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Executives

Deb Murphy - Vice President, Corporate Controller

Jitendra Saxena - Chief Executive Officer, Co-founder and Director

James P. Baum - President, Chief Operating Officer, Director

Patrick J. Scannell - Chief Financial Officer, Senior Vice President, Treasurer, Secretary

Analysts

Robert Semple - Credit Suisse

Kathryn Huberty - Morgan Stanley

Glenn Hanus - Needham & Company

Kevin Hunt - Thomas Weisel Partners

Nabil Elsheshai - Pacific Crest

Jeff Embersits - Shareholder Value Management

Chris Tuttle - Research 2.0

Netezza Corporation (NZ) F3Q08 Earnings Call November 28, 2007 8:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2008 Netezza Corporation earnings conference call. (Operator Instructions) On our call today this morning will be Jit Saxena, Chief Executive Officer; Jim Baum, President and Chief Operating Officer;

Pat Scannell, Senior Vice President and Chief Financial Officer. I would now like to turn the call over to Deb Murphy, Vice President and Corporate Controller. Please proceed.

Deb Murphy

Thank you. Good morning, everyone and thank you for joining us on our second earnings release conference call as a public company. Jit, Jim and Pat will take you through our financial results for our quarter ended October 31, 2007, which is our third quarter of fiscal year 2008 and we’ll give you color on the trends in our business for the next quarter and for the balance of the year.

Before I turn the call over to Jit, there are some important points to cover. On this conference call, we will be referencing both GAAP and non-GAAP financial measures. We provided GAAP and non-GAAP reconciliation information in the press release we issued this morning announcing our Q3 results. The press release is available on the homepage of the investor relations section of our website at www.netezza.com. The webcast of the call will be archived in the same section.

In addition, a recording of the conference call will be available later today and will be available for two weeks. The replay can be accessed by dialing 1-888-286-8010 for participants in the United States and by dialing 1-617-801-6888 for participants outside the United States. The passcode for the replay is 49374446. This information is also included in the press release.

Some of the statements made on this call will be forward-looking statements, including our comments on expected financial performance, operating performance, the growth of our business and other financial expectations. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the risk factors section of our most recent quarterly report on Form 10-Q, which is on file with the SEC.

In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

Now let me turn it over to Jit Saxena, our Chief Executive Officer, for his overview and commentary on the quarter.

Jitendra Saxena

Thanks, Deb. Good morning, everyone. I realize that it is really very early in the morning for some of you on the west coast and we appreciate the fact that you have taken the time to join us on this call. We are very pleased with our results for our third fiscal quarter. Based on what we saw during the last quarter and what we are currently seeing, I would like to make the following comments.

First, demand from both our existing customers and from new customers continues to be very good.

Second, our pipeline for future business is very robust and our visibility in terms of our business is getting better. The macro factors affecting certain sectors of our economy have not had any impact on our business.

Third, we have continued to improve our value proposition and our price performance and cost of ownership is getting stronger.

Fourth, based on the strength of our pipeline, we have continued to aggressively invest in product development and in expanding our distribution channels.

Fifth, we continue to see evidence that the market for our products and the applications in which our customers are deploying our products are quite large and that the market segment that we have created is becoming more mainstream.

At this point, I would like Jim Baum, our President and COO, to elaborate on several of these observations.

James P. Baum

Thank you, Jit and good morning, everyone. As Jit mentioned, we are very pleased by our fiscal Q3 results. During the quarter, we again exceeded our objectives and saw strong new customer wins, as well as key repeat orders from our installed base. We added 18 new customers in the quarter, notably the U.S. division of a major telecommunications provider, which uses our technology to optimize call routing and minimize carrier costs. We also added one of the largest advertising agencies in Japan using our technology to perform audience rating analysis, and we added a large European online travel provider, which performs customer analysis and segmentation to allow them to more effectively target prospects.

We experienced large repeat orders from several existing clients, expanding our penetration into some of these key accounts as they expand their deployments to support new users and applications.

In each of our Q3 wins, we were able to beat our competition based on our key strengths. Our price performance remains strong, our systems are substantially easier to deploy and administer, and our company is perceived by our clients and prospects as an easy to do business with partner.

Let me comment on the market for a moment. We continue to believe that we are in the early innings in the business analytics space. The analytical applications that our customers and prospects deploy range in complexity from what we would characterize as simple business reporting to near real-time operational reporting to more sophisticated analytics and optimizations that are crucial to business decision making.

In every case, the first consideration to a successful deployment of such an analytical environment is the information infrastructure on which these applications are built. The keys to the suitability of this infrastructure lie in its ability to accommodate changing data and user profiles, performance and of course, costs. The successful information analytics platform must be able to support the current and changing requirements that the trends in business analytics in fact demand.

Our confidence in our own ability to rapidly grow our business remains high as we see substantial differentiation from the larger vendors in this space, especially in the context of the changing landscape and business analytics.

In the case of what we would characterize as the traditional enterprise data warehouse vendors like Teradata, or the new entrant from HP, Neoview, customers are forced to make a commitment to a very high-cost, mainframe like solution to their information infrastructure problem. These systems tend to be large environments that promote the idea that all of the enterprise data must reside in a single large system that has been tuned for a specific application. Many of these deployments require a great deal of professional services to deploy, often as much as the cost of the product itself.

As a result, not only is the initial commitment high, the ongoing cost to maintain these systems is also high, in terms of both inflexibility and the human capital required for system maintenance.

Clearly the advantage that these vendors have once installed is that the switching cost is perceived to be high. This is an obstacle that we overcome through the proof of capability phase of our sales cycle, allowing us to complement or replace these systems, and often deploying our systems in new areas altogether, clearly a further illustration of the strength of our value proposition.

In new application deployments or greenfield situations, it’s difficult to convince a company to make a commitment of the magnitude in terms of both dollars as well as human capital required to deploy one of these mainframe like systems, and we believe this may indeed be a significant inhibitor to the growth for these businesses.

In contrast, the Netezza solution with our $1.1 million to $1.5 million average order size solves the information infrastructure problem with an incrementally scalable architecture that requires very little effort to deploy, creating significant time to value for our clients.

As an example, a specialty finance company in the U.S. was able to evaluate, purchase and deploy a Netezza environment to support a proprietary scoring model for the evaluation of very large volumes of consumer credit data in under 30 days. This is something that’s just unheard of with traditional data warehousing technology.

While our customers do experience a substantially lower TCO as a result of the minimal maintenance required to run our system, we see that the key drivers of this reduced TCO, namely the elimination of the need to specifically tune our systems, provides the flexibility to support new applications and new data easily, promoting the rapid deployment of our systems and better supporting the changing analytical needs of the market.

Our recent announcements about the Netezza developer network, or the NDN, show the beginnings of a new set of opportunities to exploit our architecture into new application areas. Through this initiative, we’ve partnered now with over 50 technology providers and customers to enable them to actually embed their analytical applications into our appliance. This gives them the ability to take advantage of the tremendous database price performance benefits of our platform and in effect bring that same advantage to their applications now that traditionally sit outside the database.

We believe that this further extends our competitive differentiation by making Netezza's platform ideal for differentiating the full range of business analytics applications from simple reporting through complex algorithmic optimizations.

As an example of this, one of the U.K.’s largest communications companies initially deployed Netezza to run call data record reporting for regulatory compliance, network routing, and usage analysis. This company quickly then decided to migrate several more multi-terabyte data marks from Oracle onto Netezza to launch more applications.

As this progression of new applications has continued, they are now embedding application capability from one of our NDN partners into our appliance to bring game-changing performance to their ability to benefit from advanced price modeling and analysis on all of their call data records. This ultimately provides them with bottom line savings and the ability to optimize their profits in ways previously unobtainable by this business.

The competition cannot easily mimic this experience, given their constraints with both the services intensive business model and technology. We believe that our approach will support the current and emerging needs of the business analytics market and that it is highly accessible to the companies that drive their businesses on analytically based decision making.

Another market dynamic I would like to mention is the impact of the state of the financial services industry on Netezza's business. We have not experienced any unexpected changes in our business in this vertical. Our business in financial services is primarily in the areas of compliance and high volume transaction analysis. This fact has kept us relatively immune to the issues surrounding this vertical segment of the market. In fact, across all sectors we sell into, we’ve not seen any purchase delayed or deferred based on any IT spending pull back. As a result, we continue to invest aggressively in our distribution channel and product offerings.

I would now like to turn it over to Pat to have him take you through the specifics of the quarter and our outlook from Q4 and next year.

Patrick J. Scannell

Thanks, Jim and good morning, everyone. Let’s review revenue first. Revenue for the third quarter was $33.4 million, representing an increase of 44% over the third quarter last year of $23.2 million and a sequential increase of 18% from last quarter. Year-to-date revenue was $87.2 million, or an increase of 65% over $53 million for the same period one year ago.

Product revenue increased 41% year over year and 19% sequentially, reflecting continued momentum in our business analytics appliance strategy. Service revenue increased 60% year over year and 12% sequentially. One-hundred percent of our service revenue comes from the installed base, substantially representing annual maintenance contracts on the Netezza appliance. Our experience has been that we get 100% attach rate with our maintenance contracts when we sell on appliance.

Forty-eight percent of our total revenue in Q3 came from the installed base, versus 53% a year ago and 47% last quarter. As Jim mentioned, we secured 18 new customers this quarter, up from eight new customers in Q2, so the total number of new customers year-to-date are 40 new customers versus 28 through three quarters of last year. And the average deal size this quarter was in the range of $1.1 million to $1.5 million.

As we have said time and time again, the ebb and flow of our new customer acquisition rate will vary from quarter to quarter but it does represent a key indicator for the longer term growth of our business. Our experience has been that the recurring revenue from the installed base continues to be a growth engine for revenue, a leverage factor in reducing our cost of sales with shorter sales cycles, and an excellent visibility metric to our longer term forecasts.

Geographically, 83% of our business was generated in the U.S. and 17% internationally in Q3, versus 80% in the U.S. and 20% international a year ago. We expect that this will be in the range of 75-25 U.S.-international over the next year as we continue to expand into new international markets. Today we operate in seven countries with 29 personnel deployed internationally with four additional staff targeted to join us in this, our fourth quarter.

Our products were deployed in 10 separate vertical markets this quarter versus the same number of vertical markets a year ago. We had two verticals that each represented more than 20% of the revenue this quarter, e-business and telecommunications. As we have said, we continue to see wide adoption of the Netezza appliance across a variety of vertical markets with excellent diversification.

At the end of the year, we expect that no one vertical should represent more than 25% of our business for the year.

We have 33 quota carrying teams in addition to our resellers and analytical service providers. We have commitments from six new sales personnel for our fourth quarter and are targeting to have 40 quota carrying teams on board by the end of this fiscal year. Our plan is to continue to build both the direct and the indirect channels, adding an average of three to five direct quota carrying sales teams each quarter, while maintaining one of the highest standards of performance in the industry for our direct sales personnel.

We had two customers that each accounted for more than 10% of the revenue for the quarter, one from the e-business sector and one from a major telecom account. For the year, we do expect one customer to account for slightly more than 10% of our business when you look at our business over the course of the year.

Now I am going to turn to gross margins and our operating expenses. As a result of the feedback that we’ve received from many of you, I will be speaking mostly in non-GAAP terms. The non-GAAP numbers all exclude stock-based compensation and accretion of preferred stock dividends. Because of the varying valuation methodologies and assumptions that companies use under FAS-123R, we believe that excluding non-cash stock-based compensation allows investors to analyze our recurring business over multiple periods and provides more meaningful comparisons with other companies.

Upon the closing of our initial public offering, the accretion of preferred dividends was no longer applicable due to the conversion of our preferred stock to common stock and is therefore excluded again in aiding to compare current and future operating results with those of past periods.

For a reconciliation of non-GAAP to GAAP results, please refer to our earnings release which can be accessed on our website.

Now, specifically gross margins; on a non-GAAP basis, we reported a blended gross margin of 60%, combining our product margins of 59% with our service margins of 68%. On a GAAP basis, blended gross margins were 60% with product margins of 58% and service margins of 68%.

For the same quarter one year ago, we reported non-GAAP gross margins of 59%, with 58% product and 62% service. On a GAAP basis, blended gross margin was 59% with product margins of 58% and again service margins of 62%. You can expect that these margins will continue to blend in at the 60% level on both GAAP and non-GAAP basis as we continue to grow our business.

Margins are impacted by a number of factors, including maintaining inventory at the lower cost of market, discounting, and in the level of investment that we make in our support resources.

Turning now to operating expenses, and again the remainder of this income statement discussion is now on a non-GAAP basis, we had total operating expenses of $18.3 million, which was up from $14.8 million a year ago, or an increase of 23%. The company is operating with 254 personnel at the end of Q3, up from 212 a year ago.

Sales and marketing expenses increased 17% year over year. Approximately 70% of this increase is due to employee compensation, which includes higher commissions on record revenues this quarter.

R&D spending increased 15% year over year. We have 90 personnel in R&D, in addition to the investment that we have in Pune, India where we have contracted for the equivalent of 56 personnel that are dedicated to the Netezza solution.

G&A expenses increased by 128% year over year. Sixty-six percent of this increase is related to the additional costs of being a public company; in particular, incremental audit fees, tax planning fees, as well as costs associated with consulting related to SARBOX compliance. An additional 16% of this increase is the result of additional headcounts to support the infrastructure of a public company, growing from 17 heads a year ago to 22 heads today.

Moving on to operating income, our operating margins were 5.7%. It was $1.9 million for the quarter, up from a loss of 5.1%, or $1.2 million loss a year ago.

We saw four points of operating margin improvement, or call it leverage improvement in our model from last quarter, and that leverage came -- three points of that leverage or improvement came from R&D, two points came from sales and marketing, and it was offset by one point in G&A, which was the incremental investment as we previously discussed, due to the investment we made in our public company infrastructure.

We will continue to experience operating leverage in our model consistent with our ongoing guidance of at least generating one to two points of operating margin improvement in our operating margin at the pace of every six months.

The non-GAAP net income for Q3 was $2.9 million and non-GAAP EPS was $0.04 on a diluted weighted average share count of 63.8 million shares. Our prior year non-GAAP loss was $1.2 million and a non-GAAP EPS loss of $0.08 on a diluted share count of 14.7 million shares.

Our effective tax rate for the quarter on a non-GAAP basis was 9% and on a GAAP basis was 15% and was comprised of [inaudible] tax, foreign taxes and state taxes for those states where we have no net operating losses.

Turning now to the balance sheet, we exited Q3 with over $123 million in cash, cash equivalents and investments, up from $117 million on July 31st, our last quarter. Cash flow from operations was $7.7 million for the quarter, compared to cash used in operations of $400,000 a year ago. Capital expenditures in the quarter were 360K. Accounts receivable ended the quarter at $23.2 million with DSOs of 60 days. Our target DSOs remain in the 75 day range, even though we had the benefit of some early payment from some customers over the last two quarters.

We ended the quarter with $33.7 million of inventory, up from $18.8 million a year ago and relatively flat from last quarter of $33.2 million; $18.1 million -- of the 33.7, $18.1 million was finished goods inventory ready for customer shipments and roughly $14 million was our proof-of-concept inventory, which is deployed at customer sites and in our offices. All of this inventory is current and saleable as we constantly rotate systems through to ensure that we are maintaining our inventory up to current revs and specs and accounting for this inventory at the lower of cost [to our market].

Inventory turned at the rate of 3.2 times this quarter and you can expect that our inventory turn will fluctuate between three and four times.

We ended the quarter with $46.3 million of deferred revenue. Approximately $31 million is made up of deferred maintenance revenue, maintenance renewals for our prepaid maintenance and support contracts, and the balance is deferred product revenue where we have further obligations associated with future product deliverables.

We expect the majority of this $14.4 million of product deferred revenue will turn to revenue over the course of the next three to nine months, as we complete the delivery of all products that have been ordered. These product deferrals are a normal part of our business and will vary from time to time.

Now I would like to spend a few minutes addressing guidance. As we have indicated to the market, our intention is to give annual guidance with quarterly updates with the exception of these first two quarters where we will give quarterly guidance on certain line items on the P&L. As I’ve said before, this is an effort of letting you get to know us and us getting to know you.

For this fiscal year, we are raising our annual guidance from $114 million to $116 million in total revenue to revenue that will be slightly north of $120 million. For Q4, we expect to maintain the GAAP and non-GAAP diluted EPS at roughly the same levels as Q3 while taking into account the level of investment that we’ll make over the course of this quarter and adding additional headcount across the board.

We expect our effective tax rate to approximate 10% on a non-GAAP basis and 20% on a GAAP basis.

For next year, fiscal year ’09, we are providing guidance to revenue levels of approximately $160 million. We are expecting FY09, next year’s gross margins to stay at the 60% level on both a GAAP and a non-GAAP basis.

During next year, to take advantage of our accelerating momentum in selling business analytic appliance solutions, we will continue to invest in sales and R&D aggressively. These investments will drive further penetration of targeted vertical markets and extend our leadership and reach in business analytics.

In addition, we expect to incur additional public company compliance costs associated with Sarbanes-Oxley.

We expect these investments in sales and distributions will best position us to exceed our fiscal year ’09 and fiscal year ’10 revenue and profitability objectives. As we continue to accelerate top line revenue growth, we also maintain that we can incrementally increase our operating margins at the pace of one to two points every six months on a GAAP and non-GAAP basis, while maintaining our long-term operating margin goal in the 15% to 20% range on a GAAP and non-GAAP basis.

We expect our effective tax rate to approximate 10% on a non-GAAP basis and roughly 25% on a GAAP basis next year.

This concludes the formal part of our presentation and the commentary on the financials. Thank you for your attention and I would now like to turn it back over to the moderator to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Rob Semple from Credit Suisse. Please proceed, sir.

Robert Semple - Credit Suisse

Thank, guys. Understand the demand environment looked pretty good; can you talk about the competitive landscape? Did you see any aggressive pricing out of some of your larger competitors in the quarter?

Jitendra Saxena

Focusing primarily on the larger competitors, we did not see any appreciable changes on their part. As Jim pointed out in his presentation, the selling model and the selling strategies for the larger competitors, especially Teradata and newcomer HP Neoview, is substantially differentiated from our own selling strategies and I think that has not changed and it continues to favor us, especially in situations where time to value is very, very critical to the end user.

Robert Semple - Credit Suisse

Okay, and I guess since we heard from you guys last, we have seen both Business Objects and Cognos announce their intent to be acquired. Can you talk about your relationship there? Do you expect any impact on your business from these acquisitions?

Jitendra Saxena

Those relationships continue to be very, very strong for us. They have been that way in the past and continue to be very strong for us right now.

One thing that I should point out that in most of the deals where we are involved, our customers are really looking for the best-of-breed offerings from different vendors and when the focus is on the best-of-breed offerings, we generally win that business. Now there are clearly some cases where a particular customer may ask a vendor for the entire solution and to a certain extent, some of this consolidation will favor those larger folks. But for all of our business, which is again primarily a best-of-breed basis business, those relationships are at the same level or are in fact, in some cases are getting better for us.

Robert Semple - Credit Suisse

Okay, and I guess the last one for me; you talked about the demand environment being good and no real deferrals. Just a question on sales cycles -- did you notice any lengthening at all or anything of that nature?

Patrick J. Scannell

None whatsoever. Our sales cycle continues to be nine to 12 months on our new business and on the recurring business, it can be as short as 30 days to 60 days.

Robert Semple - Credit Suisse

Okay, thanks, guys.

Operator

Our next question comes from Kathryn Huberty from Morgan Stanley. Please proceed.

Kathryn Huberty - Morgan Stanley

Good morning. A couple of questions; first, in the past you talked about signing something in the range of 10 to 12 new customers a quarter. This quarter you are clearly well above that range. What do you think drove the incremental wins in the period? And then, can you just touch on how that influences your sequential guidance for January?

Patrick J. Scannell

You know, in any one quarter the ebb and flow of our rate of acquiring new customers will vary and as we had guided last quarter, we said it could be six to 15 and in fact, it’s 18 and I think you’ll see that it’s more likely to be the pace of 10 to 20 customers a quarter.

Kathryn Huberty - Morgan Stanley

And then as it relates to leverage, a quite impressive improvement this quarter. It sounds like sales hiring will be at a higher level in January, so should we still assume that we’ll see a half a point or so of leverage in January or do we take a step back and that’s really pushed out into future quarters?

Patrick J. Scannell

I think it’s more the latter because we are accelerating the investments from the 254 people that we have on board and looking at almost 300 people by the end of the year, which is across the board but with a primary emphasis on sales and R&D. So I think you’ll see while we maintain the one to two points every six months, that you’ll see that more towards the latter part of the year.

Kathryn Huberty - Morgan Stanley

Okay, and just a last question; longer term view of the business, at the user conference in September you discussed the opportunity to move out closer to the edge and allow more users to run analytics. You also talked about the ability to run unstructured as well as structured data. When do these opportunities become real from the standpoint of product availability and real customer adoption?

James P. Baum

I think that during the course of FY09, we have a series of product deliverables that will come out that involve both some new product opportunities as well as some extensions to our existing product.

When we talk about moving analytics to the edge and moving analytical applications into the appliance, we are starting to see those things happening as near-term as right now in a few cases. I would say it’s not significant yet in terms of our sales but we do see some early indications of real interest in this area and as I said, product deliverables will become available during the course of next year that will extend our capabilities on all those fronts.

Kathryn Huberty - Morgan Stanley

Great, thanks. Congrats on the quarter.

Operator

Our next question comes from Glenn Hanus from Needham. Please proceed.

Glenn Hanus - Needham & Company

Good morning. Could you talk maybe a little bit about some trends in some of the newer vertical markets -- government, healthcare, pharma, manufacturing -- some of the initiatives you have there and whether that accounted for some of the strength in the quarter?

Jitendra Saxena

I think as you can see from our results, our businesses are fairly well spread out and we did get some orders from some of these newer sectors like travel and entertainment that Jim and Pat alluded to. And we continue to see those kinds of situations in most of our markets.

I think one thing we should keep in mind though that the four or five dominant sectors for us will continue to be telecommunications, e-business, retail, financial services, and our federal market. And the business will be fairly well spread out across these things and from time to time, we’ll see new opportunities in the travel and entertainment, from some of the healthcare opportunities and so on.

It will be a while before they become a double-digit share of our vertical market segmentation.

Glenn Hanus - Needham & Company

Anything particular sort of surprise you on the upside this quarter? I guess you had one or two 10% customers and you beat my model on product by about $3 million or so. Was it one or two orders that came a little bigger than you thought or was it much broader based than that?

Jitendra Saxena

I think it was fairly broad-based and we should continue to see that as we move into the future.

Glenn Hanus - Needham & Company

And on the gross margin side, your product gross margin was maybe just a hair under what I was looking for and services was very strong. Could you comment on that?

Patrick J. Scannell

Well, services will continue to be strong as we continue to get, as I said, 100% attach rate on all our customers. And gross margins, when you blend in all of the costs of manufacturing, the 60% level is the level that we’ve guided to and we feel good about that.

Glenn Hanus - Needham & Company

Indirect sales, maybe I missed it, what percent was that in the quarter? And maybe just sort of give us some color on how you are building out your indirect sales initiatives.

Patrick J. Scannell

Indirect was 15% of the quarter, 15-85 direct versus a year ago when it was 75-25. And the initiatives that we have in indirect are showing themselves more internationally. For example, in Japan where we have tremendous relationships with NEC and Unisys and [C-ETO] and we’re also establishing indirect footprints in some of the other Western European countries where we don’t have a direct presence. So we have that avenue in addition to the analytical service provider partners that we have being Epsilon and Axion. I don’t know if you can add anything to that, Jim.

James P. Baum

No, I think that pretty much covers it. As we look at that, those are areas where we continue to focus on finding those indirect distribution relationships. Certainly in North America, the analytical service provider relationships are strong and represent ongoing opportunity and the more classical kind of indirect reseller relationships as Pat said, tend to be primarily internationally focused today.

Glenn Hanus - Needham & Company

Thank you.

Operator

Our next question comes from Kevin Hunt from Thomas Weisel Partners. Please proceed.

Kevin Hunt - Thomas Weisel Partners

Thank you. I have a couple of questions. It sounded like your average deal size was slightly down in the quarter. Was that just sort of a random fluctuation?

Patrick J. Scannell

I think the random fluctuation was last quarter where it was -- where that was anomalous, where it was $2.3 million with the three large customers that we secured last quarter. So the 1.1 to 1.5 is really the -- where we’ve been since inception and where we expect to be as time goes on.

Kevin Hunt - Thomas Weisel Partners

Okay then, following up on some earlier questions about the sales cycle and maybe the pipeline too, inventory was fairly flattish yet you have pretty good numbers. Would that imply maybe that you are going to see sales cycles start to come in a little bit, and having to the point where you have less demo units required?

Patrick J. Scannell

Well, there are a couple of different variables in that question. One, inventory is coming down because we believe we are managing that much more effectively based on our visibility and based on our ability to predict demand and give demand to Sanmina, our contract manufacturer and partner.

Sales cycles are what they are. They are nine to 12 months and to the extent that we have repeat business coming from the recurring revenue from the installed base, that just gives us excellent visibility and predictability, such that we can load the plant much more effectively. So I think you will see inventory being managed tighter. We’re at 3.2 times turn. It may go to 4, it may go to 4.5 but I think our objective is to make sure that we are managing that as tightly as we can so that we are not sitting there with inventory where we have to take a hit for lower of cost or market type accounting.

Kevin Hunt - Thomas Weisel Partners

And one last one on the pipeline, you did imply that it’s definitely improving and you also mentioned some of the verticals obviously, but is there any commentary you can give on within that improving pipeline, if it is specific verticals? Last quarter you had mentioned a government deal. Is that something that’s improving or is it --

Patrick J. Scannell

Let me comment first and I’ll turn it over to my colleagues. The pipeline is as good as it’s ever been and that’s across -- that’s a broad-based statement across many different verticals. Jim.

James P. Baum

I don’t think that we would say that any particular vertical stands out. I think interestingly, when you look at some of the concerns around the financial services vertical, that’s an area where we just have not seen any slowing down in terms of our visibility in our pipeline. So we feel good across all verticals.

I think we would also say that we continue to see the trends in business analytics driving interest across verticals. And again, it’s primarily focused on the key verticals that Jit mentioned earlier.

Jitendra Saxena

I think you should keep in mind that at this size of the company and for the foreseeable future, our pipeline issues are really focused on our value proposition and our distribution channel expansion, and I think those are the elements that really determine how good the pipeline is versus any macro-economic factors at this point.

So we continue to make our value proposition stronger and we continue to make the distribution channel wider and I think that really drives our pipeline.

Kevin Hunt - Thomas Weisel Partners

Thanks, guys.

Operator

Our next question comes from Nabil Elsheshai from Pacific Crest Securities. Please proceed.

Nabil Elsheshai - Pacific Crest

A couple of questions; one, on the type of projects you guys are seeing, could you give me a little bit of detail on greenfield versus displacement and then if you see budgets getting squeezed a little bit going forward, would you see that changing? Or have you seen that changing at all?

Patrick J. Scannell

From a market standpoint, greenfield opportunities we see, and it’s pretty typical that that would represent 5% to 10% of our business, and that 90% is that we are actually displacing.

James P. Baum

Or complementing.

Patrick J. Scannell

Or complementing.

Nabil Elsheshai - Pacific Crest

Okay, and then from a competitor perspective, I think you’ve talked about Oracle being about 50% of the cases historically. Has that been the case in this quarter?

James P. Baum

Yeah, that continues to be the case.

Nabil Elsheshai - Pacific Crest

Okay, great. And then last question, I just missed the tax rate that you had said for --

Patrick J. Scannell

For Q4?

Nabil Elsheshai - Pacific Crest

For next quarter, yeah.

Patrick J. Scannell

For Q4?

Nabil Elsheshai - Pacific Crest

Yes.

Patrick J. Scannell

Let’s see, on a GAAP basis -- 10% on a non-GAAP basis and 20% on a GAAP basis.

Nabil Elsheshai - Pacific Crest

Great. Thanks.

Operator

Our next question comes from Jeff Embersits from Shareholder Management. Please proceed.

Jeff Embersits - Shareholder Value Management

Good morning. On your channel strategy, could you talk more in detail about how that’s going to link with I guess the 100% services or follow-on? And given the flexibility of the product, it seems like you’ve got an awful lot of different channel opportunities. How are you going to weigh those in terms of margins and trade-offs on the services, follow-on sales, et cetera?

Patrick J. Scannell

Well, the service paradigm when you have a channel partner, you have to look to the channel partner as the first line of defense. So the economics in terms of how much do they get and how much do we get, that all gets sorted out on a case-by-case basis. So we’ll work that as that expands.

But it’s most important, our most important asset is the 127 customers that we have and making sure that we’ve got, that we don’t delegate or abdicate that responsibility to someone that can’t do the job. So first and foremost, we make sure that the first line of defense is there with the in-country service partner and then we’ll be there to back them up.

The economics of all that, we have to sort out. The margin haircut that perhaps we would take with a distribution partner, that’s -- we have to look at that trade-off versus us trying to go in-country directly ourselves, so each of those are one-off discussions.

James P. Baum

And I think as we look at it vertically, a number of our partners tend to be partners who provide influence and provide additional application and professional service capabilities that are vertically oriented, so from our perspective while they may not represent a classical reseller channel, they are a strong influencer for us and they drive product revenue through our direct sales channel and then they add their own value on top through the availability of their application and their domain specific professional services capability.

Jeff Embersits - Shareholder Value Management

Okay, and would you characterize most of the installation as being sort of data mark oriented as opposed to [an enterprise data marks]?

James P. Baum

It’s clearly a combination of the two. I think that this distinction of kind of a data mark versus an enterprise data warehouse is often one that the market defines in terms of database size and number of users and types of applications that are run against the data warehouse. And our customers range from smaller, what you would call data mark implementations to very large, multi hundreds of terabytes kind of enterprise data warehouses that support the entire user population in the corporation.

Jeff Embersits - Shareholder Value Management

Okay, and then one last question on the scale and ability to not have to tune your products the way a Teradata or some of the competitors do; could you just -- a little more detail sort of understand how that --

James P. Baum

Absolutely. One of the characteristics of our technology and our architecture is that as a result of the level of performance that we’ve been able to obtain through our appliance architecture, it in fact tends to eliminate many of the needs to create some of the traditional constructs that the other database guys create -- things like indices and things like very specific approaches to partitioning data. And those requirements are eliminated in our architecture and the result of that, of course, is that you don’t have to deploy the system and then tune it to a very specific and known use case, if you will. And as a result of that, you get a very flexible environment that can support changing data, changing applications, changing use cases very effectively.

Jitendra Saxena

In fact, it is that time to value part of our product equation that is the most appealing to many, many of our customers because they are dealing in many of these cases with mission critical type of analytics and for them, the effort that is required to deploy a Netezza based solution is significantly shorter than anything that is out there in the marketplace today.

Jeff Embersits - Shareholder Value Management

Well, I know it’s hard to generalize, but what would be that time difference, roughly?

Jitendra Saxena

It could clearly be -- for example, let’s say one month in our case versus 10 to 12 months in some of the competitor situations.

Jeff Embersits - Shareholder Value Management

Okay, great. Thank you. I look forward to following up.

Operator

(Operator Instructions) Our next question comes from Chris Tuttle from Research 2.0. Please proceed.

Chris Tuttle - Research 2.0

Thank you very much. Two questions, one of them is can you give a little bit of an update in terms of what the path to productivity is for the new sales people you are bringing in? And I would also be curious to know where you are finding those people, what types of organizations are you generally extracting them from?

James P. Baum

The path to productivity remains pretty consistent. We in our own thinking tend to look at new sales people as being fully productive after 12 months in a territory or in a market and we tend to see a little bit of upside on that depending on the particular geography or market where a new salesperson goes. But we tend to think in terms of a 12-month ramp to full productivity.

As far as where we find them, a lot of our sales force has come from the business intelligence space and really continues to, so we’ve done a lot of hiring of people from BI providers. In some cases, from companies that are ETL organizations and in some cases from other database companies, but I’d say primarily in the BI and ETL world is where they tend to come from.

Chris Tuttle - Research 2.0

Okay, and it seems that you are very much on an organic growth strategy for the next year or two at last. Is there any element of your plans that would lead us to expect any kind of M&A activity with you filling in some areas, or is that just not really on the plate for the next little while?

Jitendra Saxena

Chris, the whole business analytics market is still in a fairly early stage and we believe that there’s a lot of interesting work that is being done by some smaller companies that are adding a lot of vertically oriented analytics to this problem. And we believe there may be some opportunities there down the road for us to look at some of those situations.

Nothing in the M&A area right now is imminent but we keep on watching a lot of this new activity that is coming, that is becoming more mainstream as we continue to move forward.

Patrick J. Scannell

The one word I’d use is we are very opportunistic in looking at those and evaluating and assessing those.

Chris Tuttle - Research 2.0

Right, understood. Understood. Thank you.

Operator

We have a follow-up question from Jeff Embersits with Shareholder Management. Please proceed.

Jeff Embersits - Shareholder Value Management

I was just curious following up on the M&A, since you guys just recently went public and I have no idea whether or not you can answer it, but I was just curious if there have been bidders to acquire you guys as opposed to going public.

Jitendra Saxena

Nothing that we are aware of at this point.

Jeff Embersits - Shareholder Value Management

Okay. I was just curious. Thanks.

Jitendra Saxena

If there are no more questions, I would just like to close by saying that we are seeing excellent momentum for our offerings in the marketplace. Our visibility continues to get better and we are investing aggressively and focused on executing as our business continues to move forward. Thanks for your support and talk to you in a few days.

Patrick J. Scannell

Yes, and by the way, I’m speaking at the Credit Suisse conference tomorrow in Scottsdale, Arizona. Thanks for your participation.

James P. Baum

Thanks, everyone.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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Source: Netezza F3Q08 (Qtr End 10/31/07) Earnings Call Transcript
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