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Article by DailyStocks_admin    (12-09-08 01:53 AM)

Filed with the SEC from Nov 27 to Dec 03:

Double-Take Software (DBTK)
Thoma Bravo reported ownership of 1,522,369 shares (6.9%), after buying them from Oct. 8 through Dec. 1 at prices ranging from $6.08 to $7.65.


BUSINESS OVERVIEW

Overview

Double-Take Software develops, sells and supports affordable software that reduces downtime and protects data for business-critical systems. We believe that we are the leading supplier of replication software for Microsoft server environments and that our business is distinguished by our focus on software license and recurring maintenance sales, our productive distribution network and our efficient services infrastructure. Organizations of all sizes increasingly rely on application systems and stored electronic data to conduct business. Threats of business disruptions from events such as 9/11 and Hurricane Katrina and new regulations that have increased data protection requirements for businesses in many industries are causing more organizations to re-examine their data and server recovery strategies. Our software responds to these needs by continuously replicating changes made to application data on a primary operating server to a duplicate server located on- or off-site. Because the duplicate server can commence operating in place of the primary server at almost any time, our software facilitates rapid failover and application recovery in the event of a disaster or other service interruption. With our recent acquisition of TimeSpring Software Corporation (“TimeSpring”), now known as Double-Take Software Canada, Inc. (“Double-Take Canada”) and its TimeData products we can also recover data from almost any point in time from a repository located on- or off-site.

Our success has been driven in large part by our software technology, which was first released in 1995 and has been enhanced by years of customer feedback. Residing on the server operating system, our software continuously monitors and captures file system activity. Intercepting file system changes enables our software to replicate only those changes that are being written to files. Our hardware- and application-independent software efficiently protects data created by any application on almost any type or brand of disk storage on any brand of server running Windows file systems.

We sell our software through multiple channels, including a global distribution network that is supported by an experienced direct sales force. Our distribution partners include leading server manufacturers, such as Dell Computer Corporation and Hewlett-Packard Company, leading distributors, such as Bell Microproducts Inc. and Tech Data Corporation, and over 500 value-added resellers that we believe are generally well-connected with small- and medium-sized enterprises. Our direct sales force augments the revenue generated by our distribution partners and actively supports them in their third-party sales efforts.

Our broad distribution network, coupled with affordable price points, feature-rich proven software, modest implementation costs and dependable support, makes our software accessible and scalable from small enterprises of 20 people to Fortune 500 companies. As of December 31, 2007, our customer base of more than 15,000 organizations included over half of the Fortune 500 companies, as well as a large number of law firms, financial institutions, hospitals, school districts and government entities. We believe that we have a highly satisfied customer base. Many of our customers provide references that help us to generate new sales opportunities and to shorten sales cycles. Our sales personnel often enlist the assistance of satisfied customers to recommend our software to potential customers in similar industries or that have similar applications or server configurations. The breadth and diversity of our customers frequently allows us to refer to a similar configuration when making a new sale. The satisfaction of our customer base also contributes to reduced support costs.

We believe that the software replication market is large and growing, and that our software is particularly attractive to businesses in the small-and medium-sized enterprise information technology market, which has been growing at a faster rate than the large enterprise information technology market. We expect that growth in our market will continue to be driven by a number of factors, including the following:


• the rapid growth in digital data, driven by increased usage of automated systems;

• an increased focus on protecting a growing number of business-critical applications, such as email applications, particularly in service-oriented industries;

• a heightened awareness of the potential for natural and man-made disasters;

• the increasingly high cost of downtime, which is partly attributable to an increase in the sharing of applications with customers, partners and remote users; and

• government and industry regulations, such as the Health Insurance Portability and Accountability Act of 1996 and the Sarbanes-Oxley Act of 2002, which require data protection and recovery.

For our fiscal year ended December 31, 2007, we had revenue of $82.8 million, an increase of 36% from fiscal 2006 revenue of $60.8 million. The matters discussed in this “Business” section should be read in conjunction with the Consolidated Financial Statements found under Item 8 of Part II of this annual report, which include additional financial information about our total assets, revenue and measures of profits and loss and financial information about geographic areas.

Organization; Principal Executive Offices

We were organized as a New Jersey corporation in 1991, and we reincorporated in Delaware in 2003. In July 2006 we changed our name to Double-Take Software, Inc. from NSI Software, Inc. Our principal executive offices are located at 257 Turnpike Road, Suite 210, Southborough, Massachusetts 01772, and our main telephone number at that address is (877) 335-5674. We maintain our general corporate website at www.doubletake.com. The contents of our website, however, are not a part of this annual report.

Our Strategy

Our goal is to provide affordable software that will reduce our customers’ downtime for business-critical systems to as close to zero as possible and offer effective protection and recovery for less critical systems. In striving for this goal, we seek to be the leading provider of software for application availability and data protection. We are pursuing the following key initiatives:


• Expand our Customer Base within our Current Markets. We plan to gain additional customers in the markets we currently serve by expanding our distribution network to reach more customers and by leveraging our existing customer base. We believe our customers are very satisfied and will continue to provide references across multiple industries, multiple configurations and multiple applications. In addition, we plan to continue to offer enhancements to our current software to broaden its appeal.


• Cross-sell Existing and New Software to our Customer Base . We plan to sell software for additional applications to our current customers and believe that many of our existing customers will acquire more licenses to the software that they are already using. We also believe that a large majority of our customers will renew in the future because of their satisfaction with our software and customer support. We plan to offer new software that complements our existing software and applications and achieves additional customer objectives. We expect that our new offerings primarily will be developed internally, but we anticipate that we may in some instances hire third-party developers to develop software on our behalf or acquire new offerings through strategic transactions. For example, in December 2007 we acquired Montreal-based TimeSpring Software, now known as Double-Take Software Canada, Inc. Corporation, which provides software that allows users to recover protected data from any point in time. We plan to offer this functionality to new and existing customers in 2008.


• Enter New Markets. We plan to enter into new markets and grow our presence in markets where we currently have a small presence. We expect to do this through expansion of our channel by creating or expanding relationships with partners that serve different markets. We also plan to continue to grow our presence in the larger enterprise market by leveraging our supportive customer base. We believe that small- and medium-sized enterprises frequently lead in the adoption of cost effective technology solutions out of necessity and that large institutions follow by replacing more expensive solutions with cost effective solutions. We have seen organizations in the larger enterprise market adopt our software, and we expect this trend to continue.

• Expand Globally. We believe that the market potential outside the United States is at least as large as the market within and offers us significant growth potential. We plan to extend our global reach though the expansion of our direct and channel sales efforts and through strategic acquisitions. For example, in May 2006 we acquired our main European distributor, now known as Double-Take Software S.A.S., or Double- Take EMEA, with offices in France, the United Kingdom and Belgium. We also work closely with Hewlett-Packard, which has a strong international presence and is our largest OEM, and we plan to continue our increased focus and sales support on international sales. In August 2006, we established a full time presence in Asia.


• Continue to Innovate. We plan to continue to focus on enhancing our existing software and to develop new, innovative software. For example, in 2007 we introduced new software products and features that protect the full system state of a server, including operating system and application configuration. We believe that software innovations will also help us to expand our addressable market, and we have software in the development pipeline that we expect will help us to scale up to serve larger entities and to scale down to serve even smaller enterprises. For example, we have released software for support of Microsoft’s Small Business Server. We also plan to continue to monitor market dynamics and to prepare to apply our technology to other server operating systems to the extent significant market opportunities exist.

Our Software and Services

Double-Take Software. Our Double-Take software provides continuous protection of data to reduce or eliminate data loss, as well as the ability to recover rapidly the application and server needed to utilize that data through automatic or manually initiated failover. This combination of data protection with high availability failover provides significantly higher levels of availability than solutions that address only data protection or that provide local failover clustering but that do not provide data redundancy or protection across multiple locations.

We derive nearly all of our software revenue from our Double-Take software, which generated 97% of our total software revenue for the year ended December 31, 2005, 96% of our total software revenue for the year ended December 31, 2006 and 98% of our total software revenue for the year ended December 31, 2007. In addition, we derive substantially all of our maintenance and professional services revenue from associated maintenance and customer support of these applications.

Our Double-Take software is easily installed on each protected “source” server as well as on each “target” server that will store copies of the protected data and be prepared to take over for the protected server and its applications. This software-based approach provides several important features and benefits:


• Real-time Byte Level Change Capture. Our file system filtering technology monitors all file input and output (I/O) to files selected for protection and captures changes as they occur, without the overhead of additional disk reads to compare file content. This approach captures only the bytes written to the file system, rather than full files or disk blocks, and allows Double-Take to replicate any application data, including open files such as databases, messaging systems or other transactional applications. As a result, data can be protected continuously with very little system impact or overhead.

• Storage Architecture Independence. Double-Take can replicate to or from almost any storage type supported by the host operating system. Not only can replication occur between storage types such as Fibre Channel or iSCSI Storage Area Networks and directly attached disks, but source and target disks that have completely different geometries or multiple source volumes can be consolidated onto a single large capacity target volume. As a result, customers can use their existing storage systems and even replicate between storage systems of different types. Only solutions that run along with the applications and replicate logical file system structures can provide this level of flexibility and performance.

• Integrated Application and Server Availability. Software replicating between servers can easily monitor and failover other functions such as server name, IP addresses or integrated applications between servers. As a result, not only is data protected, but the operating system and applications that use that data to provide services to users can be replicated and activated quickly and automatically, even on different hardware or virtual servers. Double-Take provides application managers for a variety of the business-critical applications that companies rely on to run their businesses.

• Standards-Based IP Networking Support. Double-Take utilizes standard IP networking for data replication, monitoring and failover, allowing data to be protected and servers to be managed remotely over great distances. In addition to capturing the smallest byte level changes possible, our software is optimized for long-distance, wide-area network communications providing built-in data compression and flow control capabilities, as well as leveraging advanced functionality such as encryption, wide area network optimizations and quality of service controls provided by existing IP infrastructure.

Our Customers

As of December 31, 2007, we had more than 15,000 customers in a variety of industries. Our customers use our software for a variety of purposes in terms of the applications they protect and the configuration of their servers. Our customers deploy our software in installations ranging from two servers to several hundred servers. Our customers include Bank of Montreal, the Boston Celtics, Brattleboro Memorial Hospital, Hatch Mott MacDonald, Hershey Entertainment & Resorts Company, infoUSA Inc., McGuireWoods LLP, MidAmerica Bank, Morgan Stanley, Shorenstein Realty Services, L.P., Suffolk University, The E.W. Scripps Company, The Pentagon, The United States Securities and Exchange Commission, United States Department of Defense and the United States Department of State. Our customers include over half of the Fortune 500 companies, 19 of the 25 largest U.S. law firms in the 2007 The American Lawyer AmLaw 100, over 1,000 financial institutions, over 1,100 hospitals and healthcare service providers and over 1,000 school districts and educational institutions.

Our Technology

Our Double-Take software is based on flexible and efficient file system replication technology and advanced server and application failover technology. Most client/server applications have not been designed to provide for data redundancy or application failover to a different server or a different geographic location. Consequently, we had to develop solutions outside of standard application frameworks, utilizing different approaches to ensure that business-critical applications can be moved and restarted in different locations in a way that is as fast and transparent to users as possible. Many years of experience across a large installed base have given us a mature base of data protection and availability technologies that we believe represent a significant competitive advantage.

We believe that our patented architecture allows our software to be easily adapted to almost any operating system. The software’s functionality is built into the user-mode components (source and target) of the software, which remain largely consistent across operating systems.

The driver component is responsible for intercepting file system modifications, determining if the modifications are selected for replication and passing this information to the source component. The driver has been optimized to produce high-throughput with minimal resource requirements and to minimize file system latency to the end user.

The source component packages these transactions and transmits them to one or more target machines. The source component queues transactions when the target server or network is either slow or unavailable and uses patented compression techniques to minimize the system overhead required for this queuing. The source component also controls transmission and initial mirroring, as well as verification, replication set maintenance and connection management.

File system transactions are transmitted to the target machine using standard networking mechanisms to provide interoperability between various operating systems and high-throughput. The target component then receives replication transactions from the source component and applies these transactions to the target file system. The target component is multi-threaded to handle efficiently simultaneous transactions from multiple source servers to multiple target files. The target component also monitors the source server’s health and performs server failover (via name, network address and share/mount point aliasing) when the source is unavailable.

Management of our software is supported through various client interfaces, including a Win32 graphical interface, a full-screen text client, and a command-line interface. All client platforms are based on the same set of common application interface commands, and these functions are available to all third-party developers.

Our GeoCluster software combines our core replication technology with the application failover capabilities of Microsoft Cluster Services (MSCS). GeoCluster eliminates the need for clustered nodes to share access to the same physical disk, providing data redundancy and allowing cluster nodes to be placed at different locations, providing geographic redundancy for the cluster nodes as well as the data. With GeoCluster, mission critical data is stored on each cluster node’s local drives and then replicated to the other nodes in the cluster using our patented real-time replication. GeoCluster can also provide quorum capability, acting as an arbitrator for the cluster in the event that the cluster nodes are running but cannot communicate.

Our TimeData technology captures file system changes on a production server and transmits those changes to a repository server where they are stored in a database in time sequence. The source file system driver intercepts file system changes and stores them in a local file to be transmitted to the repository server. Like the Double-Take file system filter, this driver has been optimized to have a minimal impact on production server performance.

The TimeData repository component reads file system change logs from the production server, and stores those in time sequence order within a database. A target file system interface allows other applications to access the protected file system data at various points in time by presenting a view of the file system at that time. The repository component also tracks file system changes from the production server to determine when application consistency points have been reached.

Management of the TimeData technology is done via a Management Console that currently runs on the repository server. This interface allows the user to configure and manage protection of multiple production servers to the repository server from a central location.

Marketing and Sales

We market and sell our software primarily to or through distributors, value-added resellers and OEMs, supported by an inside and field-based direct sales force located in the United States and Europe. Our selling model is based on building a strong distribution network through which customers can purchase the software. To date, we believe that this selling model has created an advantage for us. We currently have more than 500 selling partners within our distribution and value-added reseller program, and we are adding more to this group to meet regional and technology related needs. To support our partners in our sales channels, our sales group has been organized in an overlay format so that our sales teams are working with our partners within any geography to pursue sales jointly.

In addition, our marketing partners complement our sales campaigns through seminars, trade shows and joint advertising. We leverage our customers and partners to provide references and recommendations that we use in our various promotional and sales activities. These partners include Dell Computer Corporation, IBM Corporation, Microsoft Corporation, Hewlett-Packard Company and VMware, Inc.

The goal of our marketing effort is to develop sales opportunities by increasing the awareness of our software’s functionality and business need within our target markets and segments. We plan to continue to invest in building greater Double-Take brand recognition in the United States and internationally through expansion of the use of our brand, public relations programs, interactions with industry analysts, trade shows, web search optimization, regional seminars and speaking engagements.

In 2007, we received approximately 18% of our total sales from sales of software and services to Dell Computer Corporation, which is the largest reseller of our software and services and approximately 12% of our total sales from sales of software and services through Sunbelt Software Distribution, Inc., which is a reseller of our software and services. No other resellers or distributors and no customer accounted for 10% or more of our total sales in 2007.

Our software revenue generally experiences some seasonality. Many organizations make the bulk of their information technology purchases, including software, in the second half of the year. We believe that this generally has resulted in higher revenue generated by software sales during the last half of any year. Software revenue has increased each consecutive quarter during 2007. We expect this seasonality to continue in future years.

CEO BACKGROUND

Dean Goodermote joined Double-Take Software in March of 2005 as President, Chief Executive Officer and Chairperson of the board of directors. Since July 2004 he has also served as Chief Executive Officer of Grid-Analytics LLC, a concept-stage company he founded focused on aggregated research. From September 2001 to March 2005, Mr. Goodermote served as a Venture Partner of ABS Capital Partners. From September 2000 to August 2001, Mr. Goodermote was Chairman and Chief Executive Officer of Clinsoft Corporation, a developer of software for clinical research. From 1997 to August 2001, Mr. Goodermote was Chairman and President of Domain Solutions Corporation, a software developer for enterprise applications and the parent of Clinsoft. From May 2000 until December 2001, Mr. Goodermote founded and was Chief Executive Officer and then the Chairman of IPWorks, Inc., a developer of internet address management software. From August 1996 to May 2000, Mr. Goodermote was Chief Executive Officer and President of Process Software Corporation, a developer of Internetworking software. From August 1986 to February 1997, Mr. Goodermote served in various positions, including eventually President and Chairman, of Project Software and Development Corporation, later known as MRO Software, Inc., a provider of software-based asset and service management solutions.

Paul D. Birch has served on the Board of Double-Take Software since September 2006. Mr. Birch has been a private investor and business owner since August 2003. From September 2000 to July 2003, Mr. Birch held the following positions with Geac Computer Corporation Limited, a global provider of business-critical software applications and systems: December 2001 to July 2003, President, Chief Executive Officer, July 2001 to December 2001, Chief Operating Officer and Chief Financial Officer, September 2000 to July 2003, Director. From July 2001 until August 2002, Mr. Birch served as President of Geac Enterprise Solutions, Americas. From March 2000 to July 2001, Mr. Birch was the Chief Operating Officer, Chief Financial Officer, Treasurer and a Director of Escher Group, Ltd. From February 1991 to February 2000, Mr. Birch was the Chief Financial Officer, Treasurer and a Director of MRO Software, Inc. From November 1985 to February 1991 Mr. Birch served as a Tax Manager at PriceWaterhouseCoopers LLP, and as a Tax Manager with Arthur Anderson & Co. from 1980 to October 1985. Mr. Birch currently serves on the board of CommonAngels, Inc., nimbit, Inc., and Emerson Hospital.

Ashoke (Bobby) Goswami has served on the Board of Double-Take Software since 2002. Mr. Goswami is a general partner of ABS Capital Partners, a private equity firm that he joined in 2001. Prior to joining ABS Capital Partners, Mr. Goswami served as an investment banker with Alex. Brown, Merrill Lynch and Goldman Sachs. Previously, Mr. Goswami spent four years in the systems practice at Andersen Consulting.

John B. Landry has served on the Board of Double-Take Software since September 2006. Mr. Landry serves as Managing Director of Lead Dog Ventures LLC, a private technology investment firm he founded in 2005. From January 2001 to December 2007 he served as Chief Technology Officer and Chairman of the Board of Directors of Adesso Systems, Inc., a provider of mobile enterprise software and services. From January 2002 to July 2003, Mr. Landry served as the founder, Chairman and Chief Technology Officer of Adjoin Solutions, Inc. From February 1999 to June 2000, he was Chief Technology Officer and Chairman of the Board of Directors of AnyDay.com, Inc. From August 1995 to December 2000, Mr. Landry served as Vice President of Technology Strategy of International Business Machines Corporation. Prior to joining International Business Machines Corporation, Mr. Landry served as Senior Vice President, Development and Chief Technology Officer of Lotus Development and as a Senior Vice President and Chief Technology Officer at Dun & Bradstreet, Cullinet Software, Distribution Management Systems, and McCormack & Dodge. Mr. Landry currently serves on the Board of Overseers of Babson College and the Museum of Science — Boston.

John W. Young has served on the Board of Double-Take Software since June 2003. Mr. Young has been Vice President, Asset Management Development, IBM Software Group, a division of International Business Machines Corporation since October 2006. He served as Executive Vice President, Products & Technology for MRO Software, Inc. from 1998 until it was acquired by IBM in October 2006. From 1995 to 1998, he served as Vice President of Research and Development at MRO Software and from 1992 to 1995 he was Director of Product Management at MRO Software. From 1988 to 1992, Mr. Young served as Vice President of Sales for Comac Systems Corporation, an application software company.

Required Vote and Board Recommendation

In order to be elected as a director, a nominee must be elected by a majority of the votes cast with respect to such nominee at the Annual Meeting. A majority of the votes cast means that the number of shares of common stock voted FOR a nominee must exceed 50% of the votes cast with respect to that nominee. Stockholders do not have the right to cumulate their votes in the election of directors. If an incumbent nominee in an uncontested election such as the election to be held at the Annual Meeting fails to be elected, the incumbent nominee will continue in office and the Board will consider whether to accept the nominee’s earlier submitted conditional resignation. If the resignation is not accepted the incumbent nominee may continue in office until a successor is elected.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Double-Take Software develops, sells and supports affordable software that reduces downtime and protects data for business-critical systems. We believe that we are the leading supplier of replication software for Microsoft server environments. By simply loading our software onto servers running current Windows operating systems, organizations of any size can maintain an off-site standby server with replicated data, providing rapid recovery in the event of a disaster. We estimate that we have sold licenses for approximately 135,000 copies of Double-Take to more than 15,000 customers.

In recent years, we have experienced substantial growth, increasing our total revenue from $14.3 million for the year ended December 31, 2002 to $82.8 million for the year ended December 31, 2007, and we have gone from having net losses of $14.3 million to a net income of $20.1 million during that same period. We believe that our focus on providing affordable replication and high availability software to companies of all sizes through an efficient direct sales team and a robust distribution network has been instrumental to our continued revenue growth. Revenue generated by sales of our software represented 59% of our total revenue in 2007. Sales of maintenance and professional services generated the remainder of our revenue.

As a result of our investments in developing our software and establishing our broad distribution network, as well as legal fees and settlement costs associated with the defense and settlement of a legal case involving our intellectual property, we experienced significant operating losses through 2005. Our ability to increase the productivity of our sales force and distribution partners while controlling our other expenses has driven an improvement in our results, from an operating loss of $3.8 million and a net loss of $3.8 million in 2005 to an operating income of $16.6 million and net income of $20.1 million in 2007. Our acquisition of Double-Take EMEA on May 23, 2006 has also contributed to our improved results.

We commenced operations in 1991, primarily developing software for load balancing between network interface cards of servers running NetWare, a then-popular network operating system developed by Novell, Inc. We released the first Windows-based version of Double-Take in 1996 based, in part, on these experiences.

Some Important Aspects of Our Operations

We license our software under perpetual licenses to end-user customers directly and to a network of distributors, value-added resellers and original equipment manufacturers, or OEMs. Our distributors primarily sell our software to our resellers. Our resellers bundle or sell our software together with their own products and also sell our software independently. Our OEMs market, sell and support our software and services on a stand-alone basis and incorporate our software into their own hardware and software products.

Software sales made to or through our distributors, value-added resellers and OEMs generated approximately 93% of total software sales in 2007. During 2007, approximately 7% of our software sales were made solely by our direct sales force, approximately 13% were made to our distributors for sale to value-added resellers, approximately 73% of which were made directly through resellers and approximately 7% were made through OEMs, primarily Hewlett-Packard Co. We believe that we will need to continue to maintain close relationships with our partners to sustain and increase profitability. We have no current plans to focus future growth on one distribution channel versus another. We believe our direct sales force complements our indirect distribution network, and we intend to continue to increase revenue generated by both.

In 2007, the median price of sales of Double-Take software licenses to customers was approximately $5,000 and the average sales cycle was less than three months. The pricing of our product has not materially changed from 2003 through 2006. On May 1, 2007 and December 1, 2007, we implemented a nominal price increase across all of our products except in a few international markets where the price was already commensurate with the nominal price increase implemented in the United States. We believe that these factors have contributed to more balanced sales throughout the year and more predictable revenue streams in comparison to other software companies with perpetual license models. We believe that the affordability of our software is a competitive advantage.

On May 23, 2006, we completed our acquisition of Double-Take EMEA. Our acquisition of Double-Take EMEA has provided us with a direct presence in the European, Middle Eastern and African markets, the opportunity to further our strategic initiative to increase revenue generated outside of the United States, and opportunities for improved margins. The inclusion of Double-Take EMEA’s assets and operations in our business since May 23, 2006 has contributed to a significant increase in the size of our business. On December 24, 2007, we completed our acquisition of TimeSpring Software Corporation, now known as Double-Take Software Canada, Inc which we refer to as Double-Take Canada. We do not anticipate this acquisition will provide significant revenue in 2008, but we believe the acquisition of TimeSpring’s patented technology and the engineering expertise of the employees, specifically in the area of file systems and application level recovery, fits extremely well into our core capabilities as does the product design into our architecture. We expect that this acquisition will help broaden development efforts of our products resulting in generation of future revenues.

Revenue

We derive revenue from sales of perpetual licenses for our software and from maintenance and professional services.

Software Licenses. We derive the majority of our revenue from sales of perpetual licenses of our software applications, which allow our customers to use the software indefinitely. We do not customize our software for a specific end user customer. We recognize revenue from sales of perpetual licenses generally upon shipment of the software. In accordance with EITF 01-9, our software revenue is reported net of rebates and discounts because we do not receive an identifiable benefit in exchange for the rebate or discount.

Our software revenue generated approximately 59% of our total revenue in 2007 and 63% of our total revenue in 2006. Our software revenue generally experiences some seasonality. Many organizations make the bulk of their information technology purchases, including software, in the second half of the year. We believe that this generally has resulted in higher revenue generated by software sales during the last half of any year. Software revenue has increased each consecutive quarter during 2007. We expect this seasonality to continue in future years.

Maintenance and Professional Services. We also generate revenue by providing our customers with maintenance comprised of software updates and product support. We generally include our maintenance for a designated period in the price of the software at the time of sale. In addition, some of our customers enter into a maintenance agreement for periods longer than a year. These agreements entitle our customers to software updates on a when-and-if-available basis and product support for an annual fee based on the licenses purchased and the level of service subscribed. Almost all of our customers that purchase maintenance pay the entire amount payable under the agreement in advance, although we recognize maintenance revenue ratably over the term of the agreement. This policy has contributed to increasing deferred revenue balances on our balance sheet and positive cash flow from operations.

In some cases, most often in connection with the licensing of our software, we provide professional services to assist our customers in strategic planning for disaster recovery and application high availability, the installation of our software and the training of their employees to use our software. We provide most of our professional services on a fixed price basis and we generally recognize the revenue for professional services once we complete the engagement. For any paid professional services, including training, which have not been performed within three years of the original invoice date, we recognize the services as revenue in the quarter the age of the unperformed services become three years old.

Of total maintenance and professional services revenue, maintenance revenue represented 87% in 2007 and 85% in 2006. Professional services generated the remainder of our total maintenance and professional services revenue in these periods.

Of our total revenue, maintenance revenue represented 35% in 2007 and 32% in 2006. Professional services accounted for 6% and 5% of our total revenue in 2007 and 2006, respectively. Our maintenance and professional services revenue historically has generated lower gross margins than our software revenue. The gross margin generated by our maintenance and professional services revenue was 77% in 2007 and 72% in 2006. We expect the proportion of revenue derived from sales of maintenance to increase in the future as we increase the number of software licenses sold and in service. As the percentage of total revenue attributable to maintenance increases, our overall gross margins will be adversely affected.

Cost of Revenue

Our cost of revenue primarily consists of the following:

Cost of Software Revenue. Cost of software revenue consists primarily of media, manual, translation and distribution costs, and royalties to third-party software developers for technology embedded within our software. Because our development initiatives have resulted in insignificant time and costs incurred between technological feasibility and the point at which the software is ready for general release, we do not capitalize any of our internally-developed software.

Cost of Services Revenue. Cost of services revenue consists primarily of salary and other personnel-related costs incurred in connection with our provision of maintenance and professional services. Cost of services revenue also includes other allocated overhead expenses for our professional services and product support personnel, as well as travel-related expenses for our staff to perform work at a customer’s site.

Operating Expenses

We classify our operating expenses as follows:

Sales and Marketing. Sales and marketing expenses primarily consist of the following:


• personnel and related costs for employees engaged in sales, corporate marketing, product marketing and product management, including salaries, commissions and other incentive compensation, including equity-based compensation, related employee benefit costs and allocated overhead expenses;

• travel related expenses to meet with existing and potential customers, and for other sales and marketing related purposes; and

• sales promotion expenses, public relations expenses and costs for marketing materials and other marketing events, including trade shows, industry conventions and advertising, and marketing development funds for our distribution partners.

We expense our sales commissions at the time of sale. We expect our sales and marketing expense to increase in the future as we increase the number of direct sales professionals and invest in marketing programs.

Research and Development. Research and development expenses primarily represent the expense of developing new software and modifying existing software. These expenses primarily consist of the following:


• personnel and related costs, including salaries, employee benefits, equity and other incentive compensation and allocated overhead expenses, for research and development personnel, including software engineers, software quality assurance engineers and systems engineers; and

• contract labor expense and consulting fees paid to independent consultants and others who provide software engineering services to us, as well as other expenses associated with the design and testing of our software.

To date, our research and development efforts have been primarily devoted to increases in features and functionality of our existing software. We expect research and development expense to increase in the future as we continue to develop new solutions for our customers. However, we expect research and development expense to increase as a percentage of revenue in 2008 as we continue to invest in the development of our products.

General and Administrative. General and administrative expenses represent the costs and expenses of managing and supporting our operations. General and administrative expenses consist primarily of the following:


• personnel and related costs including salaries, employee benefits, equity and other incentive compensation and allocated overhead expenses, for our executives, finance, human resources, corporate information technology systems, strategic business, corporate quality, corporate training and other administrative personnel;

• legal and accounting professional fees;

• recruiting and training costs;

• travel related expenses for executives and other administrative personnel; and

• computer maintenance and support for our internal information technology system.

General and administrative expenses have increased as we have incurred increased expenses related to being a publicly-traded company and have invested in an infrastructure to support our continued growth. However, we expect general and administrative expenses to decrease as a percentage of revenue for the foreseeable future, as we believe the rate at which our revenue will increase will exceed the rate at which we expect to incur these additional expenses.

Depreciation and Amortization. Depreciation and amortization expense consists of depreciation expense primarily for computer equipment we use for information services and in our development and test labs, and amortization of intangible assets acquired.

Legal Fees and Settlement Costs. In December 2005, we agreed to terms for settlement of a legal proceeding with a provider of information storage systems that involved claims regarding some of the intellectual property used in our software. Pursuant to a settlement agreement entered into in January 2006, we paid $3.8 million in January 2006, which represented our initial settlement payment in connection with the resolution of this matter, and we agreed to pay the other company an additional $0.5 million in each of January 2007, 2008, 2009 and 2010. Our obligation to make these future payments will be reduced on a dollar-for-dollar basis to the extent that we purchase or resell the other company’s products. We have purchased computer equipment in the amount of $1.0 million through December 31, 2007. As a result, our future obligation has been reduced to $1.0 million as of December 31, 2007. Our obligation to make these payments is collateralized by a letter of credit from Silicon Valley Bank.

2007 Compared to 2006

Revenue

We derive our revenue from sales of our products and support and services. Revenue increased 36% to $82.8 million in 2007 from $60.8 million in 2006. Revenue in 2007 includes revenue from Double-Take EMEA for the entire year whereas 2006 only includes revenue from Double-Take EMEA from the acquisition date of May 23, 2006 through December 31, 2006. There was no revenue included in 2007 related to our acquisition of Double-Take Canada.

Software License Revenue. Software revenue increased $10.8 million, or 28%, from $38.4 million in 2006 to $49.2 million in 2007. The increase in software revenue was primarily due to increased volume of $5.2 million attributable to increased volume resulting from broader demand for, and acceptance of, our software, $1.0 million from new products available during 2007 and $4.6 million from sales through Double-Take EMEA as a result of an entire year of sales being included in 2007 because Double-Take EMEA was acquired on May 23, 2006.

Maintenance and Professional Services Revenue. Maintenance and professional services revenue increased $11.2 million, or 50%, from $22.4 million in 2006 to $33.6 million in 2007. Maintenance and professional services revenue represented 41% of our total revenue in 2007 and 37% of our total revenue in 2006. Maintenance revenue increased $9.7 million, or 51%, from $19.2 million in 2006 to $28.9 million in 2007. The increase in maintenance revenue was attributable to higher sales to our expanding base of customers, continued maintenance revenue from our existing customers, as well as maintenance revenue of $5.4 million generated by an entire year of revenue from Double-Take EMEA, which was acquired on May 23, 2006. Professional services revenue increased $1.3 million, or 39%, from $3.3 million in 2006 to $4.7 million in 2007. The increase in professional services revenue was due to more professional service deliveries due to an increase in professional services personnel as well as $0.7 million of revenue generated by Double-Take EMEA as a result of an entire year of sales being included in 2007 because Double-Take EMEA was acquired on May 23, 2006.

Cost of Revenue and Gross Profit

Total cost of revenue increased $0.7 million, or 9%, from $7.5 million in 2006 to $8.2 million in 2007. Total cost of revenue represented 10% of our total revenue in 2007 and 12% of our total revenue in 2006.

Cost of software revenue decreased $1.0 million, or 70%, from $1.4 million in 2006 to $0.4 million in 2007. The decrease was due to cost of software for Double-Take EMEA sales in the period from May 24, 2006 through December 31, 2006 relating to the inventory of Double-Take products on hand at May 23, 2006 of $1.4 million. This inventory was substantially sold during 2006 resulting in no similar costs in 2007. The $0.4 million of expense in 2007 was royalties paid to third parties related to software we began to include in our product in 2007. Cost of software revenue was nominal as a percent of total revenue in 2007 and 2% of total revenue in 2006.

Cost of services revenue increased $1.6 million, or 26%, from $6.2 million in 2006 to $7.8 million in 2007. The increase was the result of higher employee compensation of $0.8 million due to an increase in the number of our maintenance and professional services personnel and $0.8 million of costs of maintenance and professional services personnel of Double-Take EMEA which was acquired on May 23, 2006. Cost of services revenue represented 23% of our services revenue in 2007 and 28% of our services revenue in 2006.

Gross profit increased $21.2 million, or 40%, from $53.3 million in 2006 to $74.5 million in 2007. Gross margin increased from 88% in 2006 to 90% in 2007. This increase is primarily related to the increased maintenance revenue in 2007 from Double-Take EMEA and the expanding customer base. Additionally, cost of software revenue decreased in 2007 as a result of the use of Double-Take EMEA’s inventory during 2006. These increases to gross profit are all partially offset by increased personnel costs in maintenance and professional services.

Operating Expenses

Sales and Marketing. Sales and marketing expenses increased $6.7 million, or 30%, from $22.2 million in 2006 to $28.9 million in 2007. The increase was due to an increase of compensation and commission expense of $2.1 million resulting from increased sales and headcount, an increase of $1.0 million in marketing and advertising related to creating Double-Take brand awareness, an increase of $0.2 of travel expense and an increase of $3.3 million of costs of sales and marketing efforts through Double-Take EMEA which was acquired on May 23, 2006.

Research and Development. Research and development expenses increased $1.2 million, or 11%, from $10.7 million in 2006 to $11.9 million in 2007. The increase resulted primarily from higher compensation expense of $0.7 million due to an increase in personnel and $0.4 million from outsourced development projects.

General and Administrative. General and administrative expenses increased $3.0 million, or 26%, from $11.8 million in 2006 to $14.9 million in 2007. The increase in 2007 was primarily related to $0.3 million of compensation expense related to increased headcount, an increase of $2.5 million related to legal, accounting, insurance and consulting fees as a result of being a public company, $1.3 million attributable to expensing of stock options because of the adoption of SFAS 123R in January 2006, and $1.5 million of costs from Double-Take EMEA which was acquired on May 23, 2006. Additionally, in 2006, there was a settlement with the former COO for $1.2 million recorded as a reduction to general and administrative expense. There was no similar reduction to expense in 2007. These increases are partially offset by a decrease in compensation expense in 2007 of $3.2 million due to the issuance of stock to our CEO in 2006 and $1.2 million as a result of the vesting of stock options to our former CEO in 2006.

Depreciation and Amortization. Depreciation and amortization expense increased $0.7 million, or 45%, from $1.6 million in 2006 to $2.3 million in 2007. The increase was attributable to increased depreciation expense of $0.4 million associated with increased capital expenditures, which were primarily for product development and other computer-related equipment, as well as increased amortization expense of $0.3 million related to the intangible assets acquired in the Double-Take EMEA acquisition and minimal amortization of the intangibles acquired as part of the Double-Take Canada acquisition.

Interest Income

Interest income increased $2.7 million from $0.3 million in 2006 to $3.0 million in 2007. The increase is attributable to higher balances in our cash and short term investment accounts, mainly as a result of our initial public offering in December 2006 and our positive cash flow from operations.

Foreign Exchange gains (losses)

Foreign currency losses totaled $0.2 million due to foreign currency fluctuations related to Double-Take EMEA during 2007.

Income Tax Expense (benefit)

Income tax expense was $0.5 million in 2006 and was a benefit of $0.8 million in 2007. During 2007, we recorded a current tax expense of $8.2 million related to income generated during the period using an effective tax rate for the full year. Because we have delivered consistent profitability over the past two years, we concluded that it was more likely than not that we would generate sufficient taxable income to utilize the benefit from our net operating loss carryforwards eligible to be used in 2007, 2008 and 2009. As a result, the Company reversed the valuation allowance on $9.0 million of deferred tax assets resulting in a net benefit of $0.8 million in 2007.

In determining future taxable income, assumptions are made to forecast federal, state and international operating income, the reversal of temporary timing differences, and the implementation of any feasible and prudent tax planning strategies. The assumptions require significant judgment regarding the forecasts of future taxable income, and are consistent with forecasts used to manage the business. As of December 31, 2007, the valuation allowance against net deferred tax assets, which are primarily comprised of net operating loss carryforwards as a result of operating losses incurred since inception, and our acquisition of Double-Take Canada is approximately $26.0 million. Realization of deferred tax assets is dependent upon future earnings, if any, the timing of which is uncertain. Accordingly, the net deferred tax assets were offset by the valuation allowance. If not utilized, the federal and state net operating loss and tax credit carryforwards will expire between 2011 and 2026. Utilization of these net operating losses and credit carryforwards are subject to annual limitations due to provisions of the Internal Revenue Code of 1986, as amended, that are applicable due to “ownership changes” that have occurred. The valuation allowance as of December 31, 2007 will be maintained until sufficient further positive evidence exists to support a reversal of, or decrease in, the valuation.

Net Income

Net income increased $13.3 million from a net income of $6.8 million in 2006 to net income of $20.1 million in 2007. This increase is primarily related to our revenue growth of $21.9 million in 2007 while operating expenses have increased by only $11.7 million in the same period. This increase was the result of our continued focus on expense control and continuing to leverage our existing sales force and partners to generate incremental revenue, as well as our acquisition of Double-Take EMEA, which occurred on May 23, 2006. The other contributing factors are the reversal of the valuation allowance on our deferred tax assets as well as increased interest income during 2007.

Preferred Stock

Accretion on our Series B and Series C Preferred stock decreased from $4.5 million in 2006 to $0.0 million in 2007. The accretion increased the carrying value of the preferred shares from their carrying value to their redemption value on a straight-line basis over the period from the investment date to the mandatory redemption date. Accretion ceased as of November 12, 2006, the redemption date for both issuances.

Dividends on our Series B and Series C Preferred stock decreased from $2.8 million in 2006 to $0.0 million in 2007. In connection with our initial public offering in December 2006, our Series B and Series C Preferred stock converted into an aggregate of 11,553,130 shares of common stock. Thus, there are no dividends in 2007.

2006 Compared to 2005

Revenue

Total revenue increased $20.1 million, or 49%, from $40.7 million in 2005 to $60.8 million in 2006. Revenue for 2006 includes revenue from Double-Take EMEA from its date of acquisition on May 24, 2006. Of our total revenue in 2006, 94% was attributable to sales to or through our distribution partners, which was an increase from 93% of our total revenue attributable to sales to or through our distribution partners in 2005. Of our total revenue in the 2006, 6% was attributable to direct sales to end users, a decrease from 7% of our total revenue attributable to end users in 2005.

Software License Revenue. Software revenue increased $12.2 million, or 47%, from $26.2 million in 2005 to $38.4 million in 2006. The increase in software revenue was due to increased volume of $3.4 million resulting from broader demand for, and acceptance of, our software, $1.9 million due to the release of our new product Double-Take for Virtual Systems, $1.9 million due to a price increase that was effective on August 1, 2005 and $5.0 million from Double-Take EMEA sales from May 24 through December 31, 2006.

Maintenance and Professional Services Revenue. Maintenance and professional services revenue increased $7.9 million, or 55%, from $14.5 million in 2005 to $22.4 million in 2006. Maintenance and professional services revenue represented 36% of our total revenue in 2005 and 37% of our total revenue in 2006. Maintenance revenue increased $7.1 million, or 59%, from $12.1 million in 2005 to $19.2 million in 2006. The increase in maintenance revenue was attributable to higher sales to our expanding base of customers, as well as maintenance revenue of $5.2 million generated by Double-Take EMEA. Professional services revenue increased $0.9 million, or 38%, from $2.4 million in 2005 to $3.3 million in 2006. The increase in professional services revenue was due to more professional service deliveries due to an increase in professional services personnel as well as $0.5 million of revenue generated by Double-Take EMEA.

Cost of Revenue and Gross Profit

Total cost of revenue increased $3.1 million, or 72%, from $4.4 million in 2005 to $7.5 million in 2006. Total cost of revenue represented 11% of our total revenue in 2005 and 12% of our total revenue in 2006.

Cost of software revenue increased $1.3 million, or 3,466%, from a nominal amount in 2005 to $1.4 million in 2006. The increase was due to cost of inventory related to Double-Take EMEA sales in 2006. We expect this amount to decrease because Double-Take EMEA sold through their remaining inventory on hand at the time of the acquisition during 2006. Cost of software revenue represented 0% of our software revenue in 2005 and 2% of our software revenue in 2006.

Cost of services revenue increased $1.8 million, or 42%, from $4.4 million in 2005 to $6.2 million in 2006. The increase was the result of higher employee compensation of $0.7 million due to an increase in the number of our maintenance and professional services personnel, higher facility costs associated with the increase of personnel of $0.2 million and $0.8 million of costs of Double-Take EMEA maintenance and professional services personnel. Cost of services revenue represented 30% of our services revenue in 2005 and 28% of our services revenue in 2006.

Gross profit increased $17.0 million, or 47%, from $36.3 million in 2005 to $53.3 million in 2006. Gross profit decreased from 89% in 2005 to 88% in 2006. This decrease is related to the cost of software increase related to Double-Take EMEA.

Operating Expenses

Sales and Marketing. Sales and marketing expenses increased $5.0 million, or 29%, from $17.2 million in 2005 to $22.2 million in 2006. The increase was due to an increase of compensation and commission expense of $1.2 million resulting from increased sales, an increase of $0.3 million in marketing and advertising related to our Double-Take brand re-launch and $3.5 million of costs of Double-Take EMEA sales and marketing efforts.

Research and Development. Research and development expenses increased by $1.0 million, or 10%, from $9.7 million in 2005 to $10.7 million in 2006. The increase resulted from higher compensation expense of $0.4 million due to the implementation of a company wide incentive plan in the second half of 2005, and $0.5 million from outsourced development projects.

General and Administrative. General and administrative expenses increased $5.1 million, or 76%, from $6.7 million in 2005 to $11.8 million in 2006. The increase was related to $1.6 million in compensation expense in 2006 attributable to expensing of stock options because of the adoption of SFAS 123R in January 2006, an increase in compensation expense of $3.7 million due to the issuance of stock to our CEO of $3.2 million and the implementation of a company wide incentive plan in the second half of 2005 and $1.4 million of costs from Double-Take EMEA. These increases were offset by a decrease in legal fees of $0.6 million incurred in 2005 related to an investigation of expenses attributable to former employees as well as a reduction in expenses in 2006 arising from the settlement with the former COO for $1.2 million.

Depreciation and Amortization. Depreciation and amortization expense increased $0.8 million, or 100%, from $0.8 million in 2005 to $1.6 million in 2006. The increase was attributable to increased depreciation expense associated with increased capital expenditures, which were applied primarily for product development and other computer-related equipment, as well as amortization related to the intangible assets acquired in the Double-Take EMEA acquisition.

Legal Fees and Settlement Costs. Legal fees and settlement costs decreased $5.7 million, or 100%, from $5.7 million in 2005 to $0.0 million in 2006. This decrease is attributable to the settlement in December 2005 of the legal proceeding between us and a provider of information storage systems regarding certain intellectual property rights.

Interest Income

Interest income increased $0.2 million from $0.1 million in 2005 to $0.3 million in 2006. The increase is attributable to higher cash balances in our deposit accounts and an increase in related interest rates.

Foreign Exchange gains (losses)

Foreign currency gains totaled $0.1 million due to foreign currency fluctuations related to Double-Take EMEA from May 24 to December 31, 2006.

Income Tax Expense

Income tax expense increased from $0.0 million in 2005 to $0.5 million in 2006. The increase is related to income tax expense incurred by Double-Take EMEA as well as a nominal amount related to our domestic operations. We expect that our income tax expense will continue to increase in future periods related to Double-Take EMEA’s operations. This increase will be partially offset by our domestic operating loss carryforwards available as well as associated foreign tax credits related to Double-Take EMEA tax payments. As of December 31, 2006, we hav e approximately $60.0 million in net operating loss carryforwards, a portion of which is subject to usage limitations due to ownership changes.

Net Income (Loss)

Net income increased from a loss of $3.8 million in 2005 to income of $6.8 million in 2006. This increase is related to our revenue growth of 49% from 2005 while operating expenses have increased by only 15% in the same period. This increase was the result of our continued focus on expense control and continuing to leverage our existing sales force and partners to generate incremental revenue, as well as our acquisition of Double-Take EMEA.

Preferred Stock

Accretion on our Series B and Series C Preferred stock decreased from $5.3 million in 2005 to $4.5 million in 2006. The accretion increases the carrying value of the preferred shares from their carrying value to their redemption value on a straight-line basis over the period from the investment date to the mandatory redemption date. The decrease is a result of accretion ceasing as of November 12, 2006, the redemption date for both issuances.

Dividends on our Series B and Series C Preferred stock increased from $2.7 million in 2005 to $2.8 million in 2006. The increase is a result of to the monthly compounding of the dividends pursuant to the terms of each issuance.

Upon completion of the offering in December 2006, all shares of our Series B and Series C Preferred stock converted into 11,553,130 shares of common stock. A mandatory payment to the Series B holders of approximately $10.2 million was also made upon completion of the offering.

Critical Accounting Policies

In presenting our financial statements in conformity with accounting principles generally accepted in the United States, we are required to make estimates and judgments that affect the amounts reported in our financial statements. Some of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. We formulate these estimates and assumptions based on historical experience and on various other matters that we believe to be reasonable and appropriate. Actual results may differ significantly from these estimates. Of our significant accounting policies described in Note A to the historical financial statements included elsewhere in this annual report, we believe that the following policies may involve a higher degree of judgment and complexity.

Revenue Recognition

In accordance with EITF 01-9, our revenue is reported net of rebates and discounts because we do not receive an identifiable benefit in exchange for the rebate or discount. We derive revenues from two primary sources or elements: software licenses and services. Services include customer support, consulting, installation services and training. A typical sales arrangement includes both of these elements. We apply the provisions of Statement of Position (“SOP”) 97-2, Software Revenue Recognition , as amended by SOP 98-4 and SOP 98-9, and related interpretations to all transactions to determine the recognition of revenue.

For software arrangements involving multiple elements, we recognize revenue using the residual method as described in SOP 98-9. Under the residual method, we allocate and defer revenue for the undelivered elements based on relative fair value and recognize the difference between the total arrangement fee and the amount deferred for the undelivered elements as revenue. The determination of fair value of the undelivered elements in multiple element arrangements is based on the price charged when such elements are sold separately, which is commonly referred to as vendor-specific objective-evidence (“VSOE”).

Our software licenses typically provide for a perpetual right to use our software and are sold on a per-copy basis. We recognize software revenue through direct sales channels and resellers upon receipt of a purchase order or other persuasive evidence and when all other basic revenue recognition criteria are met as described below. Revenue from software licenses sold through an OEM partner is recognized upon the receipt of a royalty report evidencing sales.

Services revenue includes revenue from customer support and other professional services. Customer support includes software updates (including unspecified product upgrades and enhancements) on a when-and-if-available basis, telephone support and bug fixes or patches. Customer support revenue is recognized ratably over the term of the customer support agreement, which is typically one year. To determine the price for the customer support element when sold separately, we use actual rates at which we have previously sold support as established VSOE.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview
Double-Take Software develops, sells and supports affordable software that reduces downtime and protects data for business-critical systems. We believe that we are the leading supplier of replication software for Microsoft server environments. By simply loading our software onto servers running current Windows operating systems, organizations of any size can maintain an off-site standby server with replicated data, providing rapid recovery in the event of a disaster. We estimate that we have sold licenses for approximately 125,000 copies of Double-Take to more than 10,000 customers.
In recent years, we have experienced substantial growth, increasing our total revenue from $14.3 million for the year ended December 31, 2002 to $60.8 million for the year ended December 31, 2006, and we have gone from having net losses of $14.3 million to a net income of $6.8 million during that same period. Revenue for the nine months ended September 30, 2007 totaled $59.2 million and we recorded net income of $13.7 million. We believe that our focus on providing affordable replication software to companies of all sizes through an efficient direct sales team and a robust distribution network has been instrumental to our continued revenue growth. Revenue generated by sales of our software represented 59% and 63% of our total revenue in the nine months ended September 30, 2007 and September 30, 2006, respectively. Sales of maintenance and professional services generated the remainder of our revenue.
As a result of our investments in developing our software and establishing our broad distribution network, as well as legal fees and settlement costs associated with the defense and settlement of a legal case involving our intellectual property, we experienced significant operating losses through 2005. Our ability to increase the productivity of our sales force and distribution partners while controlling our other expenses has driven an improvement in our results, from an operating loss of $3.8 million and a net loss of $3.8 million in 2005 to an operating income of $7.0 million and net income of $6.8 million in 2006. Our acquisition of Double-Take EMEA on May 23, 2006 has also contributed to our improved results. We achieved operating income of $11.1 million and net income of $13.7 million for the nine months ended September 30, 2007.
Some Important Aspects of Our Operations
We license our software under perpetual licenses to end-user customers directly and to a network of distributors, value-added resellers and original equipment manufacturers, or OEMs. Our distributors primarily sell our software to our resellers. Our resellers bundle or sell our software together with their own products and also sell our software independently. Our OEMs market, sell and support our software and services on a stand-alone basis and incorporate our software into their own hardware and software products.
Software sales made to or through our indirect channels such as distributors, value-added resellers and OEMs generated approximately 94% of total software revenue in the nine months ended September 30, 2007 and September 30, 2006. During the nine months ended September 30, 2007 and September 30, 2006, approximately 6% of our software sales were made solely by our direct sales force, approximately 12% and 19%, respectively, were made to our distributors for sale to value-added resellers, approximately 75% and 67%, respectively, were made directly through resellers and approximately 7% and 8%, respectively, were made through OEMs, primarily Hewlett-Packard Co. We believe that we will need to continue to maintain close relationships with our partners to sustain and increase profitability. We have no current plans to focus future growth on one distribution channel versus another.
In the nine months ended September 30, 2007, the median price of sales of Double-Take software licenses to customers was approximately $4,000 and the average sales cycle was less than three months. On May 1, 2007, we implemented a nominal price increase across all of our products except in a few international markets where the price was already commensurate with the nominal price increase. We believe that relatively small deal levels have contributed to more balanced sales throughout the quarter and more predictable revenue streams in comparison to other software companies with perpetual license models.
On May 23, 2006, we completed our acquisition of Sunbelt System Software S.A.S., which is now known as Double-Take Software S.A.S., or Double-Take EMEA. From 1998 through the acquisition date, Double-Take EMEA was the principal or exclusive distributor of our software in our European, Middle Eastern and African markets and a certified Double-Take training organization. Sales of our software and related services generated 93% of Double-Take EMEA’s revenue in 2005. Our acquisition of Double-Take EMEA has provided us with a direct presence in the European, Middle Eastern and African markets, the opportunity to further our strategic initiative to increase revenue generated outside of the United States, and opportunities for improved margins. The inclusion of Double-Take EMEA’s assets and operations in our business since May 23, 2006 has contributed to a significant increase in the size of our business.

Revenue
We derive revenue from sales of perpetual licenses for our software and from maintenance and professional services.
Software Licenses . We derive the majority of our revenue from sales of perpetual licenses of our software applications, which allow our customers to use the software indefinitely. We do not customize our software for a specific end user customer. We recognize revenue from sales of perpetual licenses generally upon shipment of the software. In accordance with EITF 01-9, our software revenue is reported net of rebates and discounts because we do not receive an identifiable benefit in exchange for the rebate or discount.
Our software revenue generated approximately 59% and 63% of our total revenue in the nine months ended September 30, 2007 and September 30, 2006, respectively. Our software revenue generally experiences some seasonality. Many organizations make the bulk of their information technology purchases, including software, in the second half of the year. We believe that this generally has resulted in higher revenue generated by software sales during the last half of any year. We believe this pattern is consistent in 2007. Software revenue has increased each consecutive quarter during 2007.
Maintenance and Professional Services . We also generate revenue by providing our customers with maintenance comprised of software updates and product support. We generally include our maintenance for a designated period in the price of the software at the time of sale. In addition, some of our customers enter into a maintenance agreement for periods longer than a year. These agreements entitle our customers to software updates on a when-and-if-available basis and product support for an annual fee based on the licenses purchased and the level of service subscribed. Almost all of our customers that purchase maintenance pay the entire amount payable under the agreement in advance, although we recognize maintenance revenue ratably over the term of the agreement. This policy has contributed to increasing deferred revenue balances on our balance sheet and positive cash flow from operations.
In some cases, most often in connection with the licensing of our software, we provide professional services to assist our customers in strategic planning for disaster recovery and application high availability, the installation of our software and the training of their employees to use our software. We provide most of our professional services on a fixed price basis and we recognize the revenue for professional services once we complete the engagement.
Of total maintenance and professional services revenue, maintenance revenue represented 88% and 86% in the nine months ended September 30, 2007 and September 30, 2006, respectively. Professional services generated the remainder of our total maintenance and professional services revenue in these periods.
Of our total revenue, maintenance revenue represented 36% and 32% in the nine months ended September 30, 2007 and September 30, 2006, respectively. Professional services accounted for 5% of our total revenue in the nine months ended September 30, 2007 and September 30, 2006. Our maintenance and professional services revenue historically has generated lower gross margins than our software revenue. The gross margin generated by our maintenance and professional services revenue was 76% and 72% in the nine months ended September 30, 2007 and September 30, 2006, respectively. We expect the proportion of revenue derived from sales of maintenance to increase in the future as we increase the number of software licenses sold and in service. As the percentage of total revenue attributable to maintenance increases, our overall gross margins will be adversely affected.
Cost of Revenue
Our cost of revenue primarily consists of the following:
Cost of Software Revenue . Cost of software revenue consists primarily of media, manual, translation and distribution costs and may in the future include royalties to third-party software developers for technology embedded within our software. Because our development initiatives have resulted in insignificant time and costs incurred between technological feasibility and the point at which the software is ready for general release, we no longer capitalize costs of our internally-developed software. As a result, we do not believe that amortization of internally developed software will have any effect on our cost of software revenue in future periods.
Cost of Services Revenue . Cost of services revenue consists primarily of salary and other personnel-related costs incurred in connection with our provision of maintenance and professional services. Cost of services revenue also includes other allocated overhead expenses for our professional services and product support personnel, as well as travel-related expenses for our staff to perform work at a customer’s site.

Operating Expenses
We classify our operating expenses as follows:
Sales and Marketing. Sales and marketing expenses primarily consist of the following:
• personnel and related costs for employees engaged in sales, corporate marketing, product marketing and product management, including salaries, commissions and other incentive compensation, including equity-based compensation, related employee benefit costs and allocated overhead expenses;

• travel related expenses to meet with existing and potential customers, and for other sales and marketing related purposes; and

• sales promotion expenses, public relations expenses and costs for marketing materials and other marketing events, including trade shows, industry conventions and advertising, and marketing development funds for our distribution partners.
We expense our sales commissions at the time of sale. We expect our sales and marketing expense to increase in the future as we increase the number of direct sales professionals and invest in marketing programs.
Research and Development . Research and development expenses primarily represent the expense of developing new software and modifying existing software. These expenses primarily consist of the following:
• personnel and related costs, including salaries, employee benefits, equity and other incentive compensation and allocated overhead expenses, for research and development personnel, including software engineers, software quality assurance engineers and systems engineers; and

• contract labor expense and consulting fees paid to independent consultants and others who provide software engineering services to us, as well as other expenses associated with the design and testing of our software.
To date, our research and development efforts have been primarily devoted to increases in features and functionality of our existing software. We expect research and development expense to increase in the future as we continue to develop new solutions for our customers.
General and Administrative. General and administrative expenses represent the costs and expenses of managing and supporting our operations. General and administrative expenses consist primarily of the following:
• personnel and related costs including salaries, employee benefits, equity and other incentive compensation and allocated overhead expenses, for our executives, finance, human resources, corporate information technology systems, strategic business, corporate quality, corporate training and other administrative personnel

• legal and accounting professional fees;

• recruiting and training costs;

• travel related expenses for executives and other administrative personnel; and

• computer maintenance and support for our internal information technology system.
General and administrative expenses have increased as we have incurred increased expenses related to being a publicly-traded company and have invested in an infrastructure to support our continued growth. However, we expect general and administrative expenses to decrease as a percentage of revenue for the foreseeable future, as we believe the rate at which our revenue will increase will exceed the rate at which we expect to incur these additional expenses.

Depreciation and Amortization. Depreciation and amortization expense consists of depreciation expense primarily for computer equipment we use for information services and in our development and test labs, and amortization of intangible assets acquired.
Results of Operations
Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
Revenue. We derive our revenue from sales of our products and support and services. Revenue increased 30% to $21.3 million, from $16.4 million for the three months ended September 30, 2007 compared to September 30, 2006. Of our total revenue in the three months ended September 30, 2007, 88% was attributable to sales to or through our indirect channels such as distributors, value-added resellers and OEMs, which was a decrease from 96% of our total revenue attributable to sales to or through our indirect channels for the three months ended September 30, 2006. This percentage can vary from quarter to quarter and we do not plan to significantly increase our proportion of sales from direct sales. Of our total revenue in the three months ended September 30, 2007, 12% was attributable to direct sales to end users, an increase from 4% of our total revenue attributable to end users in the three months ended September 30, 2006.
Software License Revenue. Software revenue increased $2.4 million, or 23%, from $10.2 million in the three months ended September 30, 2006 to $12.6 million in the three months ended September 30, 2007. The increase in software revenue was primarily due to the increased number of software licenses sold resulting from broader demand for, and acceptance of, our software.
Maintenance and Professional Services Revenue. Maintenance and professional services revenue increased $2.5 million, or 41%, from $6.2 million in the three months ended September 30, 2006 to $8.7 million in the three months ended September 30, 2007. Maintenance and professional services revenue represented 38% of our total revenue in the three months ended September 30, 2006 and 41% of our total revenue in the three months ended September 30, 2007. Maintenance revenue increased $2.4 million, or 46%, from $5.3 million in the three months ended September 30, 2006 to $7.7 million in the three months ended September 30, 2007. The increase in maintenance revenue was attributable to higher sales to our expanding base of customers in both North America and through Double-Take EMEA as well as continued maintenance renewals from our existing customers. Professional services revenue increased $0.1 million, or 8%, from $0.9 million in the three months ended September 30, 2006 to $1.0 million in the three months ended September 30, 2007. The slight increase in professional services revenue was due to more professional service deliveries due to an increase in professional services personnel as well as increased revenue generated by Double-Take EMEA.
Cost of Revenue and Gross Profit
Total cost of revenue decreased $0.2 million, or 10%, from $2.2 million for the three months ended September, 30 2006 to $2.0 million in the three months ended September 30, 2007. Total cost of revenue represented 14% of our total revenue in the three months ended September 30, 2006 and 9% of our total revenue in the three months ended September 30, 2007.
Cost of software revenue decreased $0.4 million, or 86%, from $0.5 million for the three months ended September 30, 2006 to $0.1 million for the three months ended September 30, 2007. The decrease was due to cost of software for Double-Take EMEA sales in the three month period ending September 30, 2006 relating to the inventory of Double-Take products on hand at May 23, 2006 of $1.4 million. The balance of the inventory was sold from the acquisition date through the three months ended March 31, 2007, resulting in no similar cost of revenue for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006. Cost of software revenue represented 5% and 1% of our software revenue in the three months ended September 30, 2006 and September 30, 2007, respectively.
Cost of services revenue increased $0.2 million, or 13%, from $1.7 million for the three months ended September 30, 2006 to $1.9 million in the three months ended September 30, 2007. The increase was primarily a result of an increase in personnel. Cost of services revenue represented 28% of our services revenue in the three months ended September 30, 2006 and 22% in the three months ended September 30, 2007.
Gross profit increased $5.1 million, or 36%, from $14.2 million for the three months ended September 30, 2006 to $19.3 million for the three months ended September 30, 2007. Gross margin increased from 86% in the three months ended September 30, 2006 to 91% in the three months ended September 30, 2007. This increase is primarily related to higher cost of software revenue relating to Double-Take EMEA’s inventory in the three months ended September 30, 2006.

Sales and Marketing. Sales and marketing expenses increased $1.3 million, or 23%, from $5.6 million for the three months ended September 30, 2006 to $6.9 million for the three months ended September 30, 2007. The increase was substantially due to increased compensation expense related to an increase in personnel as well as increased commission expense resulting from increased sales.
Research and Development. Research and development expenses increased $0.2 million, or 10%, from $2.8 for the three months ended September 30, 2006 to $3.0 million for the three months ended September 30, 2007. The increase primarily resulted from higher compensation expense of $0.1 million due to an increase in personnel and $0.1 million from outsourced development projects.
General and Administrative. General and administrative expenses increased $1.5 million, or 59%, from $2.6 million for the three months ended September 30, 2006 to $4.1 million for the three months ended September 30, 2007. The increase was substantially related to an increase of $0.5 million in compensation expense in the three months ended September 30, 2007 attributable to stock option expense, a $0.1 increase in compensation due to increased personnel, an increase in insurance expense of $0.2 million related to higher premiums associated with coverages for a public company, an increase of $0.3 million in legal and accounting fees due to being a public company, an increase of $0.4 million of costs from Double-Take EMEA primarily related to personnel expense, and a $0.3 decrease in bad debt expense.
Depreciation and Amortization. Depreciation and amortization expense increased $0.1 million, or 23%, from $0.5 million in the three months ended September 30, 2006 to $0.6 million for the three months ended September 30, 2007. The increase was attributable to increased depreciation expense associated with increased capital expenditures.
Interest Income. Interest income increased $0.7 million, or 767%, from $0.1 million for the three months ended September 30, 2006 to $0.8 million for the three months ended September 30, 2007. The increase is attributable to higher balances in our cash and short term investment accounts, mainly as a result of our initial public offering in December 2006, our secondary offering in August 2007, and our positive cash flow from operations.
Foreign Exchange gains (losses)
Foreign currency losses increased a nominal amount due to foreign currency fluctuations related to Double-Take EMEA for the three months ended September 30, 2007.
Income Tax Expense (Benefit)
Income tax expense increased by $1.8 million, or 548%, from $0.3 million for the three months ended September 30, 2006 to $2.1 million for the three months ended September 30, 2007 substantially as a result of increased taxable income generated from operations in the United States. In the three months ended September 30, 2007, we recorded a current tax expense of $2.1 million related to income generated during the period using an effective tax rate expected to be in effect for the full year.
In determining future taxable income, assumptions are made to forecast federal, state and international operating income, the reversal of temporary timing differences, and the implementation of any feasible and prudent tax planning strategies. The assumptions require significant judgment regarding the forecasts of future taxable income, and are consistent with forecasts used to manage the business. As of September 30, 2007, the valuation allowance against net deferred tax assets, which are primarily comprised of net operating loss carryforwards as a result of operating losses incurred since inception, is approximately $19.3 million. Realization of deferred tax assets is dependent upon future earnings, if any, the timing of which is uncertain. Accordingly, the net deferred tax assets were offset by the valuation allowance. If not utilized, the federal and state net operating loss and tax credit carryforwards will expire between 2011 and 2025. Utilization of these net operating losses and credit carryforwards are subject to annual limitations due to provisions of the Internal Revenue Code of 1986, as amended, that are applicable due to “ownership changes” that have occurred. The valuation allowance as of September 30, 2007 will be maintained until sufficient further positive evidence exists to support a reversal of, or decrease in, the valuation.

Net Income
Net income increased $0.8 million, or 32%, from $2.5 million for the three months ended September 30, 2006 to $3.3 million for the three months ended September 30, 2007. This increase is substantially related to our revenue growth of $4.9 million during the three months ended September 30, 2007. The increase in revenue is a result of the continued leverage of our existing sales forces and partners to generate revenue. Operating expenses increased by only $3.2 million in the same period as we are continuing to focus on expense control. The revenue and operating expenses are partially offset by the increase in income tax expense of $1.8 million and the increase in net interest income and foreign currency expense of $0.6 million.
Preferred Stock
Accretion on our Series B and Series C Preferred stock decreased from $1.3 million in the three months ended September 30, 2006 to $0.0 million in the three months ended September 30, 2007. The accretion increased the carrying value of the preferred shares from their carrying value to their redemption value on a straight-line basis over the period from the investment date to the mandatory redemption date. Accretion ceased as of November 12, 2006, the original redemption date for both issuances.
Dividends on our Series B and Series C Preferred stock decreased from $0.7 million in the three months ended September 30, 2006 to $0.0 million in the three months ended September 30, 2007. In connection with our public offering in December 2006, our Series B and Series C Preferred stock converted into an aggregate of 11,553,130 shares of common stock. Thus, there are no dividends for the three months ended September 30, 2007.
Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
Revenue. We derive our revenue from sales of our products and support and services. Revenue increased 42% to $59.2 million, from $41.8 million for the nine months ended September 30, 2007 compared to September 30, 2006. Revenue for the nine months ended September 30, 2007 includes revenue from Double-Take EMEA for the full nine months whereas revenue for the nine months ended September 30, 2006 only includes revenue from Double-Take EMEA from the acquisition date of May 23, 2006 through September 30, 2006. Of our total revenue in the nine months ended September 30, 2007, 91% was attributable to sales to or through our indirect channels such as distributors, value-added resellers and OEMs, which was a decrease from 94% of our total revenue attributable to sales to or through our indirect channels in the nine months ended September 30, 2006. Of our total revenue in the nine months ended September 30, 2007, 9% was attributable to direct sales to end users, an increase from 6% of our total revenue attributable to end users in the nine months ended September 30, 2006.
Software License Revenue. Software revenue increased $8.8 million, or 33%, from $26.2 million in the nine months ended September 30, 2006 to $35.0 million in the nine months ended September 30, 2007. The increase in software revenue was primarily due to increased volume of $3.8million resulting from broader demand for, and acceptance of, our software, $0.7 million from new products available during the nine months ended September 30, 2007, and $4.3 million from sales through Double-Take EMEA, which was acquired on May 23, 2006.
Maintenance and Professional Services Revenue. Maintenance and professional services revenue increased $8.8 million, or 56%, from $15.5 million in the nine months ended September 30, 2006 to $24.3 million in the nine months ended September 30, 2007. Maintenance and professional services revenue represented 37% of our total revenue in the nine months ended September 30, 2006 and 41% of our total revenue in the nine months ended September 30, 2007. Maintenance revenue increased $7.9 million, or 60%, from $13.3 million in the nine months ended September 30, 2006 to $21.2 million in the nine months ended September 30, 2007. The increase in maintenance revenue was attributable to higher sales to our expanding base of customers, continued maintenance revenue from our existing customers, as well as maintenance revenue of $4.5 million generated by Double-Take EMEA, which was acquired on May 23, 2006. Professional services revenue increased $0.8 million, or 35%, from $2.2 million in the nine months ended September 30, 2006 to $3.1 million in the nine months ended September 30, 2007. The increase in professional services revenue was due to more professional service deliveries due to an increase in professional services personnel as well as $0.7 million of revenue generated by Double-Take EMEA which was acquired on May 23, 2006.

Cost of Revenue and Gross Profit
Total cost of revenue increased $0.2 million, or 4%, from $5.8 million for the nine months ended September 30, 2006 to $6.0 million in the nine months ended September 30, 2007. Total cost of revenue represented 14% of our total revenue in the nine months ended September 30, 2006 and 10% of our total revenue in the three months ended September 30, 2007.
Cost of software revenue decreased $1.1 million, or 84%, from $1.3 million in the nine months ended September 30, 2006 to $0.2 million in the nine months ended September 30, 2007. The decrease was due to cost of software for Double-Take EMEA sales in the period from May 24, 2006 through September 30, 2006 relating to the inventory of Double-Take products on hand at May 23, 2006 of $1.4 million. The balance of the inventory was sold from the acquisition date through the three months ended March 31, 2007, resulting in a decrease of similar cost of revenue for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006. Cost of software revenue represented 5% and 1% of our software revenue in the nine months ended September 30, 2006 and September 30, 2007.
Cost of services revenue increased $1.4 million, or 31%, from $4.4 million for the nine months ended September 30, 2006 to $5.8 million in the nine months ended September 30, 2007. The increase was the result of higher employee compensation of $0.6 million and $0.1 of travel expenses due to an increase in the number of our maintenance and professional services personnel and $0.7 million of costs of maintenance and professional services personnel of Double-Take EMEA which was acquired on May 23, 2006. Cost of services revenue represented 28% of our services revenue in the nine months ended September 30, 2006 and 24% of our services revenue in the nine months ended September 30, 2007.
Gross profit increased $17.2 million, or 48%, from $36.0 million for the nine months ended September 30, 2006 to $53.2 million for the nine months ended September 30, 2007. Gross margin increased from 86% in the nine months ended September 30, 2006 to 90% in the nine months ended September 30, 2007. This increase is primarily related to the lower cost of revenue in the nine months ended September 30, 2007 as a result of the use of Double-Take EMEA’s inventory during the nine months ended September 30, 2006 and the increased maintenance revenue in the nine months ended September 30, 2007 from Double-Take EMEA.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased $5.1 million, or 33%, from $15.6 million for the nine months ended September 30, 2006 to $20.7 million for the nine months ended September 30, 2007. The increase was substantially due to an increase of compensation and commission expense of $1.4 million resulting from increased sales and headcount, an increase of $0.6 million in marketing and advertising related to creating Double-Take brand awareness and an increase of $2.9 million of costs of sales and marketing efforts through Double-Take EMEA which was acquired on May 23, 2006.
Research and Development. Research and development expenses increased $1.0 million, or 13%, from $7.8 million for the nine months ended September 30, 2006 to $8.8 million for the nine months ended September 30, 2007. The increase resulted primarily from higher compensation expense of $0.6 million due to an increase in personnel and $0.4 million from outsourced development projects.
General and Administrative. General and administrative expenses increased $4.6 million, or 73%, from $6.4 million for the nine months ended September 30, 2006 to $11.0 million for the nine months ended September 30, 2007. The increase was substantially related to an increase of $1.0 million in compensation expense in the nine months ended September 30, 2007 attributable to stock option expense, $0.2 million associated with an increase in headcount, an increase in insurance expense of $0.6 million related to higher premiums associated with coverages for a public company, an increase of $1.0 million in legal and accounting fees due to being a public company and an increase of $1.5 million of costs from Double-Take EMEA which was acquired on May 23, 2006.
Depreciation and Amortization. Depreciation and amortization expense increased $0.6 million, or 56%, from $1.1 million for the nine months ended September 30, 2006 to $1.7 million for the nine months ended September 30, 2007. The increase was attributable to increased depreciation expense associated with increased capital expenditures, which were applied primarily for product development and other computer-related equipment, as well as amortization related to the intangible assets acquired in the Double-Take EMEA acquisition.
Interest Income. Interest income increased $2.0 million, or 939%, from $0.2 million for the nine months ended September 30, 2006 to $2.2 million for the nine months ended September 30, 2007. The increase is attributable to higher balances in our cash and short term investment accounts, mainly as a result of our initial public offering in December 2006, our secondary offering in August 2007, and our positive cash flow from operations.

CONF CALL

Erica Mannion

Good afternoon and thank you for joining us to discuss Double-Take’s 2008 third quarter financial and operating results. With me today are Dean Goodermote, President, CEO and Chairman of the Board of Directors and Craig Huke, Chief Financial Officer. On the call today you will hear forward-looking statements about events and circumstances that have not yet occurred. Statements regarding projected financial results, statements containing words such as will, expect, believe and should and other statements in the future tense are forward-looking statements.

Actual outcomes and results may differ materially from the expectations contained in these statements due to a number of risks and uncertainties. Please refer to the company’s recent SEC filings at the SEC’s website at www.SEC.gov for detailed discussions of the relevant risks and uncertainties. The company undertakes no responsibility to update this information in this conference call under any circumstance.

The press release distributed today that announced the company’s results is available on our website at www.DoubleTake.com in the investor relations section under financial press releases. The current report on Form 8-K furnished with respect to our press release is available on our website in the investor relations section under SEC filings.

In addition, in this conference call we will provide non-GAAP financial results. The reconciliation of these measures to GAAP measures is set forth in the tables that reconcile our non-GAAP results to GAAP results from the press release located on our website as I just described. Before I turn the call over to Dean I would like to mention that the company will present at Thomas Weisel Partners’ Small and Mid-Cap Conference on November 18 in Chicago.

Now, I will turn the call over to Dean Goodermote, Chairman, President and CEO.

Dean F. Goodermote

Thank you all for joining the call. As you know this past quarter was challenging for us as we missed our revenue guidance by about 7%. While a modest discrepancy by some measures we understand how important it is to meet expectations we have set. With that said our earnings performance was solid and we achieved the high end of earnings guidance we set forth in July.


We were able to achieve these earnings with reduced revenue because we were cautious in hiring given the economic environment and because our compensations tied heavily to performance. Our sales force has a considerable portion of its pay tied to commissions. Our executive compensation is tied closely to achieving both revenue and income targets and most of our North American non-sales personnel receive part of their compensation based on the achievement of those same targets. Therefore, reduced performance lowers our cost.

We missed our revenue targets because we failed to bring in deals that we projected and lacked sufficient coverage to make up for those deals. Most of the push in deals occurred in the Americas region. It is easy to blame the economy but we try to take into account economic conditions when we give guidance and we do not credit the economy when we do well.


Still, in some cases we experienced some of the signs of struggling companies such as new levels of approval required at the last minute, some sales cycles elongating and some buyers just plain becoming quiet. The push was across multiple verticals. Some of these deals have now closed. There are few we are skeptical of and the rest we still project to close.

The overall near term opportunity for us still appears to be strong. While we would like to do better in Europe it is improving from poor performance in previous quarters and performed roughly as expected when we gave guidance in July. Asia continues to grow though it’s a small contributor and U.S. pipelines are as strong or stronger than they have ever been. But when providing guidance for the future we cannot ignore the predictability issues we had at the end of September, the negative impact, the appreciation the dollar has on revenue and most important, pummeling news we constantly receive about the world economy and IT spending specifically.

We’ve tried to take this turbulence into account when looking to the completion of the year. That is why we have revised guidance down from previous estimates and why we’ve widened the range. I must add that for the most part neither our employees or most of our customers exhibit the negative outlook about the future of IT that we see in the press.

We also continue to get reinforcement from our customers with the value they get from our products. For example, while Hurricane Ike held back a few orders for us, it also produced many examples of successes. We received several notes from our customers. Now I’ll quote one of them here written to one of our sales professionals: “Hello, Jeff. Thanks to Double-Take we are doing just fine. With our replicated data to one of our other locations we are up and seeing patients once the patients could get to us. We appreciate your concern and your overall support of our organization. On behalf of the doctors and staff we want to say thank you.”

Natural disasters, power outages and operational errors will continue regardless of the condition of the economy. Craig will comment on our distribution but I’d like to add a word about HP. That channel continued to disappoint with sales down more than 20% from last year. However, the two companies continue to make progress in attempting to improve our sales relationship.

We were able to adjust our economic relationship in certain segments so that we can now jointly sell together as we do at Dell and HP is planning to pre-install on all HP ProLiant storage servers with storage mirroring their OEM version of Double-Take to make it easy for customers to purchase a license and use the product. Just to be clear, this is not all ProLiant servers but it is the storage servers.

Most of our new products contributed this past quarter and though small they show growth. TimeData continues to show quarter-over-quarter growth. N-Boot revenue was better than anticipated and Linux also showed modest growth. We also gained some early accounts with our Livewire product which we released late in the quarter.

We anticipate that ultimately this will be a good contributor to our business. It opens up a lower tier market for us that does not require the full capabilities of our standard Double-Take and it also takes on the few competitors who nip at us through their sales into this lower tier market. Our virtual skews also continues strong, nearly doubling in sales from where they were in Q3 of last year which is a faster growth rate than we experienced in Q2. These skews represent about 13% of our product sales last quarter.

I’ll turn it over to Craig now to get more detail but in summary, even in these economic conditions we’ve generated solid earnings in cash flow. And while the current market conditions make predictions difficult for us, the overall opportunity for our products has not changed.

S. Craig Huke

The third quarter as Dean said was a difficult one from a revenue perspective as we fell short of our revenue guidance by about 7%. This was the first time since Double-Take went public that we’ve not met our guidance. However, even with a lower-than-expected non-[PEP 0:05:36.0 file (2)] revenue, non-GAAP operating income was within the guidance and diluted earnings per share is at the high end of our range.

Our September 30 cash position was strong at $68 million. Accounts receivable balances were down from previous quarters and our DSOs remain constant. Deferred revenue did decrease by about $400,000 from the balance at June 30 but the decrease was due largely to the stronger U.S. dollar compared to the Euro on September 30.

Looking at some of the details of the financial results. Total revenue for the third quarter was $24 million, an increase of 12.4% from $21.3 million in the third quarter of last year. Software license revenue was $12.8 million, an increase of 1.6% from Q3 of 2007 and maintenance professional services revenue totaled $11.1 million.


As we stated in our October 6 press release Dean mentioned earlier in the call, sales in North America were less than we had expected with the number of deals that we had expected to come in during the last week of September not closing. Revenue from EMEA was slightly less than expected at the beginning of the quarter but the difference was due primarily to exchange rates and the strengthening of the U.S. dollar versus the Euro. Asia came in pretty much as we had originally expected.

Included in the third quarter revenue is $118,000 of sales from TimeData and $257,000 of sales from products acquired from emBoot. Our resellers generated 74.4% in total sales. Distributors generated 12% of total sales and OEMs, primarily HP, generated 4% of sales. Overall, our indirect channel generated 90.5% of sales in Q3 compared to 88.2% last quarter and 87.5% in Q3 of last year.

Dell and Sunbelt continue to be our only 10% plus partners and CDW continue to be strong as well. Dell contributed 19.1% of sales during the quarter which is higher than the 17.5% it delivered last quarter. Sales from HP decreased by 22.6% during the quarter and year-to-date revenue from HP is down 24.5%.

Gross margin for the quarter was 89.6% compared to 89.2% last quarter and 90.6% in Q3 of ’07. Excluding stock option expense, gross margin was 90% in Q3 and 90.9% in Q3 of last year. Total operating expenses were $17.1 million, an increase of 16.3% compared to the third quarter of last year and up 18% excluding stock option expenses to $16.2 million.

Sales and marketing expense increased 21% to $8.4 million in the third quarter from the third quarter of last year. Excluding stock option expense the increase was 20.9%. The increase resulted from higher head count both in the United States and Asia, increased marketing spending and a reallocation of certain expenses from Double-Take in Europe from G&A as these people are now more directly related to the sales and marketing efforts.

Excluding stock option expense, sales and marketing was 34.2% of revenue in the third quarter 2008 compared to 31.8% in the third quarter of 2007. Research and development expenses increased 42.4% to $4.3 million in the third quarter. Excluding stock option expense the increase was 37.2%. The increase is due to increased head count, increased third party costs for resources we used to supplement in-house development activity and the expenses related to our acquisition of Double-Take Canada which was the TimeSpring acquisition and emBoot.

R&D expenses from Double-Take Canada were $500,000 in the quarter and the expenses from emBoot were $200,000. Excluding stock option expense, R&D as a percent of revenue was 16.9% in the third quarter of 2008 compared to 13.9% last year. General and administrative expense decreased 17.8% to $3.4 million in the third quarter of 2008 from the third quarter of 2007. Excluding stock option expense, G&A expense was $3 million or down about 10% from the end of Q3 of 2007.

The decrease is a result of decreased public company costs associated with the audit and survey and [inaudible 0:00:35.1 file (3)] costs incurred in the third quarter as compared to third quarter of last year and certain reallocation of costs in Double-Take EMEA. The decrease is partially offset by several head count added during the quarter.


Excluding stock option expense, G&A was 12.3% of revenue in the third quarter of 2008 compared to 15.4% in the third quarter of 2007. Depreciation and amortization expense increased 61.5% to $1 million in the third quarter of 2008 compared to 2007. The increase was a result of depreciation on capital expenditures made over the past year and the amortization of about $200,000 related to technology related intangible assets associated with their acquisitions. Of the $900,000 of depreciation and amortization in the quarter, about $400,000 of the total was the amortization of the intangible assets.

GAAP operating income for the third quarter was $4.4 million compared to $4.6 million in the third quarter 2007, a decrease of 5.3%. GAAP operating margin was 18.3% in the quarter compared to 21.7% in the third quarter of 2007. On an adjusted non-GAAP basis, operating income was $5.4 million in the third quarter compared to $5.8 million in the third quarter of 2007, a decrease of 6.8%.

The $5.4 million was in the middle of our previously stated guidance for the quarter which had been $5.3 million to $5.5 million. Adjusted non-GAAP operating margin for the third quarter was 22.5% compared to 27.1% in the third quarter of last year. A reconciliation of these non-GAAP financial measures as well as other non-GAAP financial measures referred to in this call to the most directly comparable GAAP financial measures is included in the appendix of our press release that preceded this call and is available on our website at DoubleTake.com under the investor relations tab.

Turning quickly to other income, investment income decreased by $400,000 in Q3 2008 to $400,000 when compared to last quarter. The decrease resulted from lower returns on our invested cash, the investments that matured during 2008 which had been invested during the year at rates much lower than what we saw last year.


GAAP net income was $2.6 million or $0.11 per fully diluted share for the third quarter of 2008 compared to GAAP net income of $3.3 million or $0.14 a share for the same period a year ago. The decrease in net income and earnings per share is primarily related to increased costs associated with increased head count, costs associated with our acquisitions of TimeSpring and emBoot as well as lower-than-expected revenue growth rates for the quarter.

During the quarter, both 2008 and 2007, recorded income tax expense was $2.1 million. Our expected tax rate on GAAP net income was 44.1% in Q3 2008 compared to 38.3% in the third quarter of 2007. The increase in the effective rate in 2008 relates to virtually all stock option expenses in 2008 being non-deductible for tax purposes while in 2007 a substantial portion of stock option expenses were deductible because they were identified as disqualifying dispositions for tax purposes. The number and amount of these disqualifying dispositions in 2008 has been negligible.

For the third quarter, adjusted non-GAAP net income was $3.6 million or $0.16 per diluted share compared to $4.0 million or $0.17 a share last year. To get to non-GAAP net income we exclude only non-cash stock based compensation expense associated with stock options.


The effective rate on non-GAAP income during the quarter was approximately 36.4%. We ended the quarter with cash and short term investments of $67.9 million compared to $73.8 million at the end of June and $64.7 million at December 31, 2007. Cash from operations during the quarter provided $5.3 million. We used about $500,000 for capital expenditures and we used about $9.9 million of our cash on hand for the acquisition of emBoot in July of 2008.

Through three quarters, cash from operations totaled $16.3 million, an increase of 34% over $12.2 million generated at this point in 2007. Accounts receivable at September 30, 2008 was $17.6 million which is a decrease from the $18.1 million we recorded at June 30, 2008. Accounts receivable days sales outstanding was 66 days compared to 67 days at June 30 and 68 at September 30 of last year so the number for the DSO stayed relatively constant over the past year.

As I mentioned earlier, deferred revenue decreased by approximately $400,000 from June 30 to September 30, ’08. The change in deferred revenue is comprised of a decrease of approximately $1 million due to the U.S. dollar being stronger versus the Euro of September 30 as compared to June 30. Excluding the effect of exchange rates, deferred revenue increased by approximately $600,000 or 2% during the quarter.


Head count was 388 at the end of the third quarter 2008. This does include five employees that came from the emBoot acquisition. This compares to 382 employees at the end of June. We have been and remain very deliberate in hiring additional employees and we will remain so for the rest of the year. We will hire new employees in areas we deem critical but others will likely be pushed out until 2009 or until revenue growth picks up or is more predictable.

Finally, we’re providing the following guidance for the fourth quarter of 2008 and the full year. Double-Take expects revenue for the fourth quarter 2008 to be in the range of $24.8 million to $26 million. With actual revenue through the third quarter at $71.3 million, full year revenue is expected to be in the range of $96.1 million to $97.3 million.

Now, in compiling this guidance we’ve assumed that the U.S. dollar will be approximately 15% stronger in the fourth quarter 2008 as compared to the fourth quarter 2007. We have the effect of reducing revenue by approximately $1 million. Non-GAAP operating income excluding the impact of stock option expenses will be in the range of $5.4 million to $6 million for the fourth quarter, between $20.6 million and $21.2 million for the full year.


These numbers do include the effect of the amortization of intangible assets which will be about $400,000 in the quarter and total $1.3 million for the full year. Non-GAAP income per share for the fourth quarter is expected to be in the range of $0.15 to $0.17 per share and for the full year to be between $0.59 and $0.61. The effective income tax rate on non-GAAP income for the fourth quarter and the full year is expected to be between 36% and 37% and weighted average diluted shares for the fourth quarter and full year are assumed to be approximately 23.2 million shares.

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