Isilon Systems, Inc. (ISLN)

Q2 2010 Earnings Call

July 22, 2010 8:30 am ET

Executives

Chris Blessington - Senior Director of Marketing and Communications

Sujal Patel - CEO

Bill Richter - CFO

Analysts

Katy Huberty - Morgan Stanley

Brent Bracelin - Pacific Crest Securities

Sid Parakh - McAdams Wright Ragen

Rajesh Ghai - ThinkEquity

Glenn Hanus - Needham & Company

Amit Daryanani - RBC Capital Markets

Alex Kurtz - Merriman & Company

Aaron Rakers - Stifel

Jason Ader - William Blair

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Isilon Systems 2010 second quarter financial results conference call. (Operator Instructions) I would now like to turn your presentation over to Mr. Chris Blessington, Senior Director of Marketing and Communications.

Chris Blessington

The purpose of our call today is to discuss results for the second quarter of fiscal year 2010. With me this morning are Isilon's CEO, Sujal Patel; and CFO, Bill Richter. Following their prepared remarks, we will open the call up to questions.

If you haven't seen a copy of today's press release announcing these results, it's available on the Investor Relations of our website at www.isilon.com/company. A recording of this conference call will be available on the website later this evening through midnight Eastern Time on July 29. Details on the playback are included in the press release mentioned earlier.

On this conference call, we will be referencing both GAAP and non-GAAP financial measures. When we review gross margin, operating expenses, operating margin and net income or loss, we may be speaking in non-GAAP terms, which excludes stock-based compensation. We believe that excluding these expenses gives our management and investors a better indication of our operating results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures, in our press release.

During this conference call, we will make forward-looking statements about our business and expectations for the future, including but not limited to statements regarding our financial and operating results and outlook, the benefits of our products and services and broadening of our addressable markets.

These forward-looking statements are based on expectations as of today and are inherently subject to risks, uncertainties and changes in circumstances that are difficult to predict. If the risks or uncertainties ever materialize or the assumptions prove incorrect, our actual results may differ materially from those expressed or implied by our forward-looking statements.

Any forward-looking statement should be considered in light of very various important factors including the risks and uncertainties previously noted as well as others including those set forth in our documents filed with the Securities and Exchange Commission, including our most recently filed Form 10-Q and/or report and other filings. Except as required by law, the company makes no commitment to revise or update any forward-looking statements in order to reflect subsequent events or circumstances.

And with that, I will now turn the call over to Sujal.

Sujal Patel

Thank you, Chris. Good morning, everyone, and thanks for joining us today. Isilon's second quarter was marked by continued strong business execution, significant additions to our product lines and a growing awareness of the role that Isilon's core value propositions, simplicity in light of the scale can play in optimizing a wide range of enterprise storage environment.

Before I share my thoughts on Isilon's continued business process, I'd like to have Bill start out by providing a review of our Q2 financial results. Bill?

Bill Richter

Thank, Sujal, and good morning to everyone on the call. Total revenue in the second quarter of 2010 was $45.1 million, up 56% from $29 million in the second quarter of the previous year. Sequentially, total revenue increased 15% from $39.3 million in Q1.

Let me give you some detail on our Q2 revenue. Geographically, 74% of revenue was generated in North America and 26% came from our international locations. Here is the breakdown in dollars across our major theaters.

North America was $33.2 million. Asia-Pacific was $7.4 million and EMEA was $4.5 million. Our EMEA business was the only geography sequentially down in Q2. We believe the European economic situation coupled with the stronger dollar impacted our business there. Overall, the channel growth was 69% of revenue in Q2, which is an all-time record for the company.

Breaking out North America separately, the channel generated 59% of revenue. This compares to 45% in Q1 and 45% in Q2 of 2009. Our North American channel business grew 68% sequentially from $11.7 million in Q1 to $19.7 million in Q2 and was a significant driver of our strong revenue results.

In Q2, sales of our add-on software applications contributed 11% of our total revenue mix or $5.1 million. As a reminder, during Q2, we offered pre-sales of our new software application, InsightIQ and SmartPools, but no revenue will be recognized on these products until they're officially released in Q3.

In Q2, we acquired a record 97 new customers. In the past when we're reporting new customer revenue mix, we used to speak in terms of total revenue. Going forward, we will report new customer mix specifically within products revenue as we believe this metric is more reflective of our underlying order patterns. With that said, the new customer product revenue mix was 28% in the second quarter compared to 28% in Q1 and 31% in the same period a year ago.

In terms of vertical market contributions, only two crossed the 10% mark, media and entertainment at 35% and life sciences at 17%. Internet, the federal government, carriers and manufacturing were all in the mid-single digits.

Our non-verticalized business at 28% was the highest it's been for some time and reflects success going into key enterprise applications such as virtualization, business intelligence, home directories and backup and archive.

Lastly on revenue, this is our second quarter in the new revenue recognition standards, ASU 2009-13 and 14, which we adopted on a prospective basis effective January 1, 2010. Just as in Q1, the new standard had an immaterial impact on our results.

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