Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Kelly Blough – VP, IR

Matt Medeiros – President and CEO

Robert Selvi – CFO

Analysts

Jonathan Ruykhaver –ThinkEquity

Rob Rezza – RBC Capital Markets

Jason Nolan – Robert Baird

Sterling Auty – JPMorgan

Eric Martinuzzi – Craig-Hallum

Catharine Trebnick – Avian Securities

SonicWALL, Inc. (SNWL) Q1 2010 Earnings Call Transcript April 23, 2010 8:30 AM ET

Operator

Good morning and welcome to the SonicWALL first quarter 2010 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Ms. Kelly Blough, please go ahead.

Kelly Blough

Thank you, Mark. Good morning. Welcome to our first quarter 2010 earnings conference call. With us today are Matt Medeiros, President and CEO of SonicWALL and Robert Selvi, CFO. Before we begin I'd like to remind everyone that during this conference call we will be making forward-looking statements within the meeting of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended.

Forward-looking statements include without limitation revenue GAAP and non-GAAP earnings per share and growth margin guidance for the second quarter of 2010, expected operating expenses for the second quarter of 2010, our ability to maintain mid to high teen operating margin, recovering demand condition, future availability of new and benefits of new product offerings and our positioning to deliver growth of both market rate.

All forward-looking statements made on this call are subject to risks, uncertainties and assumptions that could cause actual results or events to differ materially from those contained in the forward-looking statement.

For a detailed description of the risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these forward-looking statement, as well as the risks related to our business in general we refer you to the periodic report that the company has filed from time-to-time with the SEC. Including discussions in the risk factor section of the company's annual report on Form 10-K for the year ended December 31, 2010.

The Company undertakes no obligation to update forward-looking statements at any time or for any reason. In addition to supplement our consolidated financial statements presented in accordance with generally accepted accounting principles or GAAP, SonicWALL presents certain non-GAAP financial measures. Management regularly uses these non-GAAP financial measures to evaluate aspects of the company's operating performance with respect to business objectives and planning targets.

These non-GAAP financial measures also facilitate comparisons of our operating performance to other companies in our industry which may also disclose similar non-GAAP financial measures to supplement their GAAP results. We also believe that investors benefit from this additional disclosure as it provides transparency into financial information used by management in our assessment of operating performance.

A reconciliation of each non-GAAP financial measure referenced in this presentation to the most directly comparable GAAP financial measure is in the news release issued earlier today in tables immediately following the condensed consolidated statements of cash flows. These non-GAAP measures should not be viewed as a substitute for the company's GAAP results.

I will now turn the call over to Matt Medeiros.

Matt Medeiros

Thank you, Kelly. Good morning everyone, and thank you for joining our call. SonicWALL had a strong start to 2010. The first quarter was characterized by solid fundamentals delivering 17% year-over-year revenue growth, strong operating margin, non-GAAP EPS growth of 70% year-over-year, excellent operating cash flow and continued growth in deferred revenue. In spite of the typical Q1 seasonality, SonicWALL continued to build momentum.

We are systematically implementing our strategic plan, and based on our strategic plan we believe that we are well positioned to deliver growth above market. Our past R&D marketing and sales investments are fueling our current and future growth. In Q4, we reported that we saw stabilization in the SMB market, and in the first quarter we are pleased to see a continuation of improving conditions.

Channel partners reported relatively linear demand throughout the quarter, which is not typical for the first quarter and maybe a sign, a further recovery in the SME, SMB demand. Our new refresh TZ family is selling well and above typical first quarter expectations. SonicWALL continues to attract new channel partners who for various reasons including our superior channel programs, new products and better profitability are recognizing SonicWALL as the right choice for today's complex networks.

Wire-speed malware scanning of all data, voice and video traffic is the primary competitive advantage we bring partners and then customers along with the best total cost of ownerships. Informatics recently released its fourth quarter and full year 2009 market share data and as we expected SonicWALL continued to show market share gains. In 2009, SonicWALL was the clear leader in the $500 to $1,500 category leading in both revenue and units.

We also posted gains in other firewall categories, most notably in the 5,000 to 10,000 category where our market share doubled between the first and fourth quarters of 2009. These market share gain support our view that SonicWALL is building momentum in mid-enterprise and government accounts.

Our SSL VPN market share was 20% for 2009. When you consider that this 20% unit market share does not include SSL VPN, sold as part of the UTM Firewall offering, well, we're a major player in the SSL VPN market. As I said, we continue to build momentum in mid-enterprise, large distributed enterprise and governments with some notable new customer wins. For example, a large U.S. healthcare organization increased its deployment of NSA 240s by over 200 units for securing the robotic surgical devices.

A large Canadian agricultural firm selected SonicWALL's NSA 5500 and TZ 210 for its distributed enterprise security solutions. A large European manufacturer deploys 5500s to scan gigabit traffic in their data centers. The healthcare provider in Japan replaced their existing security by purchasing 16 of our NSAs E3500s. And two premiere British universities purchased E-class UTMs with comprehensive gateway security services.

We had many other examples of mid-enterprise customer wins in the quarter, but I also want to call attention to the government segment that continues to show good progress. Government agencies demand thorough competitive bidding environments and a rigorous testing. With governments worldwide taking greater interest in and responsibility for cyber security, these agencies are becoming early adopters of leading edge technologies and products.

We are very pleased to be gaining momentum with government and intelligent agencies worldwide. For example a U.S. federal agency purchased a high availability pair of E7500s with their comprehensive gateway security services basing its decision in the large part on our ability to scan malware at wire-speeds of virtually all packets and attachments. A European central government department signed a six figure deal for E-Class UTMs.

A European national health service deployed both enterprise, SSL VPN and enterprise UTM to protect its distributed networks. A large state agency in North America standardized our E-class Aventail SSL VPN for secure communication with its remote users and locations.

An Asian government agency responsible for planning and finance purchased a high availability pair of our E-NSA 7500. Our E-Class Aventail SSL VPN and our high-end email solution as an initial step in standardizing their networks on SonicWALL's security solutions and a postal agency in Asia selected a high availability pair of NSA E6500s, two NSA 4500s and our Universal Management Appliance to manage security across the nation’s postal networks.

RSA Security Conference last month, we introduced some exciting new product. We announced a portfolio of virtualized appliances. The first two Virtual GMS and Virtual ViewPoint began shipping in the first quarter with a good acceptance rate at Interop next week. We will announce the availability of our Virtual Email Security Solution.

At RSA, we also announced our NSA E8500. The E8500 sets a new standard for high performance malware scanning. Firewalls are often the bottle mix in enterprise networks. With the E8500 SonicWALL continues to eliminate these performance barriers. The E8500 will allow customers to integrate our new application intelligence and control services along with our improved intrusion prevention service fine tuning their networks for the best balance of security and productivity.

There are future – there are further market and growth opportunities for SonicWALL as we pursue our vision, our strategy of dynamic security for the global network. Achievement of this vision requires innovation. I would like to highlight two new areas of innovation, which embrace both organic and inorganic opportunities.

First, today we announce the acquisition of technology from DBAM systems. This acquisition expands up on our existing UTM quality of service and bandwidth shaping capabilities with the adding of innovative WAN Optimization technology. The WAN Optimization WAN acceleration market segment is large, and no vendor has met the expectation of ease of use, ease of management and reasonable cost of ownership for the SMB and distributed enterprise networks.

When combined with our application intelligence and control capabilities and malware scanning capabilities, we believe that we will we can deliver the most compelling WAN Optimization solution for these markets. Our channel partners see pent up demand for the right WAN Optimization technology designed specifically for the SMB and distributed enterprise networks.

DBAM was an early stage company. Our first shipments of this technology will be in the late fall of this year, and second we are very excited about our new next generation security platform that we will be announcing at next week at Interoute. At Interoute, we will be showcasing a 40 gigabit per second depacket inspection malware scanning security platform.

SonicWALLs new massively scalable firewall architecture combines multi-core hardware with our patented reassembly free depacket inspection engine, which will provide maximum security and application control without compromising performance and most importantly with virtually unlimited scalability.

Our new platform will enable equal control over both encrypted and unencrypted traffic with its unique proxy free real time SSL inspection capability. With this new architecture SonicWALL will deliver powerful next generation firewalls capable of conducting, 10, 20, and 40 gigabit per second malware scanning enabling customers to optimize and secure the performance of their largest networks.

SonicWALL fundamentally believes that the most secured networks scans everything. Let me repeat scans everything regardless of protocol or file size for malware. This new platform allows us to do this with ease of use and manageability that customers have come to expect from SonicWALL. The market potential for this new platform is significant and will enable us to continue to build upon and accelerate the momentum we have seen in our enterprise and government businesses in recent quarters.

This new architecture will shift in late fall of this year. The investments for these two initiatives will be made in line with their future revenue potential and are included in the guidance that Rob will share with you. We remain committed to maintaining our mid to high teen operating margins. So, with that let me hand it over to Rob to review our financials.

Robert Selvi

Okay. Thanks, Matt. The $55.3 million in total first quarter revenue, UTM solutions contributed 78%, secured content management solutions contributed 9%, SSL VPN solutions contributed 9%, and CDP contributed 4%. Total revenue unit shift for the quarter were 50,000.

Product revenue was $21.8 million down 4% sequentially and up 41% year-over-year. TZ product revenue represented 37%, of total product revenue in the quarter. NSA product revenue represented 45% of total product revenue in the quarter. Other products accounted for 18% of total product revenue in the quarter.

License and services revenue of $33.5 million increased by $2 million sequentially and $1.8 million compared to the same period last year. License and services revenue represented 61% of total revenue in the quarter, compared to 58% in the prior quarter and 66% in the same period last year.

License and services revenue represented 11% of total license and services revenue during the quarter, compared to 10% in the prior quarter and 8% in the same period last year. The impact to total revenue of our adoption of the new revenue recognition rules for an ASC 605-25] was approximately $1.2 million consistent with our previously issued estimates.

Total subscription services billing were $34.3 million relatively level with the fourth quarter in up about $700,000 over the same period last year. Multi-year subscriptions accounted for approximately 36%, the subscription service billings in the first quarter, compared to 38% in fourth quarter, and 32% in the same period last year.

On a percentage basis, North America represented 66% and international represented 33% of total revenue. Europe, the Middle East and Africa contributed 21%. Asia Pacific and Japan contributed 10% and Latin America contributed 2%. I'll begin my discussion of the income statement with our GAAP results, then go on to report our non-GAAP results.

GAAP gross margin was 73% compared to 69% the prior quarter, and 72% in the first quarter of 2009. GAAP operating expenses were $33 million or 60% in the first quarter revenue. On a GAAP basis, research and development cost were $9.7 million or 18% revenue. Sales and marketing expenses were $18.3 million or 33% of revenue and general and administrative expenses were $4.8 million or 9% of revenue.

Non-GAAP gross margin was 74% compared to 71% in the fourth quarter and 74% in the first quarter of last year. Sequential improvements in gross margin were due to a more favorable mix or revenue. The change of revenue recognition policy and reductions and product cost of revenue.

Non-GAAP operating expenses were $31 million compared to $29.5 million in the fourth quarter and $29.4 million in the same period of last year. The sequential increase in non-GAAP operating expenses is primarily attributable to increases in payroll taxes, variable compensation expenses and marketing programs. Total non-GAAP operating expenses represented approximately 56% of revenue for the quarter, compared to 55% in the prior quarter and 52% the first quarter of 2009.

Non-GAAP operating expenses for research and development represented 16% of revenue. Non-GAAP sales and marketing expenses represented 32% of revenue and non-GAAP, general and administrative expenses represented 8% of revenue. On a GAAP basis, our first quarter operating margin was 13.2%, compared to 9% in the prior quarter and 5.1% in the first quarter of 2009.

Non-GAAP operating margin was 18.4% compared to 16.2% in the prior quarter and 11.6% in the same period in 2009. Other income expense net in the first quarter was $500,000 compared to $800,000 in the prior quarter and $800,000 in the same period last year.

GAAP net earnings for the first quarter were $4.4 million or $0.08 per diluted share. Non-GAAP net earnings in the first quarter were $6.7 million or $0.12 per diluted share. At the end of the first quarter, total regular employee headcount was 847, compared to 819 at the end of the fourth quarter. The increase was primarily associated with headcount additions in sales, support and R&D, a majority of which were in regions outside of North America.

I'll now review the balance sheet and cash flow statements. We had another solid cash flow quarter as Matt mentioned, generating operating cash flow of $11.1 million. At the end of the quarter cash, cash equivalents and total investments were $229.5 million, compared to $215.9 million at the end of the fourth quarter.

Net accounts receivable were $23.9 million in the first quarter, compared to $24.9 million in the prior quarter and DSO was 39 days, compared to 41 days in the prior quarter. Net inventories were $7.5 million in the first quarter, compared to $6.8 million in the previous quarter and $6.5 million in the same period last year.

Net inventories consist of inventory at two of our largest distributors and finished good at our third party manufacturers and logistics provider. Total annualized inventory turns were eight times. Deferred revenue increased $3.1 million quarter-over-quarter to $127 million, up 3% sequentially and 18% year-over-year. Subscription deferred revenue increased $3.4 million sequentially to $109.8 million.

Regarding the DBAM system transaction that Matt mentioned earlier, let me provide some summary financial information. The transaction is structured as a purchase of all intellectual property and certain other assets. Total consideration was approximately $4 million and the transaction was completed on April 19th. We've also hired a small engineering team of former DBAM employees.

I'll now complete my comments with guidance for the second quarter of 2010. We expect second quarter revenue in a range of $55 million to $57 million. Our forecast for GAAP gross margin in the quarter is in the range of 71% to 72%, and non-GAAP gross margin in the range of 72% to 73%. We expect GAAP earnings of $0.08 to $0.09 per diluted share and non-GAAP earnings in the second quarter to be in the range of $0.10 to $0.11 per diluted share.

This guidance reflects continued investments in sales, R&D and marketing as well as transactional and ongoing expenses related to the DBAM transaction. And now I'll turn over to Matt to conclude.

Matt Medeiros

Thanks Rob. 2010 is shaping up to be an exciting year for SonicWALL. Momentum is building in mid-enterprise and government as more customers are attracted by our vision, our industry leading product performance and our competitiveness. We continue to development of new disruptive technologies gaining access to new and larger market segments and customers.

Demand is reemerging in the SMB segment where customers simply can't afford not to neglect their security needs any further. With our continued channel strength and investments like WAN Optimization and acceleration for SMB, we will continue to be the best choice for SMB networks security solutions.

SonicWALL lab sees a continued rise in malware and networks threats. Threat developers are getting more aggressive each day. We are taking advantage of improving economic conditions, growing revenue ahead of the market. We are meeting our strategic objectives of dynamic security for the global networks. I want to thank our employees, partners and customers for a strong first quarter, and we look forward to your questions. Thank you.

Kelly Blough

Before the operator pulls the questions, I'd like to remind everyone that we will be presenting on May 19th in Boston at the JPMorgan Technology conference, on June 2nd in Minneapolis at the Craig Hallum Conference and on June 9th at the RBC Technology Conference in New York City.

We hope that you will attend one or more of those presentations. Now Operator, can you please pull for questions?

Question-and-Answer session

Operator

Yes. Thank you. (Operator Instructions). Our first question today will come from Jonathan Ruykhaver, ThinkEquity.

Jonathan Ruykhaver –ThinkEquity

Good morning guys. Congrats on the performance.

Robert Selvi

Thank you Jonathan.

Jonathan Ruykhaver –ThinkEquity

Just you're looking at the product growth in the quarter and then going into the rest of this year, what should we expect in terms of sequential growth trends and what will be the main drivers to that growth? Is it more just the macro and better spending trends within the SMB, or how important are your initiatives with higher end products to deliver an excellent product growth as we looked into this year?

Robert Selvi

Well I think both the mid-enterprise initiatives and the SMB rebound are important to the growth story and product unit sales and revenue going forward. We had as Matt mentioned good performance in our opinion in Q1 with respect to product sales and revenue. We had a pull back in TZ sales, which we weren't surprised by of about 2,000 units quarter-over-quarter.

But we had an increase in NSA sales, and of course those were higher value sales and that more than offset the decline in TZ, so I think going forward we expect sequential growth in products in both SMB and mid-enterprise are going to be central to that assertion.

Jonathan Ruykhaver –ThinkEquity

So we should expect in the current quarter that we will see the TZ product grow sequentially? Is that what you're sensing in terms of pipeline activity?

Robert Selvi

Yes. That would be our expectation.

Jonathan Ruykhaver –ThinkEquity

Okay, good and then the NSA 85100 product I know it's relatively new since reason to introduce it, but can you just talk a little bit more about where that is aimed specifically where you are positioning in the market place what kind of initial success you might be experiencing.

Robert Selvi

Sure Jonathan, that's clearly aimed at the mid-enterprise government accounts enterprise accounts. This is a very high performance product, it's our very first 2 gigabit malware scanning capability and again it would be definitely targeted for that enterprise data center and mid-enterprise government account. We are seeing quite a bit of interest from governments simply because we scan virtually everything including all different types of protocols and attachments.

Jonathan Ruykhaver –ThinkEquity

Is it a piece of infrastructure that is we place in a firewall, or does it fit in line buying a firewall?

Robert Selvi

In most cases, it's replacing a firewall. In some cases, its actually people are installing it as you would might expect. They have more than one firewall in their networks, throughout their data center networks and we become one of perhaps a couple.

Jonathan Ruykhaver –ThinkEquity

And when you go into those deals, can you just talk about the competitive dynamics who is that you've seen a few go after those opportunities?

Robert Selvi

Well they're clearly the same types of competitors that we've always met with the Cisco's, Juniper, Checkpoint, Fortinet. At government, we've been doing an awful lot of work at replacing secured computing types of networks based on our scanning capability and a proxy free capability that allows us to scan it a much faster rate, which is really becoming a normal requirement in today's mid-enterprise and government account.

Jonathan Ruykhaver –ThinkEquity

Okay, good enough. Thanks a lot guys.

Matt Medeiros

Thank you, Jonathan.

Jonathan Ruykhaver –ThinkEquity

Okay, congrats.

Robert Selvi

Thank you.

Operator

And our next question will come from Rob Rezza, RBC Capital Markets.

Rob Rezza – RBC Capital Markets

Hi. Let me add my congratulations itself, I'm actually just boarding an airplane, so pardon me if I'm down a little off here, but Matt, I was wondering if you could in terms of looking at the second half of the year, what do you think about the Q4 timeframe on the late ball that you characterize it, do you expect the channels to be fully kind of trained and up and running on the new products and how should we think about the role model? Thanks.

Matt Medeiros

Well, as you know we train, train and retrain. It's a constant process for us, but I think in this particular case where you are talking about our massively scalable new architecture. Yes we would hope that we are spending enough time educating and training people in our office, our first step is that just getting the word out, getting our products put into the road maps of other IT organizations and selecting our data customers for that opportunity.

So, we will spend a better part of the next six months truly educating, training and creating market awareness and demand awareness for this incredibly incredible technology. This is one of the best product innovations that I've seen in the seven years that I've been running SonicWALL.

Rob Rezza – RBC Capital Markets

Maybe Matt or Rob, just a quick housekeeping item. How many people did you say you added from the acquisition, I guess how many do you expect to add? Thanks.

Robert Selvi

We didn't really say. It's a handful. It's a small number. A set of small team, and I would expect to have with the team that we hired along with some other supporting cast along the order of 10 to 12.

Rob Rezza – RBC Capital Markets

Great. Thank you, nice quarter.

Robert Selvi

Thanks.

Matt Medeiros

Thank you, Rob.

Operator

And the next question will come from Jason Nolan with Robert Baird.

Jason Nolan – Robert Baird

Great. Thank you. Maybe a discussion on gross margins, and product gross margins specifically it's the highest in maybe six quarters or so, Matt or Rob if you could touch on that?

Matt Medeiros

Well, the first thing to remember is that we had the change of revenue recognition, which as I mentioned amounted to about $1.2 million rounded in the quarter and that basically is unburdened revenue. So, it's rich from the gross margin standpoint. That's revenue that would have been captured in deferred revenue, but now is been recognized on the P&L.

So that was added to gross margin in the quarter, but beyond that, as I mentioned, we did have some favorable experience in materials cost quarter-over-quarter and we think some of those benefits are durable and will be providing benefits as we step through the year. So, those are the two major things that happened in product costs and for gross margin.

Jason Nolan – Robert Baird

Okay, from a competitive dynamics standpoint, we sort of delivery delays with Cisco, ASA. I wonder if you're benefiting from those delays and what sort of allocation of components you're seeing yourself from a supply chain standpoint.

Matt Medeiros

Well, let me take the latter part of that question. First, we certainly have not seen any problem acquiring our components. We've done a very good job to negotiate with our manufacturing partners in Taiwan. We have multiple sources on just about every product including each of the finished goods products. So I think we're well protected. We've got contracts out for our critical components and that's I think very important.

We believe that it's hard to kind of understand the impact of the shortages. We're seeing most of our benefit Cisco being a – quite frankly based on the performance of our product. We're winning based on the performance of our product. The fact that there might be a shortfall is interesting, and it's bringing us into an opportunity of recruiting and possibly getting with new resellers that are finding a shortfall, but it's hard to understand and justify the impact of that in our quarter.

Jason Nolan – Robert Baird

That makes sense. Last question from me on WAN Optimization; anything more you can say about feedback from data users or comparison to our Riverbed there would be helpful?

Matt Medeiros

Well again we're targeting a new market not that SMB distributed enterprise where I think price points performance, ease of use and ease of management will be critical. This DBAM was an early stage company, did a lot of great engineering, an incredible amount of source code and product efficiencies in their product, but they really had only shipped a few hundred products primarily into Europe.

So again they really didn't develop a market or a brand capability and that I think is something that we bring with our distribution channel and with our partners. I think we can bring that forward. We're very excited about the core engineering team joining the company. As Rob pointed out, there are several of them that are joining. Some of them will actually relocate here to San Jose, and I think that that's going to give us a great advantage at accelerating the deployment of that technology as we said into the fall of this year.

Jason Nolan – Robert Baird

Great, nice quarter guys. Thanks a lot.

Matt Medeiros

Thank you very much, Jason.

Operator

Sterling Auty with J.P. Morgan as our next question.

Sterling Auty – JPMorgan

Yes. Thanks. Hi guys. I didn't hear and I don't have access at the moment to the supplemental, but are you guys still giving us the units total for the first quarter?

Matt Medeiros

Yes. It was 50,000 strong.

Sterling Auty – JPMorgan

All right. Fantastic and then on the way in optimization, will that be offered as standalone device or only as part of the integrated platform?

Matt Medeiros

Initially, Sterling will operate as a standalone device. It will be auto discovered within the network of SonicWALL. Obviously, like all of our products will look for cross pollination of critical features that make sense, that we have some minor WAN Optimization, bandwidth shaping already in our UTM device, but we will look for cross pollinization of all features. We are very excited about taking our scanning capability into WAN Optimization.

We think there is some value there, we will be looking at application intelligence and control and that new feature, that new service that we offer as also a way to further broaden a WAN Optimization acceleration capability.

Sterling Auty – JPMorgan

How would you characterize the technology you are picking up; meaning that the SMB customers that I have talked to that actually utilize WAN Optimization, there are actually some that like were 1000s of gas stations where they have done some of their own development work in their own boxes in terms of partnering with the vendor.

There are those that are like step above that, and then there are those that are all the way to the kind of Riverbed type of technology. Where would you kind of characterize this technology within that offering from specification level?

Matt Medeiros

Well I think it's across the gamut that you defined. I do think that we have an opportunity to play literally in that space we are going stay with our core market, and I think it will be the best place for us to perfect and that is in the SMB and distributed enterprise market.

Let me though highlight a few things that we think are going to be critically important for our success in this market. One, we do believe that there has to be a better and easier way to install and manage WAN Optimization and acceleration today.

Two, I think the our surveys have been coming back saying that small businesses in the remote branch offices are starting to add substantially more bandwidth or require substantially more bandwidth at running key applications.

And for that reason WAN Optimization is also going to be very important to them and it will deliver to them a decent level of return on investment right actually optimizing and accelerating the network.

We think coupling that with our application and intelligence and control. We really think that we have a winning solution, and of course so that can be managed as all of SonicWALL devices have been managed through our Global Management System, its just going to make our partners, or if you will the IT administration team is far more productive and efficient.

Operator

And we will take our next question from Eric Martinuzzi with Craig-Hallum.

Eric Martinuzzi – Craig-Hallum

Thanks curious about the government success you are seeing. I was wondering if you can comment at least what percent of the vertical was perhaps maybe in 2009 and what you think that become in 2010?

Matt Medeiros

Eric, we are not going to be able to talk a little bit about the percentage of the vertical. I really don't have that in front of us, and we wouldn't disclose that, but it was a very good quarter as was Q4 in the government and I think our pipeline also is very encouraging about the opportunities in government.

One of the reasons why I said it in the script, one of the reasons why governments are truly taking interest is our ability to scan at wire-speed, the ability for us to virtually look at any type of traffic going across your networks, scanning that for malware and been able to now bring application intelligence and control over it. The governments are really seeing the big value in that, and as I noted earlier, we are finding that a lot of government agencies and networks are replacing some of the older proxy type of solutions in the market today.

Eric Martinuzzi – Craig-Hallum

That you mentioned specifically secure. I can't imagine McAfee takes competitive threat lying down. Have you seen any change in behavior there?

Matt Medeiros

McAfee is a partner of our so, and we are going to compete with McAfee and Secure as we have always and I think again the competition is based on the performance of our next generation firewall. 10, 20 and 40 gigabits worth of throughput I think are going to be a very interesting benchmark for a lot of the industry to chase.

Eric Martinuzzi – Craig-Hallum

Thank you.

Operator

(Operator Instructions). This time, I will take a question from Catharine Trebnick with Avian Securities.

Catharine Trebnick – Avian Securities

Hi. Congratulations to you guys.

Matt Medeiros

Thank you Catharine.

Catharine Trebnick – Avian Securities

Nice quarter. I'm going to ask you a couple of questions there. Just could you go into more detail on the new channel partners that you are seeing more channel partners, and can you just kind of give us is it for the high-end, the SMB, the government? Thanks.

Matt Medeiros

Well, I think it's across the Board. We are recruiting for obviously the expansion into mid-enterprise and government. It takes a different type of reseller, and clearly what we had two years ago and even last year so we are adding to those numbers of resellers.

On the other hand, we've also had a pretty good quarter of recruiting new SMB channel partners and again I think it's based on the technology and the performance. Most of these VARs have been in business for quite sometime and have competitive solutions, but what they are finding is that their customers are asking for SonicWALL quite frankly based on performance in the cost of total ownership.

Catharine Trebnick – Avian Securities

Got it. And then how are you doing geographically with recruitment of partners? You had a very good quarter strength across all the seeders, so I was just kind of wondering about that.

Matt Medeiros

Rob pointed that out obviously in our mix of revenue by geography. We had a pretty good quarter in Europe and we were very excited about that opportunity coming especially into Q1, where we see usually seasonality. I think Catharine, the recruiting effort is globally. We are certainly recruiting more people in Asia Pac and Japan as well as in Europe and I think again, it's the performance of the technology that's really gaining a lot of interest on behalf of the resellers. We also, and I think most of you all know that resellers tend to make more money selling SonicWALL in a lot of our competitive products.

We have developed a business model where resellers participate in the recurring revenue on the life cycle of that technology and that's a very strong recruiting opportunity for us with resellers that don't get that level of economics with other competitors channel programs.

Catharine Trebnick – Avian Securities

Got it. Thanks a lot.

Matt Medeiros

Thank you, Catharine.

Operator

And next is Sterling Auty with JPMorgan.

Matt Medeiros

We wanted you to get back.

Sterling Auty – JPMorgan

I'm back. I'm home guys. AT&T has got a long way to go. That's for sure. Listen on that last point. I want to touch upon that. Besides just participating the recurring revenue, are you either giving resellers bigger discounts or are resellers able to not discount as much in there selves because the other products from other vendors are maybe overrate in certain cases. What are the other attributes that allow us to be more profitable?

Matt Medeiros

Well, I think there is a couple of things. First of all, let me say that our gross margins of 74% I think demonstrate that we've been able to maintain pricing power with our partners and the fact that they can make more money selling the SonicWALL is I think demonstrated based on what they can charge for the product, so they make quite a bit more money just selling the initial product and make more money because its easier to install, so they have more productivity for their teams that installing our technology, and then as you know so many of our partners actually manage these networks and our Global Management System is truly becoming one of the best productivity aides for lifetime management of that customers infrastructure, so certainly I don't think it's any one area, but what I'm really proud of is that our margin have certainly led me to believe that we've got good pricing power within our channel and yet the entire echo system is making money, and our end customers are certainly gaining the benefits of the lowest total cost of ownership.

Sterling Auty – JPMorgan

Got you, and on the federal you talked about the experience in the federal, are you on your own GSA Schedule, or you are still working through other primes that is actually booked up?

Matt Medeiros

Thank you. That's a great point. We are working clearly with our distributors and some of our resellers that have GSA schedules and I think that that's probably at this point in time; that the way for SonicWALL to act. Obviously there's different discount structures for the government and some state agencies that we've been talking about.

Sterling Auty – JPMorgan

All right, great. Thank you, guys.

Matt Medeiros

Thanks Sterling.

Kelly Blough

Thank you for joining.

Operator

We currently have no questions in the queue. I will now turn the conference back over to our host for any closing or additional remarks.

Matt Medeiros

Well listen, I want to again thank everyone for their interest in the call today and I also want to once again repeat myself, thank you to our employees, to our partners and to our end customers for a great start to 2010.

Kelly Blough

Thank you everyone.

Operator

And that does conclude our conference call. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: SonicWALL, Inc. Q1 2010 Earnings Call Transcript
This Transcript
All Transcripts