we, had good new customer traction with 16 new customers in the quarter. We are seeing the results of some of our prospecting efforts come to bear bringing POCs into new account situations, but I would characterize it as a healthy mix.

Alex Kurtz - Merriman

Pat, it seemed like the average deal size jumped quarter-over-quarter. Was that in part to do to the large deal order, or a couple of large deals you had in the quarter? Any sort of return back to maybe a million next quarter?

Pat Scannell

As we’ve always said, the average deal size is, anywhere from $1 million to $1.5 million. So the movement of $100,000 to $200,000 on a given some deals with some of those deals that are in the quarter, it may well move in that range, but $1 million to $1.5 million is our guidance on that.

Alex Kurtz - Merriman

Last question, Pat, can you just give us a little more detail on the product deferred decline quarter-over-quarter? Is it sort of where that came from and sort of how, guess you can’t give guidance on that, but how you saw that trail during the quarter?

Pat Scannell

Yes, so as with any of the product deferred, deferred product revenue movement, there are three reasons we put deferred revenue up on the balance sheet. One is because there maybe acceptance with the customer, one is. Two is, because there maybe product that may not have been delivered. The third is, because we may have a question on the credit worthiness of a customer. In this instance, it was acceptance and product delivery and it was when those are cured, or when those events happen that comes off the balance sheet.

Operator

Your next question comes from Doug Reid - Thomas Weisel Partners.

Doug Reid - Thomas Weisel Partners

Wanted to ask the impact that Teradata has had over the past year, that not only introduced the clients, but I mean, dramatically increased the number of products and the breadth of the market they’re going after with the greatly expanded product portfolio. Wondering if Teradata specifically is having an impact on sales cycles and how you think that impacts or plays out to the next few quarters?

Pat Scannell

I think as we’ve seen in competing with Teradata, our win rate against Teradata has remained at its historical levels. So we haven’t seen them getting the upper hand on us. We have seen them primarily in their install base. As you know, their strength lies in their install base and that’s where much of their revenue comes from.

So we do compete against them in their customer base and when we see them there, they have continued to do a pretty good job of introducing a variety of solutions and products to try and manage the situation to their advantage, but as I look at it, I fall back on our win rate and see that our win rate remains at its historical levels.

Operator

Your next question comes from Nabil Elsheshai - Pacific Crest Securities.

Nabil Elsheshai - Pacific Crest Securities

So, on the sales head count I was surprised to see it decline given the stated goal of getting to the mid-50s. Could you talk a bit about what happened there?

Pat Scannell

So, during the quarter we performance managed eight reps out of the business and as we look at recharging that direct channel, our goal is to aggressively add back to get to the mid 50s range and we believe that that puts us in a great position as we go forward with people that are performers so to speak.

Nabil Elsheshai - Pacific Crest Securities

As you expect basically this quarter you expect the higher tons?

Pat Scannell

That’s correct. That’s right.

Nabil Elsheshai - Pacific Crest Securities

Then on the indirect side, you guys have talked historically about, some potential trying to drive indirect leverage in the model. Is there a timeframe that you expect that to start to show up in the split between direct and indirect revenues?

Pat Scannell

I don’t want to predict a timeframe, Nabil, but what I would draw your attention to is the fact that given the change in architecture of the product line from, proprietary platform to now what is a standards-based or standards-Laden network and storage-based architecture, it has given us the opportunity to have conversations that we’ve never been able to really have before and so we continue to put an emphasis on this strategy and we’re having all of those conversations in the market. So, I don’t want to predict a timeframe right now, but I can tell you that we are actively engaged and continuing to pursue that.

Nabil Elsheshai - Pacific Crest Securities

Then on the customers, I think you said of the new customers roughly half were on TwinFin. What’s the reason that somebody would adopt the Mustang Series for a new customer?

Jim Baum

Some of that is historically depends on this specific application within a vertical market. It could have been and as they look at from a price performance standpoint as they look at certain programs that were offered to them.

Pat Scannell

We have numerous situations where we had 10000 Series equipment that was out in POC, in that customer’s environment and those converted into a sale and we tried to manage those relationships very carefully because we didn’t want to damage the, the revenue in the quarter based on what we were seeing in the POC pipeline.

There were a couple of instances where the customer said, hey, I want to switch to the new product once they learned about it, but in general, we maintain a very close set of relationships with our customers and our prospects and we were very upfront with them about our plans and successfully managed through that transition.

Jim Baum

There were some customers that don’t want a 1.0 Version of the product.

Nabil Elsheshai - Pacific Crest Securities

Then last question, is there a significant number of customers on the pre-Mustang and installed base still?

Pat Scannell

No, there are just a few.

Operator

Your next question comes from Glenn Hanus - Needham.

Glenn Hanus - Needham

Just a quick comment on your performance versus your internal expectations sort of about inline?

Jim Baum

Inline.

Glenn Hanus - Needham

Previous deferrals from earlier quarters, has that been sort of cleaned up now and we’re not really seeing project deferrals anymore?

Jim Baum

In terms of slippage, I think what we’ve seen, Glenn, is these selling cycles have become somewhat more deterministic in terms of when they will end, earlier in the year, as we spoke it was more difficult to predict when a sales cycle would end and in some cases, if it would come to closure at all for any vendor, Netezza or a competitor.

What we do see now is that the environment is - I wouldn’t call it robust, but I would call it stable, people are planning for next year. They are executing processes seriously. They are not getting surprised internally and therefore we’re not getting surprised. So, I would characterize it as a more stable environment.

Glenn Hanus - Needham

As you look at the improving or stable environment in your sales and marketing investment, I appreciate you’re not giving guidance. Can you sort of talk about how you’re thinking about operating leverage versus operating spending going forward in the improving environment as the emphasis on grow quickly and not think too much about leverage near term or is it more balanced, maybe you could give some qualitative color on that?

Pat Scannell

So the operating Mantra is seize the day and with the technology that we have right now is to take advantage of the lead that we have. However, it’s also to pivot off of growth that we see in the business and with growth, there will be more investment. So we will balance that with the operating income that we deliver over the course of the year and balance both investments with growth and as we see more growth, we’ll invest accordingly.

Glenn Hanus - Needham

Maybe just back on the competition for a second, so with Oracle, were you competing I assume with the Version 1.0 product? What’s sort of the dynamic you’re seeing with Version 2.0 not quite out yet or what’s going on there?

Jim Baum

The dynamic with Oracle is the Version 1.0 products not being proposed. So we’re not really seeing that competitively. As you know, they somewhat abruptly abandoned the HP relationship when they announced some Version of Exadata and that’s still not been visible in the market. So we’ve had no head-to-head experience with it.

One thing I would draw your attention to though is that Oracle, as I’m sure you’ve seen, has spent aggressively on its own marketing efforts around Exadata, with daily ads in the Wall Street Journal and every airline lounge around the world. I mean it’s very, very visible. In some respects, this has created some additional visibility to this market in general. So we are indirectly somewhat a beneficiary of the amount of visibility that analytics and the idea of a database appliance has in a market.

Operator

Your next question comes from Brian Denyeau - Oppenheimer & Co.

Brian Denyeau - Oppenheimer & Co.

First just quickly on the sales teams, were the eight reductions you made in the quarter, were primarily more recent hires or people that have been fairly tenured?

Jim Baum

Across the Board.

Brian Denyeau - Oppenheimer & Co.

Then you talk about a pretty sharp increase in the POC activity. Could you just remind us historically, how long has it taken that type of up tick in your metrics to start coming through in terms of actual wins and revenue contribution with the move to TwinFin. Do you think that cycle might shorten this time around?

Jim Baum

So our typical sales cycle is still of the 9 to 12 month order. The POC cycle within that cycle is anywhere from two weeks to three weeks. The conversion of a POC to revenue is still in the order of once we get to POC activity, the conversion rate is 80%. The timing still is a function of budgets. It’s a function of the other sales activities that take place within the account, so that’s indeterminate.

Brian Denyeau - Oppenheimer & Co.

Then lastly, you bring up budgets. As you talk to your guys in the field, any sort of anecdotal feedback from their customers about how their budget process for 2010 is playing out so far?

Pat Scannell

Nothing really noteworthy, I mean what we’re seeing, what we’re hearing back from our customers is that they’re going through their budgeting processes. They are spending business analytics, high on the list of priorities, which of course drives the need for the data warehouse underpinnings for it. I think that people are trying to figure out of the cuts they’ve made, what cuts can they leave in permanently, to permanently reduce costs? Then they’re layering back in on top of that.

Jim Baum

To add to that, I think just quantitatively, the metrics that we’re seeing in the business suggest that this is returning and it’s returning to a level not quite the pre Q3 of a year ago, but it’s returning to a level just again quantitatively and that’s the best metric that we have to measure there.

Operator

Your next question comes from Jason Nolan - Robert W. Baird.

Jason Nolan - Robert W. Baird

First question, on just new product introduction, there’s still a few more products to come and I would assume TwinFin’s kind of the core product here, but is it fair to assume that some of the new potential customers you’ve come across on NZ would be waiting for one of the other three products to come?

Jim Baum

In a very few cases, I would say yes. We have seen demand for some of these variants of the products in a couple of situations that we’re working on now. In general, however, we are seeing demand largely for TwinFin and we’re quite intentionally not aggressively marketing the other variants of the product line until they’re much closer to release.

Jason Nolan - Robert W. Baird

On the OpEx line, I assume there’s a lot of kind of onetime costs with NZ, but with new hiring, is it fair to assume OpEx trends up into Q4?

Pat Scannell

Yes, it is.

Jason Nolan - Robert W. Baird

Then on the demo units, about a $6 million increase sequentially, if you can say roughly how many units or customers that would be?

Jim Baum

Are you talking about on the inventory line?

Jason Nolan - Robert W. Baird

Yes.

Jim Baum

So in inventory, about 60% of that represents TwinFin inventory. We can’t talk about the number of units, but suffice it to say that it’s up substantially.

Operator

Your next question comes from Nathan Schneiderman - Roth Capital.

Nathan Schneiderman - Roth Capital

Jim, you made the comment that your proof of concepts were up dramatically. Can you drill down a little bit more, how many proof of concepts do you have out right now? What would that have been, let’s say last quarter?

Jim Baum

What I can say, Nate, is that our proof of concepts went up dramatically in the month of October and they are remaining at very high levels through what we’re seeing here in early November or in November. I don’t want to drill down further than that and disclose kind of specific numbers of POCs that we have out there, but you do see evidence of it and we are building the inventory to support that and the demand has been substantially higher than our historical levels over the last nine months.

Nathan Schneiderman - Roth Capital

If you don’t want to speak to the absolute number of proof of concepts, could characterize it on a percentage basis? Is it doubled? Is it up 50%? Can you couch it in that kind of language?

Pat Scannell

I would say it’s up about 30% to 40%.

Nathan Schneiderman - Roth Capital

Is your typical pattern that you do a proof of concept in two to three weeks and then you would typically see a conversion to a deal in that 80% of the cases that would convert, that would usually happen within one quarter? Is it typically two quarters?

Pat Scannell

We use the proof of concept strategically, because what we don’t want to do is go into a sales cycle and show our stuff and then leave it to the customer or our competitors to, especially if there’s an incumbent competitor to comeback in and try to figure out how they can get a way to outperform Netezza. So we strategically use the proof of concept at different points in the sales cycle and it varies. It’s really consistently a 9 to 12 month sales cycle.

Nathan Schneiderman - Roth Capital

One of the comments you made in your presentation was that the pipeline was up meaningfully. Could you characterize that on a percentage basis? How much is that up relative to let’s say last quarter?

Jim Baum

Again, I don’t think we want to get specific on percentages, but what we do is we carefully monitor a series of metrics around our pipeline that are indicative of the potential amount of business that’s out there against our internal objectives. So it’s a percentage against our internal objectives and what we have seen is those percentages have returned, or I should say are returning to pre 2009 levels.

Nathan Schneiderman - Roth Capital

Then a question on operating expenses. I understand the expenses would be up sequentially. Could you give us the sense on a dollar basis how much your core operating expenses would be up sequentially in Q4?

Pat Scannell

No, we’re not going to comment on that.

Nathan Schneiderman - Roth Capital

Final question for you, do you expect the Cruiser product for large data to be generally available in the fourth quarter?

Pat Scannell

No, we do not.

Operator

Your next question comes from Mark Kelleher - Brigantine Advisors.

Mark Kelleher - Brigantine Advisors

Just quickly, it looks like the linearity in the quarter was a little less than last quarter. Receivables bumped up. Can you talk to what was driving the bump up in receivables?

Jim Baum

Yes, 55% of the revenue was in the last month of the quarter, and much of that was collected over the course of the subsequent month of this quarter. So I think it’s just timing of those cash flows.

Mark Kelleher - Brigantine Advisors

Last quarter was 60% in the last month, correct?

Jim Baum

Yes.

Mark Kelleher - Brigantine Advisors

I don’t know if you can give us this, but can you give us the percent of systems that are embedded with SAS?

Jim Baum

Zero, we just announced it and they are making it generally available sometime in the next I believe month to six weeks.

Operator

Your next question comes from Rajesh Ghai - ThinkEquity.

Rajesh Ghai - ThinkEquity

A couple of metrics that I noticed were a little inconsistent with the sequential growth in revenue, one was the number of deals closed and the other was number of new customers. I was just kind of curious what your explanation to that was.

Pat Scannell

So the number of new customers was 16. We typically expect, the last quarter sequentially it was 20. We typically expect the number being between 15 and 25, as we have guided in the past. The average deal size is $1.2 million. I’m not sure where the…

Rajesh Ghai - ThinkEquity

Yes, I’m just looking at product revenue divided by the PSP.

Pat Scannell

Yes, I mean that all squares with me. Maybe you can ask your question in a different way.

Rajesh Ghai - ThinkEquity

I guess I just looked at the product revenue divided by the ASP to get that number and that number was lower sequentially, so I was just curious if that was anything that is…?

Pat Scannell

No, I don’t think there’s anything to be gleaned from that as it relates to a trend or an inconsistency. I think that the number of deals in the quarter were 36 deals versus 37 last quarter.

Rajesh Ghai - ThinkEquity

Looking at revenue from Europe, so that obviously, the decline was rested and you did see a modest sequential growth in Europe. What’s your sensing of the pipeline and the number of deals that you had out there? Is that also trending up in line with what you see in North America maybe?

Jim Baum

It is, Rajesh, very similar.

Rajesh Ghai - ThinkEquity

You had made an acquisition and you have this product called the Mantra appliance, any update from that during the quarter, specifically in the federal vertical?

Jim Baum

The update around Mantra so, at the end of the third quarter, now the beginning of our fourth quarter on the first of November, we made a decision to include the Mantra appliance with every TwinFin that we sell. So what means is that, we added some to the list price to account for that, and it’s not an option. So it comes with the product and it gives our customers then the data auditing and compliance capability on that TwinFin set of databases.

Then our objective here is to get mantra into the market, get it attached to a large number of Netezza TwinFin appliances and then we believe that creates an opportunity for us to come back and sell the enterprise version of Mantra, which then allows our customer to have data auditing and compliance capabilities across their entire heterogeneous database environment. So that’s really the news with Mantra and overall, I would say that the integration of the team and of the technology is working extremely well.

Rajesh Ghai - ThinkEquity

Going back to your sales teams, had you mentioned 55 at end of quarter, this current quarter in your previous call. Do you still plan to get back to that number by end of this quarter and has the hiring happened, or is it yet to occur?

Pat Scannell

So as we said earlier in the prepared comments, as we are aggressively trying to get to the mid-50s level, and we are making headway, and it’s an aggressive target, but we’re certainly trying to get to the mid-50s level. So I would expect it would see a sales team headcount in the 50 to 55 range, but we’re certainly trying to get to the mid-50s.

Rajesh Ghai - ThinkEquity

Talking about that one better bite skill deployment in your a proof of concepts, are you seeing larger warehouses showing up in your proof of concepts or is that the one better bite deployment just one of thing?

Jim Baum

The one kind of deployment is not a one-off thing. I would say that in general, our kind of base business proof of concepts continued to be a similar scale perhaps with some growth, especially as our customers focus on all the opportunities around customer relationship management and customer marketing initiatives, but they’re analyzing all of the data they have around their customers.

That said we have seen a number and an increasing number of select opportunities where the scale is getting very large. We’ve seen these both in financial services, as well as our government verticals primarily.

Rajesh Ghai - ThinkEquity

One last question, what’s the tax rate that we should use for the January quarter?

Pat Scannell

27%.

Operator

Your final question comes from Bhavan Suri - William Blair & Co.

Bhavan Suri - William Blair & Co.

Just a couple of questions, most of mine got answered. Could you provide little color around some of the smaller OEM partners that are reselling the smaller footprint offering? How is that coming along and sort of what is customer traction been there?

Jim Baum

So it’s coming along and it’s probably fairly announced the relationship with Kolido, and Kolido has built the product or is in the process of building a product with us, where they will leverage the TwinFin architecture to take a series of pre-packaged warehouse and MDM solutions to market. It’s still early days. We recently announced the relationship and the products are still being developed.

We also have the project in place with Actuate, which is also now in the process and according to the TwinFin. I would say from a revenue perspective, they are still immaterial, although we do think that they are important from the standpoint of really supporting the idea of the application or solution level appliance.

Bhavan Suri - William Blair & Co.

Any color around the federal pipeline, how is that progressed, obviously remained, but are those becoming more frequent? That’s in more frequent opportunities to bid for business there?

Jim Baum

Yes, we singed, we’ve invested in our federal business for a number of years now. So we feel like we have, both feel that a very good team in federal as well as developed a series of relationships with partners, integrators, and end user customers in federal that are producing momentum for us there.

So our federal pipeline is good. We’ve seen now some consistent performance from federal in terms of revenue contribution over the last few quarters. So we’re in good shape there.

Bhavan Suri - William Blair & Co.

I don’t know if someone asked this earlier, but are you guys anticipating any sort of budget flush or are customers talking about they may have held back early in the year, and so it might not be just a flush it, might be some excess capital. Are you anticipating or expecting any of that?

Jim Baum

We’re not planning on it, we’d like to see it, but it’s not part of our plan.

Operator

At this time, I would like to turn the call back over to Mr. Jim Baum for closing remarks.

Jim Baum

Great, thank you all for joining us this afternoon. We appreciate your participation and your insightful questions and your support. I just have really one final comment. Our success in this competitive market is clearly due to the outstanding work of a very talented set of employees and partners, who all share with us a common passion for the customer success and excellence.

So just in closing, I would like to thank them for their continued support and I also like to thank our customers for their continued commitment and support. So thank you all very much and have a happy Thanksgiving.

Operator

We thank you for your participation in today’s conference. This does conclude your presentation. You may now disconnect and have a great day.

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Source: Netezza Corp. F3Q10 (Qtr End 31/10/09) Earnings Call Transcript

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