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

Executives

Jenifer Kirtland – IR, EVC Group

Phil Soran – President and CEO

Jack Judd – CFO

Analysts

Katie Huberty – Morgan Stanley

Eric Martinuzzi – Craigh Hallum

Aaron Rakers – Stifel Nicolaus

Amit Daryanani – RBC Capital Markets

Patrick Mulvehill – Piper Jaffray

Jayson Noland – Robert W. Baird

Rajeesh Ghai – ThinkEquity

Alex Kurtz – Merriman and Company

Kevin Hunt – Hapoalim Securities

Erin Anthony – Pacific Crest Securities

Compellent Technologies, Inc. (CML) Q3 2010 Earnings Conference Call October 26, 2010 4:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Compellent third quarter 2010 financial results conference call.

(Operator Instructions) This conference is being recorded today, Tuesday, October 26, 2010.

I would now like to turn the conference over to Jenifer Kirtland. Please go ahead.

Jenifer Kirtland

Thank you, operator; and thank you for joining the Compellent conference call and webcast to review financial results for the third 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 reports on Form 10-Q 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, 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 third quarter 2010 earnings call. With me is Jack Judd, our Chief Financial Officer.

We're extremely pleased to report Q3 as a record quarter for Compellent. Customer response to our product innovation and enterprise storage efficiency has been tremendous. I have many highlights to share.

We achieved record revenues as third quarter sales reached $42.1 million. That's a 31% increase from one year ago and a 15% sequential increase over the second quarter. We achieved record net income as GAAP net income was $3.3 million or $0.10 a share. Our non-GAAP net income which excludes stock-based compensation expense was $4.9 million or $0.15 per share. Our gross margins were strong at 55.9% compared with 53.6% in the second quarter of 2010.

And we continue to grow our customer base and added 179 new customers in Q3 for a new total of 2,303. That means our Compellent Fluid Data architecture replaced legacy storage for customers including Northrop Grumman, [Milestone] North America, Boston University, the Michigan Court of Appeals and West Point Military Academy. We are very pleased with these results and believe that they demonstrate strong momentum for Compellent.

As further evidence of our continued traction in the marketplace, during the second quarter, Storage magazine once again gave us its quality award. The quality awards are based on user surveys. Compellent was ranked number one in every measured category. We were number in product features, number one in product quality, number one in product reliability, number one in sales force competency, number one in technical support, and number one in overall standing. But the best part of all, 100% of Compellent customers in this survey indicated they would buy Compellent again.

But let me give some examples in the third quarter of the ways customers around the world are implementing Compellent. Take for instance Skechers, the shoe apparel company. With 280 terabytes of capacity, Skechers chose Compellent for differentiation and scalability, ease of use and flexibility. RealPage, a provider of on-demand software-as-a-service products chose Compellent to replace its legacy storage to support its core business and its cloud computing services. With multiple sites, customers like RealPage can easily scale out today and scale up in the future. Philips Plastic Corporation which is implementing Compellent unified storage with solid state drives for its virtual desktop infrastructure, Oracle ERP and Windows environment.

Over in Europe, one of the largest credit management firms, Intrum Justitia, has more than 90,000 clients and 3,000 foreign employees in 22 countries. Its data center in the Netherlands supporting all its European operations chose Compellent for automated tiering, thin provisioning and our perpetual software licensing. These few examples highlight the broad range of customers that are choosing Compellent over incumbent competitors as a result of our rich feature set and highly flexible architecture.

Over the next few quarters you'll see a series of new product releases that expand upon our Fluid Data architecture and scale beyond our existing platform. This expanded feature set, something I like to call Fluid Data 2, will provide enterprise data centers greater performance, scalability, efficiency, ease of use and reliability, and all will be based upon our existing virtualization and dynamic block architecture. Let me give you three examples how we'll scale our technology to take us into more opportunities.

First, a key enabling technology for virtualization and the cloud is our enhanced Live Volume. This Compellent exclusive can detect when a hypervisor moves a virtual machine from one server to another and it can automatically migrate the Compellent storage volume to follow the application. For years we have intelligently moved data within an array; now we are automatically moving data between arrays to provide businesses with continuous access to data and high availability. Live Volume works with multiple hypervisors including VMware's vSphere, Microsoft Hyper-V and Citrix XenServer.

Second of all, our next-generation data centers require tight integration between best-of-breed products to build out cost-effective and secure infrastructures. We recently announced our VMware vSphere client plug-in which allows every VMware customer to manage Compellent storage through vCenter. What used to take hours will now take minutes. The market reaction has been extremely positive.

Third, a persistent architecture is especially valuable to large enterprises because they could easily add new technologies and scale from terabytes to petabytes without throwing away their previous investment. We will further demonstrate this value in Q4 when we launch our newest version of Storage Center, the largest, most comprehensive hardware and software release in our company history.

All these examples illustrate how our architectural advantages position us well for the ongoing wave of virtualization and cloud computing.

For years we've had customers in cloud providers using Compellent as their storage foundation. For instance, over the past year, Virtustream, an international cloud service provider, implemented 15 Compellent systems for its multi-tenant xStream platform cloud infrastructure in five global data centers in the United States and the United Kingdom.

We have previously talked about our enterprise penetration. We already have more than 200 customers with installations over 100 terabytes of Compellent storage and several in the petabyte-plus range. Going forward we will push our innovations in highly-scalable features deeper into enterprise to a wider range of customers. For us, scaling in enterprise is more than scaling our product; we're also scaling our business around the world. Our marketing will further emphasize our product for both midrange and large enterprises and our sales channel will likewise evolve as we invest in more sales professionals and business partners to expand our addressable market.

This past quarter we formally launched in Australia, hosting events in Sydney and Melbourne that were attended by dozens of our existing customers, partners, press and analysts. We're also leveraging the success of our C-Drive user and partner conference and we'll host our first-ever C-Drive Europe event to be held in London in May of 2011.

We're also expanding our sales team. As an example, European sales and technical resources who have previously worked for our international distributor will become Compellent employees effective January of 2011.

These are all great examples of investments to grow the channel, grow our brand and expand our customer base.

So now let's recap. This quarter we've continued to achieve record revenue, record net income, displacement of competitors, recognition of our industry-leading product quality and more product innovation. We are building upon the core traits of our company that have been present since the beginning and we are poised to build on this quarter's strong results to continue Compellent's growth and increasing market presence.

I'd like to thank the Compellent team and our business partners for their hard work and dedication in helping us achieve these results. I'd also like to thank our customers for their continued support and confidence in Compellent.

And now I'd like to turn the call over to Jack to provide a more detailed look at our financial results for the third quarter and outlook for the fourth quarter of 2010. Jack?

Jack Judd

Thank you, Phil.

Our record third quarter 2010 revenue of $42.1 million was an increase of $9.9 million or 31% from the third quarter of 2009. Sequentially, revenue grew $5.6 million or 15% in the second quarter of 2010. Our customers at September 30th totaled 2,303 compared to 1,627 one year earlier and 2,124 at the end of June. Measured on a year-to-date basis, our product revenue was 55% from existing end-users compared to 45% from new end-users.

Our international markets totaled 14% of revenue or $5.9 million during the third quarter of 2010. We think now is the right time for Compellent to place more emphasis internationally, especially Western Europe. Accordingly, our international sales and marketing costs will grow at a greater rate than past years. As our plans firm up over the next quarter, we will provide greater details on this expand strategy.

Our gross margin was 55.9% in the third quarter of 2010, above our target model of 52% to 55%. During our past seven quarters, our margin has varied from a low of 52.8% to a high of 57.2%. This kind of variability is possible in future quarters as we balance discounts, hardware costs and revenue recognition policies.

Operating expenses increased to $20.5 million in the third quarter of 2010 from $16.3 million a year ago. At September 30th we have 469 employees compared to 360 a year ago and 431 at the end of the prior quarter.

GAAP operating margin was 7.2% during the third quarter. Excluding the effect of stock-based compensation, non-GAAP operating margin was 11.1%. GAAP net income for the third quarter of 2010 was $3.3 million or $0.10 per share. Excluding the effect of stock-based compensation, our non-GAAP net income for the second quarter was $4.9 million or $0.15 per share.

Our balance sheet remains strong. We ended the quarter with $138.8 million in cash and investments, an increase of $15 million from the end of 2009. Our year-to-date cash flow from operations totaled $19.5 million, a positive reflection on our strong deferred revenue for maintenance and support programs. Our balance sheet includes $51.2 million of deferred revenue, an increase of $13 million from December 2009. Our days sales outstanding was lower than the prior quarter and as a reflection of improved [lineary] compared with recent quarters. We have purchased approximately $6.3 million of capital so far in 2010, mostly on investments supporting future product development.

I would now like to provide some guidance on the coming quarter.

Our current revenue forecast range for the fourth quarter 2010 is $44 million to $46 million. We expect our non-GAAP EPS to be between $0.09 and $0.11, reflecting greater spending in sales, marketing, engineering and our gross margin being within our target range.

Stock compensation costs will be approximately $1.7 million in the fourth quarter. Our quarterly taxes in the fourth quarter will be approximately $200,000, but this could change significantly as a monitor for the appropriate time to bring our tax net operating loss into income. Once the capitalization of the value of our NOL occurs, we expect our tax rate to be 35%.

Finally, Compellent continues to invest in scaling our business sales channel and product to grow our market opportunities.

That concludes our formal remarks. Now, operator, could you please open the call to Q&A?

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question is from the line of Katie Huberty with Morgan Stanley. Please go ahead.

Katie Huberty – Morgan Stanley

Congrats on the quarter. First question is about the December guidance. Revenues typically grow 10% to 15% sequentially in December, even during the financial crisis in '08 you saw nearly a 10% increase. So, why not expect similar seasonality this year given how linear the September quarter was and the new product launch that Phil walked through?

Jack Judd

Great question, Katie. And I think you've seen that our guidance is reflecting still a conservative feeling around guidance here, coming up the last two quarters, and trying to maintain more of a beat philosophy versus a guidance philosophy. So hopefully we'll go out and we'll beat the numbers.

Katie Huberty – Morgan Stanley

So you're not expecting any hiccup as it relates to timing of the product launch or anything like that?

Phil Soran

No, we don't anticipate anything like that.

Katie Huberty – Morgan Stanley

Okay. And then on – if I just do quick back-of-the-envelope math around the ASP for your new customers, it looks like that increased from about 88,000 in the June quarter to 120,000 or in September. Can you just talk about what's driving larger deals among the new customers that you're attracting? And then, were there any large deals that maybe pulled that ASP higher?

Phil Soran

Well, we don't give the ASPs or whatever. There's a lot of factors in the revenue with the upgrades and new systems and that type of thing. But I would tell you that we had more larger deals, so the quantity of them was greater than the previous quarter there. We always have a big deal or two in a quarter, so it wasn't anything that was totally out of line there. And I think the big thing is that I think we're, frankly, we're getting into bigger and bigger deals, we're getting customers who have been with us a while, who have upgraded their data centers significantly over what they previously had, and it's kind of growth into those larger enterprises.

Katie Huberty – Morgan Stanley

Okay. And then just lastly, it's our understanding that EMC will target the channel with its new storage platform that they expect to launch in the first quarter. Is there anything you're doing to prepare yourselves and your channel teams to make sure that doesn’t create a speed bump in market share within your existing channel partner?

Phil Soran

Well, the best thing we do is what we do everyday and have done since day one which is we're 100% channel, we – they are a sales force, we work very collaboratively and closely with them, and we deliver the best products in the market so that they don't have to think twice about what's the best thing to sell their customer. So I think it's more of the same.

Katie Huberty – Morgan Stanley

Okay. Great, thanks, guys.

Phil Soran

Thanks, Katie.

Operator

Thank you. Our next question is from the line of Eric Martinuzzi with Craigh Hallum. Please go ahead.

Eric Martinuzzi – Craigh Hallum

Let me add my congratulations on the successful quarter.

Phil Soran

Thanks, Eric.

Eric Martinuzzi – Craigh Hallum

No problem. The enterprise sales force, that's something that as companies like yours grow, it tends to be an evolution. People start out dependent on a channel and then – especially what you guys are seeing, these larger customers, larger deals, do you feel that need to stand up a direct sales force?

Phil Soran

We get asked this a lot here. I would tell you that we have – I have a group I call the Enterprise Advisory Board which is a set of small group of very, very large IT that we usually meet with several times a year, and that's one of the questions I asked them about our distribution, some of that. And I'll tell you what I hear from them is they would like a direct relationship with Compellent but it doesn’t mean you can't have a channel-based distribution model.

So they want to know that they, when they call 188-EASYSTORE, that a Compellent employee is – our copilot is the one that's helping them through whatever they're calling for. They want to know – come here for executive briefings, they want to get their product roadmap from Compellent. They'd like to go and get their product feedback into Compellent directly. And that's where our assisted channel model actually works really, really well. We work very closely with our channel partners and kind of a virtual team, and that customer really knows Compellent and those – their business partners kind of as one virtual team.

So we think it scales right the enterprise and we've gotten a lot of feedback from customers where it actually is an advantage because our business partners have relationships in purchasing and approved vendor list and things like that that when we're first getting to an account, we don't have, and we just got to leverage them to help build bigger solutions and enhance our offering. So I think it works real well.

Eric Martinuzzi – Craigh Hallum

Okay. And then with the new platform, deduplication is something that can be done, both the backup target, it could be done in the primary storage side. Is that something that you guys are considering for the next-generation product?

Phil Soran

Yes. So, obviously we're considering some of that, and you'll see us, when we announce, you'll see what we do and stuff. But I would tell you that we already have a lot of deduplication built into our primary storage offering. Primarily dedup is most effective in archive-type or backup-type environment as opposed to primary. But things like our dedup boot, and how we do our replay architecture is a lot of dedup capabilities on it, our thin replication.

So we already, you know, the kind of efficiencies we already deliver to customers is 3x to 4x what you could get out of any kind of deduplication or compression-type stuff. But we're always looking for ways to improve the efficiency of our storage and I think customers will excited with our roadmap.

Eric Martinuzzi – Craigh Hallum

Okay. And then lastly, on the headcount, it looks like you were up 38 employees, net employees, sequentially versus June. Where do you see headcount finishing out the year?

Jack Judd

I think we'll hire another 38. We are actively hiring in many areas of our company. We hire people off in the copilot area every quarter. We are currently always hiring people that can sell storage to partners out in the field, and of course software engineers.

Eric Martinuzzi – Craigh Hallum

Thank you.

Phil Soran

Thanks, Eric.

Operator

Thank you. Our next question is from the line of Aaron Rakers with Stifel Nicolaus. Please go ahead.

Aaron Rakers – Stifel Nicolaus

Yes, thanks, a couple of questions as well. First, I want to understand a little bit of what looks to be some great leverage in the model on the OpEx side this quarter. It looks like on an OpEx per employee basis, this is the lowest level I've seen in quite sometime. So I guess, Jack, if you can, can you help me understand, even with the increase that we're seeing on the headcount side, what's driving that leverage? And then also, I think more importantly, how we should think about the commentary around OpEx increasing as you invest in particular in Europe here as we move out over the next couple of quarters?

Jack Judd

Great question, Eric, and I think you set that thing up nicely for Phil and I because we oftentimes talk about our business model advantages. And just the fact that we sell through partners is a real advantage to us in our operating cost because we can leverage partners and put their thousand people on the street versus hiring our own thousand people. So that's the business model advantages where you see a lot of this leverage comes from.

But as you look at the third quarter, yes, the operating costs were really good. So I want to compliment all the people that are at Compellent that make day-to-day decisions on how this company is run, everybody did a great job. Plus it is a seasonally slower quarter for marketing expenditures.

Aaron Rakers – Stifel Nicolaus

And then, Phil, I think you had mentioned that you were bringing over some employees from a partner of yours starting January 1st. Is that an appreciable amount of new employees that'll be falling into the Compellent P&L?

Phil Soran

Well, it's not significant but it's a nice number and it's [inaudible] I want to invest in that area. These are guys that have been working with us closely through this distributor, and we're going to bring them on full time as Compellent employees. And, Jack, you want to talk on the quantity or wait till later to do that?

Jack Judd

It's less than a dozen.

Aaron Rakers – Stifel Nicolaus

Okay. And --?

Jack Judd

But we're going to be adding other people in Europe besides just these in the coming year, so there'll be a lot more expenditures for sales and marketing in Europe. And as I said in my part of the talk, as we get into the fourth quarter, we'll give you a little bit more color as we do our planning for 2011.

Aaron Rakers – Stifel Nicolaus

And then final question for me is, you guys talked about a new product cycle coming up. I think one of your longer-term strategies is to obviously broaden your addressable market. I think you guys historically have talked about kind of $75,000 to $100,000 type of price point as kind of the sweet spot of your market. How do these new products expand your addressable market? And how should we maybe think about that average deal size trending out over the next couple of quarters?

Phil Soran

Yes, I think we'll still be very strong in the range you talked about, the 75K to 150K, but we're also seeing more and more multi-$100,000 deals that we do. Some of that is the product architecture will help and some of it is just us expanding our reach in the marketplace. But you will see more larger deals.

Aaron Rakers – Stifel Nicolaus

Trending, could we see $200,000 type ASPs over the next 12 months? Is that the right trend to be thinking about in terms of average deal sizes?

Phil Soran

We're not going to forecast on our deal sizes right now, I think right now, Aaron.

Aaron Rakers – Stifel Nicolaus

Okay. Thanks.

Phil Soran

You bet.

Operator

Thank you. Our next question is from the line of Amit Daryanani with RBC Capital Markets. Please go ahead.

Amit Daryanani – RBC Capital Markets

Congratulations on the quarter as well, guys.

Jack Judd

Thank you.

Phil Soran

Thank you.

Amit Daryanani – RBC Capital Markets

Just to start off with the December quarter, barring the guide that you guys are giving, are you guys seeing from an end-market perspective anything that will indicate you would not see a normal regular IT budget slash happen this year?

Phil Soran

I think the economy is, I thought, stable now, not robust still, but it's much more stable than it was definitely a year and a half ago or something like that, and we continue to see that going. So whatever people tend to do, I think you might see a little of that. You see some people do want to spend their money in terms of the budget, others are saying let's only spend what we have to spend, and we should be able to benefit from either or both of those, so.

Amit Daryanani – RBC Capital Markets

All right. And then you guys have obviously talked about kind of moving up the enterprise market and you've certainly been adding features to do that. I'm just curious, given the recent 3Par acquisition, I'm curious, do you see maybe to a smaller degree being as much of the acquisition being beneficiary for you as you guys benefited when Dell bought EqualLogic, or is that just an unfair expectation?

Phil Soran

No, I think that whenever there's change, there's opportunity. And I think there's opportunity for us when all that change is going on and we'll try to take advantage of it. I think people are increasingly realizing our scalability was a lot more than some people thought and I think a lot of our customers knew what it was and [saw that], but it creates opportunity for us for sure.

Amit Daryanani – RBC Capital Markets

Just finally for me, there are some articles out today about you guys possibly hiring a bunch of investment banks and putting yourself up for sale. Any thoughts, any comments you have around those releases today?

Phil Soran

No, I'm not [inaudible] to rumors or speculations on that, we're just going to talk about the business here.

Amit Daryanani – RBC Capital Markets

Thank you.

Operator

Thank you. The next question is from the line of Patrick Mulvehill with Piper Jaffray. Please go ahead.

Patrick Mulvehill – Piper Jaffray

Hey, guys. Congrats again on the quarter.

Jack Judd

Thank you.

Phil Soran

Thanks a lot, Patrick.

Patrick Mulvehill – Piper Jaffray

Quick question on kind of your geographic revenue breakdown. You mentioned that you're kind of investing in European sales starting in the first quarter of next year and the revenue mix has been pretty constant as far as between the U.S. sales and international sales, and just curious if you guys have a target mix.

Jack Judd

Target mix is a hard thing. When we get a lot of comments about how you're trying to grow Europe fast, well, yes, we are, but we're trying to grow the U.S. fast too. So our numbers are up year-over-year, it's just that our numbers are up in the United States also.

And we've been emphasizing Europe for a long time. We've got partners over there. We've got a lot of active sales strategies going on. We have launched in countries over there. So I don't want to make it sound like we've – that we're just now starting to be. I think that we're going to take the next step and have more of the employees with us instead of with our distributor.

Patrick Mulvehill – Piper Jaffray

Okay, great. Thanks, guys.

Phil Soran

Thanks, Patrick.

Operator

Thank you. The next question is from the line of Jayson Noland with Robert W. Baird. Please go ahead.

Jayson Noland – Robert W. Baird

Yes, thank you. Question on gross margin first, Jack. You're above your model. I guess, if you could talk more about what drove that and would we expect it to come down looking forward here?

Jack Judd

I think I talked about the gross margin coming back down within the target model. So, yes, it will come down. But the items that drove the margin up a little bit this quarter would be the things that we've talked about consistently these past few quarters which is discounting, vertical selling, what we buy products for, revenue recognition rules, mix, all those things come into play in terms of how our product margin comes out. But again, on a long-term basis, we said between 52 and 55, and that's really where we're at. So I would expect that the margin that we had here in this quarter would be down in the fourth quarter.

Jayson Noland – Robert W. Baird

Okay. And then any --?

Jack Judd

Still good.

Jayson Noland – Robert W. Baird

Yes. Any verticals you guys would point out as areas of strength and then maybe if you can talk about some of these cloud-based computing environments and any update there?

Phil Soran

You broke up a little bit there. Say it one more time.

Jayson Noland – Robert W. Baird

Any verticals you would identify as areas of strength, first off. And then, anything you could say about some of the cloud-based computing architectures.

Phil Soran

Yes, the whole technology services which I include the cloud providers in there has been a real strong area for us. I highlighted a few in the earnings call there. Healthcare has been real significantly a positive momentum builder for us. A lot of the data needs there fit our architecture really, really well. Financial services and government would be the other two that I'd kind of highlight right away. But we're very cross-industry and doing well in all industries, don't really have any single concentration. But those are some that I'd kind of highlight.

Jayson Noland – Robert W. Baird

Okay. Congratulations on the quarter, gentlemen.

Phil Soran

Okay. Thanks a lot.

Operator

Thank you. The next question is from the line of Rajeesh Ghai with ThinkEquity. Please go ahead.

Rajeesh Ghai – ThinkEquity

Yes, thanks. Congratulations on the accelerating momentum. Just a question on the new platform, you mentioned that the new products will help you scale into the enterprise. I just want to understand if you can quantify how much of an increase in the addressable market you visualize this could have. And also, if you could quantify any impact on the gross margin that you might see from this – on the upgrade of the hardware.

Phil Soran

Yes. So first of all, the architecture, the current architecture does real well there, but this is just one step further in that progression. So you're going to see a lot more performance and scalability and some neat software features that enhance them [there].

As far as going to the actual dollar amount, I mean I'm not going to go into market segments right now. But it just takes you up another notch, and I think with that you can look at that, we've kind of settled on the margins, try to stay within the target model and let us execute there, keep trying to drive the top line growth as much as we can with these new product offerings.

Rajeesh Ghai – ThinkEquity

Okay, great. And you launched the zNAS product in Q2 I guess and this was really the first real quarter of zNAS being out there in the market. Did you see any impact of the enterprise storage offering in the quarter? And if you can quantify that and what your expectations are going forward?

Phil Soran

Yes. The zNAS, it's – our [NAS] strategy, several planned strategies there, and those are incremental revenue. We get there, we won deals because of them. I think people really liked the fact that our unified approach, all our Fluid Data [dynamic block] architecture advantages are able to be utilized both in a file environment and a block environment, and pick one or the other to optimize on, and we've had good reaction on it, and I think we'll continue to see more growth in that area for us.

Rajeesh Ghai – ThinkEquity

And one last question for me, the comparative landscape, actually following up on the question that was asked earlier, the 3Par acquisition by HP, does it increase competition for you given that 3Par didn't really sell to F class and midrange, to the midmarket, and now you're going to have HP sell that into the market?

Phil Soran

Well, I mean it changes the competitive landscape. I would tell you though, if we look at – we had had headwinds against 3Par, many of them, in both their core market to the service providers and also in the commercial type accounts. We saw [some of these] in the commercial accounts that they may not have made the finals as often as maybe other competitors, but in some of those other target markets we tend to see them and we did real well.

So I think it's just a little change on who you're having to deal with. They obviously got a little more scale, but then they're going to have to decide if they're going to be pushing EVAs or 3Par products, and we have one less competitor and the same number of sales people basically going after that market.

Rajeesh Ghai – ThinkEquity

All right, thank you.

Phil Soran

It also I think presents a little opportunity in the channel too with the confusion that could be caused there and a chance for us to get mine share in the channel.

Rajeesh Ghai – ThinkEquity

Absolutely. Thank you so much.

Phil Soran

Thank you.

Operator

Thank you. Our next question is from the line of Alex Kurtz with Merriman and Company. Please go ahead.

Alex Kurtz – Merriman and Company

Yes, thanks for taking the question, guys. Jack, in the past you've talked about the discounting practices, how that hits the hardware upfront and the good margin goes on to the balance sheet with the services. Does that framework still hold? Are there any changes to that, thinking about that?

Jack Judd

The factors regarding discounting and what we call VSOE in accounting were the same in the third quarter that they've been for as long as Compellent's been around. So, no changes in that in the quarter.

Alex Kurtz – Merriman and Company

Okay. And, Phil, you guys had a really good footprint obviously at VMworld Day. I wonder, how do you guys differentiate your integration on top of VMware or underneath VMware, when your two core competitors have a lot of resources they can bring to bear? So, how should we think about how you differentiate in the market versus say someone like a NetApp who has a lot of R&D effort around VMware and vSphere integration?

Phil Soran

Yes, that's a really good question. So we did have a big footprint at VMworld; it was a great show. We actually got Best in Show Hardware Virtualization finalist, so that was real nice to get that award from them and just a great buzz around the show. We are a platinum sponsor, we demonstrated that techno capability there. We had a joint press conference with Heineken where they'd displaced their HP equipment with Compellent and we were able to cut down the number of drives significantly and still deliver 100% to 300% performance improvement. So that was exciting.

I'll tell you what, we got really, really positive reaction, especially from our existing customers, on the vSphere plug-in that we showed there. And also, like today we had two executive briefing [here at] Compellent and they're demonstrating that to those customers and really, really exciting.

I'll tell you, the thing that really differentiates it is that what you're doing is you're allowing a customer from vCenter to manage Compellent storage. So that management is only as good as what the Compellent software feature set is like. And so the way we differentiate it is to have the best [data and replay] architecture, have the best thin provisioning, have the best automated storage, and allow customers to get access to those best-in-breed feature sets from VMware without having to jump between interface to interface. So it just kind of highlights what we're already better at even more. So that's been a really, really good one.

And then, Live Volume, we've enhanced it even more.

Alex Kurtz – Merriman and Company

All right. Thanks, guys. Nice quarter. Thanks.

Phil Soran

Okay, thanks, Alex.

Operator

Thank you. Our next question is from the line of Kevin Hunt with Hapoalim Securities. Please go ahead.

Kevin Hunt – Hapoalim Securities

All right, thanks, guys. Yes, I wanted to follow up just on the OpEx question. You had a record operating margin and from what I could see really it's kind of the best leverage you've ever had other than when you were really early in your – early in the company. And last question I think, if I recall, you talked about how you'd be investing more aggressively and you kind of said that again this quarter. So I just want to kind of go back, is there something where you didn't invest as much as you thought this quarter? You had relatively flat sales and marketing which typically you really wouldn't expect that if you're in investment mode. So I just kind of want to circle back and see what really was the driving factor of that leverage.

Jack Judd

I think we invested in everything in the quarter that we had opportunities to invest in. I think we try to make good, wise decisions all the time and I think we did a good job. Again I'm going to take you back, that second quarter especially for sales and marketing is a high seasonal quarter between very many trade shows and the fact that we do our C-Drive event in the month of May, that they tend to inflate expenses in the second quarter, so they don't work as well sequentially. But we'll spend more in the fourth quarter than we did in the third quarter though.

Kevin Hunt – Hapoalim Securities

Okay. And then, can you just comment on sort of the longer-term model now that you nearly had some [inaudible] coming out last year and you're back on sort of seeing long-term model, or are you [inaudible] you think the long-term model is or --?

Jack Judd

On a general model basis, our long-term model has not changed, we remain extremely confident that we will reach our target model type numbers at revenue numbers that will be best in the industry. And I think that our margins overall, our operating margin on a non-GAAP basis will be industry-matching or best-in-industry operating margin. And I think it's driven by our unique business model and our software.

Kevin Hunt – Hapoalim Securities

Okay. Thanks, guys.

Phil Soran

You bet.

Operator

Thank you. We have time for one more question, and that is from the line of Brent Bracelin with Pacific Crest Securities. Please go ahead.

Erin Anthony – Pacific Crest Securities

Hi, thank you. This is Erin Anthony in for Brent. I was wondering if you could give us an update on the competitive landscape, maybe specifically in cloud opportunities. And also you've given the mix of top ten channel partners before and I was just wondering if we could have that again for this quarter.

Phil Soran

Yes, I'll give you a little bit of the competitive landscape, especially for the cloud providers. And the nice thing about some of the cloud providers is that whether it's on public or private cloud, a lot of the needs are the same there, and it's – and I always describe it as the [inaudible] looking for is flexibility, and so it's flexibility and cost, location, geography, quality of service, those types of things. And if you kind of think about our Fluid Data architecture, that's exactly what it delivers, flexibility in how you provision storage, how you manage it with the automated tiering, how you move around between systems with Live Volume, how you use our [bonus] Replay to geographically remote things.

So it really, really fits nicely, and we've had out there frankly for quite a while, and we keep expanding on that differentiation with our announcements as we come out for it. So I see a lot of [them] trying to do some of the same things we do and the customers that I've talked to that have looked at or seen it in operation would tell you it's not the same, not closed, and we still have a significant competitive advantage. And when they see our roadmap, they get even more excited.

So, Jack, you want to comment on the other one?

Jack Judd

Yes, the top ten business partners overall are a little less than 40% of our business this past quarter, with no partner being 10%.

Erin Anthony – Pacific Crest Securities

Thank you.

Phil Soran

Thank you.

Well that concludes our full remarks, and so – our show here, so we'd like to thank you guys for joining us. And I didn't hear the operator come on, so I guess I'm closing it off here. So, thank you guys very much, and congrats to the team on a great quarter.

Jack Judd

Thank you.

Operator

Ladies and gentlemen, this concludes the Compellent third quarter 2010 financial results conference call. If you'd like to listen to a replay of today's conference please dial 303-590-3030 or 1-800-406-7325 followed by the access code of 4372046 and the pound sign.

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!

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 CEO Discusses Q3 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts