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Executives

James Baum - Chief Executive Officer, President and Director

Patrick Scannell - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer

Deb Murphy - Vice President & Corporate Controller

Analysts

Glenn Hanus - Needham & Company, LLC

J. Derrick Wood - Wedbush Securities Inc.

Bhavan Suri - William Blair & Company L.L.C.

Mark Kelleher - Brigantine Advisors

Nathan Schneiderman - Roth Capital Partners, LLC

Rajesh Ghai - ThinkEquity LLC

Jayson Noland - Robert W. Baird & Co. Incorporated

Nabil Elsheshai - Pacific Crest Securities, Inc.

Alex Kurtz - Merriman Curhan Ford & Co.

Kathryn Huberty - Morgan Stanley

Netezza (NZ) F1Q11 (Qtr End 04/30/2010) Earnings Call May 25, 2010 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to the First Quarter Fiscal 2011 Netezza Corporation Earnings Conference Call. My name is Alicia and I'll be your coordinator today. [Operator Instructions] I will now like to turn the call over to Ms. Deb Murphy, Netezza's Vice President and Corporate Controller. Please proceed.

Deb Murphy

Thank you, Alicia. Good afternoon, everyone, and thank you for joining us on our Earnings Release Conference Call for our first quarter of fiscal 2011, which ended April 30, 2010. Speaking today will be Jim Baum, President and Chief Executive Officer; and Pat Scannell, Senior Vice President and Chief Financial Officer.

Before we begin, I'd like to remind you that some of the statements made on this call may be forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to differ materially. These risk factors are described in our most recent annual report on Form 10-K, which is on file with the SEC. In addition, any forward-looking statements represent our views only as of today, and should not be relied upon as representing our views as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change.

On this conference call, we will be referencing both GAAP and non-GAAP financial measures. We provided GAAP and non-GAAP reconciliation information in the press release we issued earlier today announcing our Q1 results. The press release is available on the homepage of the Investor Relations section of our website at www.netezza.com. The webcast of this call will be archived in the same section.

I would now like to turn the call over to Jim.

James Baum

Thank you, Deb, and thank you all on the call for joining us today. Q1 was a great start to the year for Netezza and over the next few minutes, I'd like to give you some color on the quarter and our experiences in it.

The business performed extremely well in Q1, and our revenue growth is a clear indicator of the adoption of our TwinFin product by the marketplace. We saw strong demand and our sales team executed well, delivering 20 new customers. By vertical, we saw consistent performance across each of our industry verticals, with major customer wins in each of Digital Media, Retail, CPG, Telecommunications and Financial Services.

While we were not satisfied with our international productivity, we did see this business generate wins in several new geographies, encouraging signs of increasing our international breadth. Looking forward, our visibility remains strong as we exit Q1 and we feel even more confident about the year.

Our momentum is not gone unnoticed by our industry and last quarter, we were pleased to be recognized as a leader in our field. InformationWeek Business Technology Network’s Intelligent Enterprise awarded us the Editors’ Choice award for the third time, ranking Netezza among their elite list of the most influential companies that will drive the intelligence enterprise in 2010. In their comments, they recognized us for our product achievements with TwinFin and Skimmer, our aggressive pricing model and our strategic partnerships.

Competitively in Q1, we encountered the usual players. Oracle remains the one we encounter most frequently and their Exadata database machine is very visible in the marketplace. Teradata was our second most encountered competitor, and the selling dynamic between the two companies remains largely the same as previous quarters. These two competitors make up the vast majority of our competitive encounters and overall, our win rates remain high.

We continue to rely on the proof of concept process to differentiate our products and while specific positioning does vary from competitor to competitor, we continue to differentiate our products on performance, simplicity, total cost of ownership and now an additional differentiator is emerging as i-Class is getting introduced to the market, more on this later. As always, our customers and prospects are very receptive to our easy-to-do-business-with philosophy and our business practices continue to be a strength.

From a market standpoint, analytics continues to garner the attention of large enterprises and is generally considered mission-critical by these companies. We strongly sensed that sentiment during the quarter as many large companies moved their analytics agenda forward. The competition continues to invest heavily to bring general market attention to the array of solutions available, whether it be IBM with their Smarter Planet positioning, or Oracle with their smarter computer story, all of this attention is good for demand creation in this industry and we find that we benefit from the visibility of analytics and the infrastructure required to deploy it that’s being created by these competitors.

A good example of the mission criticality of analytics comes from the financial services industry. After the May 6 flash crash of the markets, analytics have been playing a major role in understanding what happened and will ultimately be used to define the mechanisms to prevent another anomaly in the trading systems that power of the market. NYSE Euronext employs the Netezza TwinFin for large-scale data analysis and TwinFin is greatly helping them to self-assess and respond to the regulators on these recent events.

In another case, the social networking company that provides community websites for social organizations purchased the Netezza TwinFin 12, which will help the company scale and complexity of analytics as the company shifts its business model. Before Netezza, this business had built a 100-terabyte Hadoop cluster that became unmanageable as query sophistication, data volumes and analytic demands grew. They didn't have the headcount to support the demands of this system, especially with the company's focus on becoming profitable. This company is now deploying Netezza to optimize its ad placement service by analyzing clickstream data, behavioral data and billing cycles, altogether. In the first week of it's POC with Netezza, they discovered a billing error that meant they weren’t billing clients accurately. Identifying this error, Netezza helped them deliver much of their ROI before they even purchased the TwinFin.

During the quarter, we announced that Pacific Northwest National Labs is using Netezza to conduct their regional smart grid demonstration project for the United States Department of Energy. The TwinFin architecture was chosen for its ability to efficiently manage massive data volumes generated by the smart grid meters and sensors and have the data accessible, analyzable and action-ready within minutes of receipt.

Some of the possible analyses that the TwinFin will enable include grid health, price fluctuations, and energy consumption, risk identification and fraud detection. This demonstration project will become a model for innovative electrical grid advancement helping the U.S. achieve its energy goals, including reduced energy consumption and cost savings.

You can see from these examples how critical analytics has become from unwinding a complex financial markets breadth, to driving increased revenue, to meeting the need to reduce our energy consumption, analytics have begun a critical part of every type of business.

During Q1, we also made excellent progress with our partner initiatives. For example, we expanded our commitment to our SAS partnership since the recent releases of SAS/Access and the SAS Scoring Accelerator for Netezza greatly enhance the performance and interoperability of both SAS and Netezza's products. Our belief is that this will provide us greater access to the large SAS customer base. Our field team has begun engagement with the SAS team, and the early indicators are promising.

We've also established in a partnership with Amdocs, the largest supplier of telecom billing applications in the industry. This partnership is showing some early signs of success, with a significant joint sale closing during the Q1 in Europe. We are in the midst of ongoing joint account collaborations and sales efforts with their sales team and are encouraged by the strength of the partnership.

And yesterday, we announce a partnership with DemandTec. DemandTec is a leader in retail consumer products analytics, and they have chosen to use TwinFin as the platform of choice for the deployment of their next-generation products, Shopper Insights Analytics, a solution that predicts shopper behavior. They value the scalability, performance and analytics processing capability of TwinFin as these characteristics allow them to deliver highly complex, contextual analytics at the point of position. This is also an excellent example of the strength of our solutions in the analytical service provider market, with DemandTec joining the ranks of our other large partners in this space.

During the quarter, we made very good progress with our product initiatives. Highlights include releasing the NEC data-warehousing appliance that incorporates our technology. NEC are continuing to ramp up their production, selling, delivery and support processes. They've now delivered their product to the first customers.

We also announced TwinFin i-Class. I-Class is a set of extensions to the TwinFin platform that allow our partners and customers to deliver their advanced analytics solutions directly on our appliances. This capability has become a differentiator for us, as it allows customers and partners to run the analytics algorithm natively on TwinFin, improving execution speed, reducing costs and simplifying complex, big data and algorithmic environment. This will be a chargeable option that we will release this summer with our next major software upgrade of TwinFin. This software upgrade itself will improve the performance of the TwinFin by 200% to 300%, continuing our strong history of delivering major performance gains and every nine to 12 months.

In closing, we're very pleased with the progress we made in Q1, both in the numbers and against our milestones. We had an outstanding quarter and are now even more confident in our prospects for the rest of FY ‘11 and beyond.

Now I'd like to turn the call over to Pat.

Patrick Scannell

Thanks, Jim, and good afternoon, everyone. As Jim said, we are very pleased with the results of Q1. We saw continued strength in North America and continued market acceptance of TwinFin. We saw some major upgrades from our install base, which represented an unusually high percent of our business, coming in at 82%, augmented by 20 new customers we added during the quarter.

For Q1, we delivered revenues of $58.2 million, representing an increase of 28% year-over-year. We saw our product revenues increase 31% and service revenues increase 21%. Our North American business was 46% higher than a year ago, and we see continuing strength in this market for the balance of the year.

There is continued softness in our international sectors both in Europe and in Asia. However, as I have mentioned previously, we've increased our investments in these territories, which should reap positive returns as we move through the balance of this fiscal year.

Given the small percentage of our business in EMEA, the declining value of the euro had minimal impact on our business. We had one 10% customer, greater than 10% this quarter, in the digital media space.

As we specified in our recently filed 10-K, we adopted the new revenue-recognition rules effective at the beginning of our first quarter, and we're mindful in our fiscal year '11 planning that certain transactions that would normally be deferred for revenue would be recognized as revenue in the current quarter. And we planned our business and our forecast accordingly.

The revenue guidance for the year that we've provided on our last call assumed the adoption of this new revenue-recognition standard at the beginning of our fiscal year. Thus, this policy will have no impact on the revenue outlook for the year. This change accounted for $17 million of revenue for two transactions that were booked this quarter, which previously would have been deferred to Q2 or Q3 under our old revenue recognition rules.

We have 55 quota-carrying reps onboard today that drove 86% of the business. We will continue to add to this direct channel upwards to 60 reps throughout the course of this year, while also focusing major efforts on our partnerships and on our indirect go-to-market activity. Our average deal size was $1.3 million and we added 20 new customers.

We continue to see the adoption of TwinFin across all vertical markets and within our existing customer base, as companies upgrade and migrate their data centers to our new platform. 87% of our revenue was TwinFin.

The top four vertical markets this quarter were Digital Media, Telecommunications, Financial Services and Retail. I'll be referring to non-GAAP figures in this call, unless I specifically say that I am referring to GAAP figures. A reconciliation of these non-GAAP measures to the most recently comparable GAAP measures is available on our earnings press release issued earlier today, which is also posted on the Investor Relations section of our website.

Total gross margins were reported at 67%, up from 66% a year ago. Product gross margins came in at 64%, up from 62% a year ago. And service margins were 73%, down slightly from 74% a year ago.

From a product margin perspective, we've maintained our average selling price with TwinFin and are seeing our product cost structure stabilize throughout the supply chain. Service margins saw some slight pressure with the addition of more resources to support our increasing customer base.

For Q1, operating expenses were $31.6 million, up 13% from $28.1 million a year ago. We are operating with 447 people, which is up from 409 people year ago, not including our offshore contractors who represent approximately 80 additional resources, which is up slightly from a year ago.

As we've indicated previously, most of the incremental investment was within the areas of our direct sales channel and marketing. Operating income for the quarter was $7.1 million or 12% of revenue, up substantially from $1.7 million or 4% of revenue a year ago in Q1.

Our tax rate for the quarter was 34% for non-GAAP and 35% for GAAP. We expect our rates for fiscal year '11 to be in the 30% range for both non-GAAP and GAAP.

Net income for the quarter was $4.9 million or 8% of revenue, up from $1.6 million or 3% of revenue from Q1 a year ago. Fully diluted earnings per share for the quarter was $0.08, up from $0.03 a year ago.

We ended the quarter with $157 million in cash versus $154 million at year-end. We generated $3 million in cash from operations. Included in cash is $48 million of auction-rate securities, where we've had some recent successful auctions that have reduced our exposure to these instruments. Since quarter end, we have successfully liquidated at par an additional $7 million in auction-rate securities and expect to have more liquidations during this quarter, as UBS has committed to liquidate their portion at par for the latter part of this, our fiscal Q2.

Most of our cash is invested in U.S. Treasuries and agencies with our principal goal being preservation of capital. Accounts receivable DSO was 58 days. We ended the quarter with $36 million of inventory, up from $28.7 million at year-end. Almost all of this inventory on the books is TwinFin, made up of finished goods, systems at partners, our concept pool and some of our development systems.

Deferred revenue was $54.6 million, down sequentially from $58.4 million at year end. Product deferred revenue declined $7 million, while deferred service revenue increased $3 million. Given the adoption of the new revenue-recognition rules as previously discussed that allow us to revenue multiple element transactions, which would have previously been deferred, it is likely that our deferred product revenue will not be a substantial component of our balance sheet as we move forward.

Turning now to guidance. We have seen continued improvement in our pipeline along with strong visibility for the balance of the year. The fiscal year '10 investments that we made in R&D and in the field, position us extremely well to take advantage of our TwinFin momentum in the marketplace, as evidenced by our performance this past quarter.

We are concerned with the Eurozone crisis that is unfolding day-by-day and cannot predict with great confidence the long-term outlook in that market or its impact on our business. However, this has historically represented a small portion of our business, thereby reducing our exposure. We do expect that this will be a growth sector for us over the next two to three years.

Despite this Eurozone issue, we are even more confident that we will achieve the 20% annual revenue growth guidance that we previously discussed, as a result of the overall confidence we have with respect to our market, our solutions and our ability to continue to execute. Further, you should expect to see year-over-year operating margin improvement.

Let me turn it back to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from the line of Katy Huberty with Morgan Stanley.

Kathryn Huberty - Morgan Stanley

I guess the obvious question is that you just posted 28% year-on-year growth and revenue compares only get easier from here. So I guess I'm wondering why 30% growth isn't more realistic for the year. And especially given that Europe just isn't big enough to move the needle, given the momentum you're seeing in North America. Was there anything in the April quarter that was sort of one-time deal-related that you don't think is repeatable? And that's why you're being conservative? Or do you see a bigger pipeline opportunity than maybe the guidance is implying?

Patrick Scannell

This is Pat. We're only one quarter into the year. We did have a 10% customer and if you reflect back on our business out of the last 10, 11 quarters, 10 quarters we've had a 10% customer. I do think as we look at the year and we look at our forecast for the next three quarters, we feel good about that. It's just that we're one quarter into the year and I think in terms of raising guidance at this point, we didn't feel it was appropriate.

Kathryn Huberty - Morgan Stanley

And then just as a follow-up, is there any risk of delays or timing impact with the new i-Class starting to ship and update to the TwinFin over the next couple of quarters?

James Baum

Katy, it's Jim. If I could maybe just restate your question to make sure I understand it. Are you asking…?

Kathryn Huberty - Morgan Stanley

Is there any risk of revenue volatility given the timing of new products that come out over the next couple of quarters?

James Baum

No, we don't think so. The projects to deliver these are on schedule, and you know we have a long history of continuing to bring out new software upgrades to the existing appliance base and that's exactly what this is. No, we don't think so.

Kathryn Huberty - Morgan Stanley

And just to be clear, the i-Class broadens the market that you go after. So arguably with a broader product set going into, for instance, your fiscal fourth quarter, there's an argument that you could see an acceleration of revenue growth? From those product launches?

James Baum

Yes, what i-Class does for us is it really serves as a foundation that our partners and customers can use to integrate their applications more directly into the appliance, so taking advantage of the parallel grid that's in our appliance. And so for i-Class to reach full momentum, people will be building applications. We have a number of partners now who are doing that integration work today in beta and looking to release later in the year. So I think we're seeing i-Class effective as a differentiator in a number of account situations, but I do think given the fact that people need to build an application on it, it'll take a little bit of time.

Kathryn Huberty - Morgan Stanley

And then just lastly, Pat, this is the best product gross margin in the last eight quarters, sounds like pricing is stable and I imagine the better volumes are helping. Any reason that you can't stay up in the 64% range?

Patrick Scannell

The only reason that we would come off of that is with new products that are coming off the line and new technologies coming off the line where we have no experience or no runtime with them, our nature is to actually look at a 62% to 63% gross margin. I mean, today, as I said in my prepared comments, the supply chain is stabilized, the costs are stabilized, but as new chips come down the line, as we entertain SSDs or what have you, we've got to keep that in the back of our minds.

Operator

And the next question comes from the line of Nabil Elsheshai with Pacific Crest Securities.

Nabil Elsheshai - Pacific Crest Securities, Inc.

The deal size has actually been trending up a little bit over the last couple quarters, really, since TwinFin came out. Is that just a function of TwinFin or is there anything that's going on there?

James Baum

I think that the dynamics are to a certain extent, it's a function of TwinFin. A number of the deals that we've seen are coming from the install base and, so they tend to be refreshes of existing infrastructure. And so if you're a new customer and you're just getting started, you may buy a smaller system. If you're an existing customer and you're refreshing something, you may just replace what you have. So I think there's some of that dynamic and that number.

Nabil Elsheshai - Pacific Crest Securities, Inc.

And then if I could just understand a little bit more on the rev-rec. Is that $17 million that you mentioned all in product revenue? Or is any of that services?

Patrick Scannell

The $17 million is product revenue.

Nabil Elsheshai - Pacific Crest Securities, Inc.

And then on your -- have you guys seen it? I mean, that hasn't been an area of strength, but have you seen what's going on from a macro perspective to make things incrementally more challenging, yet? Or is it just still kind of the same stuff that you'd been seeing previously?

Patrick Scannell

So from a macro perspective, we’re just reading the papers as you are everyday and more or less concerned about what impact that might have longer-term. We're not seeing that at the detailed transaction level. And in fact, as I've said before, we've placed some big bets in the European, in EMEA as a whole, with deploying more resources there, because we believe that that's a growth opportunity for us longer term. So we've not seen any direct implications where deals, like we saw here in '08, that's not the case, no.

James Baum

In fact, Nabil, I would argue that we feel better about our pipeline in Europe today than we have. Pat said there is some macro uncertainty, which causes us caution, but at a tactical execution level, we feel better about the pipeline now than we have previously.

Nabil Elsheshai - Pacific Crest Securities, Inc.

And then you mentioned competition with the regular guys. I'm just wondering if you had any thoughts on SAP buying Sybase and particularly IQ? If you run into them at all and if you expect that to be a competitive issue going forward?

James Baum

We do see Sybase on an occasional basis. Of the list of competitors and the frequency with which we encounter them, Sybase is very near the bottom of the list. So they're somewhat, I won't say irrelevant, but close to it, at least in the market as we are addressing it today. I do think that as they become part of SAP, that dynamic may change some. Although where I would expect to see Sybase is in the SAP install base, which is a pretty small percentage of our revenue of our business today. So I think it's a significant event in the industry, although I think that its impact on us will be somewhat mitigated by where we are in the market.

Nabil Elsheshai - Pacific Crest Securities, Inc.

Pat, I think you have $6 million left in product portion of deferred after this quarter. How quickly do you expect that to go to zero?

Patrick Scannell

That'll bleed in Q2, Q3.

Operator

And the next question comes from the line of Glenn Hanus with Needham & Co.

Glenn Hanus - Needham & Company, LLC

Maybe from a distribution perspective, could you talk about how you feel? You added a lot of new teams earlier this quarter, at the end of last year. How are those teams coming along in terms of productivity? And then maybe talk through NEC a little bit more, just sort of the operational steps that are currently taking place and over the next couple of quarters?

James Baum

In terms of the productivity and the development of the new teams, we actually feel good. We feel like they're on track. As we stated before, it takes six to 12 months for a new team to ramp up to speed. We have, in the most recent round of recruits, the class of late 2009, if you will, we've seen a few of those guys come up to speed more quickly than we had anticipated, particularly in the digital media marketplace. So overall, I would say we're on track and perhaps a little bit ahead of where we had historically been. And then you asked me to comment on NEC, as well. And I did mention on my prepared remarks that NEC have now taken delivery of the product and they’ve delivered it to their first couple of customers, which we think is encouraging. The NEC relationship is good. They appear to be very committed to this product line and taking it to market. I think from a revenue standpoint as we've pointed out in the last call, we don't expect this to be a significant influencer on this year, although we expect it to be ramped up and contributing more significantly next year. We may be a little bit ahead of that, I don't know. But like I said, we've got it delivered and in a couple of NEC clients at this point, which is encouraging.

Glenn Hanus - Needham & Company, LLC

And just to follow up a little bit more on the revenue for this year. Do you expect, I mean, you normally have sort of a stronger seasonality in the second half of the year. Do you expect that kind of trend this year?

James Baum

Yes, we do.

Operator

And the next question comes from the line of Alex Kurtz with Merriman and Company.

Alex Kurtz - Merriman Curhan Ford & Co.

First, Pat, I just want to clarify. You said 55 sales teams exiting in the quarter?

Patrick Scannell

That's correct.

Alex Kurtz - Merriman Curhan Ford & Co.

And you guys are still on target for 60 for exiting the year?

Patrick Scannell

That's correct.

Alex Kurtz - Merriman Curhan Ford & Co.

And Jim, when you look at and when you talk to the sales force and look at different pipeline metrics, what are you looking for specifically? And what are you and Pat looking for specifically? I mean are they going to give you increased confidence to up the guidance? Obviously, DSOs were good and average deal sizes are increasing so what are sort of the missing pieces that you want to hear from the sales force that will give you the go-ahead to do that?

James Baum

Let me take that just as opening. So we, as you know, look at the forecast with rigor. And we look at the forecast with a nine-month view, frequently, weekly. And we sit down with the sales management team, monthly to go through that. And as we said in our prepared comments, the visibility on that forecast is good. The growth of that forecast is good. It's just that here we are on May 25 early on just closing our first quarter, and I think that we feel really good about the guidance that's been issued to date. And I think it would be premature for us to be -- to start talking about raising that guidance up from where we are now. The negatives that are in the marketplace really do center around those smaller markets as they have been on the board today, the euro, what’s happening in Europe with Greece falling apart and what have you. So here we are.

Alex Kurtz - Merriman Curhan Ford & Co.

Jim, just on competition a little bit more deeper on Exadata and Teradata. Are you seeing any changes in tactics? Is it still on Teradata pushing the appliance then maybe up-selling to the higher-end platform? And is Exadata really just still focused on OLTP from what you're seeing and from what the sales force is telling you?

James Baum

Yes, we haven't actually seen a lot of change in this tactics, Alex. I mean, Exadata is, like I said in my prepared remarks, it’s omnipresent. It's everywhere in the market, both from a marketing standpoint, as the messaging is everywhere, and then all the historical accounts have certainly looked at. And we are definitely seeing them migrating their positioning more toward OLTP when they get tactical in account and less toward analytics. In fact, we have customers now who have used Exadata, who have Exadata, who will say that they like it as an OLTP consolidation server, but not as an analytics platform. And I think some of the product appears to be, at this juncture, most applicable in the OLTP space. So I think their following the path of least resistance. So that's a very real dynamic. And as you said with Teradata, yes, very much the same. They use the appliance. They position the appliance as the competitor to Netezza. They try to up-sell, especially when the appliance -- the appliance has some functional limitations compared to the high-end products. So they do end up needing to up-sell to the high-end product to meet some of those needs, especially around things like workload management.

Alex Kurtz - Merriman Curhan Ford & Co.

Just a Neoview and IBM, what are you seeing out of those competitors? And those customers that have been traditionally an IBM or HP shop, is there anyway to sort of go through that and their install base through your partners and start to pick away at that, given sort of the lack of competitive solutions from those guys?

James Baum

Well, in terms of competitively, what we see of them, we really don't see much Neoview. As I went through all of competitive encounters in Q1, I think there were one or two with Neoview. It was kind of a non-factor for us through our lens into the market. We do have, however, have a very good partnership with HP with the DI group, their consulting business, the former Knightsbridge Group. So we've done a number of deals with them jointly, where they provide the services work around Netezza. So there's a good partnership emerging there. IBM, similar, sort of the model hasn't changed much. We just don't encounter them that much, but when we do, they're strong in their install base, as you know.

Operator

And the next question comes from the line of Brad Reback with Oppenheimer.

Unidentified Analyst

This is Renaud for Brad. Could you talk a little bit about sort of your large deal contribution expectations, with respect to your full year guidance? And whether or not sort of the pipeline there has changed from the start of the year?

Patrick Scannell

So every quarter we have a 10% deal. We had one this quarter, most likely we'll have one next quarter. And so that's all in the composition and as I said, 10 out of the last 11 quarters, we had a 10% deal, so I'm not sure I'm being responsive to your question.

Unidentified Analyst

Well, I guess if that's the case, could you talk about whether or not the pipeline with regards to those large deals has improved over the last 90 days?

Patrick Scannell

The pipeline has improved overall and there are a handful of those 10% deals in our pipeline, which we continue to go after both from the install base and new business.

James Baum

I think as a percentage of the composition of the pipeline, the larger deals have probably not changed significantly, although the overall pipeline has grown.

Operator

And the next question comes from the line of Mr. Jayson Noland with Robert Baird.

Jayson Noland - Robert W. Baird & Co. Incorporated

First question on just recent upside and strength in the pipeline, I guess how much of that is due to the Enzee road show last year? Are you seeing some of those leads start to flow through?

James Baum

Absolutely. I mean, some of the leads from the Enzee road show continue to flow through as well as, I think I've mentioned on earlier calls that we've increased our investment in our internal lead generation activities through the use of an inside sales organization. And that function is also ramping nicely and contributing nicely to the pipeline.

Jayson Noland - Robert W. Baird & Co. Incorporated

Just a follow-up on partnerships and OEMs, Jim, are you still optimistic on additional OEM partnerships going forward?

James Baum

Well, I think when we announced the OEM partnership, we talked about others. And there were some discussion about, is there a near-term OEM partnership like NEC. And we discouraged you from thinking about something near-term. I will tell you that it's obviously still of interest to us strategically, and we do continue to invest cycles there. But there's no news to report.

Jayson Noland - Robert W. Baird & Co. Incorporated

Pat, if we look at product and services, product has out-performed the last few quarters relative to services. As we look through fiscal '11, should we expect that trend to reverse and see more strength in services?

Patrick Scannell

I think you'll see that ratably progress through the year, where you'll end the year at 70/30 in keeping that -- maintaining that balance.

Operator

And the next question comes from the line of Nathan Schneiderman with Roth Capital Partners.

Nathan Schneiderman - Roth Capital Partners, LLC

First, on 10%-plus customers, what was that customer as a percent of revenue?

Patrick Scannell

That customer represented roughly 30% of revenue.

Nathan Schneiderman - Roth Capital Partners, LLC

Can you remind us approximately how much was your largest customer as a percent of revenue last quarter and in the year-ago period?

Patrick Scannell

Last quarter, it was roughly 15%.

Nathan Schneiderman - Roth Capital Partners, LLC

And in the year-ago period?

Patrick Scannell

I don't know that off the top of my head.

Nathan Schneiderman - Roth Capital Partners, LLC

Can you share with us any comments about how your business is progressing thus far in May?

Patrick Scannell

We actually, Nate, we don't talk about the quarters internal to the quarter, other than to say -- to give you the commentary that we've already given you. And that is that the pipeline is growing and momentum is growing. We feel good about that in all sectors of our business.

Nathan Schneiderman - Roth Capital Partners, LLC

When we think about modeling product revenue for Q2, I was wondering if there was anything you might share with us there just because you, obviously, you took down the product revenue as $7 million or so, and I'm just wondering if that -- do you still believe you can get increasing sequentials there on the product revenue? Or does that kind of lack of deferred product revenue make that challenging in Q2? How do you think about the sequentials…

Patrick Scannell

Not to take you off that track, but we don't give quarterly guidance for the simple reason that in our business is on occasion lumpy. And we feel really good about the 20% revenue guidance that we outlined at the end of last year and we're restating that.

Nathan Schneiderman - Roth Capital Partners, LLC

At Analyst Day, in discussing the op margin and how that might progress, last year, it was up nearly 700 basis points from Q1 to Q4. And you seem to think maybe this year the pattern might be similar. Is that still your thinking? Or did Q1 throw off that pattern if we should think about that.

Patrick Scannell

As I think is in the press release. What you can expect from us this year is operating margin improvement year-over-year.

Operator

And the next question comes from the line of Mr. Rajesh Ghai with ThinkEquity.

Rajesh Ghai - ThinkEquity LLC

So Jim, you talked about new products that were launched earlier this year including the i-Class and the Skimmer and the Retail Analytics Appliance. I was wondering if you could quantify the contribution of these new products to the quarter, as well as how they are showing up in the pipeline?

James Baum

Well, i-Class will release later in the summer, and so i-Class still -- it’s in beta, but it’s fair to say it’s had no contribution at this point. And I actually don't know the contributions for Retail Analytics and Skimmer.

Patrick Scannell

Skimmer was 2%. Retail Analytics as a segment was roughly just over 10%.

Rajesh Ghai - ThinkEquity LLC

On the i-Class, when it gets released, is there a possibility that you may have an opportunity to sell that as a software-only module to sit on existing deployments of Twinfin that your customers may have?

James Baum

Yes, there is. I mean, it'll be packaged in two ways, both as a software add-on to existing TwinFin as well as, as part of an appliance sale. And either mode, it's viable for us.

Rajesh Ghai - ThinkEquity LLC

And on the NEC deal, you mentioned that you did deliver the first appliances to a couple of customers. Was that in the previous quarter? Or is that something that's going to be recognized in the July quarter?

Patrick Scannell

It'll get recognized in the July, perhaps the Q2 or Q3 quarter, depending on the sell-through on that.

Rajesh Ghai - ThinkEquity LLC

Can you provide us a little bit more color on the thinking behind the rev-rec policy change?

James Baum

Sure. When we were planning fiscal year '11, we have the choice to early-adopt this revenue-recognition policy. And our policy previously was this multiple-element revenue-rec policy, which means that if you did not complete shipment of a system, you could not score the revenue and you would have to defer that revenue. And we felt that our business was more aligned to this new revenue-recognition policy, which allows us to score that revenue on these multiple-element transactions. And the Financial Accounting Standards Board allowed companies to early-adopt, and we felt that it was appropriate to adopt this methodology at the beginning of our fiscal year, which is what we did.

Operator

And the next question comes from the line of Mark Kelleher with Brigantine Advisors.

Mark Kelleher - Brigantine Advisors

I wanted to go into a little more on that last question on the revenue recognition. Is there a way to figure out what the comparison would have been last Q1 if that revenue-recognition policy had been in place?

Patrick Scannell

Yes. In fact, we did that over the course of the year by quarter. And last Q1, which was reported $45.3 million, I think, was just slightly at $45.4 million. And over the course of the year it was less than 3% impact.

Mark Kelleher - Brigantine Advisors

I’m trying to understand the revenue flow a little bit more here now. Does that mean that, that $17 million came from further quarters Q2, Q3 got pulled in? Or do we move all the quarters sort of up one quarter as we?

Patrick Scannell

This deal that we booked this quarter, that normally under the old revenue-recognition guidelines would have been revenued in Q2 or perhaps in Q3. But when we were putting our guidance together and our plans together, we knew this deal was coming and we knew that it would get scored in Q1.

Mark Kelleher - Brigantine Advisors

So it gives a little bit of a boost to the front of the year at the expense of the back of the year. Is that the right way to look at it?

Patrick Scannell

It's not the right way to look at it. This will have a neutral effect on the year. And our 20% guidance that we talked about holds.

Operator

And the next question comes from the line of Bhavan Suri with William Blair & Company.

Bhavan Suri - William Blair & Company L.L.C.

Just talking about the i-Class. As a software upgrade, what does that due to sort of the margin profile if existing customers add it? Is this similar to the compression technology that you up-sold on the Mustang Series a few years ago?

James Baum

Yes. As a software upgrade, it is similar to that with the associated gross margins that come with it. As we bundle it with the appliance, of course, it'll be factored into the appliance gross margin.

Bhavan Suri - William Blair & Company L.L.C.

And then just a little more color on -- you said it would drive a 200% to 300% improvement in TwinFin. Just trying to understand what exactly is going on in the software that would allow you to do that? That's going to do that without impacting the hardware?

James Baum

So two concepts here, just to be clear. I-Class is a set of new interfaces to the TwinFin that allows for developers to integrate their applications, taking advantage of areas various languages and algorithms and functions that we provide. In addition to i-Class, there is a software release that will be coming out at the same time, which is a software upgrade, which is the thing that will be responsible for the performance improvement in the platform. The basic technology areas where we are focusing to improve performance in that software release are both in the areas of compression and in the areas of how we manage table structures in our storage subsystem. And so those are the two technology areas that are most enhanced by this release.

Bhavan Suri - William Blair & Company L.L.C.

And then Jim or Pat, just an update on the relationship with Accenture and other of the systems integrators. Have you seen any sort of contribution from their activities? Or are you expecting any at some point?

James Baum

The relationship with Accenture continues to evolve. We have worked together with them in the field on a number of opportunities. We are continuing to work with them on some of their internal initiatives, as well. We, I think as we've talked about before, the systems integrator base for us is actually fairly fragmented. We end up typically working with system integrators that are close to our customers and they tend to usually be small and midsized companies. And that process, that part of our business, I would actually say, is flourishing. We're investing heavily in it and we're working with many, many of them in various account situations. Some larger names you would recognize folks like PCS and Accenture and [indiscernible] and others, and then many, many smaller names that you would not necessarily recognize who happen to be strategic vendors of some of our larger clients.

Operator

And the next question comes from the line of Mr. Derrick Wood with Wedbush Securities.

J. Derrick Wood - Wedbush Securities Inc.

First of all, how much revenue on a percentage basis is coming from Europe? And I'm curious, had the issues in the Eurozone not developed, do you feel like you would have been more comfortable with raising guidance?

Patrick Scannell

So the first question is Europe represented just slightly less than 10% of our business. I think that perhaps is a contributing factor to us not raising guidance, but I think the other element of that is where we are in the year.

J. Derrick Wood - Wedbush Securities Inc.

You did mention in your prepared remarks that you saw a little less productivity out of international regions. Is there something going on here other than sort of the macro issues in Europe?

James Baum

I don't think so. I think it’s just as we look at the revenue produced internationally, we would've liked to have seen that higher than it was. As I mentioned earlier, it’s one of the other questions, we do feel good about the pipeline in Europe, in particular. So we have some good expectations around Europe. But in Q1, we would have liked to see that produce better.

J. Derrick Wood - Wedbush Securities Inc.

So it sounds like it’s just more of a sales cycle.

James Baum

We think so, yes. We don't think there's anything fundamental. In fact, we've made a number of upgrades to the team and infrastructure there that we feel very good about looking forward.

J. Derrick Wood - Wedbush Securities Inc.

Finally, given the success the TwinFin is now getting, are you seeing a change in the size of deployments in terms of data? Or maybe in the desire for customers to use TwinFin more as an enterprise warehouse?

James Baum

Yes, we've seen consistently over our history, not just related to TwinFin, we've seen an ever-increasing amount of data that people want to be running analytics on. And so it's a trend that has played well in our favor and it does continue. And it's actually, I think a trend that has allowed us to continue to maintain our price points as these systems get ever larger and more capable. So yes, we think that's one of the macro trends that keeps us going.

Operator

Ladies and gentlemen, this concludes the question-and-answer session for today's call. I will now like to hand the call over to Mr. Jim Baum for any closing remarks.

James Baum

Thank you. And again, thank you all for joining us. We do believe that we remain very well-positioned to exploit the growth in our industry as business analytics continue to emerge as a mission-critical solution for businesses of really all sizes. Based on outstanding Q1 results, we feel even more confident in our outlook for the rest of the year and beyond. And I'd also like to take this opportunity to thank our employees, our customers, our partners and our shareholders for your continued support. Thank you, very much.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.

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Source: Netezza F1Q11 (Qtr End 04/30/2010) Earnings Call Transcript
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