Opnet Technologies Inc. F4Q10 (Qtr End 3/31/10) Earnings Call Transcript

| About: OPNET Technologies (OPNT)

Opnet Technologies Inc. (NASDAQ:OPNT)

F4Q10 Earnings Call

May 11, 2010 5:00 pm ET


Marc Cohen – Chairman, Chief Executive Officer

Mel Wesley – Chief Financial Officer

Alain Cohen – President, Chief Technical Officer


Kevin Liu – B. Riley & Co.

Gary Spivak – Noble Financial

[Gabe Louis – Mazoho Securities]

Alex Zukin – Thinkequity


You’ve joined the Opnet Technologies Q2 FQ10 conference call. (Operator Instructions) I would now like to turn the call over to your host, Chairman and CEO, Mr. Marc Cohen.

Marc Cohen

Welcome and good afternoon. I’m Marc Cohen, Chairman and CEO of Opnet Technologies. Before proceeding, let me note that various remarks we may make about future expectations, plans and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. These include statements regarding the company’s or management’s intentions, hopes, beliefs, expectations or predictions.

Because such statements deal with future events, they are subject to various risks and uncertainties and actual results could differ materially from the company’s current expectations. Factors that could cause or contribute to such difference include but are not limited to weakness in the economy, fluctuations in customer demand, the company’s ability to manage its growth, risks associated with competition and risks identified in the company’s Securities and Exchange Commission filings including those appearing under the caption Risk Factors on the company’s 10-K for the year ended March31, 2009 and our quarterly reports on 10-Q that we will file during fiscal 2010.

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. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

During this call, we may also refer to non-GAAP financial measures. A reconciliation of any non-GAAP financial measures to the most directly comparable measures will be available in the investor relations section of our website at www.opnet.com.

We are very pleased to report strong execution with quarter, which resulted in sequential and year over year growth in total revenue, deferred revenue and cash. We generated total revenue of $34.4 million, operating margin of 9% and diluted earnings per share of $0.11. Additionally, we ended the quarter with record deferred revenue of $43.4 million and record cash of $105 million.

Our presentation today will have three parts. First, Mel Wesley, CFO will review the financial results of the quarter. I will then discuss our business performance for fiscal Q4. We will conclude with a question and answer session. Alain Cohen, our President and CTO will join us in answering your questions.

Now, I’d like to hand it over to Mel Wesley.

Mel Wesley

Thank you, Mark and good afternoon everyone. As Mark mentioned, we are very pleased to report strong execution in what represents the first calendar quarter of a new budget year for many companies.

While generating record total revenue of $34.4 million, we also generated record deferred revenue of over $43 million. Our total revenue grew 19% year over year while our deferred revenue grew 31% year over year. We also ended the quarter with $105 million in cash and cash equivalents.

Before summarizing our financial performance, I want to discuss two topics. First, given our history of generating positive operating cash flow in excess of our operating needs, our optimism about the company’s long-term growth prospects, we have decided to increase our quarterly dividend $0.10 per share.

Our first dividend for fiscal 2011 will be paid on June 30, to stockholders of record on June 15. The company is targeting an annual dividend of $0.40 per share for fiscal 2011.

Second, we will begin referring to revenue from sales of software licenses and product revenue. Previously, we referred to this revenue as new software license revenue. We believe this change is appropriate given that a portion of software licenses we sell are delivered on hardware platforms.

Now I will summarize our financial performance for the quarter, which included reference to certain non-GAAP measures. Please note that a reconciliation of each non-GAAP measure to its most comparable GAAP measure is included the section of our earnings press release containing our financials.

First, overall execution by our sales team was strong. The invested team generated revenue of $25 million, a sequential increase of $700,000. International team generated revenue of $9.1 million, a sequential increase of $1.6 million. International revenue accounted for 26% of Q4 revenue and 22% of Q3 revenue.

Second, our gross margin was flat sequentially at 76%, resulting in gross profit of $26.1 million. Non-GAAP gross margin was also flat sequentially at 77%.

Third, our operating margin decreased sequentially from 10% to 9%. The decline in operating margin was largely due to an increase in payroll tax expense, which is a seasonal trend in the first calendar quarter. Non-GAAP operating margin declined sequentially from 13% to 12%.

Fourth, we generated earnings per share of $0.11. Reported earnings exceeded our guidance range of $0.04 to $0.10. We generated non-GAAP earnings per share of $0.14.

Finally, cash and cash equivalents increased sequentially by $4 million to $105 million. The growth in cash was largely due to record product and maintenance bookings during the quarter. Operating cash flow during Q4 was approximately $5 million. At the end of Q4, cash and cash equivalents represented 59% of total assets.

I will now provide more detail regarding financial performance. Product revenue was $16.2 million, up 4% sequentially and up 51% year over year. The sequential increase was due to growth in revenue from service providers and international government customers. The year over year increase was due largely to growth in revenue from corporate enterprise and U.S. government customers.

Product update technical support and services revenue was $12.4 million, up 3% sequentially and up 12% year over year. Sequential and year over year increase is due primarily to growth in our installed customer base.

Professional services revenue comprised of consulting and training revenue was $5.9 million, down 3% sequentially and down 18% year over year. Consulting services accounts for the majority of our professional services revenue. Consulting revenue was $6 million in both Q4 and Q3 and was $7.2 million in Q2 of last fiscal year.

The sequential year over year decrease are largely due to growth in the proportion of sales of our APM products as they typically require less consulting services to implement as compared to our other products.

International revenue was $9.1 million, up 21% sequentially and up 41% year over year. The sequential year over year increases were due to growth in revenue from corporate enterprise customers and service providers.

Our gross margin was flat sequentially at 76% and up year over year from 73%. The year over year increase was largely due to a 51% increase in product revenue, which typically yields a gross margin of 89%.

Q4 operating expense was $2 million up 4% sequentially and up 6% year over year. The sequential increase was due to higher sales and marketing expense and higher general and administrative expense. The year over year increase was due to higher research and development expense and higher sales and marketing expense.

Now to the details on OpEx. Research and development expense was $8.5 million or 25% of revenue compared to $8 million or 24% of revenue last quarter. The increase was primarily due to higher compensation and payroll tax expense.

Sales and marketing expense was $11.5 million or 33% of revenue compared to $11.4 million or 34% of revenue last quarter. The increase was primarily due to higher commission expense resulting from an increase in bookings and higher payroll tax expense.

General and administrative expense was $3 million or 9% of revenue compared to $2.7 million or 8% of revenue last quarter. The increase was largely due to higher bad debt and payroll tax expense.

As a result, our Q4 operating income was $3.1 million or 9% of revenue compared to $3.4 million or 10% of revenue last quarter. Operating loss for Q4 of last fiscal year was a negative $484,000 or negative 2% of revenue.

Our Q4 effective tax rate was 24% compared to 32% last quarter. The decrease was largely due to a change in estimated balances related to certain primary differences between our booking income and taxable income. As a result, our Q4 net income was 2.3 million or earnings of $0.11 per share. Earnings per share were the same as last quarter, and were up from a loss of less than one-half of one cent per share for Q4 of last fiscal year.

Moving to the balance sheet, Q4 DSO was 87, up from 79 last quarter. The change was largely driven by an increase in business activity during the third month of Q4 as compared to the third month of Q3. Approximately 48% of Q4 revenue was recorded in March compared to 39% of Q3 revenue reported in December.

In order to set forward guidance, we consider the following factors and expectations. On the negative side; first, we consider the impact of the current economic environment on our adjustable markets and sales cycles. Second, we believe a significant improvement in the economy is still several quarters away. Third, we considered the deal flow seasonality we typically experience in the June quarter. And finally, we continue to experience volatility on service provider product sales and international sales.

On the positive side, first, demand for our APM products continues to grow. Second, we believe the competitive advantages offered by our APM portfolio is opening up new opportunity and enhancing our ability to grow market share. Third, we continue to focus on growing our channel partner program and our indirect sales. And finally, we ended Q4 with record deferred revenue.

Consequently, we are establishing fiscal 2011 first quarter guidance for revenue for between $32 million and $34.5 million and earnings per share between $0.03 and $0.08.

Based on conditions we are experiencing in the market and the continued growth of our APM product sales, we believe we can achieve our target fiscal year operating margin of between 17% and 21% during fiscal 2012.

This concludes the financial performance review. I will now turn the call back to our CEO, Marc Cohen.

Marc Cohen

Opnet Technologies is a leading provider of solutions for managing applications and networks. Opnet’s best in class solutions address application performance management, network engineering, operations and planning and network R&D.

We believe the challenging economy will continue to exert pressure on our business in the near term. However, we believe the environment for IT spending is improving. During fiscal Q4, we experienced strong demand for our APM solutions especially from corporate enterprises.

We continue to focus on revenue growth and profitability by executing the following strategy; first, focusing on sales force efficiency and productivity. A number of quota carrying representatives from December 31 to March 31 decreased by two from 74 to 72. The number of inside sales representatives from December 31 to March 31 increased by three from 23 to 26. The total licensed revenue per quota carrying rep in Q4 was therefore approximately $218,000 compared to approximately $208,000 in Q3.

In Q4, we continued to invest in marketing initiatives to increase sales force productivity. Many of these initiatives focused on increasing the brand awareness of our software solutions with an emphasis on application performance management, or APM. We believe the APM market is a multi-billion market and represents our largest growth opportunity.

Furthermore, we view the APM market as less susceptible to weakness in the economy as our APM solutions are often categorized as mission critical since they increase the availability and reliability of revenue generating applications. In Q4, APM represented 54% of our licensed bookings.

The second element of our strategy is selling into our diverse install base while continuing to add new customers. Approximately 22% of total Q4 license revenue was from new customers compared to 18% in Q3.

Third, concentrating resources specifically on developing new accounts within the corporate enterprise market, because we believe this is our largest growth opportunity. Our current install base constitutes and excellent list of referenceable and active users of Opnet solutions with demonstrated potential for recurring high margin license and maintenance revenue. Approximately 37% of Q4 enterprise license revenue was from new customers compared to approximately 26% in Q3.

From a product perspective, we are putting significant emphasis on further developing and marketing our APM solution. We believe that our suite of solutions offers competitive advantages by providing unparalled end-to-end visibility and analysis. We also believe Opnet solutions offer insights of trouble shooting capabilities that allow customers to understand the root causes of performance problems much faster than other solutions on the market.

The fourth element of our strategy is to grow sales by developing indirect sales channels and partnerships. Opnet maintains two formal indirect sales channel programs; the synergy program and international resellers.

The synergy program partners co-operate with Opnet direct sales teams on individually registered opportunities approved by Opnet in advance. As of March 31, we had approximately 84 partners participating in this program with new partners enabled each month. International resellers independently sell Opnet products primarily in regions outside of North America where Opnet does not maintain a direct sales presence.

During Q4, Gartner released is first ever magic quadrant for APM. Partner recognized Opnet in the challenger’s quadrant. We believe our positioning reflects our strong technical capabilities and identifies us as a key competitor against the APM mega vendors. We have already seen our placement in the Gartner report has a significant impact on competitive deals.

I will now provide some highlights. Our software is used by our diverse customer base for the following mission critical activities; real time monitoring of application network and systems performance, pinpointing the root cause of application performance problems, detecting operational configuration problems, auditing compliance of network security policies, automatically documenting infrastructure, preventing mistakes in operational changes, planning for traffic growth, infrastructure investments and resiliency and accelerating the delivery of new network technologies.

Corporate enterprises are a growing market and primarily purchase our APM and network engineering solutions. The diversity of the enterprise accounts we sold to in Q4 highlights the size of this addressable market. We closed deals with corporate enterprises including American Honda, Ameriprise, Auto Desk, Banko d’Spana, Bank of Montreal, Baptist Health, Bair, Canadian Real Estate Association, Capital One, Catholic Health Care, West Solaris Solutions, Sysco System, DC office of the CFO, Del Monte Foods, Deere & Co., Delta Airlines, Dig.com, Getco, Hewitt Associates, IBM Global Services, J.P. Morgan Chase, Kennedy Health Systems, Lifetime Fitness, Netronics, Morgan Stanley, Motorist Insurance Group, Ohio National Financial Services, Pacific Gas and Electric, the State of Indiana, the UCLA Heath System, Universal Music Group, University Hospital of Cleveland, UPS and Walgreen’s.

Government and Defense agencies purchased our full range of software products. Revenue from U.S. government clients as a percentage of total revenue was 36% of Q4 revenue, down from 38% in Q3 and 38% of Q4 revenue last fiscal year. It is important to note that revenue from U.S. government customers originates from many different agencies, programs and contractors.

In Q4, we closed deals with domestic and international government and defense agencies including Department of Homeland Security, the Federal Bureau of Investigation, the Internal Revenue Service, the Missile Defense Agency, the Northern Ireland Department of Finance, the Patent and Trademark Office, the Swiss Army, the Taiwan Construction and Planning Agency, the U.S. Air Force, the U.S. Army, the U.S. Census Bureau, the U.S. Postal Service and the U.S. Department of Agriculture.

In addition, we closed deals with integrators and contractors supporting our government and defense clients including Draper Laboratory, Harris Corporation, Johns Hopkins University Applied Physics Lab, MIT Lincoln Lab, Northrop Grumman, Task and Verizon.

Service providers purchase our entire portfolio of products depending on the specific application. Our network service provider clients continue to have tight budgets and extended sales cycles. Revenue from service providers continued to be lumpy and was up in Q4 relative to Q3. In Q4 we closed deals with service providers including British Telecom, Moby Neal and Rogers Communications.

Network equipment manufacturers primarily purchase Molder and transport planner. Revenue from NEM’s in Q4 was down relative to Q3. In Q4 we closed deals with NEM’s including Inter Digital Communications, Meteor Comm, and Yamataki Corporation.

On the competitive front, we primarily encountered the following competitors; Compuware, CA, Net Scout Systems, IBM Tivoli and Quest Software. While we are competing more often in APM opportunities, as compared to opportunities involving our other solutions, we believe that our leading analytics and end to end solution suites are allowing us to take market share from competitors.

To summarize, we are continuing to execute on our vision, a vision based on software and appliances that embed advanced analytics to accelerate problem resolution and prevent problems and complex networks and application infrastructures.

The enhanced efficiency and problem avoidance enabled by our solutions are providing critical functions in the management of IT environment and corporate enterprises, government defense agencies, network service providers and network equipment manufacturers.

Our software is unique in its ability to analyze communication networks, applications and systems on an end to end basis. Our software represents a paradigm shift from the past. We are excited about the opportunity in front of us to deliver value and return on investment to many thousands of customers worldwide.

To recap, during Q4, we achieved strong sequential and year over year growth in total revenue, deferred revenue and cash. We achieved $34.4 million in revenue. We generated operating margin of 9%. We ended the quarter with record deferred revenue of $43.4 million. We also ended the quarter with $105 million in cash and cash equivalents.

We are significantly increasing our APM market share by penetrating new opportunities and displacing competitors and we continue to build our synergy channel program and now have over 84 registered partners.

We thank you for your time, and we’ll now take your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Kevin Liu – B. Riley & Co.

Kevin Liu – B. Riley & Co.

Generally on the enterprise segment we would see product revenues continue to increase sequentially in Q2 so I’m just curious given the strength in Q1 and you felt there might have been some incremental deals that came out of the pipeline early or if you are still fairly confident in the pipeline coverage and your guidance might be a little conservative here.

Marc Cohen

We’re very confident in our enterprise pipeline. In Q4, while we didn’t break it out in the numbers, the actual enterprise bookings were flat in Q4 relative to Q3 and as I pointed out Q3 is typically a seasonally high quarter for enterprises because of their end of year and their budget flush.

So I think the fact that it was flat for us in Q4 and the fact that our pipeline remains strong and growing is something that gives us confidence.

Kevin Liu – B. Riley & Co.

Also you mentioned the Gartner report and what that’s done for you competitively. Could you talk about what sort of boost that may have had on the pipeline and also how it’s actually helped you win some deals?

Marc Cohen

First of all, we’ve had some incoming requests from prospects that we may have otherwise heard from and those were triggered by the fact that we are mentioned in the report, so it definitely puts us squarely on the map and our strong position in the report is going to bring us into opportunities more and more.

We also had a number of situations and one that I was in myself, where I was meeting with a senior manager of a global systems integrator that has been looking at our solution and competing them with a couple of other companies, and they really liked our solutions. We performed better than the competition.

The challenge we were having was that some of the senior managers were not that familiar with Opnet compared to some of the competitors that they had worked with in prior environments but the fact that they were able to review us and our standing in the Gartner report was able to provide the confidence that they needed that we were in fact a strong player and recognized as such, and that allowed us to move forward and help them make the business case to their CIO.

So that’s a good example of having a very clear impact in a recent business opportunity.

Kevin Liu – B. Riley & Co.

In terms of the enterprise bookings you’re seeing today, are these deal sizes getting larger and are you seeing multi-module sales? And I’m just curious what sort of tax rate we should be using for fiscal ’11.

Marc Cohen

On the first question, we’re definitely seeing multi-product sales. On the network side, we’re seeing ACE Live plus ACE Analyst quite frequently and then we have other modules that we’re including such as our VOID module for example.

On the Act support side with Panorama, we’re also including ACE Analyst for example and more and more frequently as we’re getting higher and higher in the organization, we’re starting to see combo deals that involve all three, so our expectation is that will continue and we’ll really leverage the benefits that we offer by having the integration that’s end to end that spans the multiple domains.

Mel Wesley

Fiscal ’11, currently we’re modeling 40% and the reason it’s higher than what you typically see is because the R&D tax credit that we claim on our return that expired in December of ’09, so until they reinstate that, we’ll be using in our model the 40% rate.


You're next question comes from Gary Spivak – Noble Financial.

Gary Spivak – Noble Financial

Given that it’s a nice quarter and APM was actually down, what product areas saw upside in the quarter?

Marc Cohen

The product, we had an upside from a service provider. We had one strong deal that drove that in particular.

Alain Cohen

I think it’s important to note that APM isn’t really down in absolute numbers. It’s down as a percentage. In other words, overall numbers are up. There was some strong performance with some of the other products so the APM or the enterprise number is flat. The enterprise number is essentially flat. The APM number is, if you look at APM from the enterprise sector, it’s not really down. The government is a factor as well.

Marc Cohen

So APM on the enterprise side was in fact flat. It was down on the government side.

Alain Cohen

Which is normal because of the government seasonality.

Gary Spivak – Noble Financial

The margin guidance, I guess that’s a target range to hit at some point this year. That’s not a total year guidance, right?

Mel Wesley

That’s full year guidance for fiscal 2012.

Gary Spivak – Noble Financial

17% to 21%.

Mel Wesley

Correct. And that’s unchanged from what we communicated last quarter.

Gary Spivak – Noble Financial

Any comments on the pipeline? Did you see growth in the pipeline or weak because of your typical Q4 roll into Q1 downtick?

Marc Cohen

There’s always some concern that the June quarter has a little bit of softness because of the European cycle and it’s still off government quarter, but our pipeline is very strong. We have a lot of active business cycles. In other words opportunities where customers are committed to making a purchase in the quarter and that keeps growing quickly so we’re very encouraged by that.

Gary Spivak – Noble Financial

You obviously had a strong international quarter this time around. What’s your sense for EMIA and the appetite going forward given general June quarter caution?

Marc Cohen

The Pacific Rim region seems very strong. We’ve seen a lot of activity there building up so I expect that to be solid. There’s a lot of things going on in Europe right now in terms of their own economic crisis, so we’ll have to see how that plays out, but we do have a fair number of deals in the pipeline for Europe. We’ll just have to see how things turn out there.


You're next question comes from [Gabe Louis – Mazoho Securities]

[Gabe Louis – Mazoho Securities]

A question from a competitive environment and the market environment, the productivity is obviously improving in the sales force. Do you have plans to continue to add there? What percentage of the synergy channel partners are taking in on license revenue now if you can reveal that. Are we still under 10% there, and is there anything that’s changed in your view from the last couple of quarters on close rates and pipeline.

Marc Cohen

Regarding the sales force productivity, we are pleased to see that it is increasing. We still believe that we have a lot of room for additional improvement so before we start to add significantly to the sales force, we’re going to continue to work on that optimization and getting more license revenue per rep per quarter.

That is also being aided by the fact that we’re seeing a decent amount of repeat business from existing APM customers who are continuing to add and baking us into their budgets as they have new projects, new data centers, new applications etc.

With regard to the synergy program, we’ve had some nice growth in terms of the actual contribution. The synergy itself is still less than 10%. If you look at synergy plus our international it is right around 10%, but synergy is definitely growing in terms of its contribution as well as in the number of registrations that we’re getting from partners, which is growing significantly, so I think that program is on track to continue to grow nicely.

[Gabe Louis – Mazoho Securities]

In terms of the pipeline build and the close rates relative to let’s say two or three quarters ago.

Marc Cohen

I think that the pipeline is growing nicely and in part, that comes from the fact that you’re starting to see a combination of new business cycles plus existing business cycles plus repeat business that are all contributing to that. So the bigger our APM gets the more contribution we’re going to get from a lot of this run rate repeat business and so that’s definitely having a nice impact on the pipeline.

As far as close rates, we definitely have very strong close rates when we get into a competitive situations and what’s really driving that as I mentioned earlier is the end to end capability. It’s the fact that we can come in and show them what they can accomplish with ACE Analyst and Panorama and that we can address their needs both on the systems side, the app support side and the network side so that’s something that we’re going to continue to enhance further.

[Gabe Louis – Mazoho Securities]

Just one layer down on that competitive front, you mentioned the ones that you see most often. Are there any nuances in there in terms of who you might be seeing a little more of than you used to three or four quarters ago or who might be fading relative to three or four quarters ago.

Marc Cohen

We’re definitely encountering Wiley a lot more because we’re being brought into more opportunities on the app support side so I expect that there’s going to be a lot more competition there. As far as on the network side, we run into the usual suspects, Net Scout and Net QS, which is not part of CA, and Compuware of course. We continue to run into them.

I’d say we’re seeing less of Compuware in the last two or three quarters than I’d say we’d seen prior to that but as far as Net Scout and Net QS, we continue to run into them on a regular basis.

[Gabe Louis – Mazoho Securities]

On the product road map, are you happy with the what you have now and that you want to continue to drive that through both the internal sales and the channel partners or are you looking to do anything like specific vertical market oriented products? What have you got coming over the next six to twelve months that you’re comfortable talking about?

Marc Cohen

We’re not in general using the investor calls to announce new products. At least traditionally we haven’t done that. But we do have some new things coming out. They’re not so much vertically oriented. In general, our APM suite is broadly applicable to all types of enterprise and government users.

So I wouldn’t say that the strategy is to attack certain verticals to create add ons in that respect. There is a module oriented strategy especially A5 is selling very briskly, so we are trying to create some modules around that and I think we’re creating some excitement in fact.

There is a newly released or very recently released product which is what we call element insight and this element insight product really adds an SMP based data collection capability that complements the data collection capability of Ace Live so that for example when you’re investigating a problem with application performance it will allow you to get some initial insight into what’s happening on various elements of the network along the path the application travels on as well as on the servers.

So it’s very similar to the capability that some of our competitors have with suites like Ehealth for example at CA and the way that complements the type of problem solving you can do with ACE Live is something which we think customers are excited about. So that’s a new capability and there will be a few more like that as well as some other products that we’ll announce over the course of the next nine to twelve months that I won’t discuss here. But again, it’s broadly applicable to all types of enterprise and network applications.


You're next question comes from Alex Zukin – Thinkequity.

Alex Zukin – Thinkequity

Can you talk about any success you’re seeing kind of cross selling into existing non APM enterprise customers and have you seen an acceleration on that?

Marc Cohen

Non APM customers, you’re referring to I believe our solutions that would address network engineering and operation and we are definitely cross selling. When we’re in an organization, we it gives us an opportunity to show off some of the things that we do on the network engineering side and in particular one of our solutions called Net Mapper has been doing very well, and that’s a solution that completely automates the diagramming process for engineering diagrams of the infrastructure, and that’s something that organizations will typically spend a couple of FTE’s at least per year working on that.

When you add it all up, and it’s something that is a net cost reduction and it gives them something that they were typically only doing a couple of times a year, we’re doing it every day. So we’re increasing the accuracy and reliability in their overall capability and lowering their costs.

So that’s an example of one that we cross sell as well as our solution our Sentinel solution for automating the audit process of routers, switches and firewalls. And then our Encompass solution which is also for giving our customers a unified view of the organization merging topology as well as alert and traffic information.

Alex Zukin – Thinkequity

It’s fair to say then that the network engineering business is benefiting both from better APM revenues as well as the better macro economic environment?

Marc Cohen

Definitely. I think that we’re seeing a pickup in that space as well but it’s not to the same extent that we’re seeing on the APM side.

Alex Zukin – Thinkequity

On the APM side, is there any one use case in particular that’s driving APM sales more than others or is it generally pretty dispersed?

Marc Cohen

It’s typically focused on getting to the root cause of performance problems, being able to measure end user experience in real time and to be able to set alerts and alarms so that you can proactively understand how performance is changing and to be able to do that so you can react before your end customer picks up the phone to complain about a performance problem.

So the fact that we can do this very quickly and have it up and running almost immediately when we deploy the solution, I think makes it very compelling. But really, in the end what it really comes down to is the fact that we can get down to that root cause of the performance problem faster than anyone else. And that is what really drives our success.

Alex Zukin – Thinkequity

Talking a little bit about this low cost online sales version of ACE Live, what sort of strategy for that product? Who are you targeting and how is that doing?

Marc Cohen

The low cost online, the one that we’re selling online is actually one that we also sell and have been selling as part of our normal product portfolio and we call it Rover, ACE Live Rover. It’s very easily deployable product. You can install it on a laptop or any ordinary PC very quickly and so rapidly deploy the monitoring and troubleshooting capability of ACE Live. Support is much more limited in terms of the through put or processing rate that it can handle than our hardware base or our larger virtualized appliances.

In terms of the market, that is clearly more accessible to the small and medium enterprise market and the strategy for people to easily download a trial version of it once they fill out a simple form and enable them to experience the capabilities. The clients, although on a slightly reduced scale, but then of course for some customers, that can certainly serve as an entree to the product and allows them to later request the higher through put versions of the product.

So it plays multiple roles. It can just be a sale, a lone sale, and it can also be something that whets their appetite for using the products on a larger scale.

Alex Zukin – Thinkequity

Is it targeted towards the solar winds type of customer?

Marc Cohen

Certainly from a budget perspective you can draw a parallel with solar winds and also from a sales methodology standpoint in terms of selling it on line. The overhead of the sale is lower for us. So from that perspective absolutely, and I think in terms of the market segment, small to medium enterprise, that’s also correct.

So I think there’s a lot of truth in what you’re saying there, but also again for us, I think our strategy would be, and maybe this is where it would be different from solar wind, for some customers those who have the kind of budget that it would require to be able to go to the larger scale, more large enterprise class solutions. We can do the up sell.

Alex Zukin – Thinkequity

And what should we think about in terms of from a product contribution perspective as a portion of APM revenues going forward. Do you expect that product to sort of substantially ramp or is it more of a add on and then drive the higher end.

Marc Cohen

I think at this point, we would be speculating if we give any numbers on that because it is a new way of selling for us so it’s certainly something we don’t have any real numbers to base a model on yet, so maybe we’ll know more about that later one once we get some more data.

Alex Zukin – Thinkequity

In terms of you saw particular strength in Europe this quarter and you mentioned a June quarter being a soft quarter, do you sense any particular displacement or anything negative as related to that Iceland volcano event in terms of impacting sales?

Marc Cohen

No, we haven’t seen anything other than having disrupted meetings that our staff has had scheduled already. Nothing significant yet but obviously if that continues to be persistent I can see it having some sort of effect, but to date, nothing significant.


This concludes the Q&A portion of our call. I’d like to turn the call back over to Mr. Cohen for any closing remarks.

Marc Cohen

I’d like to thank everyone for attending today. The conference call is now closed.

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