SonicWALL Inc. 4Q 2007 Earnings Call Transcript

Feb. 6.08 | About: Sonic WALL (SNWL)

SonicWALL Inc. (SNWL) 4Q 2007 Earnings Call February 6, 2008 4:30 PM ET

Executives

Matt Medeiros - President & CEO

Rob Selvi - Chief Financial Officer

Analysts

Sterling Auty - J.P. Morgan

Craig Nankervis - First Analysis

Matt Hedberg - RBC Capital Management

Vik Churamani - Lehman Brothers

Operator

Good afternoon and welcome to the SonicWALL's fourth quarter and fiscal year 2007 Earnings Call. Presenting today are Matt Medeiros, Chief Executive Officer of SonicWALL; and Rob Selvi, Chief Financial Officer. At the end of this call the management team will be hosting a question-and-answer session. At that time, I will give instructions on how to join the queue to ask a question.

I will now turn the call over to Kelly Blough, Investor Relations for SonicWALL. Please go ahead, madam.

Kelly Blough - Investor Relations

Thank you, operator. Welcome to our fourth quarter and full year 2007 earnings conference call. With us today are Matt Medeiros, President and CEO of SonicWALL; and Rob Selvi, Chief Financial Officer.

Before we begin, I would like to remind everyone that during this call, we will be making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include, without limitation, revenue guidance for the first quarter of 2008, our expected GAAP and non-GAAP earnings for the first quarter of 2008, expected non-GAAP gross margin for the first quarter of 2008, the benefits of our integrated solution strategy, the implementation of our solutions strategy across all product lines, the benefits associated with the growth of our deferred revenue, the expansion of our global channel organization in developing markets, market acceptance of our TZ 180 solutions, growth prospects for our backup and recovery business, market acceptance of our comprehensive e-mail solution and New Network Security solutions and growth opportunities provided by our integrated solution offerings.

All forward-looking statements made on this call are subject to risks, uncertainties and assumptions that could cause actual results or events to differ materially from those contained in the forward-looking statements. For a detailed description of the risks and uncertainties that could cause actual results to differ from those expressed or implied in the forward-looking statements, as well as the risks related to our business in general, we refer you to the periodic reports of the company has filed from time to time with the SEC, including discussion in the risk factor section of the Company's annual report on Form 10-K for the year ended December 31st, 2006 and on the Form 10-Q for the subsequent period. The company undertakes no obligation to update forward-looking statements at anytime or for any reason.

In addition, the following information includes non-GAAP results, which exclude amortization of purchase technology and the cost of goods sold, amortization of intangible assets and operating expenses, restructuring charges, stock-based compensation expense and the tax effect of adjustments and press release of the deferred tax asset valuation allowance. Please see our website and Form 8-K filed with the SEC earlier today for reconciliation of non-GAAP and GAAP results.

Finally, I want to take a brief moment to remind listeners that SonicWALL will be a holding its 2008 Analyst Day Meeting on Wednesday February 27, at the Venetian Hotel in Las Vegas. To register, please visit our Investor Relations website at www.sonicwall.com/us/company/9014.html. We hope you will plan to attend.

Now let me hand it over to Matt.

Matt Medeiros

Kelly, thank you very much. Good afternoon and thank you for joining us. Earlier today we announced fourth quarter revenue of $56 million. Pro forma earnings per share were $0.06, and GAAP earnings per share were $0.35, reflecting the impact of a one time tax change that Rob will address in a moment.

For fiscal year 2007, we achieve record revenue of $199.2 million, representing 14% growth year-over-year and deferred revenue of over $101 million, representing a 49% year-over-year increase. Non-GAAP earnings per share for 2007 were $0.28 compared to $0.21 in 2006. GAAP earning per share for the fiscal year of ’07 were $0.43 compared to a loss of $0.17 in 2006. We achieved all of this in a challenging economic environment.

I'll start with comments about the fourth quarter and the full year before handing it over Rob, who will review the financial details. We'll wrap it up with what’s ahead in 2008 for SonicWALL and then take your questions.

We had a strong finish with a solid 2007, the fourth quarter was characterized by impressive performance across multiple metrics. Overall revenue grew 10% sequentially and 20% year-over-year. Product revenue grew 8% sequentially and 10% year-over-year with unit shipments rebounding strongly in the quarter to reach 53,000 units up 13% sequentially.

License and services were strong in the quarter, representing over 51% of total revenue and growing 32% year-over-year. Continued strong performance of our subscription services business contributed again to phenomenal deferred revenue in the quarter. This is the best indicator that our customers continue to embrace our security as a service strategy. Deferred revenue increased $9.8 million in the quarter and, as I mentioned earlier, is up 49% year-over-year reaching an all time high of over a $101 million.

We are very pleased with the upwards trajectory, as growth in deferred revenues improves our downstream visibility, provides us a recovering revenue stream for future periods and most importantly, establishes the continued relationship with our customers.

Our subscription service model and high revenue deferral also continued to deliver impressive cash flows. The business generated $17.2 million in cash flow from operation in the fourth quarter, bringing our total operating cash flow in 2007 to just over $60 million, nearly double what the business generated in fiscal year 2006.

Now, I'd like to discuss our product performance. We saw a good demand across all product lines. We were particularly pleased with the initial acceptance of the E-Class Network Security Appliance, which began shipping in the fourth quarter.

This Generation 5 platform is the industry's first family of multi-core Unified Threat Management appliances, delivering enterprise-class Deep Packet Inspection with no compromise to networks throughput. With list prices between $10,000 and $25,000, the NSA E-Class product fundamentally shifts the price performance curve for mid-tier and enterprise segment in favor of SonicWALL.

In the quarter, we are proud to hear that the TZ 180 was named the top Security Product of the Year by CRN, affirming our continued commitment to providing our channel partners with leading edge and affordable security for their small business customers around the world. TZ 180 unit shipments gained solid ground in the fourth quarter and we expect continued good performance from the TZ product family in 2008. We remain pleased with our high-end SSL VPN business. In the fourth quarter our E-Class SSL VPN product line contributed $4.6 million to our top line.

Now, let me provide you with some colors, specific by region. Our international business performed very well in the fourth quarter. Revenue from our upside North American region represented over one-third of our overall revenue and grew 21% over the fourth quarter in 2006.

Leading the geographical performance was Asia Pacific region, which grew 25% year-over-year followed closely by an EMEA region, which grew 24% year-over-year. EMEA achieved new heights in the fourth quarter tapping a phenomenal year of growth in the region. The investments we've made over the last 24 months in our European channel partners and sales team are continuing to payoff and validate our strategy of diversifying our revenue streams internationally. We were particularly pleased with the quick success of the NSA E-Class product line in EMEA, demonstrating strong customer demand and channel readiness for this product family.

The NSA E-Class appliances were brought during the quarter in Germany by [Wolf] and Switzerland by the University of Zurich, in Scotland by National Health Services, in Belgium by (inaudible), in Spain by [La Sedia] and then the Nordic regions by [SC Motors]. And we are also pleased to mention that Four Seasonal Hotels has standardized on CDP for data protection across all the properties in the Middle East.

Throughout 2007, the Asia-Pacific region was focused on recruiting and developing of vibrant and dedicated channel that will consistently bring new opportunities for SonicWALL. In the fourth quarter, these efforts resulted in particularly strength in the government, education and retail sectors.

Counted among SonicWALL's fourth quarter customers, our Ministry of Foreign Affairs, a Ministry of Education and HealthLink and Electronic Communications Network used across Australia, New Zealand to exchange electronic patient information.

In Singapore, we closed an important deal with [Qualla] an internet service and managed security service provider. Qualla has vertically integrated our solution into their corporate networks. And it is now incorporating SonicWALL products into their managed security services offering.

In the fourth quarter, SonicWALL enters into a relationship with [Singwa] one of the largest government systems integrators in the Chinese market. This relationship now offers SonicWALL the opportunity to participate in government businesses in China.

We believe that our decision to invest in Shanghai development center is critical to our commercial success in China. In 2007, we made similar strategic decisions to invest in the Indian market and we already begun to see the results of those small business and enterprise sales. In the fourth, SonicWALL won contracts in India with Videocon and Jet Airways among many others.

In Latin America, strong economic growth contributed to good demand for SonicWALL, particularly in the retail and government sectors. A large government agency in Brazil and the Central Bank of Colombia were two significant deals closed in the quarter. We also signed new distributor’s agreements in Chile, Argentine, Peru and Colombia, demonstrating the partners in Latin America are enthusiastic about selling SonicWALL. We remain committed to achieving strong results for the Central and Latin American region in 2008.

In the fourth quarter, North American revenue grew 19% year-over-year. This represents impressive growth despite signs of the small business market is suffering due to economic uncertainty. We believe that the economic uncertainty in the US validates our strategy of diversifying our revenue internationally and diversifying our product line into mid-tier enterprise class segment.

Our fourth quarter results were boosted by some impressive mid-tier enterprise customer wins, including a large contract with the North American semiconductor manufacturer for E-Class solutions.

The E-Class products also performed particularly well in government and education vertical in the fourth quarter. In the quarter we submitted for FIPS Common Criteria EAL4 with our NSA product line and expect the certification to aid in further sales to worldwide government.

Overall, it was a strong end to a very good year for SonicWALL. In 2007, we continued on the path of revenue diversification with the release of 12 major new products, both organic and from acquisitions. We also significantly expanded our security of the service offerings, giving our customers dynamic protection against the latest threats and easily managed and seamless solutions.

We also diversified our revenue and expanded our opportunities to a broader international presence, opening new offices in India, Shanghai, Taiwan, Moscow, Seattle and Arizona. We accomplished all of these while strengthening our financial position.

Financially, the company has never been stronger then it is today. Our security as a service business model has led to strong deferred revenue growth. We experienced record cash flows from operations, giving us the flexibility to fund further investments in the company and their ongoing share buyback program. And we did all of these while maintaining strong top line performance.

Now, let me hand it over to Rob to review our financial results.

Rob Selvi

Thanks Matt. Good afternoon everyone. First, I'll go through the fourth quarter results, and then I'll turn to the results for the full year 2007 and then provide some guidance for the first quarter of 2008.

SonicWALL generated $56 million in revenue for the fourth quarter inline with our updated guidance of $55 to $56 million. Our product revenue mix was approximately 33% from the TZ product line, 34% from the PRO and NSA product line and 33% from other products. Total unit shipped in the quarter were 53,000, contributing to our life time to-date revenue unit shipment of approximately $1.2 million.

Product revenue of $27 million increased 8% sequentially and 10% over the same of last year. The sequential and year-over-year increases in product revenue were attributable primarily to the revenue contributed from NSA security products and the other products category, which includes e-mail security, continues data protection products and SSL VPN products.

License services revenue were $29 million increased 12% sequentially and 32% over the same period of last year. The sequential increase in license and services revenue was the result of increased sales of comprehensive gateway security Client Anti-Virus, technical support and e-mail security subscription services. The year-over-year increase in license and services revenue was primarily the result of increased sales, comprehensive gateway security, technical support and e-mail security subscription services. Multi year subscription accounted for approximately 24% of the subscription service billings in the fourth quarter.

Product and services drive from the Aventail acquisition contributed $4.6 million in revenue in the quarter. As a reminder, this is the last quarter that we'll be providing separately new performance metrics for Aventail.

On a percentage basis, North America represented 67% and international represented 33% of total revenue. Europe, the Middle East and Africa contributed 21%, Asia Pacific and Japan contributed 10% and the remainder was contributed from other regions of the world.

Non-GAAP gross margin was 70.6%, the contraction in gross margin in comparison to the prior quarter was primarily related to promotional activities around the introduction of new products, as well as incentives and response to a highly competitive environment for our low-end appliances.

Non-GAAP operating expenses were $36 million in the fourth quarter compared to $34 million in the prior quarter and $26 million in the same period of last year. The sequential growth in operating expenses was primarily attributable to increased commission and employee related costs in sales. In terms of non GAAP results, total operating expenses represented approximately 65% of revenue for the quarter. Operating expenses for research and development represented 16.8% revenue.

Sales and marketing expenses represented 39.4% revenue and general administrative expenses represented 8.5% of revenue. At the end of the fourth quarter, total regular employee headcount was 674 compared to 631 at the end of the third quarter. The headcount increase is reflective of two important company investment priorities, expansion of our international development and support organizations and the staffing our sales and support operations centers in Tempe, Arizona. While both of these efforts should drive cost efficiencies in future periods, we did experience increase cost related to those activities in the fourth quarter.

Our fourth quarter GAAP earnings reflect the one time positive GAAP tax benefits of $ 24 million related to the partial release of the valuation allowance against net deferred tax assets. The valuation allowance was released in Q4 based on our assessment that is now more likely than not, but the future tax benefits related to the underlying net deferred tax assets will be realized as the reduction of future taxes payable.

GAAP income for the fourth quarter was $23 million or $0.35 per diluted share. Stock based compensation expense before tax, primarily associated with the expensing of the stock options was approximately $3.2 million for the fourth quarter of 2007. For the quarter, non GAAP tax expense was $2.3 million against non-GAAP income before taxes of $6.2 million. Non-GAAP net earnings for the fourth quarter were $3.9 million or $0.06 per diluted share. Non-GAAP net earnings for the fourth quarter exclude a $1 million of amortization of purchase intangible assets, $3.2 million of stock-based compensation expense and $23.3 million for the tax effect for the adjustments during the release of valuation allowance.

And now, I'll review balance sheet and cash flow statement. As Matt mentioned, we had another very strong cash flow quarter generating $17.2 million in cash from operations. Total cash, cash equivalents and short-term investments was $229 million.

During the quarter, we used $20.4 million to repurchase 2.1 million shares of our common stock. As of the end of the fourth quarter, we repurchased a total of approximately 16.1 million shares at an average price per share of $7.46; approximately $79.5 million remains against the total repurchase authorization of $200 million.

Net accounts receivable were $26.3 million in the fourth quarter compared to $22.5 million in the prior quarter and $23.2 million in the same period last year. DSO was 42 days compared to 40 days in the prior quarter.

Net inventories were $6 million in the fourth quarter, compared to $5.1 million in the previous quarter and $5.2 million in the same period last year. Net inventories consist of inventory at two of our top US distributors, and finished goods that are third-party manufacturers. Total annualized inventory turns on a non-GAAP basis were 11 times consistent with our performance in the third quarter.

Deferred revenue had a $101.1 million, increased 11% sequentially and 49% in comparison to the same period last year. 83% of the balance total deferred revenue was attributable to subscription services for comparison purposes subscription purposes, subscription services deferred revenue represented 82% and 85% of the total deferred revenue balance in the fourth quarter of 2006 and the third quarter of 2007 respectively.

Now we go with the financial results for fiscal year 2007. Total revenue for 2007 was $199.2 million compared to $175.5 million in 2006, representing an increase of 13.5%. Product revenue for fiscal year 2007 was $99 million compared to $93 million in fiscal year 2006. And license and services revenue for fiscal year 2007 was $100 million compared to $83 million in fiscal year 2006.

GAAP net earnings for fiscal year 2007 were $28.6 million or $0.43 per diluted share, positively affected by the onetime tax benefit in the fourth quarter that I previously explained. This compares to a GAAP net loss of $10.8 million or $0.17 per diluted share in fiscal year 2006.

GAAP net income for fiscal year 2007 includes $2.9 million of amortization of purchased intangible assets, $40 million in share based compensation expense, $1.9 million of in-process research and development, and $28.7 million for the tax effect of the adjustments during the release of the valuation allowance.

For comparison purposes, the GAAP loss in fiscal year 2006 included $8.1 million of amortization of purchased intangible assets, $14.4 million in share based compensation expense, $1.4 million in restructuring charges and $1.6 million of in-process research and development.

Non-GAAP net earnings for fiscal year 2007 were $18.8 million or $0.29 per diluted share, compared to $14.5 million or $0.21 per diluted share in fiscal year 2006. Cash flow from operating activities totaled $63.7 million in fiscal year 2007 representing 90% growth over the $33.6 million in cash flow generated from operations in fiscal year 2006.

I’ll now complete my comments with guidance for the first quarter of 2008.

For the first quarter, we expect revenue in the range of $54 to $56 million, we expect earnings to be in a range of $0.2 to $0.4 per diluted share on a non-GAAP basis, reflecting continued investment in the business and checking areas such as sales, sport, and marketing with emphasis on our international businesses.

On a GAAP basis, inclusive of a total of approximately $4.4 million, pre-taxes, and combined amortization of purchased intangibles assets, and stock-based compensation expense, we expect loss per diluted share in the range of $0.2 to $0.4. This is the only statement SonicWALL will be giving during the quarter with respect to guidance, unless a decision is made to provide an update.

And I will turn the call back over to Matt.

Matthew Medeiros

Rob thank you. SonicWALL had a strong 2007, characterized by success in our small business market and a very promising entry into the mid-tier enterprise base for SonicWALL. We remain the market leader in SMB and we are well positioned to extend that leadership and be legitimate alternative in the mid-tier enterprise, to the status called expensive and complex solutions.

The situation on the economy is not damping our enthusiasm. In fact, we think it gives us a great advantage. Using SonicWALL, solutions customers will experience lower cost of acquisition, lower cost to deployment and lower cost of management of security. So what others are talking about tightening, we believe that it’s the perfect time for SonicWALL to invest in the future growth of our business. We will continue to invest aggressively in new product development. In 2008, we will extend the Gen 5 technology, our multi-core technology into our SMB offering.

SonicWALL will continue to offer its customers the most state-of-the-art security solutions. We will continue to expand internationally. We have laid a solid foundation for international growth and with additional investments in sales and marketing overseas; we believe we can achieve dramatic results.

And finally, we will continue to build our security as a service business model. In 2008, we'll extend and expand our subscription services, providing dynamic, flexible and low-cost security solutions for customers of all sizes around the world. This agenda of investing in our future will contribute to a financially stronger and more competitive SonicWALL in the 2008 and beyond.

I want to thank our employees they worked extremely hard to get this Generation 5 platform introduced into the marketplace in 2007. I want to thank our partners for taking their time and effort to be trained and to start leading this new challenge for SonicWALL with our end customers.

We all look forward to great opportunities in Q1 and throughout 2008. Operator, we can open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we have our first question from Sterling Auty from J.P. Morgan.

Matt Medeiros

Hey, Sterling.

Sterling Auty - J.P. Morgan

Hey guys. So if I look at the guidance for March, the high-end of your revenue range is basically sequentially give or take, but you got $0.02 lower EPS at the high-end, which looks like you are investing more heavily. Well, how much is the incremental investment going to come from headcount versus other discretionary spend and how much of that hiring has already been done?

Matt Medeiros

Most of the headcount related, by the way, I would say there are two primary drivers and the increase in operating expenses quarter-over-quarter. The first are sort of unfortunately normal Q1 type expenses like [SpikeGuard] and the 41-K match program that is neck in neck in terms of its impact on operating expenses along with headcount and the weighted expense in the quarter.

So those are two primary drivers. We did have a worldwide sales meeting that occurred now two weeks ago that also was responsible for part of the incremental amount of operating expenses in our forecast. We are expecting an increase in cooperative market programs, as well in our channel programs and that's pretty much the lion share of it.

Sterling Auty - J.P. Morgan

Okay. And while, you are not giving kind of full year guidance, should we expect the EPS to bottom or the margins to bottom here in the first quarter and then ramp throughout the year?

Matt Medeiros

We expect to be more efficient as the year progresses, yes.

Sterling Auty - J.P. Morgan

Okay. Next question is on the mix the TZ being one third, can you remind us what percentage of the product revenue TZ was last quarter and kind of how much of that deferred revenue growth had $9 million, or so came from TZ with the bundle?

Matt Medeiros

Okay. In Q3, TZ represented about 37.5% of total product revenue versus a third or 33.3% in the current quarter. The unit volume on TZ's quarter-on-quarter increase sequentially, pretty substantially actually and revenues in fact did not increase, they went down slightly and we're very aggressive with the TZ product in the quarter to reestablish momentum with unit volume and we were successful in doing that.

Rob Selvi

I would like to add that across all of our products we have pretty good attach rate. So it wasn't as if the bundling of just the TZ 180 was what supported all of the growth in our subscription services business. We had excellent performance across all product lines Our E Class; our new products that we introduced at the end of phase obviously carry a very large level of revenue from subscription services.

Sterling Auty - J.P. Morgan

Okay. And then last question; Rob alluded to it. You made that comment of increasing competitive pressure at the low end and can you describe for us who is that primarily coming from and what were the programs that you really ran to counteract this?

Rob Selvi

I think you have to look at this, is it competitive pressure from the stand point of macro market or is it competitive pressure from competition, people that we compete with daily? And again I think it is small businesses that are absolutely looking for lower cost solutions and that’s what we had to provide to keep our products moving. This was not limited to just the TZ family, as Rob pointed out it was towards our low end. So we also took aggressive moves in our e-mail security solution. So it wasn't just limited to our unified threat management solution. We did see good competition from Cisco, Juniper, Portnet; those are the primary people that we see competition with every quarter and the good news is that I think we built a bit of an anecdote here and as much as that we are moving into that mid-tier enterprise class market and we are capable of selling solutions there.

Sterling Auty - J.P. Morgan

All right. Thank you.

Matt Medeiros

Thanks, Sterling

Rob Selvi

Thanks, Sterling.

Operator

(Operator Instructions) And we have another question from Sterling Auty from J.P. Morgan.

Sterling Auty - J.P. Morgan

We're just going to have a conversation guys.

Matt Medeiros

Sure. We were thinking that’s good for us.

Sterling Auty - J.P. Morgan

Well, I tried to get in the question queue well before the question and answer and I thought I registered it, so may be it's a technical difficulty.

Matt Medeiros

I hope not. (inaudible)

Sterling Auty - J.P. Morgan

I know it. All right. So let me ask you a couple more and I’ll hang up and hopefully the queue will be filled up. What were the renewal rates on the subscriptions in the quarter? Can you give us an idea of what's been trending?

Matt Medeiros

Well, as you know we don't provide that as metric, an operating metric in our business today and so I can't give you any real specifics on that unfortunately.

Sterling Auty - J.P. Morgan

Or can you at least talk about if there has been relatively the same as what you have experienced over the last couples of quarters, have they gone better or have they gone worst. Just especially in light of the macro economy?

Matt Medeiros

I guess I can tell you that and as you know, based on the many conversations we've had on the subsequent past, it's an area of intense focus in our business. And I can tell you that we are seeing some improvement in that area. It varies by the region of the world, I would say that we are most adapt and mature in the North American market and we are making improvements there and Asia Pacific, it kind of varies by sub-region.

Sterling Auty - J.P. Morgan

Okay. And then one metric you have been giving last couple of quarters is the percentage of multiyear?

Rob Selvi

Yeah, I gave it. Actually it was 24% up from 21% in the prior quarter. So those programs continue to be quite popular with customers.

Matt Medeiros

In fact, Sterling, if I can add to that in our NSA E-Class products, our multiyear was a pretty easy sell.

Sterling Auty - J.P. Morgan

Okay. And as we look through 2008, how should we be thinking about the cash flow and the deferred revenue, it had two really strong quarters in a row. How should we be thinking about the sustainability of that or what is the normalized level or normalized growth from here?

Rob Selvi

Well, let me tell you, we had a great cash flow year. So, we don't guide those metrics as you know, but I think qualitatively, we have absolute grow expectations for both operating cash flow and deferred revenue in 2007 or 2008. And, actually, operating cash flow is closely related to the growth and deferred revenue as you know. So, with success in one you get the opportunity for success in the other and we are pretty bullish on that continued progression of our model.

Matt Medeiros

You know Sterling, with our new E-Class products, we introduced our applications firewall, that's a great example of what we are continuing to add to this; features that can be purchase from us in either a subscription form or license. We also introduced in Q4 a product called Virtual Assist, which by utilizing our SSL VPN technology, specifically the high end, that particular service now led the systems administrator to go out to every remote site and actually tap in and take control over the PC for further diagnostics or management of the network from a security standpoint. So, as we promised we just continue to develop new products, both hardware platforms, as well as new software blade. And then finally, if you just look at the level of memory, the level of micro processing that’s in the new E-Class products, we have tremendous amount of bandwidth in those products to continue to develop, high performing software solutions that we can resell.

Kelly Blough

Sterling, we have another couple people lined for questions so, we should probably move on.

Sterling Auty - J.P. Morgan

Absolutely, more than happy to cut aside.

Matt Medeiros

We will talk to you later, Sterling.

Sterling Auty - J.P. Morgan

All right. Thanks.

Operator

Our next question comes from the line of Vik Churamani

from Lehman Brothers.

Matt Medeiros

Hi Vik.

Rob Selvi

Viktor.

Kelly Blough

Okay. We thought we had other people lined up.

Rob Selvi

Let’s go into the next one operator.

Kelly Blough

How about the next?

Operator

Our next question comes from the line of Craig Nankervis of First Analysis

Craig Nankervis - First Analysis

Hi guys, nice job.

Matt Medeiros

Thanks Craig.

Craig Nankervis - First Analysis

Sounds like the guidance for Q1 does not contemplate the continued comparative pressure that you referred to in Q4 in snap board. Are you seeing a change in Q1 relative to Q4, can you comment on that?

Matt Medeiros

Craig, I think we have considered that in our guidance. I do think that we don’t expect the macro economy here to change much and therefore, I think it’s about competition relative to each companies’ products and against competitors, but then there is competition for the buying dollars of the end-customer. And I think is that we are trying to stimulate and keep flowing as Rob said, we are going to play hard in that area, especially in the low-end of our product range to make sure we don’t loose our market share position.

Craig Nankervis - First Analysis

And then Rob, you might have talked about this, and I might have missed it, you had substantial CapEx spend in Q4, certainly more than we saw in other quarters this year. Can you just do that and talk about CapEx this year as you see it?

Rob Selvi

Yeah. I don't think we had an extraordinary CapEx. Well, we did it actually, now that I think about it, it was up approximately [$758,000] quarter-over-quarter, but it was definitely a step up. What you saw there was the purchase of capital equipment associated with officers in Tempe, Arizona for our support and sales operations center down there and some costs associated with Bangalore as well. So and we are not really guiding capital expenditures in 2008.

Craig Nankervis - First Analysis

And did you give NSA revenue?

Rob Selvi

We did not typically breakout NSA revenue, we included NSA from a percentage stand point in the PRO and NSA.

Craig Nankervis - First Analysis

Okay. Thanks a lot.

Rob Selvi

Thanks, Craig.

Matt Medeiros

Thanks, Craig.

Operator

Our next question comes from Matt Hedberg from RBC Capital Management.

Matt Hedberg - RBC Capital Management

Hey, guys. This is Matt for Rob Breza, how are you?

Matt Medeiros

Hi, Matt.

Matt Hedberg - RBC Capital Management

Great quarter on the top line cash flow and deferred were very, very strong. Rob, could you remind us again, now with several quarters of strong build in deferred. What sort of visibility do you have now for '08 in terms of what percentage of revenues can be rolling off the balance sheet?

Rob Selvi

Well, for '08 I'd say, let me just do a little math here. Probably, in terms of license and services revenue we have visibility on probably about 60% to 70% of it.

Matt Hedberg - RBC Capital Management

That's right. I guess on the year-over-year perspective, I assume that, is that visibility changed or was percentage pretty consistent, just to get a much higher base to sort of work as of now?

Rob Selvi

Yeah, no, it has improved. It has improved and it’s incremental as we go on right, because the portion to business that's related to license and services, products and services we are really talking about, in this case, has increased overtime.

Matt Hedberg - RBC Capital Management

And then I guess a follow-up to that; that would be nice, correct me if I am wrong, but I think you guys gave '08, at least top line or may be some margin guidance on Q4 of last year with the visibility. Was there any sort of reason why, was it just a general economic condition that you told that was prudent to sort of just get Q1 at this point?

Rob Selvi

Well, hopefully we haven't based a more currency established pattern with that going forward. We are talking about annual guidance for 2008?

Matt Medeiros

Right.

Rob Selvi

Yeah, we haven't made a decision to provide annual guidance at this stage.

Matt Hedberg - RBC Capital Management

Okay.

Rob Selvi

It's been our pattern, historically with the exception of Analyst Day last year, which occurred in February, to provide just quarterly guidance, and that's why we are providing today.

Matt Hedberg - RBC Capital Management

One last question, when you guys announced here sort of the pre-announced a couple of weeks ago. Obviously, you announced the transition from John to Marvin. At this point, how is that been received so far, has there been any turnover in the sales force out of the ordinary; how has that transition been handle so far?

Matt Medeiros

Matt, it has been excellent. Marvin is been at SonicWALL, as many people know, for seven to eight years. He knows the inner working of SonicWALL better than anybody. Our sales team, as Rob pointed out, one of the additional expenses that we always incur in Q1 is training of our sales team. We had the entire worldwide sales team here in San Francisco and I can tell you the level of enthusiasm has never been higher in the company. They are rallying behind Marvin, because they know that Marvin brings a very strong perspective of the channel. I think we're just very fortunate. If you look at Marvin's last two years in Europe, we are growing in Europe at over 45% per year. He's bringing that level of leadership and that determination for growth across the entire company. So we're very privileged to have Marvin here and I can't think of one deflection. I can think of a whole bunch of people that are now really re-enthused and prepared to make 2008 happen for us.

Matt Hedberg - RBC Capital Management

Great. Congratulations again on the quarter.

Rob Selvi

Thank you very much.

Operator

Our next question comes from the line of Vik Churamani from Lehman Brothers.

Matt Medeiros

Hey Vik.

Rob Selvi

Vick, how are you?

Vik Churamani - Lehman Brothers

Good. Sorry I don't know what happened earlier. I think I got cut off by mistake. Just a good, quick question on the NSA E-Class, when will it be broadly available, or if it is already to your entire channel, or even if to the selective channel base that your guys are going after. And also, since it is a higher price product, do you guys expect the mix shift to benefit or do you expect that to be offset by some of the promos that you guys just talked about earlier in the call on the some of the lower end products? Thank you.

Matt Medeiros

Vikram, we've established separate qualifications for people that sell the E-Class product. So, in essence it's not really available to 100% of our channel partners; you have to be certified. It’s a very technical product and it’s one that, quite frankly, allows the channel partner to create excellent gross margins for themselves. So, it isn't distributed in the same way that we have the rest of SonicWall's broadly distributed, very inclusive channel program. However, we are providing channel training for anyone who would like to become certified in the products, so it's a program that's always been very inclusive and so, the products are doing quite well.

I will tell you that the yearly customers and I am judging this not just by channel feedback, but by the end customers, and I mentioned several on the call, we feel very confident that we can be competitive in this space and we are the alternative. Every one of our customer visits confirmed that they are looking for an alternative to the status. They are tired of very expensive, very difficult products to manage and we bring that alternative.

Vik Churamani - Lehman Brothers

Thanks.

Operator

At this time, there are no further questions. And now I'd like to turn the call over to the panel for any final comment or closing remarks.

Kelly Blough

Thank you everyone for joining us today. We look forward to seeing you throughout the quarter and we hope that you'll join us for Analyst Day at the Venetian in Las Vegas on February 27. As a reminder, please register for the events prior to February 15, by visiting the following link, www.sonicwall.com/us/company/9014.html. Thank you again and good bye.

Operator

Ladies and gentlemen, thank you for participating in today's SonicWALL fourth quarter and fiscal year 2007 earnings conference call. You may disconnect at this time.

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