Netezza Corporation F1Q09 (Quarter End 4/30/2008) Earnings Call Transcript

May.29.08 | About: NETEZZA CORP. (NZ)

Netezza Corporation (NZ) F1Q09 Earnings Call May 29, 2008 8:30 AM ET

Executives

Deb Murphy – Vice President & Corporate Controller

Jitendra S. Saxena – Chairman of the Board & Chief Executive Officer

Patrick J. Scannell – Chief Financial Officer & Senior Vice President

James P. Baum – President, Chief Operating Officer & Director

Analysts

Kathryn Huberty – Morgan Stanley

Nabil Elsheshai – Pacific Crest Securities

Mark Kelleher – Canaccord Adams

Doug Reid – Thomas Weisel Partners

Patrick O’Brien – Needham & Company

Alex [Kurt] – Merriman, Curhan & Ford

Mark Walter – Blue Fin Capital

Operator

Good day ladies and gentlemen and welcome to the first quarter fiscal 2009 Netezza Corporation’s earnings conference call. My name is Katina and I will be your coordinator for today. At this time all participants are in a listen only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to our host for today, Deb Murphy, Netezza’s Vice President and Corporate Controller. Please proceed.

Deb Murphy

Good morning everyone and thank you for joining us on our earnings release conference call for our first quarter of fiscal 2009 which ended April 30, 2008. Speaking today will be Jit Saxena, Chief Executive Officer, Pat Scannell, our Senior Vice President and Chief Financial Officer and Jim Baum, our President and Chief Operating Officer.

On this conference call we’ll be referencing both GAAP and non-GAAP financial measures. We provided both GAAP and non-GAAP reconciliation information in the press release we issued this morning announcing our Q1 results. The press release is available on the home page 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 pass code for the replay is 31365099. 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 those forward-looking statements as a result of various important factors including those discussed in the risk factor section of our most recent annual report on Form 10K 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 up on 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 this 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 S. Saxena

Good morning everyone. We are very pleased with our Q1 fiscal year 09 results. Let me make a few observations about our progress in Q1. First, our business momentum continued to be very strong in the quarter with no apparent weakness in any of our targeted markets. While individual customers or prospects may have had reductions in their budgets, we did not see any weakness in the aggregate demand. Second, the acceleration in new account activity acquisition gives us better visibility for future business especially in our international markets. Third, we continue to invest aggressively in both product development and in expanding our distribution capabilities. Fourth, our customers continue to report acceleration and growth of data and new reasons and opportunities to capitalize on this growth using Netezza’s appliances.

During the quarter we made our first acquisition which was primarily driven by the availability of high talented professionals in the field of advanced analytics. We believe the new tech team will play a major role in developing advanced BI technology and customer relationships for certain verticals such as energy exploration, metals and mining.

I will now turn the presentation over to Jim Baum, our President and Chief Operating Officer to expand on these observations.

James P. Baum

Good morning everyone. As Jit said, we are very pleased with our Q1 performance. We exceeded our revenue and earnings objectives in the face of what many have suggested to be a difficult market. From our perspective however, demand has remained strong and our visibility has increased. As such, we saw continued momentum across all views of our business specifically geographically we produced just under three quarters of our revenue from our North American clients and over a quarter of our revenue from international clients. This uptick in our international business is very positive as we believe it suggests that our international investments and sales execution are now paying dividends.

As we mentioned on our last call, we continue to expand our coverage internationally with new sales teams in both Europe and Asia and of particular note is our new customer traction in Japan where our very strong partnership with the leading resellers in the country have created strong new customer acquisition for us. Vertically, we saw very consistent execution across our largest verticals, those being analytical service providers, the eBusiness vertical, financial services, healthcare, retail and telco. Our value proposition built around performance, time to value and simplicity continues to resonate well with all of the verticals that we sell to. For example, one of our customers in the energy sector is implementing Netezza as its engine to ensure free and equal access to energy pricing information. Not unlike a stock exchange, energy suppliers like this offer the electricity they generate at a certain price and their customers make bids to purchase it. This client is replacing its Oracle data warehouse with Netezza to run power grid usage and performance analytics. This will allow the company to run these advanced analytics on bidding strategies to ensure regulatory compliance.

The client’s data was growing at a dramatic rate causing their performance to suffer in the legacy data warehouse environment and also causing data center space and power consumption to become a real issue for them. The company was not only having trouble getting data our or Oracle to run their analysis but the data warehouse hardware infrastructure was growing such that the client would have had to expand its datacenter significantly to support the growth needs of the system. After acquiring the Netezza solution this client has commented to us that with Netezza, queries that previously consumed seven to eight hours now finish in literally seconds. This allowed them to respond to data requests in minutes as opposed to days and due to this, this client will be able to broaden the scope of the analysis it can run, improving their business operations. This includes being able to identify fraudulent activities as they occur and to ensure compliance with energy trading regulations. Before their Netezza implementation those types of fraudulent activities simply couldn’t be identified until it was too late. One of the most important benefits for this client was that the data center footprint has been significantly reduced by the deployment of the Netezza appliance so the company no longer needs to consider expanding its data center resulting in large cost savings.

We’re also pleased that Q1 was a record quarter for new customer accounts. We added 31 new customers in the quarter. Our experience remains that our customers realize substantial tangible benefits from our technology and that they are highly satisfied with the support and products they get from us. In fact, we were recognized in the quarter for outstanding customer service and exceeding customer expectations as a recipient of the Omega North Base Award. This commitment to customer success remains a key driver of our customer’s tendency to purchase more products from us. In Q1, nearly half of our revenue was generated from our customer base showing this healthy trend continuing and these facts served to further improve our visibility. Typically, our customers purchase more from us for two primary reasons. In one case, the data that they need to analyze has simply grown to the point where they need more capacity, a trend we see frequently. They also tend to launch new projects and choose our technology as the platform given their past positive experiences with us.

Competitively, we see no change in the dynamics in the market. Our top three competitors remain Oracle, Teradata and IBM and our win rates remain very high. Our investment in sales growth and product development continue. We are executing on our sales expansion efforts having added six new sales teams since the end of Q 4. We’re expanding both domestically and internationally and expect to continue our rate of expansion throughout the fiscal year. We have begun to verticalize our go to market activities with specific efforts in telco, retail, financial services and healthcare. Our strategy is to create a go to market model with internal expertise and partners that allow us to create specific business solutions to expand our value proposition beyond the data center. Our experience thus far suggests that this approach will help to further differentiate us in our market.

Our product development engine is executing well. On our last call, we described an upcoming release containing an innovative new data compression capability that substantially speeds up our system. We released that upgrade this month on time as planned. Also included in this software upgrade is the production version of our on stream capabilities. This environment allows our customers and partners to embed their own application and analytics technology in to our appliance offering dramatic performance advantages at the application level. This program was released in beta form to the Netezza developments network last fall and we now have many companies and developers working against our platform. One example that one of our partners is developing a Monte Carlo simulation solution for equities trading. We expect to see many of these types of vertically oriented solutions that target specific business problems for an industry.

Our product development innovation pipeline is strong and we have numerous additional product announcements over the course of the year in the areas of advanced analytics, data center operations and price performance. I also know that many of you noticed that we announced a partnership with EMC last week. We’re excited by the prospects of working with their technology and field organizations. While it’s too early to tell what impact this partnership will have on our business, we’re pleased to already see good signs of field level cooperation. As Jit mentioned, our acquisition of New Tech Solutions was completed during the quarter. New Tech has created considerably intellectual property in the area of advanced analytics. As part of this acquisition we’ve added a highly talented team of engineers and scientists to our team. We feel that they will contribute over time to the emergence of a next generation of business analytics that is highly predictive and prescriptive in nature as well as helping us to support our vertical go to market initiatives.

With that, I’ll turn it over to Pat for some financial color on the quarter.

Patrick J. Scannell

Good morning everyone. As both Jit and Jim have said, we are extremely pleased with our first quarter results and our continued momentum across all dimensions of our business. Let me begin the financial discussion starting with revenue. Our revenue for the first quarter was $39.6 million representing an increase of 56% over the first quarter of last year of $25.3 million and flat over our last quarter Q4. Product revenue increased 52% year-over-year and service revenue increased 73% year-over-year. 46% of our total revenue came from the installed base which was the same as a year ago. A significant milestone this quarter, as was previously mentioned, was that we secured 31 new customers bringing our total installed base to 173 customers. These new customers came from a variety of vertical industries and a variety of countries.

The average deal size this quarter was approximately $850K. The recurring revenue engine that we see from the installed base continues to thrive. Our experience continues to be that once the customer has seen the power of the Netezza solution from a performance, cost of ownership and simplicity standpoint that we have repeat purchases within the account as a result of expanding data or new applications. This is a significant leverage factor for our operating model on many fronts. It gives us excellent visibility in to the buying plans of our customers, it shortens our sales cycle and it increases the overall productivity of our sales teams.

Geographically this quarter 72% of our business was in North America and 28% was in the international sector versus 82% in North America and 18% internationally a year ago. Our footprint in the international market expanded over this last quarter as we have invested in a direct presence in Germany and France. Our business in the US continues to be strong for both new accounts and repeat business. Our products were deployed in many different vertical markets this quarter with the top six verticals being eBusiness, telecom, retail, financial services, healthcare and the analytic service providers, all at roughly 10% to 15% representing about 80% of our total business evidencing continued wide deployment of our solutions across a wide array of markets. We had no customers which accounted for more than 10% of revenue for the quarter.

We ended the quarter with 41 quarter carrying sales teams. Each team made up of a sales rep and a systems engineering. Our plan is to continue to hire direct sales teams at the pace of three to five per quarter, every quarter and have that direct channel augmented by our indirect channels throughout the world. For Q1, 73% of our business was direct and 27% in direct versus a year ago where it was 82% and 18%.

Let me turn to gross margins and our operating expenses. All these numbers will be addressed in non-GAAP terms. Accordingly, we will exclude the stock-based compensation and where applicable accretion on the preferred stock dividends. Because of the varying valuation methodology and assumptions that companies use under FAS 123R, we believe that excluding non-cash 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 IPO, accretion of our preferred stock dividends was no longer applicable due to the conversion of preferred stock to common stock and is therefore excluded to aid in comparing 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, let’s address specifically, margins. On a non-GAAP basis we reported a blended gross margin of 63% for Q1, combining our product margins of 60% and our service margins of 75%. On a GAAP basis all these margins were essentially the same except service margins were one point lower at 74%. For the same quarter a year ago we reported non-GAAP gross margins of 61% broken out with product margins of 59% and service margins of 66%. On a GAAP basis all these margins were essentially the same except overall margin and service margins were one point lower at 60% and 65%. Margins are impacted by a number of factors including maintaining inventory at the lower cost or market, our discounting and the level of investment we make in our support resources.

Let’s turn to operating expenses. Again, the remainder of this income statement discussions is on a non-GAAP basis. We had total operating expenses in Q1 of $22.1 million, up from $16 million a year ago or an increase of 38%. The company is operating with 294 personnel at the end of the quarter up from 233 a year ago. Moving on to operating income, non-GAAP operating income was $2.8 million or 7% for the quarter, up from a loss of $730K a year ago. We remain confident that we will continue to deliver operating income leverage in our model as our business grows. I will address our outlook more specifically on our model when we get to our guidance for the balance of this year.

The non-GAAP net income for Q1 was $3.8 million with non-GAAP EPS of $0.06 a share on a fully diluted weighted average share count of 64.1 million shares. Our prior year non-GAAP loss was $1 million with a non-GAAP EPS loss of $0.13 per share on a diluted share count of 7.8 million shares. Our effective tax rate for the quarter on a non-GAAP basis was 15% and on a GAAP basis was 24% and was comprised of alt [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 the quarter with over $130 million in cash, cash equivalents and investments. Our net cash used in operations was approximately $900K for the quarter. However, in the first two weeks following our quarter end, we collected $30 million in cash receipts for accounts receivable that were outstanding at the end of the quarter.

I’d now like to give you an update on the status of our auction rate securities. At January 31st of this year, we held approximately $62 million of auction rate securities in our investment portfolio. We’ve subsequently liquidated a net of $6 million of these securities leaving us with current holdings of approximately $56 million. These holdings are primarily AAA rated, federally insured student loan auction rate securities and we remain comfortable with the credit worthiness of these securities. But, as many companies have experienced the auction mechanism that provides us with a secondary market for these securities, continues to fail. As part of our adoption of FAS 157 which lays out a methodology for valuing financial instruments which do not have an active secondary market, we have taken a temporary unrealized loss on these investments of $4.8 million which effects only our balance sheet. Since we do not anticipate a need to liquidate these securities in the short term and believe that we’ll be able to hold them until the market for these securities improves, we believe that it’s probable that we’ll be able to liquidate these holdings without any material loss in the future.

Accounts receivable ended the quarter at $52.5 million with DSOs of 121 days. As I previously mentioned, we collected over $30 million of cash receipts from these receivables in the first two weeks of our second quarter which would have driven our DSOs to 51 days on a pro forma basis had they been received two days earlier. We remain comfortable keeping our DSOs in the 60 to 75 day range, our target in the 60 to 75 day range. We ended the quarter with $30 million in inventory, increasing our inventory ratio to 5.3 times up from four times last quarter. This decrease in inventory and increase in inventory turn is a direct result of our improved forecasting methodologies with our sales force and our contract manufacturer. $17 million represented finished goods and $10 million represented proof of concept inventory deployed at customer sites and in our offices.

Deferred revenue was $73.1 million. Approximately $44 million is in deferred maintenance revenue for our prepaid support and the balance is deferred product revenue where we have further obligations associated with future product deliverables. We expect the majority of the product deferrals will turn to revenue over the next two to three quarters as we complete the delivery of all products ordered. As we have said over the past quarters, these product deferrals are a normal part of our business and will vary from time-to-time.

As we discussed previously, we completed our acquisition of New Tech in May. New Tech is a relatively small company of less than 50 employees worldwide with revenues expected to represent less than 2% of our total combined revenue for fiscal year 09. Accordingly, we expect the impact of the acquisition on our gross margin and on our operating income to be negligible for the short term.

Now, I’d like to spend a few minutes addressing our guidance for the balance of this year. Based on the strength of our business and our outlook, we are raising our fiscal year 09 revenue guidance from $165 to $168 million up to the $172 million level. We expect that we will maintain our gross margin levels of 60% and that we will continue to invest in all disciplines across our business in order to effectively address this demand. For fiscal year 09, we maintain the operating margin guidance of non-GAAP operating income of 7% to 9% of revenue and GAAP operating income of 1% to 2% of revenue. We expect that our effective tax rate for fiscal year 09 to approximately 13% on a non-GAAP basis and 22% on a GAAP basis. And, as we have previously stated, our long term operating model is to deliver 15% to 20% operating income on both GAAP and non-GAAP basis over the next two to three years.

This concludes our formal remarks on the quarter. Thank you for your attention and we’d no like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Kathryn Huberty – Morgan Stanley.

Kathryn Huberty – Morgan Stanley

First, from a big picture perspective, Jim I know you touched on this a little bit in the prepared remarks but what do you think is different about your business versus competitors in that you’re seeing an acceleration in revenue growth and new customers coming to your product while your competitors are seeing revenue decelerate and missing expectations in a lot of cases? Is there something different about the type of customers you’re acquiring or the attitude in terms of what customers are looking for in a product?

James P. Baum

I think Katie it comes back to many of the sort of fundamental value proposition points we make and probably one that we see really increasing in importance is this issue of time to value. One of the things that remains quite unique about a company’s ability to deploy our technology is that it goes in very quickly. I think that from the perspective of a company that has a burning problem, that perhaps could be regulatory in nature or compliance in nature or simply business operations impairments that they’re experiencing from their existing systems, when you can look at a solution that you can deploy at a lower total cost, maintain at a lower cost to get up and running quickly, it tends to be a strong motivator to make it happen.

Kathryn Huberty – Morgan Stanley

So as budgets are pressured that focus on ROI only increases?

James P. Baum

Yes.

Kathryn Huberty – Morgan Stanley

Pat, can you go in to a little more detail as to why there was such as a significant jump in short term product deferred revenues? Was there something about the new solutions you’re rolling out where you couldn’t recognize that as revenue? Or, was it just timing in the quarter?

Patrick J. Scannell

It’s a combination of a number of factors. One, is the increased maintenance deferred revenue that we get with the increase in the installed base and the second element is a portion of that does represent the new product, this 4.5 release that we could not revenue. So yes, it’s both of those factors combined. That product portion of the deferred revenue, as we said previously, will go up and down and bounce around and will flush through revenue over the course of the next two to three quarters.

Kathryn Huberty – Morgan Stanley

Then lastly, on gross margins, this quarter was the highest in the past three years, is there anything beyond just mix fluctuations and scaling the services business that perhaps addresses your ability to win deals without significant price competition given the ROI characteristics that Jim talked about? Or, was it just mix and scale or do you think there’s something fundamentally different about your ability to maintain strong gross margins?

Patrick J. Scannell

We saw two factors this quarter, one we saw 73% gross margins on service and we say 60% gross margins on product. I think that we’re comfortable maintaining that product gross margin at the 60% level. The service, as we’ve said time and again, the service piece, depending on our acceleration of investments that we make in the field, that will dictate where that falls but, as we look back over the last three and a half years, it’s been consistently 60% and I think that as we look forward, given new features and functionality that will deliver with the product that we’re comfortable still talking about 60%.

Kathryn Huberty – Morgan Stanley

One quick follow on to the gross margin, I know it’s much too early to understand what the EMC relationship will due in terms of generating new business but, do you have an initial idea of what the gross margin profile would look like of a Netezza solution sitting in front of EMC storage versus a deal where Netezza is supplying all of the disc?

James P. Baum

Katie, we’re going to go to market with EMC product in two different ways. In one case we’re augmenting or replacing a bit of technology that’s in the appliance today with EMC storage. We do have a little bit, we have a small disc array in the appliance today and we’re replacing an older generation product from a different vendor with the EMC product. In the other case, we’re going to market with an add on optional solution that will allow a customer to embed quite a bit of storage in the appliance which we will take to market. I think when we look at in the aggregate and sort of our views how we get to market with those two pieces of technology, we don’t see any material impact on gross margins. From a cost of goods perspective, the piece that is really becoming a standard part of the infrastructure or the appliance infrastructure is approximately the same cost as what we were buying before, yet more capable. So, we don’t see a negative impact there at all.

Operator

Your next question comes from Nabil Elsheshai – Pacific Crest Securities.

Nabil Elsheshai – Pacific Crest Securities

A couple of things, one on the jump in direct revenue, was that just a matter of analytic service providers being strong or was there some other partnership or benefit from the developer network in there?

Patrick J. Scannell

The jump is really the result of wider deployment by our indirect partners for the most part internationally and you’ll see that pick up as time goes on.

Nabil Elsheshai – Pacific Crest Securities

Then on the acquisition of New Tech, does that have any impact on existing partnerships that you might have with some of the advance analytics/data mining vendors?

James P. Baum

We don’t think it does Nabil. The New Tech technology is deployed today largely in the form of a service. They have a series of scientists and engineers and professionals in many of these fairly advanced analytic areas that in the 99% of our partner base are entirely non-overlapping. So, when you look at the traditional business intelligence players that we would go to market with, it doesn’t overlap at all. In cases where there is some overlap, that overlap is very small and in fact, differentiated by the fact that the New Tech solutions go to market as more of a service than as a bundled product.

Nabil Elsheshai – Pacific Crest Securities

Then on the competitive front you said that the top three were the same. First of all is there any change in frequency within those top three? And two, one of them released a new appliance, have you seen that in the field having a competitive impact?

James P. Baum

I’d say there’s no change in frequency, we compete with them in basically the order I listed them in terms of frequency with Oracle still really the number one competitor in terms of the number of times we engage against them in the field typically due to the fact that they’re installed in so many accounts. Teradata did release an appliance, it appears to be a repackaging of much of their high end technology for the appliance market. We have not yet seen it in the markets. We suspect that in some cases, some of Teradata’s clients have engaged in discussions with them around the appliance model, probably prompted by the progression of this market created by us. But, we haven’t seen them in the marketplace and our analysis of the technology suggests that it’s less capable than what we can bring to market for lower cost.

Operator

Your next question comes from Mark Kelleher – Canaccord Adams.

Mark Kelleher – Canaccord Adams

I was just wondering, going back to EMC, are they actually helping you sell?

James P. Baum

They are not distributing product for us. What we are doing with them is we are engaging, and its early days yet, but we are engaging with their field organization and we’ve seen some very positive signs already of where their field organization has initially viewed us as competitive prior to this announcement and now views us as a partner. And, they as you know, are installed in many large accounts that have large analytical needs. We are finding opportunities where they need some solution around data warehousing and that partnership will help us but, they are not distributing product for us.

Mark Kelleher – Canaccord Adams

On the DSOs, what drove that $30 million event to kind of trip over the quarter? Was something going on there?

Patrick J. Scannell

A late payment.

Mark Kelleher – Canaccord Adams

One late payment?

Patrick J. Scannell

No, not one late payment, a bunch of late payments that came in that were due in 30 days that came in-in the 40 to 45 day range over the course of the first two weeks that we received that. It’s simply that.

Mark Kelleher – Canaccord Adams

Lastly, on the jump in new customers, that’s a pretty dramatic jump, was that because of more efficiency in your sales team? Was that kind of a fluke number? Do you expect that number to stay up that high quarter-to-quarter?

Jitendra S. Saxena

I think the jump in new customers was fairly broad based and only part of that was attributable to our partnerships in some of the international markets. We expect that the new customer acquisition rate will be in the 15 to 30 from quarter-to-quarter as we move forward.

Operator

Your next question comes from Doug Reid – Thomas Weisel Partners.

Doug Reid – Thomas Weisel Partners

First question is around the decline in average deal side. I’m trying to better understand what the source of that decline is? And, if you can comment on the average deal size for new customer acquisitions relative to prior quarters?

James P. Baum

As we look at our business it’s a combination of things that are happening. One, we saw the indirect activity increase and part of the indirect activity is with not only the indirect end users but the indirect partners. What we’re seeing is we are seeding some of these partners with a lower end version of our product and that begins the cycle of them beginning to secure and get installed in the account; so we saw that. We expect that our average selling price, if you take those partners aside, our average selling price was in the $1 to $1.1 million range but we did have some seed opportunities especially in the international market that we saw happen as a trend a year ago and now we’re seeing the follow on purchases from those accounts today. I think that the combination of the indirect getting the uplift and our ability to seed those market opportunities.

The second part of your question Doug, I’m sorry?

Doug Reid – Thomas Weisel Partners

I’m wondering if the average deal size has changed with new customers. I think you just answered that now. The second question though is on the comments earlier about in aggregate demand appears strong but some customers becoming a little more cautious. I’m wondering if you can give a little more color on where that caution appears to be greatest by vertical?

Jitendra S. Saxena

I don’t think there’s a broad based caution here but it should not be surprising in the sense that some customers have had some issues with respect to their own business. But, as far as we are concerned, we on an aggregate basis did not see that slowdown so maybe one customer here or there in financial services or even in retail might have had some individual issues but nothing on an aggregate basis.

Doug Reid – Thomas Weisel Partners

Then lastly, just on the visibility you have, would you describe that as healthy throughout the quarter? Or, over the last few weeks have you become more confident in the visibility you have?

James P. Baum

The visibility we have has really not changed because we go through a pretty rigorous process at the beginning of every month where we’re looking at not only this quarter but next quarter and the third quarter out. So, we maintain that and it’s been consistent over the last four to five quarters.

Operator

Your next question comes from Patrick O’Brien – Needham & Company.

Patrick O’Brien – Needham & Company

With the box that you’ll be offering with EMC, is this product fully [appliancized] or is there still some integration left for you guys?

James P. Baum

No, what we’ll take to market will be fully [appliancized] so it will be completely integrated within the existing footprint of our appliance and from the customer and end users perspective appears to be one in the same.

Patrick O’Brien – Needham & Company

Additionally, on availability, you guys mentioned it would be available in the second half, is that more the December time frame or perhaps earlier than that?

James P. Baum

No, we expect it to be available in Q3, so sort of mid Q3 is when we expect this to be shipping to market.

Operator

Your next question comes from Alex [Kurt] – Merriman, Curhan & Ford.

Alex [Kurt] – Merriman, Curhan & Ford

First question, just following up on the EMC point, was there something about your existing product in the stores that you guys had in it that made you guys decide to partner with EMC besides obviously the great go to market capability they have? Was this something that was customer driven, they came to you looking for a change? Or, was this something you said, “This is a great opportunity,” and decided to change your storage capabilities?

James P. Baum

I would say both Alex. On the additional bit of storage that we can offer as an option with the appliance, our customers have been asking us for solutions like this to help them with their broader based data center operations. Things like disaster recovery solutions and backup and restore and some of those types of processes. So, we felt that partnering with EMC given their position in the market and their capabilities in those areas was a best in class choice. In terms of the EMC disc array that’s embedded in every appliance that we sell that’s too racks or larger, that is a replacement of an older piece of technology that is effectively an equivalent price, higher performance, higher capability upgrade that we’re introducing to the appliance.

Alex [Kurt] – Merriman, Curhan & Ford

Will you be incorporating any of their software in to your platform at all? Any of their backup and recovery and replication software?

James P. Baum

Yes, we anticipate that over time we will be rolling out additional solutions that leverage some of those capabilities from EMC, yes.

Alex [Kurt] – Merriman, Curhan & Ford

And if you just look at you international customers this quarter, obviously very strong, was there a particular vertical that you saw really drive business in Europe or Asia that really stood out to you guys this quarter?

Patrick J. Scannell

No, it was broad based both for domestic business as well as international business.

Operator

Your next question comes from Mark Walter – Blue Fin Capital.

Mark Walter – Blue Fin Capital

I was wondering if you could walk through how you’re seeing customer ramps in terms of an end user customer? After they buy their first box, how long historically has it taken for them to come back for another blade or a bigger box? And, has that time to a second unit changed over time?

Jitendra S. Saxena

We’re experiencing generally from our customers is that typically within six to nine months of their initial purchase they will buy additional storage which comes in the form of bigger cabinet, or additional cabinets for their existing system. Or, having seen the characteristics of the box, they may additionally deploy the box for new applications. Again, the time frames are typically six to nine months out from the initial purchase.

Mark Walter – Blue Fin Capital

Any way to comment on the mix? I guess the deal size tells you a little bit, but between 5,000 high end or low end 10,000 boxes?

Jitendra S. Saxena

I think the only, and maybe it’s a small thing here, but some of the international customers, especially customers in the Asia market have started out typically with the 5,200 CD machine and within six to nine months may upgrade that or move on to the 10,000 CD.

Mark Walter – Blue Fin Capital

I’m just trying to get a better feel on the deferred, does that come on to the income statements as customers download like a firmware update? Does it happen pretty much all at once or does it happen as customers put that software on their boxes?

Patrick J. Scannell

It’s the latter. It happens as we ship the product, depending on what it is that we’re shipping or when they would download or be delivered the certain release. So, as I said, that will happen depending on their readiness and our readiness so it would be over the course of the next two to three quarters?

Mark Walter – Blue Fin Capital

And the majority of that is related to 4.5?

Patrick J. Scannell

No, it’s pretty evenly spread between some is 4.5, some represents customers where we may have had acceptance criteria in the contract where we couldn’t have revenued and some represent other product features.

Mark Walter – Blue Fin Capital

I guess I’ll just ask it, I’m interested to know what bookings were in the quarter? But, can I at least assume they were pretty meaningfully above revenue given?

Patrick J. Scannell

We don’t talk about bookings.

Operator

With no further questions in queue, I would now like to turn the call back to Jit for closing remarks.

Jitendra S. Saxena

Again, I just want to close with saying thanks to everyone for their continued interest in Netezza and thanks for your support. Thank you.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect.

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