Commvault Systems Inc (CVLT) 2020 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Commvault Q1 Fiscal Year 2020 Earnings Conference Call.

(Operator Instructions).

As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Jay Whalen, Chief Accounting Officer.

Sir, you may begin.

Good morning.

Thanks for dialing in today for our fiscal first quarter earnings call.

With me on the call are Sanjay Mirchandani, President and Chief Executive Officer; and Brian Carolan, Chief Financial Officer.

Before we begin, I'd like to remind everyone that the statements made during this call, including in the question-and-answer session at the end of the call, may include forward-looking statements, including statements regarding financial projections and future performance.

All the statements that relate to our beliefs, plans, expectations or intentions regarding the future are pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 and are based on our current expectations.

Actual results may differ materially due to a number of risks and uncertainties, such as competitive factors, difficulties and delays inherent with development, manufacturing, marketing and sale of software products and related services and general economic conditions.

For a discussion of these and other risks and uncertainties affecting our business, please see the risk factors contained in our annual report in Form 10-K, and our most recent quarterly report in Form 10-Q, and in our other SEC filings and in the cautionary statement contained in our press release and on our website.

The company undertakes no responsibility to update the information in this conference call under any circumstance.

Our earnings press release was issued over the wire services earlier today and has also been furnished to SEC as an 8-K filing.

The press release is also available on our Investor Relations website.

On this conference call, we will provide non-GAAP financial results.

A reconciliation between the non-GAAP and GAAP measures can be found on Table 4 accompanying the press release and posted on our website.

This conference call is being recorded, and a replay is available for webcast.

An archive of today's webcast will be available on website following the call.

I will now turn the call over to Sanjay.

Good morning, and thank you for joining our fiscal first quarter earnings call.

In my first 6 months as CEO and President, I have spent a lot of time with our customers, partners, product teams and our employees.

And I continue to believe we have what we need to drive innovation and customer value for years to come.

That said, we are not pleased with our Q1 results.

Rather than making excuses, we're going to talk about our progress to date and why we believe our future is bright.

As we stressed on our last call, we have work to do, and you will hear on this call that we have taken decisive actions and believe we're making -- been making the right steps to lay the foundation for growth.

The foundation starts with having the right strategy and the right people to execute.

In very quick order, we identified and onboarded the right people to build on Commvault's strong foundations, including Riccardo Di Blasio, our new Chief Revenue Officer.

He brings an extensive knowledge of the industry and strong reputation for execution to reinvigorate our field and channel go-to-market initiatives.

He is already making an impact.

Sandra Hamilton's customer success expertise is critical to our progression of the company.

She is focused on evolving our customer engagement model.

Rob Kaloustian, a Commvault veteran, is driving our new business incubation team to test and launch an innovative new product next quarter.

I'll tell you more in a few minutes.

We're really excited about this.

And Ranga Rajagopalan, our newly hired VP of Products, brings the deep domain expertise and product management experience needed to advance our already robust innovation road map.

During our last call, I said I would share more details on the strategy to expedite our path to growth.

It is built around 3 priorities: simplification, innovation and execution.

Let's take a few minutes to discuss our progress with each of these.

Simplification is all about world-class operational efficiency, led by Gary Merrill.

Our operations team is focused on improving our tools and analytical capabilities, sales and forecasting processes, enablement portal and our internal employee experience.

Combined with Sandy Hamilton's focus on customer success, we're building what we believe is a world-class engagement model for Commvault.

We are extremely pleased with the progress to date.

Simplifying how we do business with our customers and partners will enable us to unlock the full potential of our solutions and increase the value of our customer relationships.

This brings us to driving innovation.

Our second priority.

Our technology is trusted and is mission critical to our customers, and we're encouraged by the workloads and used cases we're seeing, simply said for our customers, multi-cloud is real.

Last quarter, we said that our customers are managing more than 500 petabytes in the cloud with Commvault.

This has now grown to more than 600 petabytes and has doubled in the past year.

This matters for 3 reasons: One, from the viewpoint of a CIO, customers' IT strategies always need, what I would like to call, a firm 2 strategy i.e.

most companies need to determine the best way to go from something to something, existing technology to new technology.

When I speak to our customers, this is a key differentiator, and they rely on Commvault to be the trusted partner to help them on this journey.

Number 2, our customers and partners are also leveraging us in exciting new ways to support their cloud native applications, protect against like ransomware and to comply with the regulatory rediscovery requirements, which brings us to our third reason.

As companies modernize infrastructure and applications, they must also pivot their workforce and skills accordingly.

Commvault software helps companies more efficiently manage complex and varied trials so that employees can be more productive.

As customers pursue multi-cloud strategies, platform as a service or PaaS applications have become more strategic as the out native applications rely on PaaS to deliver modern experiences.

We recently delivered new enhancements to our cloud services across Microsoft Azure, Amazon AWS and the Google Cloud platform to complement their PaaS offerings and ensure that data is protected in a seamless way.

We're encouraged by hyperscale appliance and software growth year-over-year as well as by the customer feedback that this provides flexibility and scalability and how they manage their on-prem, hybrid and multi-cloud environments.

And finally, we're excited to announce a new SaaS offering that we will make available to beta customers in mid-August with the initial launch during Q3 in the U.S. Built in-house with a startup like team focused on time-to-market and user experience.

This offer will deliver the decades of capabilities and best practices Commvault is known for as a streamlined SaaS experience that is fast and easy to try, buy and use.

In our early testing, it is literally provisioned and backing up in minutes.

I'm confident that this offer is going to impress the market.

No other vendor in our space offers such a robust set of capabilities delivered in a way that is so simple to use.

Simplifying our operational efficiency and advancing our innovation are crucial.

Additionally, success hinges on our ability to flawlessly execute.

Today, we're going to talk about execution in terms of geographies and partnerships.

Our goal is to be predictable in everything we do.

We weren't in Q1.

Brian will get into more specifics in a few moments but let me provide you with a brief overview of what we're seeing by geography.

In North America, the economy is strong, and we have a robust funnel.

Deal sizes are increasing, and the volume of large deals in the pipeline is encouraging.

However, we've had challenges with deal closure.

Given this, we've acted quickly to put the right leaders in place and are actively increasing our quota-carrying salespeople.

Riccardo working closely with the Americas team is clearly focused on this.

Europe, our second largest market is an area for improvement.

We saw large cross-border deals slow, which we believe is macro-related.

We're also seeing a steady stream of large 6 and 7-figure opportunities, which are more complex with larger closing cycles.

We're adjusting accordingly, and we're encouraged by the prospects.

We're also excited about the opportunity in APAC.

We're seeing strong trends in Australia, our largest market, and India continues to show very impressive growth.

We believe there are significant growth opportunities in this geography.

Now let's talk more about partners.

We continue to make great strides with our partner ecosystem.

In fact, a recent worldwide partner survey confirmed that Commvault is very highly regarded by our partner community.

This is further reinforced by HPE, recognizing us as their Technology Partner of the Year for Storage Solutions.

Additionally, just 2 weeks ago, we launched the simplest, most transparent and financially rewarding program for partners in Commvault's history.

This has been well received by partners who're now poised to significantly increase their profitability and predictability of full year incentives.

Combined with our leading technology and simplified enablement tools, this program makes Commvault a data backup partner of choice.

In closing, we expect that by dramatically improving our execution, optimizing our partner program and continually enhancing our customer experience, Commvault will be the vendor of choice for our customers and partners, both today and in the future.

We have taken decisive action and have made significant progress to our operational efficiency.

Our improved ability to execute and our innovation road map has never been richer.

Again, while we're not pleased with our Q1 results, we remain committed and optimistic about our return to predictable growth.

Now let me turn it over to Brian to review the first quarter results.

Brian?

Thanks, Sanjay, and good morning, everyone.

I will now cover some financial highlights for the first quarter of fiscal 2020.

Total revenues in the first quarter were $162.2 million, representing a decrease of 8% year-over-year.

Software and products revenue was $63.7 million, which was down 15% year-over-year and down 13% on a constant currency basis.

Our performance in the Americas was the primary reason for the year-over-year decline.

We also pointed to the European macro environment as a headwind this quarter.

While we are disappointed with the year-over-year decline in the first quarter, we expect to see improvements from our new go-to-market strategies, including our new Partner Advantage Program.

Revenue from enterprise software deals, which we define as deals over $100,000, represented 62% of software and products revenue for the quarter.

Revenue from these transactions was down 11% year-over-year.

However, our average enterprise deal size was approximately $298,000 during the quarter, up 23% over the prior year.

We believe that growth in the size of our enterprise contracts underscores the value that these customers see in Commvault's Innovation, and it is why we are so focused on continuing to invest in innovation to support our growth in the enterprise segment of the market.

Total services revenue for Q1 was approximately $98.5 million, a decrease of 3% year-over-year.

While we continue to have strong maintenance renewal rates, year-over-year services revenue growth was tempered by changes in foreign exchange rates and by some of our customers moving to subscription models as well as the recent declines in software revenues.

Total operating expenses were approximately $116 million for the quarter, down approximately 6% year-over-year.

We ended the first quarter with 2,513 employees, which is also down approximately 6% year-over-year.

Operating margins were 9.6% for the quarter, resulting in operating income, or EBIT, of approximately $15.5 million.

Net income for the quarter was $12.7 million or $0.27 per share based on a diluted weighted average share count of approximately 46.3 million shares.

Let me now touch on our subscription pricing models and our continued shift to more repeatable revenue.

We see customers continuing to transition to consumption models that provide flexibility to adapt to changes in their business.

For the past few quarters, we've been highlighting 2 revenue metrics to help investors track the growth and progress of our subscription revenue transition.

These 2 metrics are repeatable revenue and Annual Contract Value, otherwise known as ACV.

I will start with repeatable revenue.

As a reminder, our primary repeatable revenue streams are subscription software and maintenance services.

We will consider approximately 70% of our Q1 fiscal 2020 total revenue to be repeatable in nature.

These revenue streams continue to outperform our nonrepeatable revenue and were down 2% year-over-year.

Our second metric is Annual Contract Value.

This metric demonstrates the growth of our subscription and utility-based pricing models that we expect will drive new customer acquisition, land and expand growth and up sell opportunities.

As of Q1, ACV has grown to $106 million, up 66% from a year ago.

As a reminder, our weighted average subscription contract length is approximately 3 years.

In FY '21, we expect to start seeing a meaningful impact of the renewals of the subscription agreements we sold in FY '18 when we started focusing on more repeatable software and services revenue streams.

Let me now shift gears to our balance sheet and cash flows.

As of June 30, our cash and short-term investments balance was approximately $451 million, down 2% from our balance at March 31, 2019.

Our DSO was 92 days versus 91 days in the prior quarter.

As a reminder, our DSO calculation includes the unbilled receivables we are required to record as part of the new revenue standard.

Deferred revenue was approximately $332 million, which is an increase of 3% over the prior year period.

On a constant currency basis, deferred revenue was up 4%.

Nearly all of our deferred revenue is services revenue that has been invoiced to customers.

Free cash flow, which we define as cash flow from operations less capital expenditures, was approximately $30 million for the quarter, up 31% over the prior year period.

During the quarter, we repurchased approximately 40 million of our common stock at an average cost of approximately $48 per share.

Approximately $160 million remains in the current repurchase program authorization that expires on March 31, 2020.

We'll continue to be opportunistic with our share repurchases.

Let me now discuss our near-term financial outlook.

We do not believe our recent financial performance is indicative of Commvault's longer-term potential.

We are actively implementing our plan of simplifying our business operations, driving executional excellence and innovation.

In addition, some of the steps we're taking like adding quota-carrying sales resources in the Americas may take time before they result in improved financial performance.

As a result, we'll continue being measured with our outlook.

We currently expect Q2 software revenue to be flat to slightly up from Q1.

We also expect that services revenue will be flat.

As a reminder, large deal closure rates will likely remain lumpy, particularly in the near term.

As part of our refreshed Partner Advantage Program, we believe our indirect routes to market should improve and provide more predictable run rate revenue over time.

It is also worth noting that we expect FX to be a sequential headwind in the second quarter.

Let me now discuss our EBIT margin expectations for Q2.

Over the last year, we have taken significant steps to reduce costs.

We will continue to identify areas of operational improvement, simplify our business operations and improve execution.

However, due to our measured outlook on software, we would expect EBIT to be flat sequentially.

We are using this opportunity to reset the Q2 as a baseline for future growth.

Some of the headwinds we saw in Q1 persist in the current quarter.

However, we believe that we have marked the trough for the year, and we intend to show positive sequential growth throughout the second half of the fiscal year.

We are confident in our future, and we expect to demonstrate predictable financial results for our shareholders.

Before I turn things back over to Sanjay, you may have seen our press release regarding Michael Melnyk, our new Director of Investor Relations.

Mike comes to us with over 20 years of financial services experience, and will be an integral part of our management team, helping us engage with all of our key stakeholders.

I'll turn things back over to Sanjay.

Sanjay?

Thanks, Brian.

While we have work to do, we've made the right changes to our strategy, our leadership team and our partner ecosystem to get us back to predictable growth.

The industry is right with opportunity.

And we have the strong products and rich product pipeline that customers need as they move towards modern infrastructure and multi-cloud environments.

This is why we're confident in our ability to create value for our customers, our partners and our shareholders for years to come.

This concludes our prepared remarks, and we will now open up to questions.

(Operator Instructions) Our first question comes from Aaron Rakers with Wells Fargo.

First of all, Sanjay, I know that you've had a little bit of time now at the company.

We've seen 2 really tough quarters, and so I can appreciate kind of the commentary around the 3 areas of focus.

But I'm kind of curious of, as you've gotten your arms around the story, just how you're thinking about the long-term growth potential of Commvault, just the addressable market growth?

Any kind of expectations from a top line perspective of how we should think about this as far as top line growth?

And then also as you make investments in a go-to-market and kind of sales organization, I'm just curious of what you think about the long-term model in terms of operating profitability, your EBIT margin, et cetera?

And I have a follow-up as well.

Thanks, Aaron.

Yes, it's been 6 months, almost to the day, and I had my first full quarter in Q1, running the business after the transition.

It's been good.

It's been good because I spent a good amount of time in the field.

We got into the details with the new partner program, the innovation road maps.

I talked about some of the newer technology they're bringing to market.

So it's been a good 90 days for me.

I wish the results were stronger.

But again, to your question, how do I feel about the longer-term potential?

I think if you believe that our customers around the world are on a journey, they're going from something to something.

I have been CIO for almost 5 years of a large company, and knew all this transitioning.

And as a result, customers after they try point solutions, come back to the fact that they need an integrated road map that even -- they need a company they can count on a global basis to truly help them through what the next big problem is at the time to solve for.

We do that every day, whether it's multi-cloud, or it's virtual or its containers, we're doing that every day with our customers.

Our road map has never been richer.

We also attach ourselves to big trends because that's where customers want us to be.

So whether it be the work we're doing with the public cloud providers.

The additions we're making to our technology on Microsoft Azure or AWS, all of this keeps our customers ahead of where they need to -- the next big problem they're trying to solve for.

We're spending a lot of time on our simplification.

So innovation is one piece of it.

The second piece that I feel very bullish about.

So as a tech company, if my innovation road map wasn't as rich as I believe it is, we would be having a different conversation.

So it's not about the innovation anymore.

We're really investing in that.

Simplification is something that I feel very strongly about.

Being operationally excellent allows us to not only drive some of the things that you asked me in the second part of your question, the efficiency, et cetera, but also allows us to scale.

And so we're squarely focused on that, and a little bit of that is how we do feel, is the software is making if you would, I'll stay with the details, but needless to mention, we're making good progress there.

So it comes down to execution and the fly wheel of execution that I truly think that we need to be focused on.

Riccardo, Sandy, Rob with a new SaaS product, Rhonda with the product -- with our product management, we're bringing in some talent to this company to truly get our execution flows.

And that's what they're focused on, that's what I'm focused on.

So we just need a little bit of time, if you would, to get that up and running.

We've identified where we need to be focused on.

The 90 days of having the field has helped me, and now we're just getting it done.

So the goal here is to return to predictable growth just as fast as we can.

Perfect.

And then just maybe as a follow-up to that kind of discussion.

Can you help us understand a little bit of what's going in the Americas region, particularly around the sales force?

How much attrition have you seen?

And how much -- how do we think about how much sales capacity that you need to put in place over the next couple of quarters?

Then I'll cede the floor.

No problem.

So the Americas for us is, the economy is strong, the demand is -- the funnel looks good.

We'll be seeing it both in Europe and in America, as we're seeing 6 and 7-figure deals come up in the funnel.

So I feel much better about the pipeline and things across the U.S. What we've seen, our partner program that we put into place is brand new, and it's getting good accolades from the partner community.

So I feel good that, that will start giving us some traction.

The -- on attrition, our attrition hasn't gone up quarter-on-quarter.

We are tracking, we're not in any way hugely concerned about our attrition at this stage.

It's just that we're being super selective about the talent we're trying to bring into the company and just need to do it right.

So the sales cluster that Riccardo is trying to build, that I am very supportive of, and the fact that we need to bring in the right caliber of folks into the sales organization is what they're focused on.

And our next question comes from Jason Ader with William Blair.

Sanjay, can you expand at all on the new SaaS offering?

Is this just basically a backup -- Backup & Recovery solution that's sold as a service?

And if so, wouldn't that be competing with some of your partners that are selling backup as a service?

So the -- I am at this little crossroads without telling you too much about the product that we're going to be launching.

So I'm going to give you a sense that this is something that I'm really excited about because it's a product that we've built like a start-up inside the company.

The team is working at an incredible pace.

They turned the very design principles of how we do things on their head, and it's all about the user experience, really making it from the point that our customers thinks about a technology like ours to the point where we're expanding with them.

It's all about the user experience.

We've taken the decades of sort of work and best practices of machine learning and things that we've learnt over the last so many years and have really made them part of the products that's super easy and anticipates what a customer wishes to do without getting into -- without preempting the feature set, and we're going into private beta in a matter of weeks.

This product is 100% partner friendly because it's 100% sold through partners.

And so we don't see ourselves competing.

We see ourselves completely collaborating with our partners and all our focus is that the partners actually like what we're building.

Okay.

And then speaking of partners, can you talk about any specifics on the new partner program that is exciting some of those folks out there that you mentioned, you're getting accolades from.

What are some specifics that it's different than what you've had historically with your partner programs?

So we launched on July 15, and we obviously spend a lot of time with partners and making sure we understood where we needed to focus.

The -- it's all about making sure that it's easy.

The first stage is all about making sure it's easy to do business with us.

So the portal, the enablement, the deal registration process, the overall engagement model that we completely -- that Garagan and his team has completely reinvented for us.

And I think it has taken a step ahead of anything out there.

So we may have been a little late to the game, but we've actually stepped ahead as a result of that.

The -- it's -- the feedback -- some of the feedback we got with the quota structure that they -- the rebate structure that they wanted, which we've adjusted.

They wanted annualized plans, which we've given them.

More business development funds, we've sort of upped the ante on that.

And then a whole bunch of enablement because that happens -- that's the cost, that's the hidden cost of partners.

But if it's not easy to get up and running, getting the SE's up and running, getting the account managers up and running, then it just makes it more difficult for partners that we all know.

So an incredible effort around the portal, the deal registration, the engagement model, the sales kits, the sales plays, the videos, the top leadership content, all of that stuff is built in.

So we're really excited about.

I think we -- and all the early feedback we've gotten worldwide on the program is, is just great.

So now let the [whole world know].

Okay.

Great.

And then last one for me.

Sanjay, can you give us a bit of a window into, let's say, some of your conversations with Riccardo on essentially his diagnosis.

I mean he has worked with a lot -- at a lot of different companies.

He came in, he spent some time, he's only been there, what, a couple of months now.

2 months.

Two months, okay.

So what is he telling you that you can share with us on the problems that exist today in the sales organization and then go-to-market organization?

So if you met Riccardo, you know the guy is -- he's just all energy, and he's been in the industry a long time.

We've been talking even before he came in a little bit.

So he kind of knew the -- he knows the landscape well.

He has the domain expertise in this space.

So his ramp-up has been pretty quick.

The -- in many ways, he and I approach it the same way, which is all about keeping things simple, having the right segmentation model, having a strong partner ecosystem that you're investing in, going deeper, just making sure that we're really in the leads with it, looking at the compensation program, making sure the things needed are in place.

You know that we're going after used cases for customers that matter the most, and we're not spreading ourselves too thin.

So focus on the market that we need to be focused on.

So these are all the things that were in the details.

We've already started rolling the stuff up, capacity.

We need more feet on the street because there is demand in the U.S. So all of these things we're focused on.

Geographical expansion where it matters.

I mentioned APAC as an example.

So there is a lot of work we're doing there.

We've also, again, on the inside, ramped our digital marketing and all the things we're trying to do with customer success and bringing those pieces together, so it knocks over there.

And Jason, it's Brian here.

I think Riccardo also brings to the table just a wealth of experience when it comes to deal forecasting, pipeline, diligence, just making sure that when we're calling forecast, it's something that we're going to take to heart, and he's already having impact in that area.

As we speak, he's on forecast.

And our next question comes from John DiFucci with Jefferies.

So Sanjay, it's great to hear the new management team.

It's in place.

I presume that most of the large pieces are in place here and all the questions about the long-term opportunity for you.

But I really think at this point, it really comes down to just trying to hit some numbers.

And I know the guidance you gave seems like well, it doesn't seem like something you can't do with software revenue flat quarter-to-quarter, but the last 2 years in a row, it actually declined sequentially.

So when I look at stuff like that, I mean you look at your stock and the stock is the cheapest stock we covered at 4x recurring revenue, at least the way we look at it.

And frankly, I just think you just got to hit some numbers short term.

And the long term stuff, that's why you came here.

When you came, you started talking about the product, and we buy into that too.

There is -- Commvault is known as having good product.

Right now, it really needs some execution.

And I know you've got the team replaced, but I'm just wondering if next quarter, when the last 2 years in a row software revenue declined, this quarter, it's going to be flat at resets that you're guiding.

I know it's a lot with really disappointing fiscal first quarter, but I don't know.

I guess it goes along with one of those questions.

So I'm back.

It just happened as how confident are you that you can hit these numbers because investors, after a while, even the valued ones get tired.

John, good to hear from you.

I couldn't say -- I wouldn't say any differently than you said it.

Execution and hitting our numbers are what we're focused on.

And there are -- the -- I will say, on the innovation piece as much as we have great technology, the space we're in is moving so quickly that we have to keep focused on innovation or we have an opposite problem, so I am not saying -- that what we have been saying.

We have a really good flow of technology and listening to our customers that continue to evolve.

And so I don't take that likely, that piece of it.

The rest of anything you said, I completely agree with.

We are so focused on trying to get back to growth.

It's our singular focus.

Everything internally is driven around that.

I'm not -- a miss is a miss.

There is no excuse about it, and I feel pretty good that we have the right team.

I feel pretty good we have the right technology.

I feel pretty good we have the right strategy.

Now it's just about doing it every single day.

Yes.

John, just to add to that, I think you can look at the last couple of fiscal years and our Q2 as a good measure for what we're going to do this Q2.

I think we understand the need to get back to predictable growth, and that's what we're trying to do.

We believe we kind of reset the baseline here.

We want to gain back investor confidence.

We understand the importance of that.

We do have the right motions in play.

We've got the right leadership team.

We've got a new Partner Advantage Program, we'll start seeing the, hopefully, the renewal effect of these subscription agreements that I alluded to on the call.

So we've got a lot of things in our favor here.

And again, we tried to reset the baseline, and we understand the importance of kind of hitting a number and growing it from here.

Okay.

Okay.

And hitting the number, I think it's the first thing you got to do.

And growth is great.

But on that point, I think you said in the press release, repeatable revenue declined 2% year-over-year, Brian.

Is that -- what does it do on a constant currency basis?

Do you have it there...

Maybe slightly more favorable is our point.

Okay.

And then the last thing, I just sort of point out a question.

You said that fiscal '21 renewals, you had a big renewal year coming up, which implies some excitement there around the opportunity to up sell and cross sell.

But given the performance and not just now, but over the last couple of years, it also seems to me to be a huge risk that they don't renew.

And I don't know...

Yes, I think you can look at it a couple of different ways, and we'll give you more color on that as we get closer to FY '21.

But if you look at the -- our maintenance support renewals is a good proxy for how we're going to do with subscription renewals, I would say that as pretty strong.

And so we're working closely with Sandy Hamilton in instituting a kind of a world-class customer success function and making sure that we handle these things with really good care and making sure that it's a win-win for both the customer and Commvault as we get to the renewal cycle.

Okay.

But that repeatable revenue declined 2% this...

I understand.

Some of that is driven by kind of near-term software results if it goes hand-in-hand.

But I think you can look at this, not just within a 90-day window, but a longer-term window.

And our next question comes from Andrew Nowinski with Piper Jaffray.

I'd just like to follow up to a prior question as it relates to your long-term profitability.

I think the prior management team had laid out a plan for reducing spending on sales and marketing as a percentage of revenue, but it sounds like you have a plan more for ramping up spending, at least in the near term.

So I guess what are your views on that long-term model?

And then second, given that subscription growth did slow significantly, I'm trying to understand how you might balance cost-cutting initiatives while managing through that transition to subscriptions and also trying to get growth back on track?

We understand that this is going to be a balanced approach.

We understand the need to get to responsible and predictable growth and that means both top line and margin improvement over time.

I wouldn't say, in terms of adding more resources to quota carrying, that will probably require a little bit more of a recalibration than anything else.

And we're focused on putting our investments in sort of right resources to drive that near term and longer-term growth.

We're confident that we have the right plans in place.

We just need to implement and execute at this point.

Okay.

And then I think you noted that Europe was an area in need of improvement.

I know it's macro related.

I guess I just want to ask, are you certain?

Or how can you be certain that Veeam wasn't putting pressure on your business in that region.

No.

We fundamentally blame the slow -- the macro or the slowdown that we think we're seeing is actually in a space that I don't think Veeam plays in, which is the much larger enterprise business.

We've seen customers -- deals that -- transactions that would have been across Europe and European slowed down a little bit.

Some customers are looking at multi-cloud in a very serious way, which means there is multiple layers of technology in that.

So that takes a little longer, but it's a combination of that sort of thing, and what we think are sort of transactions that look pan-European.

And the next question comes from Alex Kurtz with KeyBanc Capital Markets.

A couple of questions here.

Just back on the big deal execution, Brian, this has been something that has been a recurring challenge for Commvault, both in a good and a bad way, right?

Because you're in big deals.

You're competing.

It means your technology matters.

But it means it can go over the years of how these big deals impact a quarter for Commvault.

So what are you guys doing differently now as far as how you forecast big deals in your pipeline?

Then I have a quick hyperscale question.

Okay.

Just to take that out, this is Brian here.

So yes, I mean the lumpiness that we refer to as a result of us not being predictable in our execution.

So we understand the need to improve our forecasting methodology, our overall deal hygiene and become more predictable.

And I think with the direction of Riccardo, we're going to do that.

So that's step one.

Secondly, as we rolled out this partner program with the incentives that we put in place, we're going to start seeing a more predictable revenue stream come from that.

And that's going to be both for new customer acquisition and also our existing customers.

And then third, the subscription revenue business that we're going to start seeing, that's going to add more predictability to the baseline.

Again, that will kind of come towards more FY '21, but that should start taking effect, and I believe that's going to have an impact.

Okay.

And then on hyperscale, how is this product -- there is so much excitement about this product when you guys announced it and allowing you guys to go into the mid-market and just compete more effectively against some of the startups.

So is there some kind of metrics that you can give us?

Or some kind of context about how that product performing over the last 90 days?

For Hyperscale, the last 90 days.

Yes, I mean hyperscale is the technology of the future.

I mean I think that we're -- we are seeing growth on a year-over-year basis with respect to our hyperscale offerings.

And I think that, again, this is sort of -- if you want to comment Sanjay?

Let me -- Alex, the way we think about the hyperscalers is both with the software and the appliance.

And our play with our customers on this is it's one part of an overall approach they may want to take.

Our technology works together.

So if a customer has a cloud footprint, they have an on-prem footprint, they want to have over time a SaaS footprint, they end in one or in certain cases in appliance or hyper-converged capability, and I'm over simplifying it, but the brain in our software talks to the other, they all talk to each other, it's in the same back plain.

So as a result, we've got customers that start out talking with us about a hyperscaler and over time sort of want to have the whole complete product in conjunction with it or a cloud-enabled capability.

So we're -- it's -- for us, it's an important part of an overall solution that the customer can have any -- in sort of in any way they like.

It is very channel friendly.

It is very easy to set up.

It is -- literally, I have done this personally in 15 minutes, setting it up and scratch.

It's a good piece of software.

Our partners like the reference architecture.

So it's sort of meeting and or I should say exceeding our expectations as technology.

We have lot of repeat customers.

It is a product that's about a year in and it's doing well.

And our next question comes from Eric Martinuzzi with Lake Street.

Yes.

I have a question on the revenue recognition regarding the subscription and utilities software.

I was under the impression that, that line would just kind of grow sequentially as we added more subscription contract to the base.

It declined between Q4 and Q1.

Could you refresh my memory on the revenue recognition there?

Sure, Eric.

It's Brian here.

So it really depends on the needs of our service providers that drive that component of our utility-based revenue.

Sometimes, we do enter into a multiyear committed arrangement with them.

So if it makes economic sense for us and them, what they'll do is, they'll commit to a couple of years at one point in time.

That actually then gets recognized as basically a committed subscription arrangement as opposed to utility.

Okay.

So the assumption then is that...

Yes.

It gets recognized in.

Yes, the committed amount gets recognized in period, and it gets pulled out of utility, but it does become part of our overall subscription revenue that becomes repeatable in nature.

Okay.

Okay.

And then a second question here.

Just -- we did see a little bit of -- I don't know, I'm trying to get a feel for normalized CapEx.

I think a year ago, you guys still had spend related to the new facility, but the $841,000 in the quarter, is that kind of a normalized CapEx?

Was that abnormally low?

What should we anticipate for fiscal '20?

I'd say, plus or minus $0.5 million on that number, more to the plus, will probably be appropriate.

And that does conclude our Q&A session for today.

And it does conclude today's call.

Thank you for your participation in today's conference.

You may all disconnect.

Everyone, have a great day.

Thank you.