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Q2 2009 3PAR inc. Earnings Conference Call - Final.

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OPERATOR: Good day, ladies and gentlemen, and welcome to the 3PAR Second Quarter Fiscal 2009 Earnings Conference Call. My name is Katie and I'll be your coordinator for today. (Operator Instructions).

UNIDENTIFIED COMPANY REPRESENTATIVE: Good evening and welcome to 3PAR's fiscal year 2009 second quarter earnings release Conference Call. This Conference Call will include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements include among others statements about our financial projections and growth trends for the third quarter and full year of fiscal 2009 and beyond, as well as financial projections and growth trends for the overall storage market and segments thereof. Anticipated impact and effectiveness of our market business and investment strategies, anticipated market share opportunities and diversification of our customer base, anticipated demand for our storage solution and reception of our value proposition as well as adoption trends in our customer market.

All of these forward-looking statements involve known and unknown risks and uncertainties and important factors that may cause our actual results, levels of activity, performance or achievement or those in our industry to differ from those expressed or implied by the statements we make. In evaluating these forward-looking statements you should specifically consider various risk factors including the risk factors detailed from time to time in our filings with the Securities and Exchange Commission including but not limited to those set forth in our quarterly report on Form 10-Q for the quarter ended June 30, 2008. Additional risk factors and other information you should consider will also be set forth in our quarterly report on Form 10-Q for the quarter ended September 30, 2008 which will be filed with the SEC in November. These factors may cause our results to differ materially from the forward-looking statements we make on this Conference Call. We cannot guarantee future results, levels of activity, performance or achievements. Our future results will depend on numerous factors including among other the impact of macroeconomic trends on information technology spending, market acceptance of our utility storage solutions, and competitive practices in our industry. These forward-looking statements are made only as of today's date and we expressly disclaim any obligation to update or revise the information contained in them.

Please also note that this Conference Call will provide listeners with certain financial metrics determined on a non-GAAP basis both for a comparison to previous quarters and the previous fiscal year and for our outlook for the current quarter. These financial metrics together with a reconciliation to comparable GAAP financial measures are contained in today's financial results press release which we have posted on our website at Investor Relations on www.3PAR.com under Press Releases and have furnished to the SEC on Form 8-K. We encourage listeners to review these items. With that, I'd now like to turn the call over to David Scott, CEO of 3PAR. David?

DAVID SCOTT, PRESIDENT & CEO, 3PAR: Good afternoon and thank you for joining us for our second quarter fiscal year 2009 earnings call. We're pleased to report revenue of $45.1 million, 61% higher than our revenue in this period a year ago and 5% higher than the previous quarter. The 5% sequential increase was particularly impressive given that we had accelerated a significant amount of revenue into our first fiscal quarter from the rest of the year including the quarter which we are reporting today. This top line result exceeded our guidance and we believe this trend demonstrates continued strength in our customer markets and demand for our products.

In fiscal Q2 we achieved a gross margin of 65.2%. I'm pleased that we continue to be able to maintain these gross margins levels. It's an important measure of our customer's view of the value that we deliver to their organizations. We delivered net income of $520,000 on a non-GAAP basis excluding stock-based compensation expenses. This result translated into a non-GAAP EPS of $0.01. We achieved this in spite of substantial headwinds in the other income line including negative currency effects and substantial reductions in net interest income. Our GAAP EPS including expenses related to stock options was negative $0.02 a share.

I'd like to talk about a few other achievements in the quarter in the areas of our new platform roll-out, continued innovation and the build-out of our business both domestically and internationally. We announced our new T-class InServ storage server in September which we've been successfully shipping since the beginning of that quarter. This new platform reinforced our leadership position as the fastest storage array in the industry as independently audited by the Storage Performance Council under its SPC-1 benchmark. The T-class delivers approximately two to three times the performance of the S-class platform that it replaces and we've been delighted by its rate of uptake within our customer base.

We've also been extending our leadership in thin provisioning innovation with our Start Thin, Get Thin, Stay Thin strategy. Thin provisioning 1.0 was about starting thin applied to new applications that were being deployed. Thin provisioning 2.0 is about getting thin to extend the benefit to existing data volumes that were created using traditional fat provisioning techniques. The T-class platform included our new Gen3 Asic with a thin built-in zero detection design. It enabled efficient and non-disrupted fat to thin data migrations. This capability can let customers efficiently migrate petabytes of bloated fat data volumes from our competitors existing installed bases on to 3PAR, delivering them a substantial return on investment. This is an example of our intent to differentiate in both software and hardware.

And we intend to continue innovating at a rapid pace. The next phase, thin provisioning 3.0 is about staying thin. A previous limitation of thin provisioning was that physical storage capacity can become trapped when used with file systems that are subject to significant file deletion over time. If the file system does not reuse the storage capacity immediately it can cause written utilization efficiency on the storage array to drop. Two weeks ago we announced a partnership with Symantec on a joint thin reclamation ATI to address this challenge. With thin reclamation, Symantec's file systems can signal the unused storage blocks associated with deleted files and 3PAR systems will be able to reuse those blocks. Rather than having to purchase more storage, this freed storage capacity can then be used for other applications resident on the 3PAR storage array.

Our leadership in thin provisioning has received ever greater industry attention. Last quarter 3PAR received the 2008 Frost & Sullivan North American Technology Innovation Award. This award was in recognition of the revolutionary impact of 3PAR's thin provisioning technology on the storage industry. Thin provisioning is also being recognized for its extremely positive impact on energy efficiency and 3PAR customer, Hilton Grand Vacations, was recently chosen by Storage Networking World in conjunction with Computer World and the Storage Networking Industry Association to receive the award for return on investment and best practices in green computing. We believe our comprehensive Start Thin, Get Thin, Stay Thin strategy will enhance both our competitive leadership and our reputation for ongoing platform innovation.

Over the last few months we've continued our integration within the broader storage and virtualization ecosystems. We announced a cooperative support agreement with Microsoft for Hyper-V, participation in the Oracle Unbreakable Limits program as well as support for Symantec's SmartMove technology. Our customers can benefit from better integrated 3PAR solutions as they build out their utility and cloud computing infrastructures.

Internationally, we recently announced new partnerships with Databasement, a storage systems integrator, who will represent 3PAR utility storage offerings in the Netherlands, Germany and Spain as well Knitlogix, a storage reseller who will distribute the InServ platform in India.

Turning to the economy, we've been monitoring the demand environment closely given recent developments. To date we've witnessed what we could consider very moderate impacts to spending patterns on 3PAR storage. We've seen a handful of instances where customer budgets have been reduced as a precaution. However to date, this behavior has been more than offset by increased prospect interest in 3PAR's value proposition and offerings. We think this interest is being spurred by the compression of IT budgets in response to the economic slowdown. We've seen companies who may previously not have considered moving away from their relationships with their incumbent storage providers begin to explore the benefits of 3PAR utility storage. It has...