Good day, ladies and gentlemen, and welcome to the fiscal third quarter 2009 3PAR incorporated earnings conference call. My name is Melanie and I will be your coordinator today. At this time our participants are on only listen mode. We will conduct the question and answer session at the end of this conference. (Operator instructions) I would now like to turn the call over to 3PAR management. Go ahead.

Thank you Melanie. Good evening and welcome to 3PAR’s fiscal year 2009 third quarter earnings release conference call. This conference call will include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements will include among others, statements about our financial projections and growth trends for the fourth quarter and full year of fiscal 2009 and beyond, as well as financial projections and growth trends for the overall storage market and segments thereof. The potential impact and effectiveness of our market business and investment strategies, management current views concerning anticipated market share opportunities and the impact of diversification of our customer base, anticipated demand for our storage solution and adoption trend in our customer markets All of these forward-looking statements involve known and unknown risks and uncertainties and important factors that may cause our actual results, levels of activity, performance or achievement or those in our industry to differ from those expressed or implied by the statements we make. In evaluating these forward-looking statements you should specifically consider various risk factors including the risk factors detailed from time to time in our filings with the Securities and Exchange Commission. This risk factors are included in our Annual report on report on Form 10-Q for the year-ended March 31st 2008 and our quarter report on Form 10-Q for the quarter ended September 30th 2008. Additional risk factors and other information you should consider will also be set forth in our quarterly report on Form 10-Q for the quarter ended December 31st , 2008 which will be filed with the SEC in February 2009. These factors may cause our results to differ materially from the forward-looking statements we may make on this conference call. We cannot guarantee future results, levels of activity, performance, or achievements. Our future results will depend on numerous factors including, among others, the impact of macroeconomic trends on information technology spending, market acceptance of our utility storage solutions, and competitive practices in our industry. These forward-looking statements are made only as of today’s date and we expressly disclaim any obligation to update or revive the information contain in any forward looking statements Please also note that this conference call will provide listeners with certain financial metrics determined on a non-GAAP basis for both the comparison to previous quarters and the previous fiscal year and for our outlook for the current quarter. These financial metrics, together with a reconciliation to our comparable GAAP financial measures, are contained in today’s financial results press release, which we have posted on our website at Investor Relations, on www.3par.com under Press Releases and are furnished to the SEC on Form 8-K. We encourage listeners to review these items. I’d now like to turn the call over to David Scott, CEO of 3PAR. David?

Good evening and thanks for joining us for our third quarter fiscal year 2009 earnings call. We are delighted to report revenue of $48.2 million, 57 % higher than our revenue in this period a year ago, and 7% sequential increase. We continue to deliver strong result and take market share at the significant rate in spite of the unprecedented economic condition. In fiscal Q3, we achieved the gross margin of 64.5% showing the customers maintain a demonstrable belief in our demo with less value proposition. As we move to a more cautious spending starts in light of the macro economic environment we manage to deliver excellent cost control. So, in addition to achieving a strong gross profit result we also maintained flat expense structure this quarter. As a result we are able to deliver a net income of $2.3 million on a non-GAAP basis. This allowed us to report our non-GAAP earnings per share of $0.04 significantly exceeding our own expectations. We delivered $461,000 in GAAP net income for a GAAP EPS including expenses related to stock options of $0.01 per share. The overall spending environment proves to be more uncertain and less predictable as the December quarter progressed. As we have reiterated on a number of occasions, we do not believe that bookings recorded as a specific point in time such as at the end of the quarter are necessarily sound indicators of our future revenue performance. This is the reason we do not report either bookings or backlog numbers in our earnings calls. As an example of this, we saw clear evidence of increased turbulence in our bookings performance towards the end of the quarter. There was a pronounced increase in last minute decisions by customers and prospects to defund or defer previously planned and budgeted projects.…

Good afternoon and let me add my welcome to David’s. Thanks for joining us. As David mentioned we are very pleased to report revenue of $48.2 million for the quarter ended December 31st , an increase of 57% for the same quarter a year ago and a 7% increase of the $45.1 million we recorded in the pervious quarter. Of this total, product revenue accounted for $43.7 million or 91% of total revenue, an increase of 51% over our product revenue recognized in the same quarter a year ago and a 6% increase from product revenue recognized in the previous quarter. Support revenue total 4.4 million, 9% of total revenue, an increase of 147% over support revenue recognized in the same quarter a year ago and a 20% increase from the previous quarter. In terms of the split between new and repeat business, 80% of total revenue in this quarter came from customers who have purchased from us previously as compared to 79% in the previous quarter. We believe that 20% of revenue representing new business reflects 3PAR’s continued market penetration excluding revenue attributable to Software [17:57] our repeat revenue for this quarter was 70% as compared to 71% in the previous quarter. This quarter, no single customer accounted for more than 10% of our total revenue although our customer concentration will fluctuate quarter over quarter as result of factors, such as when we receive orders and when we install systems, we expect to continue expanding our customer base with for further reduce customer concentration over time. Turning to the geographic view, we generate 16% of revenue from customers outside the U.S., same as we reported in the previous quarter. As we said before, we expect that our international sales will contribute in the mid-teens percentage of our total revenue…

Thanks Adriel. We now understand that the recession officially started in December 2007, just a few weeks after our IPO. The calendar year 2008, we achieved $172 million in revenue and achieved profitability on a non-GAAP basis in our full calendar quarter. This represents the reported 81% revenue growth year-on-year that probably closed the mid-60s percentage points of growth when adjusted for the [BSLE 28.56] related revenue recognition policy change in the March quarter of 2007. I am extremely proud of the commitment of the three part team that delivered great operating results to our shareholders through such unexpectedly trying times. Recently, we have expressed what we believe is the flawed hypothesis about customers’ refocusing their spending on major incumbent supplies, somewhat a few promiscuously described as a flight to quality. We believe there is stronger evidence of a flight to savings and the new vendors like 3PAR with innovative technologies can save money. We believe this is being demonstrated by customers in three ways. First, their willingness to spend capital to save ongoing operating expenditures in power, cooling, flow space, people cost and professional services; second, they are increasing desire to buy the most deficient solutions possible when spending valuable capital with thin provisioning becoming a “must-haves”; and third, when capital is unavailable to increasingly favor the adoption of enterprise level cloud computing based services where 3PAR has a significant infrastructure presence. We therefore remain confident that the trends toward cloud computing, virtualization and the need to do more with less should favor the 3PAR value proposition and allows the opportunity to continue to take market share. With that, let me turn it over to the operator to poll for questions. Thank you. Operator?

(Operator instructions). Your first question comes from the line of Mark Kelleher - Canaccord Adams. Go ahead.

Congratulations on a good quarter on a tough environment. Can you maybe touch a little bit on your hiring trends, what you are looking to do, have that shifted at all as the visibility getting a little worse here?

A strategy with slightly worse visibility and obvious times of increasing turbulence was to move to a more cautionary approach from our spending perspective and from that perspective we have really frozen hiring except for a number of key areas associated with sales and customer service in escalation support. Otherwise, we are continuing to maintain a cautionary approach until visibility gets markedly improved with lots of prudent stats.

Can we expect a couple of more account executive teams per quarter?

We will continue to hire in the sales organization at this point in time. Yes.

Your next question comes from the line of Brian Freed - Morgan Keegan. Go ahead.

On the competitive front, EMC has been talking about the new DMX they have got coming out shortly; they have got IO base center provisioning. As you talked to the customers and they look to the offerings that the EMC placed is set to appear, what kind of response do you think you had or it has impact on your competitive differentiation?

First of all, I can say that we have not had any visibility at all that we feel would affect us competitively to this new DMX. So, at this point in time it is a wait to see.

Secondly, if you are trying to look forward in terms of opportunities, yes, you have historically been very good in a Web 2.0 market. Are you seeing significant increases and penetration in the traditional markets as they become a little bit more flexible in their architectures and are there any customers designs that are tough on that side of things?

In the traditional market space, I think financial service does not get more traditional and as I mentioned in my previous comments, we saw a very strong sequential revenue growth in financial services last quarter. Furthermore I can tell you that our bookings performance in terms of new orders was even stronger in financial services during the December quarter. We saw situations where customers clearly indicated to us and in this case was a new customer win in a major European kind of bank that they felt investing in a capital expenditure in 3PAR was going to allow them to substantially reduce their operating expenditures, which is a critical success factor for them moving forward and we are willing to adapt that over EMC which then incumbent supplier as the next generation platform. We also saw examples in financial services, again another major European institution where I understand all of their spending on EMC was frozen at the end of the last quarter and the early major expenditure on primary storage was with 3PAR as they look to make the most efficient use of capital expenditures as they could.

Your next question comes from the line of Rajesh Ghai - ThinkEquity. Go ahead.

I was looking at the ESBF as I encountered this number of transactions and revenue, so those things are a result of the fact that you are selling more 800s and was that a function of pricing? What is happening over there?

Whatever measurement that you can come to from a basic kind of calculation I would be very concern because it mixes a huge set of different elements in terms of upgrade transactions, new business transactions etc, but what I will say is that that we certainly did see a characterization where for some of our new customer win environments, we had larger overall deal sizes.

Here is the question that I have been getting recently about your revenue acquisition policy. You have conservative policy that has… so why exactly do you do that? Is there a risk involved that you have seen shipping and deployment or…?

We turn around and we recognize our revenue on installation and the reason we do that is that the accounting rules and regulations now require you to have established, some of what we call VSOE, on any services you are supplying with your offering and does include the installation services and so in fact until we have completed those installation services because we have not been able to establish VSOE on an independent basis. We have to defer revenue recognition until that point in time.

One last question. Compare that from XIV that have you have seen this quarter?

We have seen XIV sporadically in various deals, not as much as we would have expected. We fundamentally believe that the XIV platform has not necessarily been designed and optimized as a utility storage platform designed for utility computing environments and flexible workload consolidation, and so it maybe that there is somewhat of a mismatch of the type of opportunities that we are both coming going after. But we have not seen anything that gives us a view that is becoming a significant competitive threat in fact somewhat to the opposite of this stage.

Your next question comes from the line of David Bailey - Goldman Sachs. Go ahead.

On the non-GAAP EPS target you are providing for the full year or actually I guess for Q4 of zero to negative $0.02. Is that a function of the OpEx increase or do you also expect gross margin to come down as well?

I think in general, it is a combination of just our general prudence in general, I mean as you can see from our revenue range that it does range from 42 to 48 for the quarter and so that is a sort of inclined those different types of scenarios as well as the OpEx increase as [38.41] to that that we will incur in the fourth quarter so it is going to take into account all of those factors.

And then just on the competitive side, have you started to see competitors bundle other offerings that they have with storage in order to provide lower price points for the bundled package and if you do start to see that working, what do you do to combat it..

We have seen certain examples where that has been used and the example is a fairly interesting because in a way what is being done demonstrates maybe the weakness of some of our incumbent competition’s offerings; for instance in one situation, I believe EMC offered 200 days of free consulting with their product. I am not quite sure we did well enough demonstrating that if you needed 200 days of free consulting to get the solution up and running what was the likely going operating expense to keep it running, maintain it and change it overtime. So, we have seen evidence of some elements of bundling. Typically, most customers see through that and are really focused on looking at what delivers them the best overall total cost of ownership in primary storage and for those customers who have that sophistication, we find ourselves pretty much able to demonstrate the ability to save substantial amounts of money competitively.

Your next question comes from the line of Doug Reid - Thomas Weisel Partners LLC.

I wanted to ask if you can put a little more color on the composition of new customers by segment. You mentioned financial services are strong. It presented some strength there but stripping off financial services within new customers last quarter, where have you seen strength and if you could also talk about other strengths outside of financial?

Sure. We secured a number of new managed service providers worldwide. In addition, in the B2B segment, we saw a lot of new software as service customers come on board. In addition to that, we are generally starting to penetrate other industries in the Global 1000 with fairly significant wins where we are effectively replacing kind of EMC's infrastructure in those accounts and we are starting to see increases, if you like in the other category as well.

Your next question comes from the line of Alex Kurtz - Merriman Curhan Ford.

Congratulations guys on a strong bottom line execution. Just a follow up on the prior question, did the financial vertical go up as a percent of sales quarter over quarter?

Yes.

Do you guys care to share that?

No. As you are aware, we tried a strategy. We gave you an indication of the size of our largest segment and we also try to give you an indication of the relative ordering of the segment. I would say right now that the traditional ordering that we have had, which is business to business service providers, being the largest segment holds through. The second segment now has always been the internet and the Web 2.0 players and the third, financial services and fourth, government. It has to be said that financial services is closing in on the number two spot.

Just on the Web 2.0 customers, what do you see this quarter? Did you acquire new customers in that vertical or was it just additional spending from the install base there?

We did acquire some new customers in that segment this quarter although I would say that if we were to say that we are seeing any weakness at all between the different segments that we focused on, the internet Web 2.0 space seems to be more cautious with its spending.

Okay. And couple of days ago, VMware provided sort of a cautious, I look obviously on their March quarter, how is VMware driving your business right now and my follow up question is, do you feel like in the storage market, maybe some of the low hanging fruit on some of the storage, VMware-led storage deals are sort of coming to an end. It is getting a little bit more competitive for those VMware-types of deals.

I do not think there is any change in the dynamic. We continue to see a very significant attach rate for, as you put it, VMware-led deals within our installed base. We do not see any signs of that changing. I think obviously everyone is jumping on the band wagon of trying to kind of reposition their product as being a perfect fit for VMware and it becomes fairly interesting to see how they position their product in that space and gives us the opportunity to really highlight the competitive advantages we have in performance space utilization and integration with disaster recovery solutions, integration with BDI and etc. So, yes there is a greater competition around. I think because bee is attracted to a honey pot.

Your next question comes from the line of Bill Shope - Credit Suisse.

Can you give some more color on the T-class system performance in the quarter, in particular, can you give us any sense of upgrade activities in the installed base and was it significant over key system sales primarily driven by new installation?

The T-system sales are driven both within our installed base and within new customers and clearly we are getting very rapidly through a transition between the EMC costs right now. It is being very rapid.

Okay and can you give us any metrics if it is possible to help us understand how successful you have done it in provision with 2.0 or migrating capacity from competitors based under your platform?

At this stage as I have indicated, team building basic capability and our T-class system is a pre-enabler for this nondestructive version of process in migration and as we announced at the time of the T-class, it is pending new version of operating system that provides a software complement to it. So at this stage, we are really seeding the ground for future migrations rather than, we did not give you any figures about something that is actually being accomplished.

Okay, sorry about that. Now on the pricing side of the equation, looking at the competitive landscape outside of the bundling deals you talked about earlier, are you seeing any incremental change in aggressive pricing versus some of the aggression you noted last quarter?

Yes, I definitely saw in the turbulence at the end of the last quarter a hint of desperation. I think, some of the incumbent suppliers have their own, well at least of the major incumbent suppliers has their own disk drive business and it seemed very clear to us that maybe that this disk drive side of their business had a lot of extra capacity or a lot of extra spindles that they were willing to give away for free.

Your next question comes from the line of Kaushik Roy - Pacific Growth Equities.

As a follow up to Bill's question, help me understand this. In terms of pricing in Q4, calendar Q4, it was worse than Q3 or it was pretty much as you would have expected normal pricing one?

I think it was characterized by there were certain deals where we saw very aggressive pricing activity but in terms of the overall pricing impact to us, we do not feel that there has been any significant impact over the normal quarter to quarter declines that we would expect to see. We sell on a value proposition of reducing overall total cost of ownership by up to 50% or more and when you take that strategy effectively, you can negate a lot of the pricing actions that occurs on a dollar per rule terabyte basis that our competitors demonstrate.

Is there any comment why their gross margins came down?

Yes, I can, actually, in our S to T transition, we were still transition selling some S-systems to some T-systems. We had some inventory that we perceived that we probably would not use of S inventory and we actually wrote that down to the tune of approximately $600,000 to $800,000 which obviously hit the gross margin line which brought that margin down.

So for March quarter, you expect margins to be going up?

I am not saying that. I am just saying that that was the impact for the December quarter that we experienced. We have only talked about that the 64% to 62% is our long term gross margin level and that is where we are sticking with.

And then it is interesting that, could you talk about life quality and you talked about flight to savings? So again in terms of composition, who are you seeing the most in terms of competition? Is it EMC or Hitachi or is NetApp? I mean, can you rank them a little bit maybe?

Absolutely. EMC by far is the number one competitor. Hitachi, number two. Probably, IBM number three, followed by HP, number four. NetApp is only in certain segments.

Last question, DSO has been up from 52 to 55, can you comment why and then, what are you expecting for March?

Did you say they went up from, what to what?

Fifty two to fifty five nil.

I have a slightly different calculation where there a lot much higher than that. I am not sure we have to find out how you do it and they were relatively flat from quarter. They went up slightly but I can tell you and from our calculation where they went up slightly, again, it was just we got this very large customers who although they are great to have as customers in terms of their credibility and their credit ratings and their cash, they can tend to put a little pressure on us from quarter to quarter especially at this macroeconomic environment. We have got that just they are putting pressure on us to delay payments.

Your next question comes from the line of Amit Daryanani - RBC Capital Markets.

David, I just got a question for you talking about EMC being your largest competitor. In the past, you have seen them go to this DMX upgrade cycles and they are ready to go for one in spring or summer this year. Is the pricing being aggressive and do you suspect the pricing probably gets a little more aggressive this time given the macro environment?

I am not certain that we have seen anything. It is two and a half years, almost three years now since we saw EMC trying to use price very aggressively directed against us and at that point in time, it backside very significantly because they used it in many of their largest accounts on a project basis where they would be pricing on a project basis at 50% less than the price of their newly agreed contractual price with those very large customers and very quickly, the customers kind of appear to turn around and say to EMC, "Look, if you are willing to price against 3PAR in this project at this level, I want that to be the new contractual price level." So that activity have directed price aggressiveness against 3PAR disappeared pretty quickly over couple of quarters and since then, we have not seen that activity. When we see it, it tends to just be more general kind of price aggressiveness. For instance not the quarter we just reported but the quarter before that, we certainly saw in the northeast and in New York, very specific, EMC price aggressiveness obviously I think in an area where they were extremely stressed to get to so many quotas, but nothing targeted against us as such.

Got it and just in terms of polls rates at this point, do you know something in held in line with the stock level that is starting to slow down a little?

No. I think that they were at historical level. What I would turn around and say is that the turbulence we saw and I discussed at the end of the last quarter with more in the form of people deciding not to go through and authorize to spending their budget at the end of December. Now, we got to work out what kind of effect that is. I mean one could have a hypothesis that it is a bit like a 9/11 effect where after September this year, everybody decided to freeze spending and they wanted to get into the new year and see what budgets look like and then free up spending and that would really demonstrate the pattern that we have seen. One of where there was more caution clearly towards the end of the year but then as soon as there was more clarity on budget, we have seen this very strong and very unusually strong start to bookings performance in January.

Got it and could you just talk about rules of mix with direct versus indirect as the percent of sales?

The direct was about 69% and the indirect was about 31%. In the previous quarter, that was 73% and 27%, so in the ball parks of what they have been before.

Can you talk about if you are using a buyback for one and a half million share, can you share if you guys bought back?

I believe it was around 227,000 shares.

Your next question comes from the line of [Unidentified Analyst]. [Unidentified Analyst]: Can you talk a little bit more about the mixture that you are seeing towards high end cyber channel drives away from data drives and what you think is it is bringing out and then, for the [54.55] drop off?

As I tried to describe, Joel, in my comments before, it was a perceived weakness in near-line drives. It was just an excessive strength in the performance of cyber channel in the quarter where the number of [55.16] shut off very dramatic. We have penetration in accounts where performance is important and on our platform they can take advantage to be autonomic wide striping that we deliver to generate tremendous performance without having to go to expense of solid state disks technology, etc and I think there were some elements of that in the mix shift towards cyber channel. As far as [Aiskasi] is concerned, that is very puzzling. The only thing that we can think of is that there is clearly more and more industry and customer discussion about the storage area and networking credit call of choice in large enterprise datacenters in the future over ethernet and I think for long time, [Aiskasi] was the only game in town over an ethernet fabric and now, it is becoming clearer I think to many people that maybe fiber channel ethernet could be the long term direction and if that is the case, we would speculate that that may lead people to focus less on [Aiskasi] in the segments that we target. Now, that is not to say [Aiskasi] will not continue to have very strong kind of performance maybe in other segments like small to medium size businesses but we certainly are basically trying to understand if there is any significance to that trend or it is just a one off work. [Unidentified Analyst]: Okay and then, solid state is something that you think would be compatible with your systems?

Absolutely. We will be planning to support solid state in our platform. The reason we do not have till today is because of our wide striping weakening. We see tremendous [I Apps] performance out of wide striping with private channel drive without the expense of having to provide solid state disk. Many of our competitors who had to drive towards solid state disk in an earlier stage have to do that because they have naturally narrowly stripe architectures where the amounts of performance they can get to a volume out of ordinary five channel drive is simply insufficient in increasingly large number of application. The problem obviously at this stage with solid state disk is it is still very expensive and is not kind of cost competitive compared with wide striping. The number of solutions where solid state disks other advantage which is latency is applicable to as remarkably small and still relatively insignificant.

Your last question comes from the line of [Mark Boulter] - Bluefin. [Mark Boulter]: David and Adriel, I just wanted to get a feel when you discussed your target model in 2011, have you kind of opened up the aperture in terms of how you get there now that you have a costs side lever that you have not planned to use or is it really just kind of the progression to driving profitability or the marginal ramp cost space is relatively flat?

From what we can see and we just registered with you the less certain visibility and the weakened visibility that we have but from what we can see, we still maintain our goal of achieving our target operating model by the March quarter of 2011 and that would represent between our IPO in that time of 40% to 45% take from a revenue perspective and achieving around probably the lower end of our 15% to 19% operating margin range. That still, at this stage, remains the goal that we are looking to achieve. Now obviously if a recession turns into a depression, every company cannot be immune from the effects of that and so we continue to look very closely but if the evidence of our countercyclical value proposition continues to grow and there is more and more evidence of that, clearly if we can continue to take market share and grow whereas the others either flat line or shrink, we feel that we will have a very strong opportunity to make these goals. Right now, if you look at the reported quarters, IBM just reported that these systems shrunk 16% year on year and this is in the year where year ago, they had acquired XIZ so a tremendously surprising results kind of to me and even the EMC I think, Sometrics was down 9% year on year. Clarian maybe up 6% and we set that against our performance of growing 57% year over year. So it is clearly we are taking significant market share at this point in time. [Mark Boulter]: Great, thank you. I missed all the questions but I wanted to see to what extent you are seeing customer shift from perhaps they purchased just once or twice a year and carry couple of quarters of storage inventory, are folks like that is shifting to making regular quarterly purchases of smaller amounts.

Yes, I believe that that is absolutely a trend in upgrade business.

Ladies and gentlemen, that does conclude our Q&A session. I will turn the call back over to management for any closing remarks.

Thank you very much for your time and we will see next quarter.

Ladies and gentlemen, thank you for your participation in today’s conference. That does conclude the presentation, you may disconnect. Have a wonderful day.