Compellent Technologies Inc. Q1 2008 Earnings Call Transcript

May.30.08 | About: Compellent Technologies, (CML)

Compellent Technologies, Inc. (NYSE:CML)

Q1 2008 Earnings Call

April 30, 2008 5:00 pm ET

Executives

Jenifer Kirtland - IR

Phil Soran - President and CEO

Jack Judd - CFO

Analysts

Katy Huberty - Morgan Stanley

Tom Cowan - Royal Bank of Canada

Eric Martinuzzi - Craig Hallum

Troy Jensen - Piper Jaffray

Glenn Hanus - Needham & Company

Alex Kurtz - Merriman Curhan Ford

Doug Reid - Thomas Weisel Partners

Operator

Good afternoon ladies and gentlemen, thank you so much for standing by. Welcome to the Compellent Technologies earnings announcement for the first quarter. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Wednesday, for 30th April 2008.

I will now turn the conference over to Ms. Jenifer Kirtland of the EVC Group. Please go ahead.

Jenifer Kirtland

Thank you, Operator, and good afternoon everyone. Thank you for joining us for the Compellent conference call and webcast to review financial results for the first quarter of 2008. Before we get started, during the course of this conference call, we will make projections and may make other statements about Compellent's business that are forward-looking and are subject to many risks and uncertainties that could cause actual results to differ materially from expectations.

The detailed discussion of the risks and uncertainties that effect our business is contained in Compellent's filing with the SEC including it's Form 10-K for the year ended December 31, 2007, under the heading "Risks Factors." Copies of these filings are available online from the SEC or on Compellent's website. These forward-looking statements are not guarantees of future performance and speak only as of the date hereof, and except as required by law, Compellent disclaims any obligation to update these forward-looking statements to reflect future events or circumstances. In addition, during today's discussion, management will comment on both actual results and certain non-GAAP results. Reconciliation of actual results of these non-GAAP results are provided in today's earnings release, which is available on our website at www.compellent.com.

And with that, I'll turn the call over to Phil Soran, President and CEO of Compellent.

Phil Soran

Well, thank you, Jennifer.And I want to thank you all for joining us for our first quarter 2008 earnings call. And with me today is Judd, our Chief Financial Officer. Well, Compellent reported another great quarter for the company driven by continued strong demand for our storage solution for midsize enterprises across the world. The strong results were across the board.

During the first quarter of 2008, revenue increased 107% from the prior year to $18.3 million. Sequential quarterly revenue growth was 9%, which is our 10th consecutive quarterly increase.

We reported a GAAP net loss of $0.05 per share, an improvement over the prior year in the fourth quarter of 2007. We're very happy with these results, which continue to reflect the growing awareness of the critical need for cost effective storage and strong acceptance of our solution.

There are several other recent highlights that I would like to touch on. We're very proud to receive several recent awards. We won the Quality Award for the Top Midrange Storage Array from Storage Magazine. The title of the article was "Compellent shakes up the midrange array competition."

This award was based on End-User Survey where Compellent was ranked number one overall when compared against 15 other midrange storage arrays. We ranked the highest of any other storage vendor in the areas of technical support, sales force competence and features. But the one I was most proud of was that 100% of our end-user surveyed said they would buy from us again.

Another award was received by our end-user customer gm2 Logistics, which is a UK-based warehousing and logistics company. They received the InfoWorld Green 15 Award in recognition of its energy-efficient data center project. The award honors the top 15 green technology initiatives undertaking by organizations over the past year in Compellent later on its customer success and their new virtual data center.

In the quarter, we announced volume shipments of our next-generation Storage Center 4.0. This new offering includes several innovations. Our Fast Track software which dynamically and automatically places active data on the outer tracks of a disk drive allowing for much faster access to information while decreasing costs and fewer high-performance disk drives are required. This block level capability is an industry exclusive.

With our Thin Import feature, as data is copied from an end-user's legacy environment to Compellent SAN is converted to thin-provisioned volumes and can reduce disk drive requirement by upto 50%. And also during the quarter, we introduced the new version of our enterprise management software, which simplifies SAN management and gives our users reporting tools to help calculate cost and energy savings. Feedback on these offering has been very strong.

Our international business continued to expand. In the first quarter, we had distribution partner in two new countries; the Netherland and South Africa. And this brings our total country presence to 32. Domestically, we're seeing increased mindshare with our larger national business partners.

Looking forward, there has been lot of commentary in the press and research reports regarding the economy. During the quarter, we expressed some lengthening of decision by end users, which are not unusual on our seasonally slowest first quarter. But this softness has been more than overshadowed by increased mindshare with our large business partners. Our pipeline continues to grow and there are two recent industry reports that point of favorable positions for Compellent.

Robert W. Baird's Q1 2008 Enterprise VAR Survey showed that storages quote is expected to be the last item cut from IT budgets, according to a large majority of respondents. And also a recent Gartner Dataquest Reports says that storage vendors whose product support advance storage features like thin-provisioning and automated tiering are likely to fair better in a tight economy than those whose products lack these cost savings differentiating capabilities.

Due to all these factors, we remained optimistic with regard to the outlook for Compellent in the second quarter of 2008 and the guidance we'll provide will demonstrate this.

Environmentals are increasingly important for storage buyers as an article in Business Week indicated. Power consumption and data centers is doubling every five years or so. By 2010, according to Gartner, about half of the Global 2000 companies will spend more IT dollars on energy than on hardware. Energy costs are now about 10% of the average IT budget with both increased power consumption and rising energy costs. This could increase to 50% in several years.

Our unique virtualization features help minimize power consumption. Physical footprint, capital outlay and costs in multiple ways. Primarily, among these are thin-provisioning, data progressions and boot from SAN.

The highly Compellent's advantage in the area of power savings, I'd like to tell about one of our end user customers; United States Capital Police. They are facing the real life energy currents in our nation's capital. They turned to Compellent to solve the space and energy issues. The US Capital Police provides protection for the grounds and the people of the US Capital and provides secret service like protection to our leadership.

Escalating requirements for both service and storage force them to ask their energy provider for more power. The unanticipated response of the provider was that none of this was available, now or for the foreseeable future. So instead of going to a painful expense of data center relocation, the US Capital Police Department System Administrator, Rob Clarke decided to accelerate the adoption of server and storage virtualization.

And by deploying Compellent Storage, the US Capital Police not only avoided the data center relocation dilemma, they have actually lowered their power consumption and now have room to grow in their existing building. The new virtualization data center continues to present opportunity for Compellent virtual storage solutions.

Finally, before I turn the call over to Jack, I would like to have some thoughts on why we remain so confident about the outlook for Compellent. We believe we've entered the market in a great time. We serve in an enormous and diverse market of midsize enterprises and our solutions to address the specific pain points that IT departments experience everyday.

Our channel assisted model and virtual manufacturing help us contain operating expenses while reaching a much broader base of end users than we could on our own. Our distribution products are well respected in the industry.

Finally, we have a strong team of dedicate professional at Compellent, and I am very much appreciated with their hard work and the efforts they have delivered the results we've accomplished today.

So, now, I'd like to turn the call over to Jack for more detailed look in our first quarter financials and second quarter and full year 2008 guidance.

John Judd

Thanks, Phil. I am excited about taking everyone to our first quarter results. As Phil said earlier, the first quarter marked our 10th consecutive quarter of sequential revenue growth. Revenue grew $9.5 million to $18.3 million, or 107% in the previous year's first quarter. Compared to the fourth quarter of 2007, revenue grew $1.5 million or 9%.

We continue to grow in international markets. International revenue increased to $2.9 million in the first quarter, 331% more than the previous year. Our end users at the end of the quarter totaled $829 compared to $474 one-year earlier. Our revenue from existing end users was 53% of product revenue and new end users made up 47% of product revenue. This combination of new end users in our current base coming back for upgrades and additional systems makes the Compellent story so exciting.

Our gross margin was 52.2% in the first quarter of 2008, compared to 46.2% in the same quarter of last year and 51.4% in the fourth quarter of 2007. Compared to one-year earlier, our product margin has increased to do a leveraging of our fixed procurement costs over increasing sales.

The largest increase is in our support and services margin from 34.4% in the first quarter of 2007 to 59% in the first quarter of 2008, and is primarily due to the leveraging of our Copilot Support Group. We will continue to leverage its infrastructure in the future as we progress towards higher overall margins. This recurring services revenue provides stability and predictability to our financial results and illustrates the high level of customer satisfaction our Copilot Services organization provides.

Operating expenses increased to $12 million in the first quarter of 2008 from $6.5 million one-year earlier, as we continue to build infrastructure in all areas, especially, our sales and marketing teams. At the end of March, our sales and marketing teams totaled 132 employees compared to 80 one-year earlier.

Other strategic areas where additional employees have been hired are our Copilot Support team and Research and Development. By making these investments, our ambitious growth plans are more assured. Our total employee base was 235 compared to 212 and 153 at the end of December and March 2007, respectively.

Our net loss on a GAAP basis for the first quarter of 2008 was $1.6 million, or $0.05 per share compared to $2.1 million or $0.51 per share in the previous year. Excluding the effective stock-based compensation, our net loss for the first quarter was $1.2 million compared with a net loss of $2 million in the previous year.

We ended the quarter with $93.1 million in cash and investments. Our balance sheet includes $12.5 million of deferred revenue, an increase of $2 million from December 2007 and $7.6 million from March 2007. This deferred revenue will generally be recognized over the coming 12 months and gives us 2008 revenue visibility.

Our aging and our cost receivable improved and was consistent with the prior quarter end. Our strategy of virtual manufacturing helped us to keep our inventories nearly the same as the previous quarter.

Now, I would like to provide our thoughts and guidance for the second quarter. Despite the slowdown in the US economy, we continue to see strong demand for our products and support services. Our pipeline remains strong and continues to grow.

We, therefore, currently expect revenue to increase to approximately $19.5 million to $20 million in the second quarter of 2008, compared to $12.1 million in the same quarter of 2007. For all of 2008, revenue is forecasted to be between $82 million and $84 million.

We intend to increase our professional services offering throughout 2008. Because of this spending, we expect our gross margin for this year to be approximately 51%. We anticipate that the company will achieve profitability in the second half of the year.

That concludes our formal remarks. Now, Operator, could you please open the call for questions-and-answers.

Question-and-Answer Session

Operator

Certainly, ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions)

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

Katy Huberty - Morgan Stanley

Thanks. Another good quarter, guys.

Phil Soran

Hi Katie

Katy Huberty - Morgan Stanley

On gross margin, this quarter was the highest we've ever seen, so how sustainable are 50% plus service margins? And then, can you also comment whether you saw a benefit of Storage Center 4.0 upgrades with a lower component of disk?

Jack Judd

Thanks for the question Katy. Regarding our margin, we did have a really great quarter. And I think our guidance suggests that we think that it's going to go down in future quarters back to maybe what we've guided or in the range of what we've guided previously.

We're going to add some people on professional services as we talked about in previous quarters. We didn't do an awful lot of it in the first quarter, but we are going to do it throughout the year. And that will show in lower margins on our professional service and maintenance line. Our product margin, I think is going to stay pretty consistent with what it was in the first quarter for the rest of the year.

Katy Huberty - Morgan Stanley

And then it looks like the average deal size of new customers declined sequentially. Do you think this is macro-driven, change in deal sizes or is there another explanation for that?

Jack Judd

Our deal size in the quarter was almost exact same as it was in the fourth quarter of 2007.

Katy Huberty - Morgan Stanley

Okay. And even if you look at it, new customers versus existing?

Jack Judd

The business from our existing customer base was higher in the first quarter than it was for all of 2007. Again, we're still trying to figure out this measurement and see what the ideal number is. We're not concentrating on what is the exact number besides that people continue to comeback and upgrade their systems and buy new systems very soon after they buy and make their initial order. And we think that's good news.

Phil Soran

This quarter, Katy, I would say, too we had lot of that existing revenue from existing customers was actually new systems in new locations, new departments, replication systems data bank, which is a real positive for us.

And on the earlier question on the 4.0 release, I think it was just a kind of one of those releases that kept the competitive edge and kept our advantage there. And I think it was like a big revenue generating release type thing there, but it -- things like Fast Track and Thin Import, just keeps our competitive advantage.

Katy Huberty - Morgan Stanley

Okay. And then lastly, why did the days payable declined so much in the quarter?

Jack Judd

An awful lot of that days payable is related to one vendor that gets paid very quick. They paid in 10 days. So a lot of it has to do with when the orders come in, in the quarter. Because soft things coming earlier in March, the bill still gets paid in March from one of our major vendors.

Katy Huberty - Morgan Stanley

Okay. Great. Thanks.

Phil Soran

And we do that obviously to get discounts.

Jack Judd

Yeah, we get a discount for payment in 10 days.

Katy Huberty - Morgan Stanley

Okay. Make sense.

Operator

Thank you. Our next question is from the line of Tom Cowan with the Royal Bank of Canada. Please go ahead.

Tom Cowan - Royal Bank of Canada

Hey, good afternoon and congratulations again.

Phil Soran

Thanks, Tom.

Jack Judd

Thanks, Tom.

Tom Cowan - Royal Bank of Canada

The competitive environment, any shifts in behavior with the -- I guess with macro-context. Do you feel like pricing is getting more competitive or are you having to respond to that more than in the past? And then, also, just any shift in who you're seeing, if you will, from a frequency perspective?

Phil Soran

No, I think, it was actually very similar the fourth quarter of 2007 itself. Storage is comparative, so that hasn't changed. And I think, we still find that the Compellent storage show matching our features and our total cost ownership. So that hasn't changed either. But, frankly, I think it was kind of similar type of quarter that has been previously.

Tom Cowan - Royal Bank of Canada

And you mentioned on the sales cycle front maybe little bit of lengthening during the quarter, obviously very healthy pipeline going forward. How do you think about close rates? Have you modified your assumptions on close rates for your pipeline just taken -- I guess to keep the macro context in mind or do you still feel like you'll get a similar yield on close rate at your pipeline in the June quarter?

Phil Soran

No, I think we'll get a similar type of close rate. People are little bit more labored in their decision making. But once again, its capital for this storage is kind of evidence of it. In this environment they have to have a new storage strategy. And I think it really plays well to won our modulary. They can start small, if they want to.

And then, two, obviously the total cost of ownership advantage of thin-provisioning and automated IOM and those types of things. So, it's slight lengthening of the -- they're just little more labored in their decision making, but I am seeing changes and what percentage will win and what percentage actually do it. So, just to increase pipeline will be more than cover it.

Tom Cowan - Royal Bank of Canada

Then you have a fairly diversified mix of verticals. Any verticals in particular, where that lengthening took place or just a general observation and also regionally any thing to that?

Phil Soran

I wouldn't put any verticals focus on. You know, you already shared about financial services. But we closed financial services account in the quarter, so it was just kind of just a general trend. It was pretty minor. I wouldn't make it major trend and the lengthening there. And then on the location across the country, I really didn't know or see change at all. Did you Jack?

Jack Judd

No, I wouldn't. I didn't notice anything one geography to another. And while we happened updated our vertical for the first quarter in 2007, we had three verticals right around 10%, but we didn't really see any large change in type customers or type verticals that we saw.

Tom Cowan - Royal Bank of Canada

Okay.

Phil Soran

Hey, a little bit…

Tom Cowan - Royal Bank of Canada

And then, just finally on the technology front, directionally or qualitatively, how do you -- what have you seen from an iSCSI attach perspective? And then also ATA versus Fibre drives on the backend?

Phil Soran

So, on the feature side, there on the iSCSI connectivity, we talked about in the last call, I think it was very similar this quarter. We had little over 60%. It was mixture of iSCSI and Fibre Channel. So, once again, one of the advantage is you can do both. And so, that really was pretty similar to this time. I didn't see any change there.

And on the Serial ATA versus Fibre Channel mix, as it might be a little bit shift more towards ATA drives and that's more tied to our Data Progression feature and that -- lot of our existing customers have bought all the fibre drives they are going to need for performance. And now they are doing, buying much more of those ATA drives as their Data Progression lifecycle search kicking in.

Tom Cowan - Royal Bank of Canada

All right. Thanks very much

Phil Soran

You bet.

Operator

All right. Thank you. Our next question is from Eric Martinuzzi with Craig-Hallum. Please go ahead.

Eric Martinuzzi - Craig Hallum

Thanks. Good afternoon. The growth in the customer base, pretty strong growth there up to 829 now. I am curious as far as your business development managers, how are they handling this increased growth of the customers? Because I know in the end it's the VARs that are really the touch point, but you want to be responsive from the buss dev managers. What are you doing there to sustain that?

Phil Soran

Well, the biggest thing is one, they're getting -- thanks, Eric. They are getting more seasoned out there in the field, so they actually get better at it. We've added some of that staffing that Jack talked about has increased -- cut their territory coverage down a little bit. That helps.

The other thing is that the business parts we have tend to season also so they can handle more of that. And then the other thing, frankly, as our Copilot Support Group, that quality award we talked about is [top joy]. And I think we've added a lot of staff there and they continue to help them. And that's a lot of the touch points is actually with that Copilot Group.

So other things we're doing is, well, actually next week we have our first end user conference. We have, I think, we called C-Drive next week. And the first two days the week are all are business partners are coming into town from across the world, frankly. And then the second half of the week -- and they have analyst also from, I think, it's a 12 analyst coming in town.

And then, we also then at the end of week have our end users customers and once again they are used that as great training time period where you can get kind of leverage touch and a very high visibility with them. So, kind of a wider combination and lot of events to keep on top of them.

Eric Martinuzzi - Craig Hallum

As far as there just a growth in buss dev managers, that ebbs can you give me percentage growth domestically versus a year ago or an absolute number?

Jack Judd

When we add people in the field in is in just BDMs as we call them it takes -- we've added storage architects. We have found of that attaching a storage architect right with the BDM is a very effectively way to go to market. We also add partner development reps internally. So it isn't one position, but I think it's a combination of two and three people working together in more markets that really is part of the strategy.

Eric Martinuzzi - Craig Hallum

Okay.

Phil Soran

And Eric, I don't have those numbers right here from a year ago. [Its right up top word turn here].

Eric Martinuzzi - Craig Hallum

But just a growth in the sales and marketing line would probably capture the percentage growth there?

Jack Judd

It'd be the real close.

Eric Martinuzzi - Craig Hallum

Okay. Thank you.

Operator

Thank you. Our next question is from the line Troy Jensen with Piper Jaffray. Please go ahead.

Troy Jensen - Piper Jaffray

Hey, congrats on a nice quarter, John.

Phil Soran

Thanks, Troy.

Jack Judd

Thank you, Troy.

Troy Jensen - Piper Jaffray

A couple questions for Jack. Can you talk about a linearity in the quarter, DSOs have dropped two quarters in a row and it's seems like its still lowest as it has been in about two years. So I was just curious how do the linearity look like?

Jack Judd

Well, I'd like to thank a little bit as the DSOs going down as our internal team doing a better and more consistent job with getting the partners and making sure they pay them well. So I want to put a little bit of wording for that. The linearity within the quarter I think is very similar what we've had in pervious quarters. There is really nothing special to talk about whether or more of our sales happened in January and February then would have happened in previous quarters.

Troy Jensen - Piper Jaffray

Okay. And then can you explain -- give some incident to the share count jump in the quarter? And then on that note, when you guys turn a GAAP profit? What should we be modeling for and probably with share count then?

Jack Judd

The share count in the quarter, it is up from the previous quarters because of having the outstanding shares for all 90 days in the quarter. In last quarter, they were outstanding for more in the range of 80 days in the quarter. So, the actual number of shares outstanding at the end of December was real close to the number we had outstanding at the end of March. Number outstanding at the end of March is around $30 million for 600,000 shares. What was your second question on that, Troy?

Troy Jensen - Piper Jaffray

Just when you return a GAAP profit share count should go up, I'm assuming here and when do you think that happens in which we model for share count then?

Jack Judd

I think that the share count is going to increase, I albeit say consistently over the year related to both stock options being exercised that would be actual shares outstanding. And then we do will cover up more stock options. It's more in the range over a 100,000 a quarter.

Troy Jensen - Piper Jaffray

All right. And then just quickly on the foot at over leased, just let us know how frequently do you guys update your software. Is this an annual event or just had in more or less frequently than it?

Phil Soran

On that one there for major releases, you know, we don't do it on our calendar or anything like that, but it's approximately once a year there is a major release. And though we put minor feature enhancements and those types of things periodically as needed and absorb a couple of those during the year and customers get those for free if they're under our maintenance agreement. But the major ones are approximately once a year.

Troy Jensen - Piper Jaffray

Got it. Keep up the good work guys.

Phil Soran

Thanks a lot.

Operator

Thank you. Our next question is from Glenn Hanus with Needham & Company. Please go ahead.

Glenn Hanus - Needham & Company

Nice job, guys.

Phil Soran

Thanks, Glenn.

Glenn Hanus - Needham & Company

Maybe just following up on the visibility question a little bit. Could you compare your pipeline and backlog and not -- I know you're not going to give out numbers, but just could you compare where you just kind of stand today versus where you stood going into the first quarter as if there are, how are those trends looking?

Phil Soran

Yeah. So, we actually track that weekly. That's a pretty very, pretty -- somebody watched pretty carefully. And you're right, I won't five you the actual numbers, but it's like I said in my comments, the economy is slowing down but our pipeline is growing real nicely.

Glenn Hanus - Needham & Company

And, maybe, how are you doing on, sort of, penetrating a little bit more into the enterprise and in some larger installations and larger capacities? Any color you can give there?

Phil Soran

Yeah. I think I mentioned in the last call, we had our first Enterprise Advisory Board in somewhere around the 1st of February, we did that there. We actually made some significant wins in the enterprise accounts. We're kind of going to wait to announce them till we've been running for a little bit longer with them and make sure they're totally comfortable with the publicity and some of that. But we're getting pulled into larger accounts and larger deals. And I guess it's kind of indicative of our feature, function advantage that those large customers are interested in our advantage.

Glenn Hanus - Needham & Company

And how about on the channel side? You've mentioned getting a little more mindshare and tie into that the continuing fallout from the Dell-EqualLogic deal. What are you seeing on the channel side?

Phil Soran

You kind of summarized right there. So our large partners are, I think, more focused on us. I think there has been some fallout from the Dell-EqualLogic with the channel model as it looks little more attractive on our end, then it does on the Dell-EqualLogic side for some of those partners. And that has contributed to the some of the mindshare suite force. I think, in addition to things like the Quality Award from Storage Magazine et cetera.

Glenn Hanus - Needham & Company

And Jack, the long-term investment on the balance sheet.

Jack Judd

We have some investments we've made in cash, some cash investments that have maturity dates longer than a year. So we've classified them as a long-term.

Glenn Hanus - Needham & Company

So that doesn't have anything to do with option rates?

Jack Judd

We have no option rate securities in our portfolio.

Glenn Hanus - Needham & Company

Okay. Thank you.

Phil Soran

Thank you, Glenn.

Operator

Our next question is from the line of Alex Kurtz with Merriman Curhan Ford. Please go ahead.

Alex Kurtz - Merriman Curhan Ford

Hey, guys, can you hear me?

Phil Soran

You bet, Alex, welcome aboard here.

Alex Kurtz - Merriman Curhan Ford

Yeah. Thanks. Congrats on a good quarter. So looking back at your transactions during Q1, how much would you attribute those to virtualization in VMware deployments just looking maybe in broad numbers if you can give us a sense for that?

Phil Soran

Yeah I'll give you some gut feel on that. I'd say, so virtualization and the decision criteria is very, very high percentage on the 90% range here that they are doing some type of virtualization strategy there. There is lots of virtualization plays out there. VMware and Virtual Iron and Microsoft and Citrix and others that we deal with them. We were pretty close with all of those partners and so.

So it is a major trend there. When you get into what's a level of implementation that varies based some are starting to get into it others are worried on full hog, but it's a real high number that virtualization is a factor in it.

Alex Kurtz - Merriman Curhan Ford

So, 90% of the deals that you're involved with somehow, somewhere, virtualization is being been deployed at in the new environment.

Phil Soran

Correct.

Alex Kurtz - Merriman Curhan Ford

Okay. Great. And…

Phil Soran

Honestly, with…

Jack Judd

One more clarification on that too. Obviously, on our storage side the 100% are doing storage virtualization and that's this tower system works.

Alex Kurtz - Merriman Curhan Ford

Fair enough. And if you look at our channel strategy for the rest of this year and as you add new partners. How are you thinking about -- who are you profiling? Are you going after specific markets to get footprint against EMC and NTAP? Or are you going -- are you looking for specific expertise in services they can deliver?

Phil Soran

It's a combination of both there. So one is obviously, who want to obviously get high end solution providing partners, who want to make sure that that kind of solution capability. And then, secondly, we look at is -- little bit of the geographic coverage is still higher listed. There is an area that we thought we're under represented or it's a smaller community we're trying to get in some of those, so, some penetration there.

And then I think you're seeing little shift in our focus too on trying to work with some partners that have some industry vertical expertise. We've has little of that in the past. I think you'll see that grow overtime, but place like the healthcare environment, financial services those types of areas, government, federal government those are the areas that we'd like to keep giving more solutions built around that and those kind of partners can really help us.

Alex Kurtz - Merriman Curhan Ford

Okay. And this is a question for Jack. So, if your installed-base revenue continues at this level, well, first of all, is that your expectations or you expected to get back down again?

Jack Judd

So is your question, do I expect that revenue from existing customers will be above 50% at the end of the next quarter?

Alex Kurtz - Merriman Curhan Ford

Yeah. I mean, I obviously can't speak to a specific number but what's the sense right now? Because as you add -- I imagine you have software keys on new trade of drives when you add capacity or imagine that carries higher margins. I am just trying to get a sense of how your installed-base revenue if it continues at this level how that may impact gross margin?

Phil Soran

I guess I have a hard time, saying exactly what's going to happen with the margin on that much granularity.

Alex Kurtz - Merriman Curhan Ford

Okay.

Phil Soran

But I would say that that existing revenue in new users, it will vacillate up and down a little bit, but I think the good things is, we're getting new end users and we're also getting upgrades. And this quarter, we had a lot of nice upgrade orders from existing customers. So you do both, that's what we kind of like to see.

Jack Judd

Yeah. And those upgrade orders are the orders from existing customers. It's spread across a lot more than a few dozen of our customers.

Alex Kurtz - Merriman Curhan Ford

Right.

Jack Judd

It's literally hundreds of our customers making additional orders.

Alex Kurtz - Merriman Curhan Ford

Okay. All right. Thanks a lot, guys.

Phil Soran

Thank you.

Operator

All right. Thank you. Our next question is from the line of Doug Reid with Thomas Weisel Partners. Please go ahead.

Doug Reid - Thomas Weisel Partners

Thanks and congratulations on the nice quarter.

Phil Soran

Thanks, Doug.

Doug Reid - Thomas Weisel Partners

Sure. Two quick ones. Can you comment at all on the concentration among your top 10 resellers? Has it changed? And, if so, how much so?

Phil Soran

The top 10 of our business partners [and that's where resellers] are business partners. It's a little bit less than 50% of our business and that would be in similar range than it had been in the past.

Doug Reid - Thomas Weisel Partners

Okay. And can you give any color on the magnitude of the difference in the gross margins you're able to generate at this stage in comparing the new business to the upgrades?

Phil Soran

I think that our margins -- we get better margins on small upgrades. But even on larger upgrades or additional systems within customers is that we have to be competitive and we have significant advantages and features functionality, and we are quite successful at selling that and earning higher margins than maybe we could, if we didn't have quite the product. But I would say that it isn't universal one way or the other that all upgrades have higher margins than original systems or vice versa.

Doug Reid - Thomas Weisel Partners

Okay. Thanks and congrats.

Phil Soran

Thanks Doug

Operator

All right. Thank you. (Operator Instructions)

Mr. Soran, there appeared to be no further questions this time. Please continue with any question comments.

Phil Soran

Well, first of all, I'll once again thank our employee base for all the hard work, our business partners for all their support, and the investment community. I really feel good about the team, the virtual team, I uses that virtual word a lot here, but the virtual team we've built at Compellent and we look forward to continue with good results.

So thanks a lot for all your participation today.

Operator

All right. Thank you, sir. Ladies and gentlemen, that does conclude the Compellent Technologies earnings announcement for the first quarter.

If you would like to listen to our replay of today's conference in its entirety, you may do so by dialing 1800-4005-2236 or 303-590-3000 and put the access code 111120848. Those number again, 800-405-2236 or 303-590-3000 and put the access code 11112083. We would like to thank you very much for your participation today. You may now disconnect. Have a great rest of your day.

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

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

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