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

Compellent Technologies, Inc. (NYSE:CML)

Q2 2010 Earnings Call Transcript

July 28, 2010 4:30 pm ET

Executives

Jenifer Kirtland – IR

Phil Soran – Chairman, CEO and President

Jack Judd – CFO

Analysts

Katie Huberty – Morgan Stanley

Troy Jensen – Piper Jaffray

Alex Kurtz – Merriman & Company

Eric Martinuzzi – Craig-Hallum

Rajesh Ghai – ThinkEquity

Jason Ader – William Blair

Glenn Hanus – Needham & Company

Amit Daryanani – RBC Capital Markets

Jayson Noland – Robert Baird

Aaron Rakers – Stifel Nicolaus

Aron Honig – Brigantine Advisors

Chad Bennett [ph] – Northern Capital Markets [ph]

Brent Bracelin – Pacific Crest

Kevin Hunt – Hapoalim Securities

Nahal Toski [ph] – Technology Insight Research [ph]

Hemant Hebbar – Wedbush Securities

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Compellent second quarter 2010 financial results conference call. (Operator instructions) This conference is being recorded today, Wednesday July 28, 2010.

I would now like to turn the conference over to Ms. Jenifer Kirtland. Please go ahead, ma’am.

Jenifer Kirtland

Thanks, operator, and thank you for joining the Compellent Conference Call and webcast to review financial results for the second 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-Q for the quarter ended June 30 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 as 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 Soran, President and CEO of Compellent. Phil?

Phil Soran

Well thank you, Jenifer, and thanks everyone for joining us today on our second quarter 2010 earnings call. With me is Jack Judd, our Chief Financial Officer.

I’m excited to announce that this quarter Compellent demonstrated a return to our growth trajectory. Highlights include, our highest quarterly revenue of $36.5 million representing a 15% sequential increase from the first quarter and a 27% increase from one year ago. GAAP net loss of $172,000 or $0.01 per share loss and non-GAAP net income, which excludes stock-based compensation expense, was $1.5 million or a $0.04 per share profit.

We added 182 new end-users for a total of 2,124. With this customer growth milestone and perspective it took us 4.5 years to reach 1,000 end-users. It took less than half that time during the next 1,000 Compellent customers. We did this by selling 100% through our all-channel model while achieving the highest levels of customer satisfaction in the industry.

The last quarter, I talked about the commitment, energy and focus of our employees and our channel partners and I’m proud of our team’s execution in bringing this back on our growth track. This growth is fueled by enterprises adopting Compellent Fluid Data storage as the intelligent, easily-managed core of a virtualized data center. Our efficient technology offers significant advantages over incumbent storage vendors. When other vendors launch products with new promised capabilities, they can insert a customer decision point on whether they do a forklift upgrade in the new model. Well that represents the sales opportunity for Compellent.

And in the last three months, 182 new enterprises chose Compellent over competitive systems. Some of these new end-users include, Playboy Enterprises, one of the most recognized brands in the world select to Compellent Fluid Data because of our ease-of-use and scalability.

VeriFone, a global leader in secure electronic payment services went with Compellent for our strong product feature set and apprehends this in strong relationship with our business partner Extensis.

Starkey Laboratories, a leading global supplier of hearing aids and protection equipment shows Compellent due to the ease-of-use and economic benefits of our automated tiered storage. Wonderlic, which develops the standardized absolute test used by organizations like the National Football League drafted Compellent because our storage easily scales of that require and (inaudible) replace upgrades in future years.

Other new customers chose Compellent for reasons such as performance, support, improved disaster recovery capabilities and the total cost of ownership. Customers like Advantage Sales & Marketing, KAVA which is the Royal Pharmaceutical Society of Antwerp, Belgium, and Sheffield Hallam University, in the United Kingdom. In each of these new end-user environments Compellent either beat or displaced larger legacy storage vendors.

Now, let me talk a bit about market trends that are helping fuel our growth. One, our wider recognition of the benefits of our two automated storage – tiered storage. Two, our persistent storage architecture, three, the continuity for integrated block and file storage solutions and four the enterprise drive for its virtualization from the data center to the desktop.

First, automated tiered storage. During this past few months, there has been a lot of talk about great automated tiered storage is. We agree and we feel we will stake our leadership in automated tiered storage. We invented our data progression technology years ago. Our customers are using it every single day and they’re saving money. For instance, Graves-Gilbert Healthcare Clinic saved $500,000 with data progression integrated with storage virtualization, snapshots and thin provisioning.

Their recent survey showed nearly 75% of Compellent customers spend on less than one hour each week managing the dynamic migration of their data. Customers are increasingly recognizing the value and differentiation of our data progression. Sophisticated data movement is just one of the mini self-tuning efficiency features we provide. Customers continue to grow with Compellent year-after-year by leveraging the second trend, our persistent architecture.

IWCO Direct, which is a direct marketing firm one of our earliest end-users, recently, upgraded its Compellent’s end. During this process, the customer realized they had deployed six generations of server technology alongside our single Compellent model, which was still used in the (inaudible) it purchased 6.5 years ago. IWCO understands the Compellent benefit of having the future built-in. This level of persistence is being recognized as a must have by enterprises with Compellent being the market leader.

Third, we’re seeing demand for integrated file and block storage solutions. During the quarter, we announced our new zNAS platform and began shipping late in the quarter. And so far, we’re getting good responds from customers. Fourth, virtualization continues to drive sales, whether through corporate IT or external file providers, Compellent Fluid Data storage has been the foundation of end-to-end virtualization strategies.

Focused development area for Compellent is integration with leading server and desktop virtualization platforms such as VMware’s vSphere 4.1, Citrix StorageLink, and Microsoft Hyper-V.

We continue to make investments to keep our technology lead and deliver continued revenue growth. We will deliver new innovations in the next several quarters that rival the innovations we delivered in the past eight years.

We’ve also invested in marketing and sales such as a new communications and training effort to sign exclusively for business partners called FieldFirst. This program will more tightly integrate our channel and highlight new products, trading, and other resources that help them optimize their sales efforts.

And our Fourth Annual C-Drive Event held this past May, hundreds of channel partners and end-users came to Minneapolis. Customer attendance was up by 25%. It was great to see the excitement and enthusiasm that followed the event.

So now, let’s recap. This is the quarter where the team knew they execute and they did. We have technology leadership, a differentiated distribution strategy and industry-leading customer support. Now I lead this quarter confident about our future growth and success. I like to thank the Compellent team and our business partners for their hard work and dedication in helping us achieve this great second quarter performance. I would also like to thank our end-user customers for their continued support and confidence in Compellent.

And now, I’ll turn the call over to Jack to provide a more detailed look at our financial results for the second quarter and outlook for the third quarter of 2010. Jack?

Jack Judd

Thanks, Phil. For the second quarter of 2010, our revenue increased $7.8 million or 27% from the second quarter of 2009 to $36.5 million. Our end-users at June 30, totaled 2,124 compared to 1,627 one year earlier and 1,942 at the end of March. Measured on a year-to-date basis, our product revenue was 56% from existing end-users compared to 44% from new end-users. Our international markets totaled 13% of revenue or $4.9 million during the second quarter 2010. We did see softness in selected geographies outside the United States, but we still see international markets as an area for additional future investment.

Our gross margin was 53.6% in the second quarter of 2010 compared to 53.7% one year earlier and 54.8% in the first quarter of 2010. During the second quarter, lower product margins were offset by higher support and services margin.

As a reminder of our revenue recognition policy, in accordance with GAAP, all discounts are applied against product revenue. Therefore, gross margin results should be evaluated in total. We do expect the gross margins will continue to vary within our target model range of 52% to 55%.

Operating expenses increased to $19.9 million in the second quarter of 2010 from $15.5 million a year ago. At June 30, we have 431 employees compared to 340 a year ago and 410 at the end of the prior quarter.

GAAP net loss for the second quarter 2010 was $172,000 or a minus $0.01 per share. Excluding the effect of stock-based compensation, our non-GAAP net income for the second quarter was $1.5 million or $0.04 per share profit. Our balance sheet remains strong. We ended the quarter with $132 million in cash and investments an increase of $8.2 million from the end of 2009.

Our year-to-date cash flow from operations totaled $11.4 million, a positive reflection on our strong deferred revenue from maintenance and support programs. Our balance sheet includes $46.5 million of deferred revenue an increase of $8.3 million from December 2009. Our day sales outstanding was lower than the prior quarter and as a reflection of improved linearity compared with the recent quarters. We have purchased approximately $4.6 million of capital so far in 2010, mostly on investment supporting future product development.

I would now like to provide some guidance on the coming quarter. Our current revenue forecast range for third quarter 2010 is $37 to $39 million. We expect our non-GAAP EPS to be between $0.03 and $0.05 income. Stock compensation costs will be approximately $1.7 million in the third quarter. Our quarterly taxes in the third quarter will approximate $200,000. We will continue to monitor for the appropriate time to bring our tax net operating loss into income. Once the capitalization of the value over NOL occurs, we expect our tax rate to be 35%.

Finally, and as always, Compellent remains focused on generating profits in 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

Thank you, sir. We’ll now begin the question-and-answer session. (Operator instructions) And our first question comes from the line of Katie Huberty with Morgan Stanley. Please go ahead.

Katie Huberty – Morgan Stanley

Hi guys. Good afternoon and nice quarter.

Phil Soran

Thank you.

Jack Judd

Thanks, Katie.

Katie Huberty – Morgan Stanley

As if – you obviously gave guidance for September but as we think about, just qualitatively, the sustainable revenue growth rate from here, is it a blended average of the first half or given the huge success with new customers and the investments you’ve made in distribution, could we potentially see a sustainable growth rate that’s again up in the 20 to 30%?

Jack Judd

A hard question to answer without considering that we just gave the guidance on the quarter. I think that everything that we’re doing is to accelerate our growth rate and it’s the emphasis on new customer growth, it’s the international – it’s the emphasis on new markets like international markets, its new features and to our products. I think all of those things are – we’re trying to do to accelerate our growth rate and we do hope that the growth rate that we’ve had in the past will be the similar growth rates we have in the future.

Katie Huberty – Morgan Stanley

So let me follow-up on that, I mean obviously the new customer rate was very good this quarter, you’ve got a good product roadmap. The one missing key seems to be the volatility in international markets and could you just, given what you know about the investments you’re putting in place, I know you can’t control some of the macro factors. What’s the timing for starting to see some real traction in the international geographies that you’re chasing?

Phil Soran

I think we’re still bullish on the international things. It was a little softer than in the past – this past result is softer than past quarters but I think we’re still bullish. So I think things seem common now, they did in the past, so I’m a little more bullish on this quarter in going into the future.

Jack Judd

Again, we’ve said as before, the third quarter of the year is soft internationally, so we’ll have to see what happens from September to see whether, Europe especially continues a little bit of softness or whether it will improve in September.

Katie Huberty – Morgan Stanley

And then, just lastly on product gross margin, it did take another small step down. Is that Jack, really just the discounts on support that have to be recognized through the product margin or is there also some mix of hardware versus software in component costs that’s playing into the gross margin trend?

Jack Judd

I think the number one issue that kind of effects that discounts and how they get allocated back to product is the number of three-year maintenance contracts we sell now as part our really quite standard offering when we go to new end-users and as we have said in prior calls, three-year maintenance contracts come with discounts yet, none of those discounts really get applied back to the maintenance offering.

Katie Huberty – Morgan Stanley

Okay. Thank you.

Operator

Thank you. And our next question comes from the line of Troy Jensen with Piper Jaffray. Please go ahead.

Troy Jensen – Piper Jaffray

Hey Jack, quick question on Q3 guidance. If you look back, last three years you guys have grown 11 to 17% sequentially, guidance here is kind of the midpoint reflects about 4% sequential growth. I’m just curious, just to disconnect there, it’s being cautious on guidance or cautious on Europe or fed vertical?

Jack Judd

I think I’ll have to stick to what we’ve said on guidance in terms that we think that 37 or 39 is the right amount considering everything that’s happened in the past six months.

Troy Jensen – Piper Jaffray

And then how about fulfill the NAS had, I guess I’d like to just hear some more about that, curious to know if customers are looking at it as standalone NAS, if they’re looking at as a unified platform and when you think that’s going to start to really impact the revenue line here?

Phil Soran

We did have some revenue on the quarter from the NAS offering and once we had shipment at the very end of the quarter, so it wasn’t substantial revenue but it was there and the opportunities were going after it. There is a lot of interest on the market on it. Most customers are viewing it as we had the best block level solution in the industry and this is another way to access data for the file side so they tend to have both, use NAS as the backend block device and using the zNAS as their frontend for file based stuff.

Troy Jensen – Piper Jaffray

And then – Okay. It’s good looking the second half here.

Phil Soran

Thanks.

Operator

Thank you. And our next question comes from the line of Alex Kurtz with Merriman & Company. Please go ahead.

Alex Kurtz – Merriman & Company

Yeah. Thanks for taking the question. I feel, considering you’re focusing on larger national partners who, a lot of those guys sell to larger competitors on their line cards. How do you keep mindshare there, considering your early days with a lot of smaller partners and now you’re going with these larger national distributors and resellers, what’s the – what’s the game plan, are you putting bodies on the floor at those places, what’s your thoughts on that?

Phil Soran

Yeah. So they – so first of all, all our partners are important whether they’re small or large whatever and we’ve seen growth from both the large and the small partners on both fronts there. On the national partners, they obviously had a lot of attention from the large storage vendors and they throw a lot of focus on them in different ways there. So I actually just met with our national partner team yesterday, it’s a pretty big group we have there, focused on all the key players and saw a lot of optimism from them there, but it’s – the best way to do it is to one, to have the best solution in the market, which I think we have there, that’s a great way to differential yourself from others.

Two, you need to make sure that they feel a lot of support or easy to business with which we hear good things from on that. And then three that they obviously want to make money on their offerings and we think with our 100% channel model we get some advantage on that front. Probably what we’re doing is on we’ve increased amount of coverage on each one of those large partners, how much attention they see from us and then we also, another big advantage we have is we leverage our assisted sales model where they can leverage our resource in the field on any of their deals. So lot of those guys are not geographically located in the same place of the end-user and they can leverage our team there which gives us differentiation too. So it’s just a lot of execution stuff and then continue to just deliver for the both the end-user on the best solution and the partner on the business model.

Alex Kurtz – Merriman & Company

And, Jack just a little more detail on the product margin being it down again this quarter? Are you seeing – is the sales force seeing the same kind of competitive pricing from your two largest competitors, what’s the – what do you think in the market and how that sort of rolling into the product margin this quarter?

Jack Judd

Same thing we’ve said before, storage is always been competitive. If you go back to deals that we were in one and two years ago, the same players we see today were the same ones we saw three years ago, it’s always competitive. We place a premium on opportunities in new end-users and I mean I think it’s going to be competitive into the future. I think the number one reason why you see a little bit of a dip in the product margin should not necessarily be viewed as the market became more competitive with price that more specific things with – maybe with somewhat customer mix and then like I said before, selling a lot of three-year maintenance with discounts on it.

Alex Kurtz – Merriman & Company

Okay. All right thanks guys.

Operator

Thank you. And our next question comes from the line of Eric Martinuzzi with Craig-Hallum. Please go ahead.

Eric Martinuzzi – Craig-Hallum

Thanks. The softness in Europe, I’m curious to know if you can clarify that a little bit more, is it geographic – is it a geographic issue, is it a vertical issue? We’ve heard commentary from other tech companies talking about public sector chill coming over public sector in EU that you – just a little bit more detail there? Thanks.

Phil Soran

I think – I think there is little bit, Eric, is we saw Mainland, Europe was a little softer you kind of compare to a year ago whatever to what we saw in the UK. So I think UK was a little stronger than Mainland, Europe. There might be a little bit of the sector thing but I really don’t have any details to say that it’s definitely one sector that’s affecting it but I’d say it’s little bit geographic and just in general we’re soft in the international side.

Jack Judd

I wouldn’t characterize Europe as that we saw competitive change.

Eric Martinuzzi – Craig-Hallum

Okay. And then just on the upside to the execution for Q2, it was 90 days ago you were talking about the issues in Q1 and the three issues that you guys laid out for the shortfall there were large deal slippage, seasonality and then district sales reorg. Could you comment on the – the seasonality and the district sales, how of those things changed or have been fixed or still in development since 90 days ago?

Phil Soran

I’ll start with the district sales managers and some of that. I’ve actually spent a lot of time with many of the people I’ve talked about there in the last 90 days and it’s going very, very well there. That whole thing has matured, it’s developed just like we thought it would and I think it’s just a real foundation for us to grow. I’ve had told Brian Bell, our VP of Sales the other day that I could just – you can really feel how important that role is going to be as we go forward in our success, so sums up on that one there on the seasonality type of things there. We saw seasonality in the first quarter and this is different quarter and we showed growth this quarter and the deal slippage, and we closed a lot of those deals in the second quarter.

Eric Martinuzzi – Craig-Hallum

Thanks.

Operator

Thank you. And our next question comes from the line of Rajesh Ghai with ThinkEquity. Please go ahead.

Rajesh Ghai – ThinkEquity

Yeah. Thanks and congratulations on the quarter. Just one question on the guidance, so for the – for the third quarter for the revenue guidance what kind of close rate assumptions are you assuming, are you making – if we compare them to what you’ve seen last year and in the first two quarters of this year?

Phil Soran

I think we would see a real similar close rate to what we’ve seen in the past, so we haven’t seen a big change there, I mean when we get our chance to battle with end-users we do real well and we win the technical battles and the one we got to do is make sure that whatever our brand and that’s something but we’re assuming similar type of win rates.

Rajesh Ghai – ThinkEquity

Okay, great. And on the gross margin, you just thinking about this, so in the second half of the year and seasons, second half of the year you typically have more new customer activity and lesser upgrades in the mix so how should we think about gross margin as the – as a number of new deals – new customer deals increased in the mix than the second half does it – does it target gross margin kind of move down or doesn’t kind of stay where it is right now or could it move up because of other factors such as more software in the mix?

Jack Judd

I think that our margin will vary within our target model and I would say that third quarter probably has more new customer sales. The fourth quarter is a great upgrade quarter, a lot of people flushing budget, of course we’ll have to see how that plays out in the fourth quarter. But I want to emphasize that I think margin need to managed in total and I think that it can vary between 52 and 55 and I think that if stays within there I think that’s long-term what we want to – how we want to run this company.

Rajesh Ghai – ThinkEquity

Okay, good. And last quarter you had mentioned that you had some deal slip, have all those deals that slipped last quarter have been recognized in June quarter or there something still left that could that have slipped into the September quarter?

Phil Soran

Well I wouldn’t show any slippage for the third quarter, I think we closed the back [ph] half of the DSO and the linearity. We did a real good job there but there are some that’s still have – most of it there, a lots of there on that table on their first quarter they’re now off the table and they are Compellent wins for us.

Rajesh Ghai – ThinkEquity

Okay, great. Thank you.

Phil Soran

Yeah.

Operator

Thank you. And our next question comes from the line of Jason Ader with William Blair. Please go ahead.

Jason Ader – William Blair

Yeah. Thanks. I just wanted to follow-up on the linearity question. Phil, could you talk about how the quarter progressed for you kind of month-by-month and then at the end of the quarter where you able to kind of not have to scramble as much as may be that over the last couple of quarters?

Phil Soran

So we start out with some of those first quarter slippages we’re able to get those in the early part of the quarter which helped on the linearity there and it showed in the DSO. After that it was kind of a business as usual type quarter here. The June’s end, we weren’t tried to do things in the last hour whatever it’s just a nice solid finish to the quarter and the team really built up the pipeline and built up the opportunity and we feel real good and how to finish as far as get us a nice steady finish.

Jason Ader – William Blair

Okay, great. And then Jack, on the DSO it looks it was down a little more than one day, is that correct?

Jack Judd

I don’t ever give the amount because it seems everybody calculates it differently.

Jason Ader – William Blair

Okay.

Jack Judd

The way I calculate it internally for our board and our management team, my calculation side it was down about 10% quarter-over-quarter.

Jason Ader – William Blair

Okay. And do you remind us why the DSOs were Compellent’s quite high relative to lot of other players?

Jack Judd

First of all, we sell-through the channel so that’s a little bit of it. But then I think it also is the strong deferred revenue model that we have and so that the deferred revenue that we’ve built but not yet collected and not yet recorded as revenue is setting an AR.

Jason Ader – William Blair

Okay. All right. Thank you.

Phil Soran

Thank you.

Operator

Thank you. And our next question comes from the line of Glenn Hanus with Needham & Company. Please go ahead.

Glenn Hanus – Needham & Company

Good afternoon and congrats. And you are upside there.

Jack Judd

Thank you.

Phil Soran

Thank you, Glenn. I appreciate it.

Glenn Hanus – Needham & Company

Just on the mix on the quarter, you mean you had real strong product growth of, I guess, 21% and the service kind of grew a little less than I have modeled, some color on that and I would start there.

Jack Judd

Yeah. I think the numbers are just kind of what they are, I – we just don’t have a strategy where we only go off and sell maintenance or we only go off and sell product. So they are kind of as they are.

Glenn Hanus – Needham & Company

Right. Usually I look for a little more because that the service comes off more of the balance sheet and then I usually would look for a little more growth than that. It’s just going forward. Would we anticipate return to more – a little more growth on the service side sequentially?

Jack Judd

I expect that over the course of time, our services will grow via higher percentage revenue than they are today. But it’s hard to say quarter-to-quarter that you won’t see a tiny bit of variability in that.

Glenn Hanus – Needham & Company

And then just on the upside there it sounds like it was – anything in particular that accounted more heavily for the upside you achieved?

Phil Soran

Well I think we did real well domestically. We had real balanced performance across the region which is real nice. And we also ended up with lot of opportunities that for the future too, so the new customer thing was real big, the 182 new customers were really well pleased about that and obviously those are nice wins because we are able to grow with them in the future not just on the initial order.

Glenn Hanus – Needham & Company

And on the competitive front, EMC I guess it was coming out with the fast too and focused pretty heavily on the midrange. How are your win rates and are you – what are you seeing in terms of EqualLogic in the left hand and NetApp, any color around the competition there?

Phil Soran

The color I think – we see the same vendors we have in the past here. It’s been nice them – let me – it has come with them in announcing the fast technology, EMC is that it’s validation for the automated tiered storage, it creates a buzz about it and it actually caused the end-users and to really start to evaluate best and breed. And I really think if I – they look at it they say ours is best and breed, it works. Customers has been using it for years. They’ve lots of references shown, what kind of savings we’re able to get from it. We’re able to talk about easy it is to use. I kind of put it real somewhere to thin provisioning at a couple of years ago, people came out with thin provisioning and I’ve got a lot of customer calls, you don’t hear them talking about that now because a lot of other customers aren’t using their thin provisioning offerings because this isn’t real elegant how it’s implemented. So I think we might get similar type of impact on that with our automated tiered storage. But similar – we see EMC is the top competitor, NetApp is the second one we see out there in the market, on the dell side you do see them bidding the EqualLogic more than and less the CLARiiON that they used to, so little bit of shift to where – will they go to market with you feel that and once again we compete well against that also.

Glenn Hanus – Needham & Company

Okay. Thank you.

Jack Judd

Good bye. Thanks.

Operator

Thank you. And our next question comes from the line of Amit Daryanani with RBC Capital Markets. Please go ahead.

Amit Daryanani – RBC Capital Markets

Yep. Good afternoon guys. I think just had a question, if you would just help me understand and help close the delta between deferred revenue is being up about 12% for you guys sequentially and the sales guide being up 4%. I realized it’s not a one-to-one correlation but, what could explain such a big gap from your perspective?

Jack Judd

Deferred revenue is up – it’s up for three-year contracts not just one-year contract. So you can’t just do a simple math calculation and find out how much of it is going to come in, in the next quarter. And again I’m going to emphasize is that we’ve had some choppiness to our revenue for the markets in the last couple of quarters and we’re really trying to set ourselves up, to do a good job going into the future.

Amit Daryanani – RBC Capital Markets

All right. And then…

Phil Soran

It represents good year-to-year growth though.

Jack Judd

Yes. Good year-to-year growth, excellent Phil.

Amit Daryanani – RBC Capital Markets

Fair enough. And then just, you guys just follow-up again on the gross margin of the product side specifically, just because of the spare [ph] the 170 basis points year-over-year or 90 basis points sequentially drop, is that purely reflect the change in maintenance contracts in the way we have to recognize them and not on the incremental pricing pressure?

Jack Judd

I think that the second item, I think the maintenance contracts are the number one item. The second thing is mixed between customers and somewhat of a mix between new customers and upgrade sales. But there is some variability of that.

Amit Daryanani – RBC Capital Markets

All right. Thank you.

Operator

Thank you. And our next question comes from the line of Jayson Noland with Robert Baird. Please go ahead.

Jayson Noland – Robert Baird

Great. Thank you. Jack just a confirm on deferred revenue, your long-term deferred was up 18% sequentially and that’s a direct reflection on the three-year maintenance deals?

Jack Judd

Yes.

Jayson Noland – Robert Baird

Great. And on the guidance for Q3, should we expect some product revenue growth of a fairly tough comp?

Jack Judd

I don’t think I want to comment more than I have on the 37 to 39. I – further emphasis that we sell one product and however the revenues allocated is good for us as long as revenue comes in.

Jayson Noland – Robert Baird

Okay. Last question for me, Phil anything you can or willing to say about your comment around new innovation coming over the next few quarters?

Phil Soran

I’ve got – you’ll see our announces coming out and as – once again a lot of you’ll see us announce after we’ve been shipping because we used to like to have customer references as we do that. But on the innovation side there, it’s pretty robust and if you really look at it, there is a lot of technology innovations on the hardware side, there will be a leverage and different server connectivities, drive technologies those types of things and those are really good for our persistent architecture that our existing customers will be able to take advantage of it and our new customers will really take advantage of it. You can also see a little of that coming out in the capital we spent on the balance sheet there, on that front. On the software side, a lot of innovation there that would try and do extending their livestock over the data management we’re able to perform and also a lot more automation, integration was other key players in the industry and then lot of enterprise type features to give continuous operations and more availability at the end-users, so it’s across-the-board. We got a lot to do. Our challenge is not finding things to do it. It’s getting it all done with the long list we have of opportunities.

Jayson Noland – Robert Baird

Okay, great. Congrats on the quarter guys.

Phil Soran

Okay. Thanks a lot.

Operator

Thank you. And our next question comes from the line of Aaron Rakers with Stifel Nicolaus. Please go ahead.

Aaron Rakers – Stifel Nicolaus

Yeah. Thanks guys. Most of my questions have been answered. I guess I just want to make sure I got the tax comment right. Jack, you said tax of $200,000, when do you think you guys get to that point, are you going to recognize that 35% tax rate?

Jack Judd

We’ll make another formal evolution on that capitalization of the NOL at the end of the year in conjunction with our year-end audit.

Aaron Rakers – Stifel Nicolaus

Okay. And so, I mean, would you rather people model 35% until we know differently or…?

Jack Judd

Yeah.

Aaron Rakers – Stifel Nicolaus

Yeah. Okay. And then the second question is on the NAS strategy. I think you guys are leveraging ZFS from a file system standpoint. It seems like NetApp is becoming a little more aggressive there on protecting the patent infringement against on. Any thoughts around that I think you guys leverage a third provider in terms of that ZFS?

Phil Soran

I’ve already commented – the legal stuff was with NetApp and Oracle and what is going across there. But, I want to say that we’ve got real good reaction on the user bases. The large community of ZFS users in pretty good strong response on the – how they feel about the ZFS open source software.

Aaron Rakers – Stifel Nicolaus

How much of your new customer opportunities you think over the next 12 months could be leveraging that zNAS product?

Phil Soran

It’s not – it’s still be a minority of the customers and so that it’s an add-on to the product and so that but we’ll end those because of our block based differentiation with the majority of the customers.

Aaron Rakers – Stifel Nicolaus

Okay. And then final question from me and I don’t know if I had touched on but inventory ticked up a little bit, any comments around that, I know that you guys run fairly thin on inventory but I just curious if there is anything going in that line?

Jack Judd

Great question. And the inventory ticked up in several areas. One of the most noticeable was for our spare parts and as Phil talked about all the new hardware that’s coming out over the next year. We have to spare that worldwide and we – we’re going to take a couple – we’ve taken a hit this past quarter and we’ll take probably another quarter of some pretty good hardware revenue going onto the field. And then also we had some internal inventory that went up and we also probably have a few e-bills [ph] that didn’t clear in the quarter.

Aaron Rakers – Stifel Nicolaus

Okay. Thank you.

Phil Soran

Thank you.

Operator

Thank you. And our next question comes from the line of Aron Honig with Brigantine Investors – Advisors excuse me. Please go ahead.

Aron Honig – Brigantine Advisors

Hi thanks. All my questions have been answered. Thank you.

Jack Judd

All right. Thanks.

Phil Soran

Thank you.

Operator

All right. Thank you. And our next question comes from the line of Chad Bennett [ph] with Northern Capital Markets [ph]. Please go ahead.

Chad Bennett – Northern Capital Markets

Yeah. Is there – not to hammer on this question for a third or fourth time but is there any way to quantify kind of how much benefit you receive this quarter from executing on deals that flowed over to Q2. I mean is it just kind of the delta of where last quarter ended up versus where you thought it would or anyway to quantify that?

Phil Soran

We’d – I’d rather try to quantify that if I just say that this quarter – each quarter is a new quarter. You just go and close the deals you’re going to there and just gets one slip doesn’t mean it’s incrementally up. You got to still close it and work it and work the customer and that’s the time you’re not spending with other customers. So I just kind of viewed as this the quarter and we grew it 17 or 15% and 27% year-over-year and hopefully it doesn’t do the foundation based for the future.

Chad Bennett – Northern Capital Markets

Okay. And then overall hour count has that changed materially from the end of last year or whatever historical data point you want to use?

Phil Soran

We – we don’t actually detail out the number of hours but it has increased and we always say that the key measurements we try to is what’s the mindshare of the ones we have as much as how many “we have signed up” but we haven’t seen any a definite increase in the number of hour or so.

Chad Bennett – Northern Capital Markets

Okay. Thank you.

Phil Soran

Yeah.

Operator

Thank you. And our next question comes from the line of Brent Bracelin with Pacific Crest. Please go ahead.

Brent Bracelin – Pacific Crest

Thank you. I have a couple of quick follow-ups and I’ll let you guys hop here. On kind of revenue order momentum, is that to normalize for the kind of the deal slippage out of Q1 and into Q2 here and just look at the first half versus the first half of last year. It looks like you guys grew 20% year-over-year, you’re guiding to Q3 to grow 15 to 21% year-over-year as you look at kind of the order book, the pipeline going into the second half of the year. Are you basically expecting things and demand to be relatively consistent with what you saw the 20% growth in the first half versus the second half, is there any reason relative to activity or order book that suggests potentially we could actually have a stronger second half?

Phil Soran

Well, we obviously want to guide that what we think we hit there and we – the pipeline we’re feeling very good about it. I think it’s stronger than it was, three months ago and so that’s that makes this optimistic but once again a lot of work to close those out.

Brent Bracelin – Pacific Crest

Okay. Fair enough. And then, the last question I had really was around kind of the mix of business, if I go back just a year and half ago, you had a pretty good growth rate coming out of your existing customer base. Obviously over the last two, three quarters you’ve had very strong new customer momentum, vast majority of growth coming now from new customers as I think just about the growth potential from existing customers, the opportunity there seems to have slowed there. So can you help us reconcile what’s going on within the existing customer base do you have some low hanging through where you can get existing customers to start now repurchasing and upgrade and how should we think about the existing customer base and that being a contributor in the second half of the year?

Phil Soran

Yeah. So it’s always just a different mix each quarter deal versus existing and once again our rep on the field focuses on the deals as that had that quarter so that’s just big upgrade some existing customer had some new opportunities and the mix changed a little bit there. But we continue to see all our existing customers. They tend to grow this, they – drives are bigger such that they have big drive can handle a little bit longer than they used to but they all continue to grow a real nice and we continue to get the business from them. They also with some of their hardware transition that will represent some opportunity for us and that that was the new technology, some deal will might want to upgrade their existing customer want to upgrade their technologies there.

Brent Bracelin – Pacific Crest

Okay. Fair enough. My last question for Jack on product gross margin, obviously some moving parts here, but if I were to just to look at the absolute product gross margin, it did downtick from Q4 where you actually did have some large footprint kind of wins in the quarter. Was there any footprint kind of buys or purchases or customers you went after this quarter?

Jack Judd

We had some nice significant customers come on this quarter. I guess I don’t really want to comment whether there was more or better that like than we had in the fourth quarter.

Every quarter is kind of different for that kind of an event so it’s hard to compare the fourth quarter to the second quarter.

Brent Bracelin – Pacific Crest

Okay. Fair enough. Thank you.

Operator

Thank you. And our next question comes from the line of Kevin Hunt with Hapoalim Securities. Please go ahead.

Kevin Hunt – Hapoalim Securities

Hi, yeah. Thank you. Can you – couple of questions on your sort of customer mix, can you repeat first – first of all the US versus international then I don’t know if you have already given it out but if you can talk about like what maybe federal and financial verticals would represent for you guys?

Jack Judd

International business was 13% of total in the second quarter. I think it was like 18% last quarter Phil. And we – the vertical numbers are very similar to what they’ve been in the past. I don’t have any specific numbers to provide on you that besides the fact is that we sell across all verticals successfully.

Kevin Hunt – Hapoalim Securities

Okay. And then my second question would really be about OpEx leverage expectations looking forward and you had pretty nice leverage of the upside this quarter, but if you look you’re still spending pretty rapidly in terms of your year-over-year growth in your OpEx and then I think that was then the plan. So when can we expect sort of leverage and maybe what kind of topline growth rate would you need to kind of get back to that towards that sort of peaked margins here couple of quarters ago up in high-single digits.

Jack Judd

I don’t – we won’t hit that high-single digits margin this year because we’re really investing for future growth and so I think that’s going to be the dominant story this year. I expect it that it’ll be better leveraging in the last half of the year then there it was in the first half and I expect it as we go forward into the future you’ll see consistent leverage more on a year-over-year basis versus a quarter-to-quarter basis.

Kevin Hunt – Hapoalim Securities

Okay. Thanks.

Operator

Thank you. And our next question comes from the line of Nahal Toski [ph] with Technology Insight Research [ph]. Please go ahead.

Nahal Toski – Technology Insight Research

Hi, guys. Good quarter. If I look at the average sales per new customer as implied by the new customer percent of revenue year-to-date, it seems to be down more than 30% year-over-year for the second quarter in a row. So I guess, my first question is, is this correct and secondly, is that the permanent change to the new customer sell profile and if so, what was driving that?

Jack Judd

It’s important to measure though on a year-to-date basis versus quarter-to-quarter basis because if a new customer comes to us in January and rebuys in April, we still call that a new customer revenue. So be careful how you use the numbers and I think you saw a great customer growth and you’ve – we’ve talked previously about our emphasis on selling to more price level successfully and I think you’ve seen a little bit of that. But again the key here is, new customers generate revenue going forward when you mind upgrades and it’s a great deal – it’s a great deal for Compellent and our investors.

Phil Soran

New deals are actually up this quarter. So despite enough – the graph despite doesn’t work.

Nahal Toski – Technology Insight Research

Okay, understood. And then – I think there has been some concerns as to Compellent’s ability to move a little bit further up to a larger scale businesses, anything you can say to address that and maybe you could talk about win rate differentials between small customers and large customers?

Phil Soran

Yeah. I’ll pick that. I’ve been at lot of large enterprise customer calls recently and there is a lot of interest on those larger players and we’re gaining a lot of traction with them so I viewed as far as the stronger position as ever on that front there. On the win rate, they’re longer sales cycles. There is at times more legacy connections with their existing vendor, so that’s finalizes a challenge for us but I’ll tell you there those big guys are looking for more efficient storage and technology leadership and I’ve been in lot of calls and I’m feeling as good as I ever had there so.

Nahal Toski – Technology Insight Research

Just to be clear, would say that your win rate is any material that materially different with large customers relative to small customers?

Phil Soran

I’d say at long-term it’s not that much different it just, it doesn’t show – it takes longer to close them so they kind of tactically it might look a little bit lower if you look long-term they eventually come in our way and they just takes some nice years to pull it off.

Nahal Toski – Technology Insight Research

Okay, understood. Thank you.

Phil Soran

You’ve got it.

Operator

Thank you. And our final question is from the line of Kaushik Roy with Wedbush Securities. Please go ahead.

Kaushik Roy – Wedbush Securities

Good afternoon guys, this is Hemant Hebbar for Kaushik Roy.

Jack Judd

Hi, Hemant.

Hemant Hebbar – Wedbush Securities

Congrats of a good quarter.

Phil Soran

Thank you very much.

Hemant Hebbar – Wedbush Securities

And Phil, I had a question on like the virtualized environment. EMC and NetApp have been making multiple announcements with VMware. So do you guys see a large percentage of your deployments in a VM environment and if so can you update on where you are with respect to your partnerships?

Phil Soran

Yeah. So first of all, if I look at our customer base there, it’s got to be well into the 90s. We’re doing virtualization of services relation of some form I think there, the VMware, Citrix, Microsoft and others so, definitely that’s a big play for us there. We get a lot of kudos from our customers on some of the virtualization we do have fits real nicely with those players and kind of leverages there and actually it more benefit on doing the combination with the two of us. I kind of hit it in my earnings script here that we’re doing a lot of stuff to continue and expand the integration with those key partners and with their future and also make it look like a single solution for an end-user and I’m excited about the areas we’re doing there. And we mentioned the VMware vSphere announcement here, it’s one of the supporting OEMs and some of that there seems to have a big presence at VM world which is coming up here in a few weeks, some nice customer announcements there and also our large boot and large presence on the floor and that just a key partnership for us to have to take advantage of.

Hemant Hebbar – Wedbush Securities

Okay. Thanks. And lastly, can you give us some details on your plan for head count addition and what is the focus of your current investments?

Jack Judd

Great question and I think that the head count increases that you’ve seen over the past few quarters I think they’re going to continue into the future and there’ll be far more towards people that touch customers and then users in other words co-pilots and people that can help sell-through partners in the field and then engineers so that we can develop new features for our product.

Hemant Hebbar – Wedbush Securities

Okay. Thank you. Congratulations and thanks.

Phil Soran

Right. Thanks a lot.

Operator

Thank you. And management, there are no further questions in queue at this time. Please continue with any closing remarks you may have.

Phil Soran

So, I'd just like to thank you all for the support. And once again, I want to thank our customers, our business partners, and our employees for the fine quarter there and we look forward to talking to you guys in three months. Thank you.

Operator

Ladies and gentlemen, this concludes the Compellent second quarter 2010 financial results conference call. If you would like to listen to a replay of today’s conference, please dial 1800-406-7325, for international participants please dial 1303-590-3030 and enter the access code 4328738 followed by the pound key. The replay will be available until August 4, 2010. Thank you for your participation. You may now disconnect.

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

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

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

Source: Compellent Technologies, Inc. Q2 2010 Earnings Call Transcript
This Transcript
All Transcripts