Compellent Technologies Q1 2010 Earnings Call Transcript

Apr.29.10 | About: Compellent Technologies, (CML)

Compellent Technologies (NYSE:CML)

Q1 2010 Earnings Call

April 28, 2010 4:30 pm ET

Executives

John Judd - Chief Financial Officer and Principal Accounting Officer

Philip Soran - Co-Founder, Chairman, Chief Executive Officer and President

Jenifer Kirtland - Investor Relations

Analysts

Jason Ader - William Blair & Company L.L.C.

Troy Jensen - Piper Jaffray Companies

Glenn Hanus - Needham & Company, LLC

Jayson Noland - Robert W. Baird & Co. Incorporated

Hemant Hebbar - Wedbush Securities

Eric Martinuzzi - Craig-Hallum Capital Group LLC

Chad Bennett - Northland Securities Inc.

Alex Kurtz - Merriman Curhan Ford & Co.

Kathryn Huberty - Morgan Stanley

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Compellent First Quarter 2010 Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Jenifer Kirtland. Please go ahead, ma'am.

Jenifer Kirtland

Thanks, operator, and thank you, everyone, for joining the Compellent Conference Call and Webcast to review financial results for the first quarter of 2010.

Before we get started, during the course of this conference call, we will make projections and may make other statements about Compellent’s business that are forward-looking and are subject to many risks and uncertainties that could cause actual results to differ materially from expectations. A detailed discussion of the risks and uncertainties that affect our business is contained in Compellent’s filings with the SEC, including its quarterly report on Form 10-K for the quarter ended December 31, 2009, under the heading Risk Factors. Copies of these filings are available online from the SEC or on Compellent’s website.

These forward-looking statements are not guarantees of future performance and speak only as of the date hereof; and as except or required by law, Compellent disclaims any obligation to update these forward-looking statements to reflect future events or circumstances. In addition, during today’s discussion, management will comment on both actual results and certain non-GAAP results. Reconciliation of actual results with these non-GAAP results is provided in today’s earnings release, which is available on our website at compellent.com.

And now, I'd like to turn the call over to Phil Zoran, President and CEO of Compellent. Phil?

Philip Soran

Thank you, Jenifer, and thanks, everyone, for joining us today on our 2010 first quarter earnings call. And with me is Jack Judd, our Chief Financial Officer.

This afternoon, we reported our first quarter results in line with the updated guidance we provided on April 7. Revenue totaled $31.8 million. While in this top line guidance given our February 11, the remainder of our P&L solid. We achieved a gross margin of 54.8%, which is 190 basis points above the margin in the fourth quarter of 2009 and 200 basis points higher than the first quarter of 2009. Operating expenses totaled $18.5 million in the first quarter compared with $18.3 million in the fourth quarter. We were able to grow our headcount in sales, marketing and R&D as we continue to build our infrastructure to support future growth with minimal increase on our overall operating expense line. We reported GAAP net loss of $780,000 or $0.02 per share. Non-GAAP net income, excluding stock-based compensation expense was a gain of $544,000 or $0.02 per share profit.

We spent time on the last conference call describing factors affecting first quarter revenue. As we transition to the second quarter, we are focused on lead regeneration, channel development and pipeline quality. The combination of our sales early in the quarter, the pipeline growth in new and existing sales territories and channel mine share provides us with optimism that leads us to guide for sequential growth in the second quarter.

The common area for questions has to do with the competitive landscape. George [ph] has always been competitive and will continue to be so in the future. We always see a variety of tactical and strategic changes based on vendor and geography. From time to time, competitors will focus on being more "channel friendly" or discount when they do not feel competitive technically. We continually adjust our playbook to meet these changes, but we sell with our core advantages. We are the lowest total cost of ownership storage solution in the market and we delivered 100% through our value-added business partner model. We win with our innovation and elegant single-platform implementations. And unlike competitive alternatives, we do not compete with our business partners by taking deals direct, and we do not wax and wane on our channel focus.

As competitors try to catch up with Compellent and discuss similar product features, it can have a positive impact of increased end-user awareness. The Compellent store solution based on our core Fluid Data architecture has proven superior to alternatives. We have gained attention and recognition for our customer benefits and our great customer support experience.

In fact, recently I heard a story where the legacy storage vendor sales rep told a customer that they have a support that is "as good as Compellent." Now when IT managers are looking for a storage solution, Compellent is evaluated more often, and we're displacing legacy vendors everyday.

We continue to expand our reach in the mid-sized enterprise market. The past three months was a great quarter in terms of customer acquisition as many new customers chose us over larger vendors. Some of our new end-user customers include: The Charlotte Bobcats NBA basketball team; American University; the Government Taxation Bureau of China, the Energy Authority, which is a consortium of 39 power utilities which is the nation's leader in public power energy trading and risk management. Another customer is the University of Florida College of Law; Freeman's, a national trade show management company; and the National Ecological Observatory Network, which collects data on the impacts of climate change, land use change and invasive species on our natural resources and biodiversity.

In addition to the validation from customers, we continue to receive important industry awards for our products and our business model. During the quarter, we won nine awards including: Network World's Best of the Tests and InfoWorld's Technology of the Year for the third consecutive time. These two awards are based on hands-on, head-to-head tests.

Our customers, Lakeland Dairies in Ireland and the Borough of Hillingdon in the United Kingdom, won awards for the cost, space and power-saving benefits of their Compellent implementations. We won Biz-News' Best Storage Product of the Year. We received CRM's Top Mid-Market Products of the Year. This honor was from a leading channel of publication based on a survey of mid-market end-user clients. We also received recognition for our business model with the CRM 100% Club, the CRM Five Star Winner, the Business Solutions Best Channel Vendor Awards.

Next week, we will host our fourth annual C-Drive. At this conference, we bring together our business partners and end users from around the world for five days of meetings and discussions. This has been an extremely productive event for Compellent where we have the ability to update our channel partners and end users on Compellent, review our products' advantages, provide future product direction and get direct feedback on our solution. This year, we expect record attendance with over 500 people from 16 countries registered.

Feedback from our customers is one of the factors for our introduction yesterday of zNAS, our latest unified storage solution. The growth of unstructured file-based data is booming, and the introduction of this new product expands our addressable market. Furthermore, zNAS provides us with another avenue to extend a relationship with our existing end users by managing a larger part of their data center. zNAS consolidates file- and block-level storage on a single platform, unifying the highly scalable ZFS file system and our Fluid Data architecture. It can actively manage and move data in one virtual pool of storage, regardless of size and type, and in mixed OS environment such as a UNIX, Linux and Windows.

The way zNAS fully integrates SAN and NAS allows enterprises to simplify management, improve performance and reduce costs.

We believe that we have led the way to storage generation over the past decade, and that we are poised to do so in the next. We have one platform with many possibilities, and we have a robust plan to roll out significant additional innovations in the months to come. Our zNAS solution is just the first in a series of announcements that will drive efficiency, data life cycle management, scalability and availability to new levels of our end users and our channel.

Demand for storage remains strong, especially as companies look to next-generation virtualization for greater IT efficiency. Our products are innovative and offer clear benefits to end-user customers. We are committed to increasing our investment in R&D, sales and marketing, to ensure that we can accommodate the future growth we expect.

The positive response of our employees and channel partners in the recent weeks has been impressive. There's energy and commitment throughout the entire organization to focus on what has made us successful together and it makes me more confident about our future success. I'd like to thank the Compellent team and our business partners for the all-out effort in support of Compellent. I'd also like to thank our end-user customers for their continued confidence.

For now, I'd like to turn the call over to Jack to provide a detailed look at our financial results for the first quarter and outlook for the second quarter of 2010. Jack?

John Judd

Thanks, Phil. Our actual first quarter results fell within a range provided during our preliminary results conference call. Revenue increased $3.7 million or 13% from the first quarter of 2009 to $31.8 million. Revenue from international markets totaled $5.7 million during the first quarter of 2010, an increase of $1.3 million from the same quarter in the prior year.

International revenue was 18% of total revenue for the first quarter. Our end users at March 31 totaled 1,942 compared to 1,376 one year earlier and 1,812 at the end of December, an increase of 130 customers. Measured on a year-to-date basis, our revenue from existing end users was 62% of product revenue compared to 30%, 8% of product revenue from new end users.

Our gross margin was 54.8% for the first quarter of 2010 compared to 52.8% and 52.9% for the first and fourth quarters of 2009, respectively. The increase in margin was driven by incremental increases in both product and support as well as higher percentage of support revenue compared to total revenue.

Our gross margin has varied during past quarters and we expect that margin will continue to be within our target model range of 52% to 55%. Operating expenses increased to $18.5 million for the first quarter of 2010 from $14 million a year ago. We continue to invest in our business especially in our sales and marketing and research and development teams. We plan to continue to add quality talent to help grow revenue and expand our technology advantage.

We continue to grow our employee headcount. At March 31, we employed 410 employees compared to 317 a year ago and 387 at the end of the prior quarter. GAAP net loss for the first quarter of 2010 was $780,000 or a loss of $0.02 per share. Excluding the effect of stock-based compensation, our non-GAAP net income for the first quarter was $544,000 or $0.02 income per share.

Our balance sheet remains strong. We ended the quarter with $131.3 million in cash and investments, an increase of $7.5 million from the end of 2009. Our cash flow from operations totaled $8.8 million during the first quarter of 2010, a positive reflection on our strong deferred revenue from maintenance and support programs for our end users. Our balance sheet includes $41.5 million of deferred revenue, an increase of $3.3 million from December 2009.

Our day sales outstanding is consistent with the prior quarter and is a reflection of both the timing of revenue and the percentage of prepaid maintenance contracts billed, but not yet paid. We spent approximately $1.8 million for capital in the first quarter of 2010.

I would now like to provide some guidance on the coming quarter. Our current revenue forecast range for second quarter 2010 is $33 million to $35 million. Due to continued investments in talent to the second quarter of 2010 and greater seasonal marketing spend, we anticipate that our non-GAAP EPS to be between a loss of $0.01 per share and income of $0.01 per share. We expect stock compensation cost to be approximately $1.6 million in the second quarter.

Capital spending will be approximately $3 million during the second quarter, as we invest in equipment for development efforts. We will continue to monitor for the appropriate time to bring our tax, net operating loss and income. Until that point, our income tax rate will be approximately 10%. Once the capitalization of the value of our NOL occurs, we expect our tax rate to be 35%.

Finally, and as always, Compellent remains focused on generating profits and cash while making the investments required to maximize our future growth potential. That concludes our formal remarks. Now operator, could you please open the call for Q&A?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Kathy Huberty with Morgan Stanley.

Kathryn Huberty - Morgan Stanley

First, just on the revenue guidance. Historically, in the June quarter, you've had double-digit increases off of an increase in March with the exception of, obviously, last year which was a different environment. How would you characterize your outlook this year? Is there some conservatism baked in? And how would you compare the change in the pipeline of this year versus what you typically see from the end of December to the end of March?

Philip Soran

First of all, some of the pipelines that kind of ties into that there, try to indicate that we're feeling good about what we see in the pipeline. We've done a lot of review of that over the last few weeks and a lot of focus on that there. So that gives us reason for optimism there. And on the guidance, it is what it is, but at this point in time, we do want to be too aggressive is the way I describe it.

Kathryn Huberty - Morgan Stanley

So if you look over the next two or three quarters, you feel really good about that pipeline converting, but you have to be conservative at this point as it relates to the timing of when those deals come through. Is that a fair characterization?

Philip Soran

I think it is [ph].

Kathryn Huberty - Morgan Stanley

And then on gross margin, Jack, a good portion the gross margin increase sequentially came from mix versus more modest increases on the product and the services margin line. How do you feel about the range that product gross margins are tracking at and services gross margins are tracking at versus what you think this business can do in quarters where you're seeing better growth rates on the top line?

John Judd

I think the best way to answer that is that based upon the last few quarters where we've had a lot of variability in our margin, and I would expect that it could vary going forward in this year also. Again, there's a lot of factors that enter into it, from how we have to allocate discounts to like you just said, mix. But I feel confident that we're going to stay well within the range of our target.

Operator

Our next question is from the line of Troy Jensen with Piper Jaffray.

Troy Jensen - Piper Jaffray Companies

Phil, could you talk quickly a little bit on what you call [ph] the zNAS. I guess I'd be curious to know how much of the product's available today or yesterday? Maybe a number of beta site you have going currently or in second sale cycle for the product?

Philip Soran

So first of all, we're excited about the zNAS product and some of that. I mean, if you kind of think about what the ZFS operating system brings and the fluidity of it and the scalability and layer that on top of our back-end, best-in-class block storage, we think it's going to be a pretty exciting product. So we don't normally talk about the number of beta customers we have there. We don't normally use the term beta here, but we've had some early users there. And you'll see us increase that kind of more, higher numbers you'd see in the June time frame.

Troy Jensen - Piper Jaffray Companies

Q1, you guys declined more than normal seasonal trends and it looks like some of these other storage vendors are actually beating the seasonal trends here. So given that Compellent's had better products and this is a small revenue base, why di you think you guys dropped the more than the seasonal trend?

Philip Soran

We kind of covered some of that in the April 7 call there. Some of the things we saw there was a little bit of seasonality. We've also seen some of those of vendors, the product lines we compare against weren't quite a growth as it might look like from the outside or whatever, should look a little bit deeper. We just see a lot of the things we talked about in there, it's feeling a lot better to us, as far as some of the development of our sale channel and the partner base and that kind of stuff. So we're optimistic.

Troy Jensen - Piper Jaffray Companies

Jack, back in the fourth quarter, gross margins came down some strategic wins that you had to discount. Is that something we should think about when we're making our models now, that there may be more big deals in the fourth quarter? We should be a little bit more conservative on the margin profile?

John Judd

Well, actually, I think that we talked on April 7 that we had less big deals in the first quarter than we would have had in the fourth quarter. I wouldn't say that big deals automatically come in in lower margins. I think we've said that before that the margin on deals is a little more complicated than just whether it's big or small.

Operator

Our next question is from the line of Glenn Hanus with Needham & Company.

Glenn Hanus - Needham & Company, LLC

Maybe just to revisit some of your commentary from earlier in April, if you sort of gone back over the issues there, is there anything sort of incremental you learned about the issues and their relative importance to each other that you would want to elaborate on?

Philip Soran

No, we try to epitomize [ph] as best as we could. I guess It's pretty similar to what we said then, as we've continued our analysis.

Glenn Hanus - Needham & Company, LLC

Just on the competitive stuff, Equallogic, Dell has been pretty strong in the market. And NetApp is doing well in a lot of the mWare [mobileware] environments are -- I mean, I know EMC's always been your number one competitor. Have you seen those competitors be more prevalent on the landscape and any commentary on what you're seeing from those?

Philip Soran

I'd say on the Equallogic front there, whenever we're up against a Dell salesforce there, we tend to see them being much more slanted towards the Equallogic product line versus the EMC CLARiiON product line. So that's a little bit of a shift. I mean, that's been kind of happening, but you do see that being pronounced there. The good news is, obviously, we compete, we're all against both of them, and obviously have some big scalability advantage over the Equallogic product offering. And then on the NetApp side there, we did see them be aggressive on some channel partners, but I just came from our training class or channel partners that do installations for us, and we had a couple of them now that used to be NetApp resellers, they're now switching over to Compellent. So that's always going to happen as you go into the future.

Glenn Hanus - Needham & Company, LLC

Back on the new file system, could you just elaborate further on your go-to-market strategy? And do you think this, as a product, could be sort of 10% of your sales at a certain point in time or maybe give us a sense of significance, of how significant it could be to your growth going forward?

Philip Soran

We don't know it's accurate to [ph] (28:29) break down the product features and stuff, what percent of everything [ph] n(28:34) meets one. We got to picture the zNAS as part of our storage center offering. It's just that if you kind of think about another way to do data acquisition more now, you can have a more elegant approach to accessing file-based data versus block-based data and stuff like that. And reason why they're really focused on really do that is that, that whole file-based space is growing faster. Now the block-based storage is much bigger, but the file-based is growing quickly. So you want to make sure that we extend some of our Fluid Data architecture benefits to that file-based architecture. So I view it as two ways. It's not -- don't view it as another product. View this as another extension on our platform and kind of exploring the possibilities. We have this one platform that do many things with it. And you'll see some of the revenue will get from upbeat from existing customers. Just add the zNAS to the existing storage center they already have. Others will help us compete in new offerings where that just gives us another bullet in the chamber to win over competitive offerings.

Operator

Our next question is from the line of Alex Kurtz with Merriman & Company.

Alex Kurtz - Merriman Curhan Ford & Co.

So looking what happened last quarter, obviously, from sales execution issues with larger deals, so Phil, if you look at the guidance you gave today, would you say that the mix of large deals over $300,000 going into where you're projecting for this quarter is up or down versus what you thought you had going into the end of Q1? And then that you have a larger percentage, is there a risk there that some of the execution problems you have last quarter could happen again this quarter?

Philip Soran

So we look at a lot of things at the pipeline and stuff like that. And as we did any quarter, we do have large deals that we have to execute again. So I'll tell you one on behalf of one of them, stuff like that. But like I said, we feel good about the pipeline, the progress against the pipeline, and we're optimistic about that. And we got to execute on those, both big and small deals.

Alex Kurtz - Merriman Curhan Ford & Co.

I mean, do you think you're doing -- you expect to do more larger transaction this quarter than last quarter?

Philip Soran

If I did just guess that we'll do more than we did last quarter, yes.

Alex Kurtz - Merriman Curhan Ford & Co.

So given what happened last quarter, what sort of gives you a confidence now that you can close those deals? Is it that you already closed some of the ones that pushed out of Q1 or you feel like you have a better handle on the ones you expect to close at the end of the quarter?

Philip Soran

Yes, two things. One is we've already seen some success this quarter, and those types of things. A lot of the deals we had in the last quarter were -- there are some extraneous circumstances on a lot of them where we got one order to date in the federal space that was in purchasing at the end of the quarter last year and they just didn't come out of purchasing. That's come out now. We had state governments that, as example, at the beginning of the year, state budgets were very tight and confusing a lot of deals [ph] (31:31), froze all expenditures. And we have started out not later in the quarter as we had one local government agency tell us, I've got on course [ph] (31:39) 1,900 purchase reposition on my desk, get in line. That's going to take a while to process and all that. They had to kind of slow things down as they forgot their budgets. You had seen a lot of examples of things like that, that I think affect us a little bit. And so from the early results and probably see what the customer reaction that our deals were working, we're feeling good.

Operator

Our next question is from the line of Jason Ader with William Blair & Company.

Jason Ader - William Blair & Company L.L.C.

I wanted to go back to some comments you had in your script. Would you guys, you said you were focused on lead generation, pipeline quality and channel development. I think those were the kind of three-key points that you made. And I guess I wanted to delve into that a little bit and just find out what are you doing differently today or since the end of last quarter than you would have been doing previous to that in terms of trying to make sure that you have these things really working kind of the way you want them to?

Philip Soran

Why, there's just as [ph] (32:50) multiple things. There is no significant strategy shift, either or it's more tweaks and improvements on kind of our corporate sales [ph] (32:59) they already have there. So an example would be just the time you spend with our existing channel partners to really make sure you refocus on that and give them the attention, time and work with them and you kind of double that with the people that we've already signed up there. Number two is just keep the work on the channel, on the pipeline development, just a lot of focus and attention and drive and short-term execution and a sense of urgency on those types of things. And on the lead generation, we've had it in place, but it just kind of doubled out again on managing the pipeline size and how many lead-generation events we are actually doing in each territory and measuring it and inspecting and deliver that there. So kind of some of the stuff, you don't see the results from that stuff. Some of those happened late last year, and it just didn't get through the pipe in the first quarter. And you'll see it in the future there, too. But it just feels like we got a lot of the right focus on the right attention areas.

Jason Ader - William Blair & Company L.L.C.

And is it fair to assume that you guys, some of the terms of your hiring over the last quarter or two and even going forward that you're really going to be focused on sales people that aren't just kind of assisting channels and feeding channels but also engaged with the end users at a deep level? So kind of a, I know you called a channel-assist model, but really kind of a classical high touch type of model. Is that the direction you guys are headed in? I know you've already had some of that but I'm just wondering if that's a big area of investment right now?

Philip Soran

Yes, so first of all, you hit right on the note there. Our channel strategy is 100% channel, and we very much depend on the channel for our execution. Well, we do it what we call this assisted-sales manner. So we're fairly hands-on in the sales process and hands-on being, they're trying to help up, bring to bear our resources. Example, yesterday, I was on two executive briefings here at our corporate facility where I'm part of the sales process, the channel partners there. The one that I'd kind of say I think we'd rather do it in concert more with a channel as much folks are on that as ever right now as opposed to doing it by yourselves, something like that. And if anything, we're almost in -- we got this great resource. We just got to leverage it and get the maximum value out of it. But we can add a lot of value with our knowledge of the product, our knowledge of what's coming in, in the product, our roadmap, those kinds of things. So we can help a lot in this assisted manner.

Jason Ader - William Blair & Company L.L.C.

Is it kind of fairly even mix between sort of sales and sales engineering that you're hiring right now?

Philip Soran

Yes, we used to deal and [ph] (35:50) we do it territory out there, we'll -- pretty much the mix we have is 1:1. So how, we call a business development manager in the field and teamed up right with them kind of on a 1:1 basis is a storage architect, which is a technical presales expert in our product.

Jason Ader - William Blair & Company L.L.C.

I know you talked on the April 7 call about the whole district manager model. How is that going? Could you give us any update there?

Philip Soran

Yes, that's still there. It's going real well. Boy, I wouldn't do any different on that one there. The district managers are maturing really nicely into their role. The new sales rep should part [ph] (36:31) in there. Their pipelines are growing. It just feels like it's either maturing just like you hope it would.

Operator

Our next question is from the line of Kaushik Roy with Wedbush Securities.

Hemant Hebbar - Wedbush Securities

This is Hemant Hebbar for Kaushik Roy. Your international revenues as a percentage of total revenue have remained fairly constant. Do you think there are opportunities to accelerate that further? And if so, what are you guys doing there?

John Judd

Well, we're attacking [ph] (37:04) international market the same way today that we already did last year. And that is that we're careful where we put our own overhead. But we are marketing into more countries than we ever had before. Part of the reason that, that international revenue stays at the same percentage, though, is that revenue in the U.S. grew also. So we had two numbers moving in concert with each other. And I think international revenue will become more important to us as we mature international markets in the next couple of years.

Hemant Hebbar - Wedbush Securities

And now that EMC has released its own version of storage tiering, do you see any change to attach rates for your automated storage tiering software?

Philip Soran

On the attach rates and stuff, if anything, we see an increase in the attach rates. I don't have any of the exact numbers. This is more my gut feel on it. But it kind of actually highlights the need and advantages of it, the fact that they're talking about so much. So a large percent of our customers now even when at day one, they don't turn around later, anything like that. So I think the tension it brings is positive for us there. And then we got to get into why our mutation [ph] is so much more elegant and business impactful as we go forward. So it's a killer app for us. And customers love it, and even when they compare it to competitive offerings that they're hearing about, it's not a fair fight. They really love this pretty alternative we provide them.

Operator

Our next question is from the line of Chad Bennett with Northland Securities.

Chad Bennett - Northland Securities Inc.

On service revenue, probably for Jack, can you give us a sense, it was actually up decently sequentially. How much of that is seasonality behind maybe maintenance versus implementation stuff and the puts and takes there?

John Judd

The seasonality of maintenance programs just isn't there. You required your maintenance programs ready to believe [ph] (39:04) over the life of the maintenance program has nothing to do with what quarter. Your professional services do vary a little bit from quarter-to-quarter, but that's a growing market for us, and it tend to go up every quarter.

Chad Bennett - Northland Securities Inc.

So should we expect that line to decelerate from a growth standpoint considering product revenue was probably below what you expected? And I assume you have some, there's some type of lag factor there where you're doing implementations you booked a couple quarters ago?

John Judd

The vast majority of the revenue on that line is maintenance programs, not installations or training programs. So the maintenance programs drive that every quarter-to-quarter.

Chad Bennett - Northland Securities Inc.

And then on the product gross margin side of things, I guess I was under the impression that Q1, and I think you mentioned on the call, is typically a good quarter for kind of existing upgrade business, which typically carries higher margins. Kind of that being said, product gross margins were up, I guess, 70 basis points sequentially. I guess is there anything I'm missing there from a kind of discount or incentive standpoint?

John Judd

I wouldn't read too much into your analysis or where you're trying to go [ph] (40:25). Truth is this, that our margins were up 190 basis points quarter-over-quarter, and they were up both individually. And I think that we want to make sure that everybody understands that there was in the target model, but they will vary quarter-to-quarter.

Chad Bennett - Northland Securities Inc.

And then just last question, maybe for Phil, the NAS product with the DFS file system, I think it makes a lot of sense, and it's pretty exciting. I guess, in going way back, I haven't checked recently, but I thought Sun was trying to kind of have -- basically brand their own product in the small to medium-sized storage space. And I know it was at one time named Amber Road but now I think it's a 7000 series, and with GFS being big behind that. Phil, any comment on whether or not that's a really competitive product or if there's anything there?

Philip Soran

I'm not sure exactly what the plans will be with the acquisition by Oracle and that type of thing. But you did hear about a lot there. I, personally, don't hear about it as much these days, but that's more kind of just gut feel or a knowledge there. So we're just excited about our product and what we would do with that.

Operator

Our next question is from the line of Eric Martinuzzi with Craig-Hallum.

Eric Martinuzzi - Craig-Hallum Capital Group LLC

I wanted to peel back the Q2 guidance a little bit more. You guys historically have seen a nice growth there on that services line as the maintenance contracts roll on. Just based on what happened last year, we picked up around $1.5 million, $2 million going from Q1 to Q2. So given the midpoint of guidance is about $2 million above Q1, is that to say then, is the implication there that our product sales are roughly equivalent to where we came out for Q1?

John Judd

Yes, last year, in the second quarter, if you go back to our conference calls, we've talked about having some unusual events in the second quarter when it came to maintenance and services that were going to happen just in the second quarter and didn't repeat. So the second quarter lies a year ahead [ph] (42:39) and unusually large jump from the first quarter.

Eric Martinuzzi - Craig-Hallum Capital Group LLC

So was that a professional services channel for just a recognition of the maintenance contracts jump?

John Judd

Second point.

Eric Martinuzzi - Craig-Hallum Capital Group LLC

And then the services growth, just very strong but that product, overall, you're growing in the high teens rate for the total company in the top line. But that product line has been in between 20% to 25%, 26% each year [ph] (43:09) for eight quarters or so. Just wondering, is there another level of sales execution or market penetration that really breaks Compellent out? What is it, what are the investments you guys need to do to really break that out so that two, three years out, we're talking about a more substantial product line?

Philip Soran

Well, first of all, I go into a lot of different customer competitive situations, Eric. And every time I hear it, you guys by far, won the tactical battle right now. So our architecture, our current offering is very, very competitive now. Now that being said, as I look at what we got planned or roll out here in the near future, the next few quarters and stuff like that, it's as exciting as any time I've ever seen for our company. So I'm really excited about it. And I would just kind of look at is that there's multiple areas of innovation occurs here. So first of all, there is some technology innovation and connectivity and drives and that kind of stuff that obviously we're going to be able to support. But if you look on the software side, how we can take this single platform to extend it to more -- example the zNAS there, large clustered file, a lot of big [ph] (44:23) storage, cloud computing, how we can integrate with some of the key vendors like VMware, Microsoft or Oracle, those types of vendors there. And then also, how we can start going to more -- extend the day [ph] (44:36) life cycle management that we're providing that user and have it be integrated based on our Storage Center platform. There's some really neat stuff we have that increased the feature set, scalability, performance, availability. It's going to hit all the abilities, if you may.

Eric Martinuzzi - Craig-Hallum Capital Group LLC

And then, lastly, on the service provider side, you had a nice win last year with Status [ph] (44:57). How is that going, and has that turned into a reference account? Are you looking at more, is there a bigger portion of the pipeline that's potentially dealing with those managed service providers?

Philip Soran

Yes, one account we won is the Virtue Stream [ph] (45:13), which is another large international hosting providers, doing a lot of cloud services with the storage infrastructure on that. That was won in the first quarter. I don't know exactly the exact number, but we got more than a dozen of these cloud providers that are basing their platform on us, that have a lot of experience with these. So it's not like we just have a new win. These are ones that have test us out and now are rolling out offerings based on our Fluid Data architecture.

Operator

[Operator Instructions] Our next question is from the line of Jayson Noland with Robert W. Baird & Co.

Jayson Noland - Robert W. Baird & Co. Incorporated

Jack, a question on gross margin. As support and services becomes a larger percentage of the mix, there would be a natural upward pressure on gross margins. So going forward, should we assume product gross margins come down off current levels?

John Judd

That's a deep question, and I guess I haven't thought about on how much it would impact it. Actually, think that as we go forward and grow this business product does grow quite a bit, but we're trying to get everybody to concentrate on overall margin versus thinking there's a separate strategy for each line number. The two are so tied together in terms of how we sell product that I guess I'm going to try to have you not think so much that any one item can be managed to get the other.

Eric Martinuzzi - Craig-Hallum Capital Group LLC

It seems like Compellent has gotten more traction with larger national resellers. I guess if you could talk about that a little bit and then just pipeline with these larger resellers and your sense of predictability with close rates there?

Philip Soran

Yes, so you're exactly right. The large national partners have been a nice area for opportunity for us, and we're investing a lot in it. I was just actually visiting one of them last week. We have teams that dedicate our resource on those people there. So we're feeling good. They present a lot of opportunities. They're more complex in different ways. You have a lot more people to cover. Different ones are different strategies, whether consolidated or they're distributed. So you kind of adjust your strategy on those types of things. But that we view that as a real high growth opportunity. We want to make sure we take care of our existing and these national partners both.

Operator

And management, I'm showing there are no further questions at this time. Please continue with any closing remarks.

Philip Soran

So once again, I just like to thank our employees for all the hard work [indiscernible] (47:59), our business partners for their support and also end users, the vote of confidence they're giving us. And thanks to the street for your attention today. That's it. [ph] (48:08)

Operator

Ladies and gentlemen, if you would like to listen to a replay of today's conference, please dial 1 (800) 406-7325 or at (303) 590-3030 and entering the access code 4283839 followed by the pound key. The replay will be available until May 5, 2010. This concludes the Compellent First Quarter 2010 Financial Results Conference Call. Thank you for your participation. You may now disconnect.

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