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Executives

Rob Dougherty – F.D. Ashton Partners

Robert W. Shaw – Chairman, Chief Executive Officer

Thomas Reilly – President, Chief Operating Officer, Director

Stewart Griersoni – Chef Financial Officer

Analysts

Rob Breza – RBC Capital Markets

Phil Rueppel – Wachovia Securities

Keith Weiss – Morgan Stanley

Israel Hernandez – Lehman Brothers

Jay Meyer – [Selto] & Company

Jonathan Ruykhaver – ThinkPanmure

ArcSight, Inc. (ARST) F1Q09 Earnings Call September 9, 2008 5:00 PM ET

Operator

Welcome to the ArcSight first quarter 2009 financial results conference call. (Operator Instructions) At this time I would like to turn the conference over to Rob Dougherty with F.D. Ashton Partners.

Rob Dougherty

Hello and thanks for joining us today for the ArcSight first quarter fiscal 2009 conference call. On the call today are Robert Shaw, Chairman and CEO, Tom Reilly, President and COO, and Stewart Grierson, CFO, all of ArcSight.

During the course of this call we will make forward-looking statements regarding future events and the future financial performance of the company. Generally these statements are identified by the use of words such as except, believe, anticipate, intend and other words that denote future events. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements in the press release and on this conference call. These risk factors are described in our press release and are more fully detailed under the caption “Risk Factors” in the ArcSight annual report on Form 10K as filed with the SEC on July 22, 2008 and the company’s other filings with the SEC.

During this call we will present both GAAP and non-GAAP financial measures. Non-GAAP measures exclude amortization of intangibles and stock-based compensation expenses. These non-GAAP measures are not intended to be considered in isolation from, a substitute for or superior to our GAAP results and we encourage you to consider all measures when analyzing ArcSight’s performance. For complete information regarding our non-GAAP financial information, the most directly comparable GAAP measures and a quantitative reconciliation of those figures, please refer to today’s press release regarding our first quarter 2009 results. The press release has also been furnished to the SEC as part of a Form 8K.

In addition please note that the date of this conference call is September 9, 2008 and any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events.

Lastly, this conference call is the property of ArcSight and any recording, reproduction or rebroadcast of this conference call without the express written permission of ArcSight is strictly prohibited.

Now I’ll turn the call over to Robert Shaw, Chairman and CEO of ArcSight.

Robert W. Shaw

Thanks to everyone for joining us today for our fiscal 2009 first quarter earnings call. We are calling you today from the Washington DC area where we are hosting our 4th Annual User’s Conference with more than 600 attendees from our customers and partners. Our product strategy is being well received at this event and is likely probably the largest gathering in the world of practitioners in the security information management area.

While I’m excited to be here with our customers, I’m even more pleased to report to our investors that we continued our momentum with another strong quarter on both top and bottom line with revenue at the high end of our guidance and non-GAAP net income well above expectations. We remain optimistic about our business and the market opportunity in front of us. In spite of the macroeconomic headwinds that are impacting IT spending, our pipeline remains strong, multiple verticals continue to deliver, our channel partners are ramping up and we continue to expand our geographic reach.

As ArcSight’s first investor and then its CEO for the last seven years, I’m extremely pleased to have led ArcSight to its current status as a growing public company and market leader in the security information and event management market. Although my tenure was longer than I originally intended, the milestones we’ve accomplished in our success today has made it all worthwhile. With the positive results we’ve posted as a newly public company and my complete confidence in the company’s prospects looking forward, I’ve decided that now is the right time to promote Tom Reilly to the CEO role which will allow me to focus my attention on my position as Chairman of the Board of Directors.

Many of you already know Tom and will concur that his contribution to our stellar growth and our market leadership position these last two years have prepared him well for this opportunity. Tom’s appointment marks the culmination and succession plan that began two years ago when we hired him as COO, subsequently promoted him to President, and recently appointed him to the Board of Directors.

With the experience and strong position to the company, I’ve decided that at the beginning of October is the right time to retire from the day-to-day Chief Executive role. ArcSight’s well positioned as a public growth company with a comprehensive platform for market leading products, world class customers, strong partnerships and an experienced management team.

It’s my firm belief that Tom is the ideal choice to guide ArcSight through its next stage of company evolution. As many of you know, Tom brings to this position an impressive resume that includes experience as both a software company CEO and he is well known amongst our ArcSight customers and investors. I look forward to working with Tom in his new capacity.

With that I’ll turn it over to Tom.

Thomas Reilly

I am very excited about becoming ArcSight’s Chief Executive Officer. As I’ve shared with many of you already, when I joined the company two years ago I saw a unique opportunity for ArcSight to become the next major IT platform providing companies with enterprise-wide IT controls to protect their businesses from cyber attacks, malicious insiders, and to demonstrate compliance in policy controls across the enterprise. I realized that ArcSight was uniquely position to offer solutions to companies of all sizes in all vertical across all geographies in both the public and private sectors.

Turning to our quarterly results. We recorded year-over-year revenue growth of nearly 40% with total revenues of $27.7 million for the first quarter of fiscal 2009. In addition we made significant bottom line improvements with ongoing efforts to control operating costs and focus on savings across all aspects of our business. With this focus we were profitable on a non-GAAP basis in Q1 with non-GAAP net income of $0.3 million or $0.01 per diluted share.

This past quarter was marked by continued growth across key verticals, geographies and strong performance by our channel partners. We believe that the market for security information and event management often referred to as SIEM is more resistant to this soft spending environment than other technology solutions and our strong competitive products enable us to gain market share, contributing in large part to our success. We find that fraud prevention and compliance monitoring continue to be priorities even in difficult economic markets.

A prime example I’d like to share is what occurred midway through our last quarter with a long-standing banking client of ours. I was notified on a Friday via email that this client had canceled their annual maintenance renewal which is a very rare occurrence and why I noticed the alert. Before I had the opportunity to contact the client, I learned on the news that this bank was struggling to keep its doors open and four days later was seized by the Office of Thrift Supervision and placed under the control of the FDIC. What is most interesting and representative of our value is that within seven days we received a call from the FDIC instructing us to reactivate support services and to provide consultants onsite to get the system back up ASAP.

For us this was a clear validation that even when money is tight, budgets are being locked down and jobs are at risk, our solution delivers a critical value proposition to safeguard a business’ most important assets. It is that value proposition that is allowing us to continue to grow in this tough economic environment.

All of our key verticals contributed to our success in the quarter and remain strong today. We added 47 new customers in the quarter. Outside of government, financial services remained our strongest vertical representing 21% of the fiscal first quarter’s business despite the sector’s challenges. Retail also performed well as PCI compliance remained an important focus in this sector.

A vertical we haven’t discussed in the past is higher education. We saw a spike in activity this past quarter in higher ed so I thought I would share some insight. These learning institutions share many of the security and compliance concerns and mandates as companies and other verticals. As an example, this past quarter a large Ivy League university purchased our solution to protect their student records and university financials from security breaches. In many cases these universities are at greater risk because they perpetually generate classes of computer science majors who are capable of and perhaps even eager to test their newly acquired skills against a familiar target. Lastly, an increasing number of universities are being required by their Boards of Trustees to demonstrate the equivalent of SOX 404 compliance across their IT infrastructures.

We’ve seen a growing trend in compliance initiatives and regulations in international markets too and we are meeting those needs as well. This past quarter we signed new customers in Thailand, Taiwan, Bulgaria, Austria, Saudi Arabia and Poland. Thailand is a good example of how government regulation and compliance mandates can grow our business. Last year the Thailand government enacted a cyber crime law that mandates that by August 2008 all corporations retain 90 days of log files to support cyber crime investigations. Our logger family of products is perfectly suited to address this market opportunity and deliver very strong results for us in Thailand this past quarter.

Additionally the APAC region in general is showing improved growth as a result of the new leadership we hired at the end of last fiscal year and due to the increased adoption of our compliance based offerings designed for the mid-market.

Our scalable suite of products allows us to sell to companies of all sizes. This past quarter our largest new client was a shipping and transportation company with more than $50 billion in annual revenues while our smallest new client was an emerging telecommunications firm with just $75 million in annual revenues. We will continue to rely on our growing list of channel partners to help us reach the mid and small markets globally.

On the product development side, we continue to enhance the value of our platform with the introduction of several new products. We launched ArcSight IdentityView an off-the-shelf product that is designed to work with identity and access management systems from a variety of vendors to provide customers a better understanding of who is on their network, what data they are seeing and which actions they are taking with that data. The benefits for our customers is greater security, improved compliance reporting, more cost effective audits, and an increased return on their original identity and access management investment. At our User’s Conference this week Oracle has joined us as a platinum sponsor and we are featuring our two-way integration with our identity and data security products. You have heard us and you’ve heard our clients say in the past that ArcSight makes other security solutions better. IdentityView continues in that tradition.

We also enhanced our ArcSight logger product with real-time analysis and event mining features, what we refer to as forensics on the fly. This capability enables IT and forensics teams to quickly conduct informative top done investigations to accelerate resolution time, increase staff efficiency and reduce costs through intuitive interactive dashboards.

In total it is our intent to arm our channel partners with market-leading products and to enable our customers with solutions to protect their most valued assets.

The investments we’ve made in product development coincide with the investments we’ve made in our partner channel. Together they are starting to bear fruit and we remain confident that investments down the distribution chain and in our product pipeline will boost penetration in the mid market. There remains a tremendous market opportunity for our products as only ArcSight has the platform that delivers solutions from simple log management to comprehensive real-time event monitoring addressing the range of problems from printer security to insider threat, fraud prevention and compliance monitoring. We believe that the market is clearly demanding this breadth of solutions.

So I am very proud of what we have accomplished so far and I’m very excited about what lies ahead.

I would now like to turn the call over to Stewart to discuss our financials in greater detail.

Stewart Grierson

As previously mentioned, for the first quarter ended July 31, 2008 we had total revenue of $27.7 million representing year-over-year growth of 39%. We recorded non-GAAP net income of $0.3 million or $0.01 per diluted share. This excludes stock-based compensation expense of $1.4 million and amortization of intangibles of $211,000. We recorded a GAAP net loss of $1.3 million or -$0.04 per diluted share.

We added 47 new customers in the quarter representing 50% of product revenue at a significant increase over the 25 new customers we added in the first quarter of last year. In fact, revenue contribution from new customers grew 75% on a year-over-year basis. We also continued to generate significant product revenues from our install base with 50% of our product revenue coming from existing customers. Unlike the prior two quarters, we did not have any 10% customers in the quarter. Product revenues grew 29% on a year-over-year basis and represented 57% of total revenue.

On a non-GAAP basis gross margin for the quarter was 81%. As you would expect, with Q1 being a seasonally down quarter from Q4 due to the lower products sales, the lower mix of product to maintenance and services had the impact of lowering gross margins in the quarter. In addition the success of our logger products continues to increase the percentage of appliance revenue to total product revenue.

Non-GAAP year-over-year operating costs increased to $23.1 million from $18.9 million as we significantly increased our headcount across the business to support our sales growth, continue to innovate and introduce new products to market, and increase G&A to support our growth in public company status. We added 36 new employees in the quarter, the majority of whom were in our sales and services organizations. We incurred a non-GAAP operating loss for the quarter of $0.6 million. In addition, given we are forecasting to be profitable on an annual basis, we recorded an income tax benefit of $0.6 million in the quarter.

Turning to the balance sheet, we ended the first quarter with cash and cash equivalents of $74.2 million. We generated $3.8 million in positive cash flows from operations and used roughly $1.2 million in capital expenditures and $0.3 million related to financing activities. We continue to invest our cash in highly rated conservative investment vehicles.

In accordance with GAAP and as discussed on prior calls, we net down accounts receivable and deferred revenue for sales transactions that are recognized on a cash basis. As a result, in order to understand the change in accounts receivable and deferred revenue from period to period, one must take the impact of the net down into consideration. Deferred revenue of $40.8 million at July 31, 2008 was net of $7 million of sales transactions that are recognized as revenue on a cash basis. This compares to fourth quarter deferred revenue of $41.3 million that was net of $5.5 million of cash basis transactions. Accordingly, gross deferred revenue increased by approximately $1 million from the fourth quarter of fiscal 2008 to the first quarter of fiscal 2009. Accounts receivable was $17.3 million at July 31, 2008 compared to $26.7 million at the end of the fourth quarter. Once again, both these balances are net of $7 million and $5.5 million respectively for cash basis transactions.

We had very strong collections in the quarter resulting in DSOs of 58 days. This compares to DSOs of 82 and 91 days for Q4 and Q1 of last year respectively. Just to remind you, our target for DSOs is 60 to 70 days.

Looking forward I will now update the fiscal year 2009 guidance we gave at the time of our last earnings call and provide guidance for the second quarter of fiscal 2009. Although our current visibility remains strong, we are cognizant of the broader issues that continue to impact the macroeconomic environment and as such are maintaining our annual revenue guidance at $124 million to $128 million for fiscal 2009. This represents very strong annual growth of 22% to 30%. As a result of our strong Q1 bottom line results we are narrowing our non-GAAP net income estimates for fiscal 2009 to be in the expected range of $8 million to $9 million or $0.22 to $0.26 per diluted share excluding stock-based compensation expense and amortization of intangibles.

For the second quarter of fiscal 2009 we expect revenue to be in the range of $29 million to $31 million which represents growth of 18% to 26% over the prior year. Non-GAAP net income for the second quarter of fiscal 2009 is expected to be in the range of $0.7 million to $1.7 million or $0.02 to $0.05 per diluted share excluding stock-based compensation expense and amortization of intangibles.

I’ll now turn the call back over to Tom to provide his concluding remarks.

Thomas Reilly

Our goals remain the same. First, become a mission critical platform in every company’s IT architecture. Second, deliver the scalability, interoperability and the multiple use cases to address the growing enterprise-wide needs of our clients. That ranges from perimeter security to insider threat, fraud prevention and compliance monitoring. Our results this quarter once again reflect our commitment to these goals. We continue to make progress on our four primary initiatives that we have talked about in the past. We used these initiatives to gauge our progress on fulfilling our strategy, specifically through our broadened distribution channel we further penetrated the mid-market in global 2008 achieving the new customer wins we planned for. Our ongoing product development and sales execution are enabling our success in penetrating the mid-market and we expect this trend to continue in fiscal 2009. We continue to drive additional product revenue from our install base within enhanced SM use cases and strong complementary solutions like our logger products.

We continue to launch new applications such as our IdentityView product which we released last quarter and our AntiFraud Accelerator which we introduced yesterday here at our User’s conference. We also have a number of new products in the pipeline that we previewed with many of our customers during this conference including the latest version of our channel friendly logger product which had significant improvements in both the event capture rate as well as search rate improvements of 100 times over the prior version. We will continue to partner with industry leaders to further grow our business. This past quarter we announced a significant and very exciting partnership with McAfee and an integration with our EPO product line that will bring our joining clients integrated workflow capabilities for improved security and compliance monitoring.

McAfee has over 30,000 EPO customers monitoring 58 million desktops in roughly 40% of all the endpoints worldwide and we hope to bring value to these multiple endpoints. We’re continually investing in strategical alliances with other large ISVs as their offering becomes a key platform within Enterprises. These partnerships help advance our positions as a lead player in the SIM space and we’ll be announcing additional partnerships in the future. We recognize our continued growth is bucking the trend that the broader IT industry is experiencing with the difficult macroeconomic environments and the tightened budgets. We hope and expect to continue outperforming the broader sector by remaining a top priority for corporations despite fiscal challenges. Even though our current visibility remains strong, I do not want to get over optimistic when there are many macroeconomic factors in the quarters ahead that are out of our control.

As a new CO designate I believe the decision to maintain our current fiscal 2009 revenue guidance unchanged is appropriate. Once again, I’m very excited about taking on my new role with the company. I’m very fortunate to have Rob as our chairman and I look forward to working with him and further delivering on his original vision. I, together with our employees, partners, customers and investors look forward to a prosperous future.

This concludes our prepared comments for today. We will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Rob Breza – RBC Capital Markets.

Rob Breza – RBC Capital Markets

Tom, can you talk a little bit about deal sizes? Obviously, you had a good quarter in getting new customers in what is normally seasonally a tougher quarter. Obviously, great to see that up quarter-over-quarter. Can you talk about deal sizes and what you’re seeing in terms of them taking on multiple new products and how that trend is working with the new customers specifically?

Thomas Reilly

This quarter, we’re actually not depending on any large deals and we didn’t have any greater than 10% deals in the quarter unlike the prior two quarters previously mentioned. So, putting that aside, we’re actually seeing our ASPs hold quite well. We do expect our ASPs to eventually start declining as we go in to the mid market and the mid market selects our appliance base offerings like Logger. A good example would be some of these higher ed organizations. Yet, for Q1 we saw our ASPs holding, our products are competing very, very well and we’re pretty pleased with that performance.

Rob Breza – RBC Capital Markets

Maybe two housekeeping items for Stewart, can you talk Stewart about taxes and what we should expect kind of how that should trend through the year? And, G&A was a little bit higher than what I had forecasted it and maybe I didn’t take in to account the user event, just a little explanation there would be helpful as well.

Stewart Griersoni

Sure, if you recall on the last call we indicated we expected our effective tax rate to be 34% for the year. For the quarter it came in slightly below that at 30% and so that maybe a revised estimate to use going forward. As it relates to G&A, a couple of factors there not related to the user conference but obviously Q1 is the period where you are doing the audit work for your year end 10K so you’re incurring more costs there. But, also going forward, we’re doing a significant amount of work around SOX this year so perhaps that’s part of the reason the G&A is higher than you would have expected but we have to obviously be SOX compliant by the end of our next fiscal year.

Operator

Your next question comes from Phil Rueppel – Wachovia Securities.

Phil Rueppel – Wachovia Securities

Congratulations to both Tom and Robert on your new roles. Along those lines are there any plans on replacing your former role, or any key executive roles that need to be filed going forward?

Thomas Reilly

Robert and I have been discussing this with the board for a while here so we’ve had a good opportunity to prepare. I do not intend to backfill my role. In fact, we have been working the last two years to build out a very strong executive team. We have a lot of very strong leadership in all of our key functional areas and we feel that we have the right leadership team in place and we don’t need to backfill me at this time.

Phil Rueppel – Wachovia Securities

Then, building on your response about sort of the big deal or the fact that there weren’t any overly big deals in Q1 I mean, is the pipeline similar as you would have seen it in other Q2s and are we really just seeing seasonality there? Or, are the effects of the economy sort of playing a bigger impact in terms of at least the large size deals?

Thomas Reilly

No, we’re not seeing necessarily the large size deals go away. I think this was just seasonality, everything looks pretty consistent. Quite frankly, I was very pleased that we had a very successful Q1 based on volume of customers and transactions and not looking for a big deal in that quarter. But, we will continue to have big deals in our future as our clients look to expand their projects.

Phil Rueppel – Wachovia Securities

Final question for me, as you move down in to the mid markets from channel partners, are you seeing any change in the complexion of the competitive environment? Are there folks you’re starting to see more down there that you didn’t in the larger enterprise installations?

Robert W. Shaw

I think you’re seeing the traditional just log management players. But, what we’ve described to some of you in the past was our squeeze play with what we offer is the ability to come at the lowest end of the market with a very competitive if not more advantaged low end product logging market and being able to transition our customers up the scale in to a full SIM if that becomes important and we add more capability to our logging products. So, yes we see some of the logging companies, we see some of the smaller SIM players but I would still say we see RSA and Symantec.

Thomas Reilly

Lastly on that is in some of these newer countries that we penetrate, often we’ll come across a local provider who just does business in that country but we bring great advantage with kind of a worldwide brand and I think we’ll continue to do well against those smaller competitors.

Operator

Your next question comes from Keith Weiss – Morgan Stanley.

Keith Weiss – Morgan Stanley

I was just hoping to get a little bit more color on the government business from you guys, sort of the tone of business in the quarter, how that opportunity is evolving and maybe your expectations for the closing of the federal fiscal year and maybe some outlook in to what the election year means to you guys from a federal spending point of view?

Thomas Reilly

I’ll give my view of that and Rob may have some comments as well. So, government has continued to be a very strong sector for us. In Q1 again, it was our strongest sector. Here in Q2 the government financial close. We actually hold our user conference here in Washington DC in the September month, one to be near all of our government clients but also we recognize it’s a September close so we’re looking forward to another strong contribution by the government. Now, this time of year continuing resolution is something that we expect to take place which kind of puts a hold on any net new projects but keeps funding going for existing projects. We went through this last year and continue to have successful performance so we expect hopefully the same.

Robert W. Shaw

I asked that same question to our federal team earlier today, what’s the crystal ball look like from an election perspective and I think it’s pretty unanimous across the group that they don’t see, no matter who wins the election, there’s not going to be any immediate impact on what we do, I think both parties understand the importance of security and compliance. And, with some of the initiatives they’re talking about in Homeland Security, we see the opportunity continuing to grow and be robust.

Thomas Reilly

I would just throw one [inaudible] here, in talking to a lot of our government customers, a topic that comes up quite frequently is actually just recently we saw, for the first time, the first synchronized land attack and cyber attack when Russia entered Georgia. There is just a lot of heightened concern around nation states sponsoring cyber attacks and as I’ve talked with many of you in past quarters and when I met with you, we believe that cyber warfare will be a tremendous opportunity for us as countries around the world look to protect their critical infrastructure from cyber attacks.

Operator

Your next question comes from Israel Hernandez – Lehman Brothers.

Israel Hernandez – Lehman Brothers

My question on the government was just that but can you comment on the linearity that you saw over the course of the quarter? Obviously, the macro environment is a headwind for all companies but I’m just kind of curious what you guys saw as you moved through the month of August? And as you kind of look out to the balance of this calendar year how are you accessing your pipelines, your book of business relative to your expectations?

Thomas Reilly

We’re very focused on not just quarter linearity but within the quarter how we do in any given month. We actually look for our month two to be strong quarters because that’s the calendar close for most of our customers and for a lot of our partners so they drive their businesses towards our month two close. And also, here in Q2, our month two which happen to be September, the government fiscal close. I think we’re trending as we have in the past and we continue to monitor that. I think one of our strengths is always to try to have early visibility in to our quarters by doing good business in month one and month two.

Operator

Your next question comes from Jay Meyer – [Selto] & Company.

Jay Meyer – [Selto] & Company

I wonder Stewart if you could go through that tax break down again one more time?

Stewart Griersoni

Sure. So, what we said on the last call Jay was that we were expecting an effective tax rate of about 34% for the year. Upon doing the Q1 calculation and looking at our expected results for the year, the effective rate is marginally lower than that, it’s around 30%.

Jay Meyer – [Selto] & Company

Sorry to do this to you but would you walk through that deferred revenue equation again?

Stewart Griersoni

Sure. Under GAAP, we report both receivables and deferred revenue net of any sales transactions that we recognize on a cash basis. So, both of those balance sheet line items get reduced by the amount of cash basis transactions in the quarter and so when you look at our balance sheet in comparing one quarter to another or one period to another you just need to take that in to consideration. So, in Q1 the net down affect was it reduced receivables and deferred revenue by $7 million. If you’re comparing that to Q4, the numbers you’re seeing in the press release or in any of our filings are reduced by $5.5 million for cash basis transactions so you just really want to compare these on a gross basis which is why we give you these net down amounts.

Operator

Your next question comes from Jonathan Ruykhaver – ThinkPanmure.

Jonathan Ruykhaver – ThinkPanmure

I’m curious or wondered if you could talk in a little more detail around the partnership with McAfee? I understand there is some technology integration but can you talk about what kind of channel opportunity this partnership may present to our side?

Thomas Reilly

McAfee has 30,000 EPO customers and we now have a joint value proposition to bring to them but it’s not just for ArcSight to sell in to McAfee’s customers. The way McAfee’s EPO solution works is they have agents that sit on desktops but they have [blades] that they can basically up sell. So, what McAfee’s strategy is how do they go back to their install base and sell more [blades] or basically license more of their EPO capabilities. What our site brings is value proposition to sell more [blades] of EPO so we think even the McAfee sales force can become a good channel for us because now when they go in jointly with ArcSight, not only an opportunity for us to sell because we have integration with McAfee but, their reps will look at it as a great way to up sell their customers and when they up sell it can be anywhere from $10 to $50 license per endpoint and they’ve got 50 million plus endpoints out there as opportunity.

So, we’re just beginning the cross training of our sales forces. We’ll likely start out with kind of SWAT teams where we’ll have just some experts on the relationship on our side and they’ll have some technical experts, we’ll go after and get our reference opportunities. But, we think these are the type of partnerships we want to forge and even here our clients responded back that this brings greater value to their investment in both McAfee and in ArcSight. I think it will be a good success for us.

Jonathan Ruykhaver – ThinkPanmure

So it’s not the McAfee channel actually being comp’d on the sale of your products it’s just more jointly going in to the customer and then McAfee trying to leverage off of what you’re able to sell?

Thomas Reilly

That’s correct.

Robert W. Shaw

That’s where any good relationship starts. You can imagine we can go other places with that once we have some success.

Jonathan Ruykhaver – ThinkPanmure

That was my next question. I guess you suggested that we could see similar partnerships that try to leverage the management or Systems Management framework from companies like HP or IBM typically. Is that safe to assume?

Robert W. Shaw

Sure. That’s always has been an early hypothesis of mine that ultimately Systems Management and what we do will have to get closer together. I think we’ve evolved in to clearly the leader from the SIMs space and I think there’s a lot more traction now and opportunity to work together with these guys. We are already integrated with most of those products and many of our customers.

Thomas Reilly

Even if you take our user conference this year, this year our platinum sponsors are Hewlett Packard, McAfee and Oracle and that’s a different trend from what we may have seen two years ago and I think it’s the importance of our capability of becoming a kind of platform within IT departments where these large ISVs look to partner with us and I think it will be a great opportunity for us to take advantage of and build go to market relationships.

Jonathan Ruykhaver – ThinkPanmure

Then, just a question on the ESM Appliances, just wondering what the sales cycle has been like? What the results have been relative to your expectations? Then, what kind of leverage are you able to get currently with that channel you’re developing? Is it still the case that your sales organization needs to go in and touch the customers to close those deals?

Thomas Reilly

Let’s first talk about our Logger appliances. We’re actually seeing pretty short sales cycles on the Logger product. Generally when somebody is looking to buy Logger they’re trying to satisfy a compliance mandate so they have some time pressures and the value proposition is basically collect logs and start reporting on them and do it in a secure way so you have kind of a chain of custody and can introduce these in to court of law. This past quarter we actually had some successes of doing some sales directly over the phone and in a matter of weeks. So, our new upcoming Logger product is designed specifically to be what we call a channel friendly product and we had a couple of our channel partners help us design the requirements for it. They participated in alpha and beta for it and we think we’ll start to see the channel drive a lot more stand alone sales.

We do have our ESM offerings available both as software and its available now on appliance. The appliance is really just a different delivery mechanism, a way of packaging the solution it really hasn’t affected the sales cycles but it does accelerate our customers implementation cycles.

Jonathan Ruykhaver – ThinkPanmure

Okay so the success you saw in the quarter in terms of the greater volume and breadth of customers and deals that really doesn’t reflect the appliance yet, it sounds like it’s more the ESM software?

Stewart Griersoni

Both the Logger product and the ESM software as opposed to the ESM appliance at this point.

Operator

That concludes our question and answer session. I’d like to turn things back to Mr. Reilly for any closing remarks.

Thomas Reilly

Thank you everyone for the call. I am very excited to have the opportunity to be the chief executive officer of this company. We have a tremendous opportunity to – and I repeat to the company all the time, we have an opportunity to sell a platform offering in to companies in all verticals. We’re selling in to companies of all sizes, we see our opportunity across the planet in multiple geographies, we have the opportunity to leverage channel partners, strategic partners and we can sell them to both the public and private sector. I think this is a very exciting place to be. I appreciate the opportunity to get to continue to work with Robert as our Chairman of the Board, Hugh Njemanze, who is our CTO and founder on a lot of this organization that’s built a great business. I look forward to updating you in the future. Thank you.

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Source: ArcSight, Inc. F1Q09 (Qtr End 07/31/08) Earnings Call Transcript
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