Netezza Corporation F4Q10 (Qtr End 01/31/10) Earnings Call Transcript

Mar. 3.10 | About: NETEZZA CORP. (NZ)

Netezza Corporation (NZ) F4Q10 (Qtr End 01/31/10) Earnings Call Transcript March 3, 2010 8:30 AM ET

Executives

Deb Murphy – VP and Corporate Controller.

Jim Baum – President and CEO

Pat Scannell – SVP, CFO and Treasurer

Analysts

Katy Huberty – Morgan Stanley

Bill Shope – Credit Suisse

Nabil Elsheshai – Pacific Crest Securities

Glenn Hanus – Needham & Company

Alex Kurtz – Merriman Curhan Ford

Jayson Noland – Robert W. Baird

Nathan Schneiderman – Roth Capital Partners

Rajesh Ghai – ThinkEquity

Mark Kelleher – Brigantine Advisors

Bhavan Suri – William Blair & Company

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter fiscal 2010 Netezza Corporation Earnings Conference Call. My name is Katina, and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of this presentation. (Operator instructions). As a reminder, this conference is being recorded for replay purposes.

I will now like to turn the presentation over to your host for today’s call, Ms. Deb Murphy, Netezza’s Vice President and Corporate Controller. Please proceed.

Deb Murphy

Thank you, Katina. Good morning, everyone, and thank you for joining us on our earnings release conference call for our fourth quarter and full year of fiscal 2010. 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 would like to remind you that some of the statements made on this call may be forward-looking statements. While these statements reflect our current outlook, we’re 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 a file with the SEC.

In addition, any forward-looking statements represent their 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 Q4 results.

The press release is available on the home page of the investor relations section of our Web site at www.netezza.com. 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, and good morning, everyone. Thank you for joining us on the call today. We’re very pleased with our fiscal year '10 fourth quarter results, and we are encouraged by the momentum we’ve seen in the sales of our new TwinFin product.

We experienced strong TwinFin uptake by both new customers and our existing customer base with 25 new customers in the quarter. This puts our new customer additions at 79 for the full fiscal year, which we believe is a strong sign of our continued execution as we reshape the market for the next generation of business analytics infrastructure and gain market share.

We closed significant deals in the quarter in telco, financial services, and digital media and announced our first major OEM relationship with NEC. We’re encouraged by the NEC win as it is proof positive of our ability to partner with a large systems provider and jointly develop products that can be taken to market through a third-party channel.

We believe we have and will continue to reshape this market and have executed well, delivering the value proposition, products, and capabilities, enabling our customers to drive more effective and efficient fact-based business decision-making.

Since our release of the TwinFin several months ago, we have recently announced and shipped the first two variants of TwinFin, Skimmer and the Retail Analytic Appliance. In addition, we’ve just announced a TwinFin i-Class product.

These product introductions and announcements are evidence of our continued thought leadership and tangible delivery of our insight vision for analytics which we released to the market last fall.

As we described last fall, our product strategy is designed to allow us to address a broader set of analytical needs for our target customers. We expect Skimmer to be an important product filling out a portion of our portfolio.

This product is a smaller system that is based on TwinFin technology and our customers and partners use it primarily as a development and test system for larger TwinFin environments, especially in North America. 90% of the Skimmer systems we have sold to-date will be used in this manner.

There are cases where it will be used as a production system in some accounts, mostly internationally, and places where we previously sold our 5200 product. In one case, one of our long time analytical service provider customers purchased both TwinFin and Skimmer together to build a marketing campaign, analytics platform and a near real time data reporting application, finding the combination of the two products allowed them to very competitively offer these solutions to their client, a major retailer.

The Retail Analytic Appliance is an industry vertical solution. It’s a combination of our data warehouse appliance technology and various software capabilities from partners that provides a turnkey approach to delivering fully functional business intelligence applications on inventory, profit, allocation and merchandising.

This is one example of our vertical approach to the market, allowing us to expand the dialog we can have with retailers. We have already won new business with this appliance where our selling efforts targeted the merchandisers rather than purely IT, providing an additional effective avenue into this account.

We also recently announced the TwinFin i-Class, unveiling the new capabilities we are bringing to TwinFin, targeted specifically at supporting advanced analytics. Essentially, this offering allows us to develop, port and execute algorithmically-oriented analytics applications on our platform.

The key differentiator (inaudible) capability is that no longer have to pare down and move data from a warehouse to a separate computing environment, which is usually a grid for complex, compute intensive analytics, allowing this form of analysis now to occur on larger data sets with far less cost and complexity. I frequently refer to this concept as big math meets big data.

The technology is the basis of our work with key partners and has been shown to have significance with numerous customers and prospects. We are working with prospects customers and partners now to deploy applications like back testing and financial services to test the viability of trading models. Fraud detection and risk analysis and social network analysis to reduce churn and improve targeting.

Clearly, these are high business value solutions and our ability to provide the platform for them is attractive to the partner community and furthers our agenda of expanding our addressable market. We expect to release this product in Q2.

Our competitive win rates continue to be strong against our primary competitors, Oracle, Teradata and IBM. In fact, our win rates against Teradata improved substantially over the course of the past year. As you are all aware, Oracle has aggressively marketed their new appliance like products and we continue to compete very effectively against them.

Our win rates against Oracle in Q4 were slightly better than earlier in the year and should be noted that we still mostly compete against Oracle’s software although we have now experienced several head-to-head competitive engagements with Exadata 2. Our win rates against Exadata 2 are as high as our historical pre-Exadata win rates and the small number of losses we have experienced were in accounts that conducted limited or no pre-purchasing comparative testing of the systems they were evaluating.

A number of our customers and prospects have now evaluated the new Oracle Exadata system and we hear a common theme emerging, mostly the platform used as a consolidation server for other infrastructure running OLTP-based applications not as a complex analytical processing platform.

Of course, we do see Oracle competing in the data warehouse but we remain well-positioned against them in our space. We’re happy to have Oracle in the market as they continue to invest heavily in marketing activities, raising the general awareness of the space and likely contributing to the pipeline growth we are experiencing.

As Oracle works out the positioning of their product offerings, we believe their entrance to the market only bolsters our position as we find the choice is good for customers, allowing them to avoid vendor lock-in and to acquire best-in-class capabilities. We remain very well-positioned to serve that need.

Our experience with our TwinFin deployments has been very positive. We now have over 100 systems deployed in POCs, production and preproduction and the system has performed as we expect.

Our customers are pleased with TwinFin finding it meets our exceeds their expectations for performance and producing rapid time to value, due to our unique ability to eliminate complexity from the data warehouse environment.

We’re also finding that our customers are excited by the vision of the TwinFin product line allowing them to incrementally build analytics infrastructure that will address varying needs in their enterprise.

Given these various developments and a generally more stable economic environment, our visibility has improved throughout the course of Q4. The sales pipeline metric that we used to drive our forecasting process have improved in all sectors of the business and our POC counts have continued to grow.

While the buying environment has improved, there clearly still remain various economic challenges in the market. However, the improvement in our visibility has reached the point where we are resuming annual guidance.

Given that we do see improving conditions we will continue to invest in the business for growth. We expect to deliver a strong growth in FY'11 and we will continue to make investments in our business to fuel that growth for this year and beyond.

As we previously committed we have now grown our field selling force to 55 quota carrying teams. We added these teams in North America and EMEA primarily.

We’re also continuing to invest in the development of leverage routes to market with new partnerships and distributor ships in EMEA, in addition to the NEC relationship.

On the product side, R&D investment continues, as we expect to execute an aggressive product road map this year. Our product pipeline is robust with significant software and platform deliverables scheduled in this fiscal year that will continue to fill out our vision for the analytics infrastructure space.

Now, I would like to turn the call over to Pat.

Pat Scannell

Thanks, Jim, and good morning, everyone. We are very pleased with the results of the past quarter on two fronts. The first being the continued wide deployment of TwinFin in the marketplace and secondly, the improving business climate.

While there is still some uncertainty in pockets we are seeing a general recovery in spending across most sectors that gives us greater confidence as we embark on our fiscal year '11 business plan.

For Q4, we delivered revenues of $53.6 million, representing an increase of 6% year-over-year. Revenues for the year were $191 million representing an increase of 2% over fiscal year '09. For Q4 and the year, domestic revenues were in the 80% range.

Our Q4 business in North America, grew 28% over Q4 last year, and grew 6% year-over-year, as we continued to see widespread adoption of TwinFin across most of our markets.

Although we saw a decline in our international business year-over-year, we expect that this will be a growth sector for us in fiscal year '11 and beyond. We have expanded our footprint internationally over the last six months to include direct operations in ten countries outside the U.S. and operations in an additional 18 countries through distribution.

Further, we recently announced a new OEM distribution relationship with NEC that will begin to contribute to revenue and earnings in the fiscal year ‘12 timeframe which will reshape the go-to-market model for us in certain Asian territories.

As Jim mentioned, we have 55 quota carrying reps on board today, which is up from the 43 direct rep level count that we talked about on our last call. Our direct engine is primed. The deployment of these reps is spread 67% in North America and 33% in international sectors.

We saw the indirect component of our business finish at 14% for the quarter and the year. As the NEC OEM program rolls out, this is one element that will increase the amount of activity coming from the indirect channels over the next 24 months.

Beyond NEC, our partnerships and the ecosystem surrounding our prospects and customers continues to be a strategic focal point of our activity in developing the necessary direct and indirect go-to-market relationships with other potential OEMs and analytics providers.

Our average deal size in Q4 was $1.1 million with 28 new customers, 22 TwinFin, 310,000 series plus three new Mantra customers adopting the new compliance engine that we introduced after our acquisition of Tizor one year ago.

79% of our product revenue was from TwinFin. We have seen the adoption of TwinFin across all our vertical markets and in all geographies. 63% of the quarter’s revenue was from the install base as our customers continue to upgrade and expand their deployments.

We decommissioned 19 former new tech customers, who are not core to our newly announced analytics mission. The total revenue contribution from these decommissioned customers to Netezza for fiscal year '10 was just under $300,000, thus immaterial. However, these 19 customers have been removed from our customer count. So, today we have 325 customers.

The top four vertical markets for the quarter were telco, financial services, digital media and health and life sciences, representing approximately 80% of the business.

For the year, digital media, telco, financial services, each represented about a 20% share followed by government and retail, which were just north of 10% each.

We had one 10% customer in the telecommunications space this quarter. This customer purchased an eight rack TwinFin system to complement their existing 17 rack Mustang environment and are using the Netezza systems to combine cutting-edge data appliance technology with network intelligence for near real time CDR or customer billing detail and high-speed aggregations collecting over 4 billion call data records a day.

I’ll be referring to non-GAAP figures in this call, unless I specifically say that I’m referring to GAAP figures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is available on our earnings press release issued earlier today, which is also posted on the Investor Relations section of our Web site.

Total gross margins were reported at 66%, up from 64% a year ago on the quarter. Total gross margins on the year were 67%, up from 63% a year ago. The early indicators on TwinFin showed that we are able to maintain our average selling price and that our cost model has stabilized, as our experience with our contract manufacturer Avnet matures, as evidenced by our product margins on the year, increasing to 63% from 60% a year ago. On the year, service margins were reported at 75% and should stay in the 74% to 75% range for the near-term.

For Q4, operating expenses increased 17% to $30 million, up from $26 million a year ago. On the year, operating expenses increased 15% to $113 million, up from $98 million a year ago.

We are operating with 425 employees versus 381 employees, a year ago.

The investments that we have made over this past year have been centered on product development with the introduction of TwinFin, the product launch, and our go-to-market activities.

We will continue to invest incrementally in R&D and our go-to-market activities as we move through the year, although the majority of these investments have already been made.

Operating income for the quarter was $5.7 million or 11%, down from $6.5 million or 13% a year ago. And operating income for the year was $14.5 million or 8%, down from $20 million or 11% a year ago.

As we examine this past year, we saw operating margin leverage build in the model over the course of the year by seven points from our Q1 op margin of 4% to our exit rate of 11%. Most of this leverage came on the R&D line with revenue acceleration.

Our tax rate for the quarter was 17% for non-GAAP and 8% for GAAP. These low rates were primarily driven by higher than expected levels of federal and state R&D credit and tax deductions from stock-based compensation.

We expect our tax rates for fiscal year '11 to be in the 28% to 30% range for non-GAAP and the 32% to 34% range for GAAP.

Net income for the quarter was $5 million or 9%, down from $5.3 million or 10% from a year ago. Net income on the year was $11.8 million or 6%, down from 20 million or 11%.

Fully diluted earnings per share for the quarter was $0.08, down from $0.09 a year ago and for the year, EPS was $0.19, down from $0.32 per share, a year ago. We ended the year with $154 million in cash which was down from $161 million a year ago.

And this decrease was directly attributable to the investments we made in building the TwinFin proof of concept pool of inventory. Included in cash is $50 million of auction rate securities. Of which 13 million has been classified as short-term as we expect to liquidate these securities at par this year.

Accounts receivable DSO was 91 days, which was above our target DSO level of 75 days. This was entirely due to the timing of cash receipts. We collected $18 million in the first three weeks subsequent to quarter-end, which equates to a pro forma DSO of 60 days.

The inventory balance was 28.7 million, which is 85% TwinFin. The balance of the inventory is the 10,000 series that is slated to be delivered to customers will be used for spare parts for our install base.

Deferred revenue was 58.4 million, which is the same level, a year ago, and up 13 million sequentially from the balance at the end of Q3.

Turning now to guidance, as Jim mentioned, given that we have seen stabilization in the economy, better predictability in our forecast and our visibility has improved over these past quarters with increasing POC and pipeline growth, we are in a position of once more offering annual guidance on our business.

We expect that our business will grow 20% on the top-line while we will continue to invest in both R&D and in our go-to-market activities.

As you know, we have seasonality in our business from Q4 to Q1, where we have flat to down performance off of Q4. We expect the same will happen this year. However, you can expect year-over-year performance will increase and that you will see operating margin leverage build over the course of the year.

In closing, I would like to review the financial highlights of this past year. We were able to deliver revenue greater than last year in a very difficult economic environment. We added a total of 79 customers, 44 customers adopting the TwinFin platform.

We successfully acquired and integrated ties of adding a new dimension to our product line. We continue to deliver higher than planned gross margins for both our product and service areas. We successfully managed a significant product transition mid-year. We increased our operating margin leverage throughout the year, while maintaining our investments in R&D and in our go-to-market activities.

We have $154 million in cash on the balance sheet with no debt. And we have a $56 million service business, that is an annuity-based servicing our customer base of 325 customers.

And we continue to gain market share in all our markets and have made significant investments that have prepared us to take advantage of our technology lead in an ever improving economy.

Let me turn it back over to Jim.

Jim Baum

Thank you, Pat. I will just recap briefly. Overall, as we both said we are pleased with the improving visibility in our business allowing us to resume providing annual guidance. We do feel that as a company and an industry leader, we are leading the way on data warehouse appliances and are seeing exciting new opportunities as our story and positioning evolve into broader analytics infrastructure.

We are beginning to see our various new go-to-market methods take shape as exemplified by both NEC and what we’re doing with our vertical solutions and our partners.

And our big competitor in Oracle is expanding visibility to this market. And we believe we are very well-positioned as the alternative and, in fact, believe this is helping to improve our sales pipeline. So we have invested in products as well as in sales investments that will have an FY '11 impact, and we feel we’re very well-positioned to resume growth this year and beyond.

So now, I’d like to go ahead and turn this over to questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Your first question comes from the line of Katy Huberty representing Morgan Stanley. Please proceed.

Katy Huberty – Morgan Stanley

Thank you, good morning and congrats on the quarter, gentlemen. Jim, if you go back to the strong proof of concept and the old pipeline that you discussed in November, can you provide any metrics around the conversion rate of those opportunities, if not in absolute terms, relative to historical conversion rates in the business?

Jim Baum

Yes, good morning, Katy. Thank you. I would suggest that the conversion rates remain very consistent with what we’ve seen in the past. As we look at the metrics around business closure in Q4 and what we expect in Q1 and beyond, we’re seeing a lot of similarity in terms of sales cycles. Sales cycles were down slightly in Q4 although I wouldn’t say significantly. ASPs have held very steady as well. So I don’t think we see a big change in the conversion rate on POCs that we have out and the business tends to be operating in a very similar manner.

Katy Huberty – Morgan Stanley

Okay. Then just as a follow-up for Pat, what are your plans to add net sales teams in the fiscal first quarter? And given your commentary around the seasonal revenue drop, would you also expect operating margins to drop sequentially in the first quarter?

Pat Scannell

As it relates to sales, we are fully charged from a sales distribution standpoint, so we don’t expect that that 55 will grow in the first quarter and you will see op margin drop Q4 to Q1.

Katy Huberty – Morgan Stanley

Okay, great, thanks so much.

Pat Scannell

Welcome.

Operator

Your next question comes from the line of Bill Shope representing Credit Suisse. Please proceed.

Bill Shope – Credit Suisse

Great, thanks. Looking at the overall pricing environment, sounds like it hasn’t changed drastically. Do you expect the overall improving economic conditions to allow for some improvements here or do you think this is still being held in check by the competitive environment as things are improving?

Jim Baum

Bill, I don’t see the pricing environment is going to improve. I think we feel very good that we’ve been able to maintain our ASPs and our gross margins as you have heard or continue to be strong. I wouldn’t anticipate that that will improve, but we also haven’t seen degradation in it. The environment is competitive on pricing. We do see our competitors get aggressive on pricing and we need to combat that both with technology as well as business relationships, but I think, overall, I would say, we expect it to remain fairly stable.

Bill Shope – Credit Suisse

And then overall digging into the competitive environment a bit more, are you seeing Oracle focus their initial efforts with Exadata 2 on specific regions or verticals? Is it primarily U.S. based? Is it broad-based? Are there any verticals where you see them being most aggressive initially?

Pat Scannell

It is just been a blanket approach from what we have seen, Bill. We have seen them in every geography, and in every vertical through their existing sales channel and as they’re adding sales channel. And as I mentioned, I think when we compete with them, we still push for the onsite head-to-head comparison of the products. We continue to have a strong advantage product wise in the areas of performance and price performance as well as in the ongoing total cost of ownership and reductions in complexity in the environment.

And so, clearly, Oracle Exadata will continue to execute in the market, but it has created an environment where people do look for alternatives, as they continue to increase their own visibility and thinking in the space.

Bill Shope – Credit Suisse

Okay, great, appreciate the help, thanks, guys.

Pat Scannell

Thanks, Bill.

Jim Baum

Thanks, Bill

Operator

Your next question comes from the line of Nabil Elsheshai representing Pacific Crest Securities. Please proceed.

Nabil Elsheshai – Pacific Crest Securities

Hey, guys.

Pat Scannell

Hi, Bill.

Nabil Elsheshai – Pacific Crest Securities

So, on the channels you obviously made some nice progress this year. Now, looking out, where do you see the greatest opportunities whether SI’s or additional ISV or hardware vendors to continue indirect channel expansion?

Jim Baum

Good morning, Nabil. Thanks for your question. Let me back up. I think as you know we’ve made a concerted effort in the company to aggressively develop our ecosystem and NEC is an example of that. Other partnerships that are emerging are also examples of that. And we continue that aggressive investment in developing these partnerships. And we are and will continue to be very partner-friendly and we find that integrating our partners with our vertical strategy, gives us an ability to bring unique solutions to the market, like the Retail Analytic Appliance, where we can get leverage both in our own product offerings, but also through our partners' distribution. So we’re still doing that.

And I would expect over the course of this year that you will see other relationships with other ISVs as well as systems integration partners to help us go-to-market, so it continues to be a big focus for us because we do believe that we can create additional leverage in our distribution channel.

Nabil Elsheshai – Pacific Crest Securities

Great. Obviously, the SI’s tend to be a little bit follower as far as market adoption goes but now that you guys have the traction that you do. Have you seen some of the larger SI’s kind of be more open to partnering or more aggressive about working together?

Jim Baum

We have. We have ongoing dialog with all the usual suspects there and continue to see opportunities to partner with them and there are numerous occurrences and I don’t have the data in front of me, but anecdotally, I would suggest increasing numbers of occurrences where we are partnered with SI’s in broader deployments of the technology, more strategic deployments of the technology.

Nabil Elsheshai – Pacific Crest Securities

Okay. And then, Pat, is there any commentary you can give on gross margins going forward as you move fully off of the Mustang series and onto TwinFin, what are gross margins on products that look like?

Pat Scannell

As I indicated in my comments, gross margins over the year went from 60% to 63% on product. And I think that for the time being we think that will hold there. And as our relationship with Avnet matures, and as we get better with the bill of materials with TwinFin, I think that the guidance going from here out is that that product margin level of 63% should hold.

Nabil Elsheshai – Pacific Crest Securities

Okay, great. And then did you give the product portion of deferred?

Pat Scannell

I did not give the product portion of deferred. And the product portion of deferred at year-end was, I believe, $13 million.

Nabil Elsheshai – Pacific Crest Securities

Great. All right. Thank you very much.

Jim Baum

Thanks, Nabil.

Operator

Your next question is from the line of Glenn Hanus representing Needham & Company. Please proceed.

Glenn Hanus – Needham & Company

Thanks, good morning, guys.

Jim Baum

Good morning, Glenn.

Glenn Hanus – Needham & Company

Nice report.

Pat Scannell

Thank you.

Glenn Hanus – Needham & Company

Maybe, Pat, as we look at the operating leverage this year, could you talk first about plans for expanding direct sales beyond the first quarter in terms of any headcount additions there and where should we see the operating leverage come from this year? Will it continue to be more on the R&D side or how should we think about that?

Pat Scannell

Good question. So we expect that as we exit the first quarter that you will see some incremental investment in the sales organization, perhaps in the 10% to 15% range as we move through the year. The leverage that you will see will come from the R&D line and perhaps from the G&A line with revenue acceleration.

Glenn Hanus – Needham & Company

Okay, good. Maybe switching back onto NEC, could you, Jim, maybe walk us through how having NEC, they’ve been reselling your product, maybe talk about how their NEC branding will expand your opportunity, enhance your competitive position, particularly, over in Asia and just kind of the overall rollout there?

Jim Baum

Sure, Glenn. We have had a longstanding relationship with NEC and NEC has been a reseller of our previous generation, as we call it the Mustang or 10,000 series technology primarily in Japan. In fact, completely, exclusively, in Japan prior to this. When we began the development of the TwinFin platform, we approached NEC at that time, explained to them that we were developing a platform on commercially available blades. We told them that that platform would be built on IBM blades and we wanted to see if they would have interest in developing a product with us. So they agreed to do that.

And we put together this partnership. And I think one of the primary differences here is that this is part of a broader NEC strategy to go more aggressively into this market of data warehousing, data management, and analytics. And so what was previously a distribution relationship through a fairly small segment of the overall NEC sales channel is now a broader relationship with an NEC branded products that is built using exclusively NEC content that will now be distributed through NEC’s entire sales force which is something around 4,000 sales professionals in the Asian region.

We expect them to sell the products, primarily in Japan, but they also intend to take it into China and they have the ability to sell it elsewhere in the world. So from our perspective, it’s a fairly extensive expansion of the distribution force that NEC brings to Netezza. I don’t know how many sales teams they had in their reseller practice, but suffice it to say, it was a much, much smaller than their entire global sales force.

Pat Scannell

I think that the reseller team on the SI side of the NEC house was 150 people.

Jim Baum

Yes.

Glenn Hanus – Needham & Company

Okay, guys, thank you.

Operator

Your next question comes from the line of Alex Kurtz representing Merriman Curhan Ford. Please proceed.

Alex Kurtz – Merriman Curhan Ford

Thanks, guys, for taking the question. Just a follow-up on the NEC comments. They’ve disclosed a very specific number that they’re going to try to hit as far as systems sold over the next three years. You guys sign off on that number and have you baked that into your fiscal 2011 guidance?

Pat Scannell

So let me answer that question. They did come up with a number and their number was that they would sell 150 units over three years the systems. And what we have is that is in our fiscal '12 numbers because we think that even though we have had a relationship, it does take time to prime the pump and to get that up and running and we think that this begins to contribute both to revenue and earnings next year.

Alex Kurtz – Merriman Curhan Ford

Okay.

Jim Baum

As far as signing off on the number, Alex, we’re happy to allow them to sell as much as this as they want and we’re fully prepared to make it available to them. So we got all the processes in place now to build these products with them, to support them, to provide them everything they need to successfully go-to-market.

Alex Kurtz – Merriman Curhan Ford

Good point, Jim. Just a follow-up on another question for Pat. Pat, you’re getting to a pretty nice install base here. Do you feel like you have enough critical mass where from a quarter-to-quarter your visibility is getting better because you have more returning customers every quarter and you can have a little bit more confidence about how the year is going to play out or do you still feel like there is still a lot of very large deals in the pipeline that can sort of swing from quarter-to-quarter?

Pat Scannell

So, Alex, as you know our business, there are multiple dimensions to our business. And one of the best parts of our business is that 60% some odd comes from the install base, so that to us does give us confidence as the install base continues to grow. This quarter we had 1/10% customer and if you look back over the last eight quarters to twelve quarters, there have been 1/10% customer and perhaps two, so, I think that there is a continuing evolution of large deals that do happen, but I think that with our average selling price being about a million dollars, we see our business base developing very nicely. And with the predictability that goes along with that.

And I think that’s the back drop to all of us in terms of how we look at the forecasting process and as I have said, many times, that our ability to rely on our forecast is the most important element of us being able to offer future guidance and we go through a pretty laborious process of looking at this quarter, next quarter, and the third quarter out, in terms of trying to gauge and understand, where is the business trending and all those signs today are positive and that gives us the confidence to be able to look at the install base, new business and all of that in being able to give guidance.

Alex Kurtz – Merriman Curhan Ford

All right, thanks for that clarity. And just real, Jim, two quick questions for you. Talking about Exadata, did you lose any deals to them where it was an onsite POC? And then the last question do you expect to try to add the same number of sales teams you added in fiscal 2010? Thanks.

Jim Baum

So, in the cases where we lost to Exadata, they were cases where the customer did not do an in-depth onsite POC and so, they were not head-to-head competitive product evaluations. And as I said earlier, our win rate in the cases and we look at the competition with Oracle and we try to disect from the overall set of competitive engagements with Oracle where it’s Exadata and where it’s Oracle software. And most of it’s still Oracle software, but in the cases where we competed against Exadata, we had a very similar win rate to our historical win rates with Oracle, which is just north of 80%.

In terms of adding additional sales capacity, our expectation is that, as you know, we just brought in a fairly large number of sales teams over the last several months. We are training these people and bringing them up to speed. They’re deployed in the market today. The new resources are primarily in North America and in EMEA. And they are in some cases walking into existing geographies and territories with established pipeline, so we expect reasonable productivity from them fairly quickly.

That said, as we get into the back half of the year and begin our financial planning for fiscal '12, we will begin to build capacity as appropriate to meet our objectives next year as well.

Alex Kurtz – Merriman Curhan Ford

Thanks, guys.

Jim Baum

Thanks, Alex.

Operator

Your next question comes from the line of Jayson Noland representing Robert W. Baird. Please proceed.

Jayson Noland – Robert W. Baird

Thank you and congratulations on the numbers.

Jim Baum

Thanks Noland.

Pat Scannell

Thank you

Jayson Noland – Robert W. Baird

Jim, if you could talk a little bit about the length of the sales cycle? You mentioned it before, but have you seen a decrease at all with the move to industry standard hardware?

Jim Baum

No. I don’t think the move to industry standard hardware has affected the sales cycle one way or the other. The sales cycle numbers that we saw in Q4, I think, I mentioned that it was slightly down, but I don’t consider a trend nor do I consider the amount that it was down to be significant. So, we have seen a very steady sales process and sales cycle here. I think where the industry standard hardware has helped us is on a couple of fronts. One, it helped us positioning wise. There were places where the proprietary hardware platform was an objection and we have certainly eliminated that objection entirely.

And the other thing is doing is you can see there is kind of a rolling thunder of product announcements coming out here and the TwinFin platform and the fact that we’re on industry standard hardware has allowed us to accelerate various product development initiatives.

Jayson Noland – Robert W. Baird

Okay. Pat, in your FY '11 guidance, do you have expectations for a contribution from Skimmer and Cruiser in there?

Pat Scannell

Yes. Skimmer and Cruiser both products that are shipping now and that are in the pipe, but they will be contributing.

Jim Baum

Cruiser is actually shipping later in the year. It’s a density system.

Jayson Noland – Robert W. Baird

And then the memory intensive solution would be announced in the next few quarters or so?

Jim Baum

Yes, so, just to sort of recap the product strategy that we announced prior, the series of products that will be TwinFin derivatives, Skimmer is out now. There will be others like the Retail Analytic Appliance that you see. Cruiser, which is the large scale density system will be released later in the year. And then the ultra performance memory intensive system will be released beyond that, which we would expect at this point to be sometime early next year.

Jayson Noland – Robert W. Baird

Thank you, gentlemen.

Operator

Your next question comes from the line of Nathan Schneiderman representing Roth Capital Partners. Please proceed.

Nathan Schneiderman – Roth Capital Partners

Hi, Jim and Pat. Thanks very much in advance for taking my question and nice job on the business. I was hoping you could share with us in a little more detail your thoughts on operating margin outlook for 2011. So, compared to your fairly close to an 8% operating margin pro forma this year, would you expect at least 300 basis points, 400 basis points or any help you can give us in your thoughts on how margin might settle for the full year?

Pat Scannell

I think in terms of aggregate positioning, you will see op margins grow year-over-year.

Jim Baum

Does that help you, Nate?

Nathan Schneiderman – Roth Capital Partners

Well, right, but do you think 300 plus basis points or is that –

Pat Scannell

Yes, I am not going to get into the specific numbers because I don’t want to get that specific from a guidance perspective, but as I said, what we expect is that you do have the Q4 to Q1 seasonality that we see in our business and that as we begin, you will see our operating margin compared to year-over-year operating margin that they will improve and will improve over last year and that you will see leverage build over the course of the year.

Nathan Schneiderman – Roth Capital Partners

Okay. Do you have a sense of if we look at year from now how much would you expect total headcount to grow kind of ballpark?

Pat Scannell

Today we’re operating with 425 people, I would say that we’ll be adding between 50 people and 75 people over the course of the year. That’s what our plans call for. But as we move through the second half of the year, we expect operating margin acceleration and we would expect that there is perhaps investment acceleration as well.

Nathan Schneiderman – Roth Capital Partners

Okay, got it. On the NEC how much revenue did NEC drive for you in Q4 and maybe if you could highlight how much of it was specifically related to the new agreement?

Pat Scannell

So the new agreement is GA on this new relationship, which is our technology running on their blades is GA in the April timeframe. So there is no revenue that in Q4 attributable to this new OEM type relationship. And as I indicated earlier, we have not factored in any of the NEC OEM flavored revenue into FY '11, and that’s really FY '12 and '13 type scenario.

Jim Baum

We don’t break out the specific revenue from a given reseller partner like NEC. But it is also important to note that this product line that NEC is taking to market we will begin with them GA in May of this year and the product line is based entirely on their blades, so they are effectively buying from Netezza software rights to resell and distribute intellectual property and the database accelerator technology that we produce and then integrating it into their own version of the appliance that they take to market. So it is a true OEM type relationship.

Nathan Schneiderman – Roth Capital Partners

Okay. And final question for you. Just on Teradata it sounded like you were experiencing some improved dynamics there. I was hoping you could share with us some details. What was the percent of the time you saw Teradata, were you mostly running up against Teradata’s appliance solution or its enterprise solution and then how were the win rates versus maybe a quarter or two ago? Thanks very much for answering the questions.

Jim Baum

Okay, thanks, Nate. So as far as Teradata is concerned, they continue to be a good competitor. We see them frequently in the market, largely in their install base. In my prepared comments I did mention that our win rates against Teradata did improve over the course of the year and in fact, they did. In terms of how frequently we saw them, I think some of the dynamics we saw competitively in the market were that we would often see Oracle and Teradata in the same deals. That was certainly the majority of the deals that we competed in.

And Teradata and Oracle continue to be the most encountered two competitors that we do see in the marketplace. But in the aggregate, over the course of the year, our win rates against both Oracle and Teradata in Q4, were in the 80% range and slightly lower than that for the fiscal year at large.

Nathan Schneiderman – Roth Capital Partners

Okay.

Operator

Your next question comes from the line of Rajesh Ghai representing ThinkEquity. Please proceed.

Rajesh Ghai – ThinkEquity

Yes, good morning, thanks. So, Jim, a question on pent up demand that might be there in the industry, considering that 2009 was a fairly subdued year for the database housing market. What are the trends that you’re seeing in terms of pent-up demand and also given the increase awareness that Oracle has created around the appliance form factor, do you see customers more open to looking at an appliance home factor for the larger deployments given that awareness?

Jim Baum

Yes, thanks for your question. It’s a good question. It’s difficult to break out the individual components of what’s driving the visibility in pipeline growth that we have seen. I do think that there were a number of projects that were shelved last year in this industry and we talked about them over the course of the year. There were projects that just simply did not get funded and delayed. So I think that’s partially responsible for some of the momentum that we feel in the marketplace.

I also think that there is a strong level of interest in TwinFin both from new customers and our existing install base and there are numerous cases where customers are migrating from our previous generation technology to the TwinFin for a variety of reasons and that seems to be helping as well

So, like I said, it is very difficult to kind of piece those out individually, but we do also see this effect of Oracle and they’ve blanketed the market with messaging around Exadata and Exadata is an appliance like product and we have seen a fairly significant number of large deployments now both our Mustang systems and our TwinFin systems.

And as a trend I would suggest to you that these deployments are becoming larger in terms of the amount of data and users they support as well as larger in terms of the sort of strategic significance in the account, where people are deploying more and more strategic mission critical type applications on appliances.

Rajesh Ghai – ThinkEquity

All right, thank you. And one question on the geographic mix, your North American business has increased steady over the past five quarters, in fact, growing steadily over the past five quarters. The overseas business has been little lumpy. Given this recent OEM announcement NEC, in general, your expansion into other countries, do you see that kind of becoming little more steady from the current pace in 2010?

Pat Scannell

Yes, absolutely. As we continue to invest, where we today have 33% of our resources deployed internationally, we expect that to be a growth sector of our business over the coming years and so, today, it represents 15% to 20% of our business. That eventually could represent 25% to 30% of our business. So I think we are dealing with a lot of small numbers where perhaps a deal does swing it one way or the other, but you should see a consistent contribution internationally growing over the course of the year.

Rajesh Ghai – ThinkEquity

Great. And on the Mantra appliance, you mentioned three new deals among the new customers that involve Mantra. And I am just curious are you finding success selling it into your install base also and also what are your expectations for Mantra in 2010 if you could break that out?

Jim Baum

Over the last two quarters or so, we have now fully integrated Mantra into the TwinFin appliance and we’re finding, in fact, that Mantra and the data compliance capability that Mantra provides are in fact a differentiator for the TwinFin appliances integrated data compliance with the data warehouse environment is quite unique and something that many, many companies are focused on in creating a layer of data security for their database access.

What we’re finding that’s doing for us is as people are deploying TwinFins with integrated mantra, it is creating a broader opportunity for an enterprise version of Mantra to come in and address not just the data and database in the TwinFin, but data and databases that are deployed more broadly in their enterprise infrastructure. So that strategy is working.

Our existing customer base is getting value and it is working as a differentiator for us and the strategy is creating opportunities for enterprise Mantra. And in addition, as Pat noted, Mantra has also created opportunities for us in new accounts, where we are not with the data warehouse, but where we could drive data warehouse opportunities after the compliance deals are done.

Rajesh Ghai – ThinkEquity:

Great. One last question for Pat. As TwinFin ramps in your revenue mix it was 79% this quarter. Why shouldn’t your gross margin increase further, gross margin on both product and support group as your revenue mix shifts towards TwinFin going forward?

Pat Scannell

So from a product standpoint we think that that should stay constant at the 63% level. And if there is upside to that, that perhaps comes with increased volume and perhaps fiscal year '12 or beyond. But for now it’s 63% is where we’re comfortable calling the gross margins.

Rajesh Ghai – ThinkEquity:

Shouldn’t that improve because you’re just supporting one product instead of two?

Pat Scannell

Theoretically, you could make that argument, but I think that our experience today too limited for us to be able to extrapolate and say that we’re going to get two points or three points of improvement.

Rajesh Ghai – ThinkEquity:

Fair enough. Congratulations.

Pat Scannell

Thank you.

Operator

Your next question comes from the line of Mark Kelleher representing Brigantine Advisors. Please proceed.

Mark Kelleher – Brigantine Advisors

Great, thanks. Pat, I was wondering if you might give us the linearity of revenue in the quarter and maybe tie that into the jump in receivables.

Pat Scannell

So, for the three months, revenue was 11% the first month, 36% the second month, 53% the third month, and that really if you compare that to a year ago, it is almost in line 14, 27, 59 a year ago. So the jump in receivables was entirely due to the timing of cash receipts. As I said in my prepared remarks, we had 18 million that was received over the first two weeks to three weeks which is a pro forma DSO of 60 days. The good news here is that we don’t have a receivables problem and that we are dealing with customers that pay their bills promptly. Well, albeit two weeks delayed this time. So that’s the linearity. And it’s not really due to back end loading of transactions.

Mark Kelleher – Brigantine Advisors

Okay. And the sales teams that you hired in the quarter, were these are the front of the quarter or the back of the quarter? I am just trying to figure out how much of the cost of those additional sales teams showed up on the sales and marketing line?

Pat Scannell

If you think about where we were, we had 43 reps when we ended Q3. In the Q3 numbers there was a cost of 50 reps. So the cost of those 50 reps stayed constant and we had it five incremental teams beyond that. Those five incremental teams were added over the course of the quarter. So that’s all more or less front end loaded on the quarter.

Mark Kelleher – Brigantine Advisors

All right, that’s very helpful. And last question, is there anyway you can give us a some sort of average size of yields in Terabytes, how big are the system that are going on?

Jim Baum

Most of the TwinFin systems that are deployed today are either TwinFin 12s or TwinFin 24s and so those are the one and two rack systems. I think we talked about this before, Mark. We generally don’t size the systems based on the scale of data. We generally size the systems based on the performance requirement of the customer. And so, in terms of data size that’s not a controlling factor, typically.

Although in some situations it is, but we always try to steer the sale more towards the performance requirement and less toward the data scale. And in fact, in this TwinFin system, as you know, they are very large in terms of the data capacity that they handle, and we’ve taken them to market using that as a differentiator, right, that you won’t run out of this capacity, but we really do drive them to size the system based on performance requirement.

Mark Kelleher – Brigantine Advisors

Okay, great, thanks, good quarter.

Jim Baum

Thanks, Mark.

Operator

The final question comes from the line of Bhavan Suri representing William Blair & Company. Please proceed.

Bhavan Suri – William Blair & Company

Thanks for taking my question, gentlemen, and good quarter there. On the NEC relationship has that ramps, is there a potential for margin to expand given that you’re now kind of getting away from the lower margin hardware space, am I thinking about that correctly?

Pat Scannell

You are, Bhavan. And the margin expansion opportunity is that this becomes software like because of the fact that it is NEC’s platform and we are selling them the software so to speak. So it does become software like so that is a margin expansion opportunity that again will manifest itself in the fiscal '12 '13 timeframe.

Bhavan Suri – William Blair & Company

And as you think about that, Pat, again not talking about guidance or anything of fiscal '12 but just a sample case if I took today TwinFin and then I said compare that to the NEC system, what’s the potential uptick in gross margin there between the two offerings for NETEZZA?

Pat Scannell

So it could be, we have 63 points of margin with today’s TwinFin and when I say software like, I will let you draw those conclusions. It could be in the mid-80s or north of that.

Bhavan Suri – William Blair & Company

Okay, good. And then just one more you guys had announced a relationship with NetIQ to OEM, similarly, the Mantra solution maybe, I don’t know, six months ago or five months ago. Any update on how that’s going and sort of what leverage NetIQ is able to drive?

Pat Scannell

So that’s a very important relationship that we have with them as it relates to them distributing the Mantra product. And it’s early days yet, but we’ve got the benefit just as we have the benefit with the TwinFin side of the house we get the benefit of their leverage. Nothing to report yet as they’re still getting up to speed with training and what have you, but I think that as we unfold Mantra and expose it to our install base, expose it to NetIQ and their teams, I think you will start to see that click over the course of this year.

Bhavan Suri – William Blair & Company

Interesting. And do you have a separate sales team for Mantra or is it the same sales guys with the carry TwinFin and Mantra in the bag?

Jim Baum

It’s a little bit of both. We have an overlay sales team that work exclusively Mantra deals and they partner with our larger direct sales channel to operate in the Netezza customer base. And as Pat mentioned there were several new customers in the quarter that were Mantra customers and they were driven by that Mantra overlay sales channel.

Bhavan Suri – William Blair & Company

Great. And then one final question. You mentioned the telco customer who had 17 rack Mustang and then they bought TwinFin. Could you just walk us through quickly what the upgrade path going forward for TwinFin does, there’s commodity hardware, improves, how does someone upgrade from say, TwinFin to whatever the next appliances without sort of a step-up function in cost or is that part of the parcel there?

Pat Scannell

Well, typically, the way companies look at this is it’s a depreciating asset. So over some period of time, typically, three years, they will be in a position where they’ve depreciated the value of the asset and they’re looking to either replace it or continue to use it, so it’s a bit unlike the software only environment where you buy a perpetual license of software and you continue to get upgrades over time for the cost of maintenance.

And so in many cases and in our customer base we’re seeing this. People are at some level of calendar time into their usage of the Mustang assets. When they look at TwinFin and there are a variety of reasons why they would want to upgrade to TwinFin. They include improved performance, additional capacity, there’re software capabilities that are and will become available on TwinFin that are not available on the previous generation. So there are a variety of reasons why they do it.

In terms of the actual process of updating, it’s really quite simple. The data migrates effortlessly from one environment to the other. The integrations that they have with their existing tools, which are typically business intelligence tools and ETL tools are fully interoperable with the TwinFin environment, and so they migrate the data over and implement the TwinFin. It is designed as is everything that we do to be very simple and low in complexity to make that migration occur.

Bhavan Suri – William Blair & Company

Great, that’s helpful, guys. Thanks. Good quarter.

Jim Baum

Thanks a lot.

Operator

With no further questions in queue I would now like to turn the call back to Mr. Jim Baum for closing remarks.

Jim Baum

So, just in closing, I would like to thank you all for participating in our call today and for some excellent questions during the course of the call. We are very enthusiastic about FY'11 as we go into it now with improved visibility and an ability to provide guidance to the market. We feel like we’re very well-positioned to continue to drive the agenda for this market space and look forward to working with all of you throughout the course of the year.

Pat Scannell

Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Good day.

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