Commvault Systems Inc (CVLT) 2007 Q3 法說會逐字稿

Good evening, ladies and gentlemen, and welcome to CommVault's fiscal third quarter earnings call. (OPERATOR INSTRUCTIONS). At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Michael Picariello, Director of Investor Relations. Please go ahead, sir.

Good afternoon. Thanks for dialing in today. With me on the call is Bob Hammer, Chairman, President and Chief Executive Officer; Lou Miceli, Chief Financial Officer; and Al Bunte, Chief Operating Officer. As a reminder, CommVault is a March 31 year-end company, and therefore, we are reporting our third quarter of fiscal 2007 results today.

All statements made during this call that relate to future results and events are forward-looking statements that are based on our current expectations. Actual results could differ materially from those projected in the forward-looking statements because of a number of risks and uncertainties which are discussed in our SEC filings and in the cautionary statement contained in our press relates and on our website. The Company undertakes no responsibility to update the information in this conference call under any circumstance.

The current report on Form 8-K with our earnings press release was furnished to the SEC earlier this afternoon and is available on our website at www.CommVault.com in the Investor Relations section under SEC filings.

On this conference call, we will provide non-GAAP financial results. All non-GAAP Q3 results presented today exclude stock-based compensation. In addition, we used an imputed tax rate of 25% in determining our Q3 non-GAAP net income. The reconciliation between the non-GAAP and GAAP measures can be found in the table accompanying the press release and posted on our website.

This conference call is also being recorded for replay and is being webcast. An archive of today's webcast will be available on our website following the call.

I will now turn the call over to Bob Hammer, our Chairman, President and CEO.

Thanks, Michael. I would like to welcome everyone to our fiscal third-quarter earnings. As a reminder, I will be referring to non-GAAP results.

We had a good third quarter with solid progress in all areas of our business. We achieved revenues of $30.3 million, up 32% on a year-on-year basis versus $29.1 million in FY Q3 2006. Software revenue grew on a year-over-year basis by 27%, while our services business grew 39% year-over-year. Non-GAAP operating income, or EBIT, was $5.7 million, up 51% year-over-year versus EBIT of $3.8 million in FY Q3 2006. Non-GAAP net income was $4.6 million, up 49% over last year, and non-GAAP earnings per share was $0.10, up 25% versus $0.08 per share for the same period a year ago. Cash flow from operations came in at $8.7 million for the quarter, which is up 11% over fiscal Q3 2006. Free cash flow came in at $7.8 million for Q3 2007, up 14% over Q3 2006.

As stated on our last call, I would like to remind everyone that we don't get quarterly guidance. While we met the street fiscal Q3 2007 revenue and earnings estimates, I would like to point out that there was an $800,000 of license revenue from one customer that came in during the quarter that simply did not meet revenue recognition requirements. Correspondingly, we saw a 10.8% sequential increase in deferred revenue, which will benefit us in subsequent quarters. We will be raising our FY 2007 guidance slightly, along with FY 2008 guidance. Lou Miceli will provide more details on the quarterly financial results along with our FY 2007 and FY 2008 guidance later on in the call.

For those that are new to CommVault's story, our goal and vision is simple. We are a pure-play independent data management provider. We have scale, high-growth rate and increasing cash flow. We are driving our growth to a highly differentiated value proposition. We believe that customers continue to standardize on CommVault over competitors because we offer the industry's best, most differentiated and Unified Data Management solution, a solution that offers significant performance, functionality, operational and cost advantages to our customers.

I want to just spend a few minutes on what we're seeing in the storage market from a macro perspective. From a CommVault perspective, the health of the IT spending environment appears to be strong. I did note in recent analyst comments that there is a slighter weekly macroenvironment for traditional backup products. That may be true on the macro basis; however, we have not seen any change in buying pattern from the marketplace as it continues to remain robust for our solutions. We believe this growth is driven by a number of technological factors, longer retention times, the growth in virtualization, increasing CPU and magnetic disk densities and the broader introduction of 64-bit computing. Longer retention times are being driven by regulatory requirements both domestically and internationally, which are requiring companies to retain data longer and are increasing the need to manage larger volumes of data for longer periods of time.

Such regulations include amendments to the Federal Rules of Civil Procedure (FRCP), SOX and HIPAA. The relatively uncontrolled growth of data is putting a lot of pressure on IT. CommVault's focus is delivering business solutions that let end users solve their data management challenges with a single unified software platform that delivers real costs and administrative savings. We believe CommVault delivers a value to our customers that is unmatched in our industry. IDC and Gartner's outlook for the storage software market, plus direct feedback from our customers, gives us confidence that the market opportunity is there for us.

In addition, we believe customers are seeking more sophisticated ways to protect their data than traditional backup. In this regard, the data protection space is in the early stage of a technological renewal, and we believe CommVault's Unified Data Management platform has product and features that best address the current needs of the market.

Turning now to our customer overview and deal stats, we continued to have strength across all of our distribution channels with good contributions from OEM partners, resellers and systems integrators. Regarding customer dynamics, we are pleased with our performance in penetrating our major accounts and with our new customer additions. We acquired 247 new customers in the quarter. As usual, this statistic does not include a large number of small orders from new OEM customers who registered through the Internet. In the third quarter of fiscal 2007, we generated approximately 30% of our software revenue from deals over $100,000 compared to 22% software revenue generated from deals over $100,000 in the second quarter of fiscal '07, and those stats do not include that $800,000 from that single customer.

As this statistic indicates, we are seeing broader deployment of our full suite of products and larger deals. As we have stated before, there are going to be some quarterly fluctuations in the number of deals over $100,000; however, we anticipate that about a third of our software revenue in the short and medium-term could come from deals greater than $100,000 as has been the average for the past few fiscal years.

We saw increased visibility in the near-term funnel and pipeline from Q2 to Q3. We have good visibility across all segments, larger enterprises, deals, leading medium and small enterprises. The increase in visibility reinforces our confidence and our execution of our balanced distribution strategy between small to medium-sized businesses and enterprise businesses. This includes our relationships with our OEM distribution partners, Dell and Hitachi.

Sales through our reseller and OEM agreements with Dell accounted for approximately 19% of total revenues for both the third quarter of fiscal 2007 and the first nine months of fiscal 2007. Our relationships with Dell and HDS are continuing to provide significant contributions to our license revenue and services revenue growth. Dell and HDS and CommVault are all making significant investments to ensure that we can meet our longer-term growth targets. We're seeing improved results as a result of our mutual commitments. We are continuing to have success with growing the SMB market and with Hitachi in the enterprise segment of the market.

Now let's talk about recordable segments and product segments. As we had previously stated, CommVault will break out revenues geographically between the United States and the rest of the world and product segments between Galaxy, our backup and recovery product and others. Geographically the United States operations generated 71% of our total revenues in the quarter with operations in the rest of the world generating the remaining 29%. The rest of the world primarily relates to Europe, Australia and Canada. We expect this percentage to be about 70% in FY 2008.

We had solid growth across both our Galaxy and non-Galaxy product segments. For the first nine months of fiscal 2007, sales of Galaxy backup and recovery represented approximately 83% of software revenue. Our software suite and our Unified capability drives a majority of our revenue.

I will spend more time talking about our vision and strategy later in the call, but I would like to first make a few comments. We have stepped up our spending in distribution and marketing to ensure that, number one, that we will meet or beat our financial objectives for FY 2008. And two, that we will make the necessary investments to support our go-to-market initiatives for our next generation technologies, which are currently in development. We believe we can continue to improve operating margin by 2 to 3 percentage points on an annual basis over the next few years while continuing to be innovative. Our long-term operating margin goal is in the low to mid-20s.

I will now turn the call over to Lou Miceli, our CFO, who will provide more details about our quarterly results. Lou?

Thanks, Bob, and good afternoon, everyone. As a reminder, the references to non-GAAP numbers have two adjustments. First is the exclusion of all non-cash stock-based compensation, and the second is the inclusion of an imputed tax rate of 25% for the quarter. I will address revenues first.

Total revenues increased 32% year-over-year and 5% sequentially over the prior quarter. Software revenues increased 27% year-over-year and 4% sequentially. And services revenue increased 39% year-over-year and 5% sequentially. Approximately two-thirds of our software revenue came from our installed base with the rest coming from new customers. This mix is consistent with the trend for the past several quarters. Software revenue increased by $4.5 million year-over-year with approximately 65% of the increase coming from our indirect sales channels, which include resellers and OEM partners and approximately 35% from our direct sales organization.

We continue to see growth in services revenue for the same reasons as prior quarters. First, the maintenance attach rates on new software orders is almost 100%. Secondly, the renewal rates on maintenance contracts are very high. And third, professional services revenue is growing in both new accounts and the installed base. The revenue mix for the quarter was 55% software and 45% services. This is down slightly from the comparable prior year period where the revenue mix was split 57% for software and 43% for services. We are anticipating this split to approximate 56% and 44% for the remainder of fiscal 2007, as well as fiscal 2008.

Now onto gross margins. For the quarter they were 85.4%, which is unchanged from the prior year period. Gross margins on our software revenue were 97.5% in the current quarter versus 95.9% in the prior year quarter. The increase is due to lower royalty and other costa driven by the mix of software products sold. The gross margin on services revenue was 70.5% in the current quarter and 71.3% in the comparable prior year period. A slight decrease in services gross margin was caused by changes in mix between maintenance and professional services and slightly higher costs associated with providing professional services.

Turning non to the individual operating expense lines, sales and marketing expenses increased $3.8 million or 30% over the power year period. Approximately two-thirds of this increase was related to employee compensation, which includes commissions on higher revenue. The rest was due to higher travel and entertainment and slightly higher marketing expenses. Our total worldwide headcount increased from 680 at the end of September to 709 at the end of December. The headcount increases were primarily in sales and marketing, R&D, customer service and support. For the quarter sales and marketing headcount increased by 7 to a total of 169, and presales and support increased by 13 to a total of 241. R&D spending increased by about $800,000 in the quarter or 15% over the prior year period. The increase was primarily related to higher headcount and slightly higher legal expenses associated with the protection of our intellectual property.

For the quarter R&D headcount increased by 12 to a total of 209 with the majority of these additions being in Hyderabad, India. You can expect R&D spending to continue to increase as we focus on developing new products that enhance our competitive position in the market segments we address, as well as new markets that we may address in the future. G&A expense has increased by $1 million in the quarter, which is 36% over the prior year period. About half of this increase was a result of higher public company costs, which include accounting and compliance.

Non-GAAP operating margins were 14.9% for the current quarter, resulting in non-GAAP operating income of $5.7 million. This is an improvement over Q3 FY 2006 where margins were 13%. During the remainder of fiscal 2007 and throughout fiscal 2008, we will continue to invest in sales and R&D.

In addition, FY 2008 will be our first full year as a public company, and therefore, we will incur higher public company compliance costs. However, we continue to believe that we can increase our operating margins as we grow the revenue line.

The non-GAAP net income for the quarter was $4.6 million and non-GAAP EPS was $0.10 per share based on a diluted weighted average share count of 46.2 million shares.

Now to the balance sheet and cash-flow statement. As of December 31, our cash balance was $56.5 million, up from $50.2 million at the end of September. Cash flow from operations was approximately $8.7 million in Q3. Our DSO was 49 days, which is within our historic average. We anticipate that our DSO will continue to be in the range of the mid to high 40s to the mid to high 50s for the foreseeable future.

Deferred revenue increased $3.6 million or approximately 10.8% sequentially. Deferred revenue is comprised of mostly 12-month maintenance contracts and professional services. This quarter it also included approximately 800,000 of new software revenue from one customer which should not meet revenue recognition criteria.

Capital spending was approximately $900,000 in the third quarter, which was down from $1.3 million in the second quarter. Our projected CapEx spending for Q4 of fiscal 2007 is $1.1 million, which will bring the total for FY '07 to approximately $4.3 million. Our current estimate for FY '08 capital spending is between $4 million and $4.5 million.

Now to the share count. The difference between the weighted average share count at December 31, 2006 and September 30, 2006 is related to the IPO shares. For the quarter just ended, we have the full impact of the new shares issued which totaled 6.1 million shares. In the prior quarter, the IPO shares were only in the share count for four days. Consequently, the weighted average share count at December 31, 2006 was 46.2 million versus 38.9 million at the end of September. We anticipate the weighted average share count on March 31, 2007 to be between 46 million and 46.5 million shares.

Taking a look at taxes now, as I previously mentioned, for the presentation of non-GAAP numbers in our press release, we applied a 25% effective tax rate to the quarter. We will use this rate for the remainder of FY 2007, which will blend the tax rate for the current fiscal year to approximately 20%.

Let me also point out that the actual cash tax rate for Q3, as well as the nine months ended December 31, 2006, was approximately 2%. In addition, the Company has a potential deferred tax asset of approximately $50 million, which is fully reserved at December 31, 2006.

Now to the guidance for the FY 2008 tax rate. We anticipate the cash tax rate for the remainder of fiscal 2007 and throughout fiscal 2008 to continue to be less than 4% as a result of the Company's NOL carryforward position. We anticipate that the effective tax rate will increase over the next several years and approach our long-term terminal rate in fiscal year 2010.

For your models we would recommend stepping up the tax rate from the current pro forma rate of 25% towards our long-term terminal rate, which we estimate to be in the range of 28 to 32%. For fiscal 2008 our anticipated pro forma tax rate will be approximately 28%, which is up from the pro forma rate of 20% used in fiscal year 2007.

Moving on to fiscal 2007 and 2008 guidance, as most of you are aware, we only issue annual guidance which will be updated quarterly. As we stated on our last call, this is due to our belief that a long-term focus is more appropriate and in the best interest of our stockholders and more in line with how we manage the business.

In addition, we will continue to present non-GAAP numbers on a forward-looking basis, which will primarily exclude stock-based compensation charges.

For the full year ending March 31, 2007, we are increasing our revenue guidance range to $150 million to $150 million. Using the midpoint of this updated guidance, the revenue growth is 37% year-over-year, which is consistent with our compounded annual growth rate since fiscal 2002. Non-GAAP diluted earnings per share is expected to be higher as well and in the range of $0.44 to $0.46 per share, using a projected fully diluted share count of approximately 42 to 42.5 million shares and applying a pro forma tax rate of approximately 20% for the full year. We are expecting fiscal year 2007 non-GAAP gross margins to be between 85.5% and 85.7%.

We are also expecting non-GAAP operating margins to be between 14.2% and 14.8%. Using the midpoint of our guidance, this represents EBIT growth of approximately 90% year-over-year. The non-GAAP guidance excludes approximately $0.11 per share related to the effects of stock-based compensation under FAS 123R, which is net of non-GAAP income tax expense of $0.13 per share.

In addition, the non-GAAP guidance also excludes the potential for additional FICA expenses, which will be incurred when employees exercise in the money stock options post lockup. It is difficult to estimate how many options would be exercised post-lockup, so this additional FICA expense will most likely be an FY 2008 expense. Although I would like to note here that our lockup is set to expire on March 21, 2007, so it is possible that some of this additional FICA expense may come in the final days of fiscal 2007.

For fiscal year 2008, guidance is as follows. For the 12 months ending March 31, 2008, revenue is expected to be in the range of $191 million to $193 million. Using the midpoint of our guidance, this represents revenue growth of 28% year-over-year. Non-GAAP diluted earnings per share is expected to be in the range of $0.54 to $0.56 per share using a projected fully diluted share count of approximately 47 to 48 million shares and applying an effective tax rate (multiple speakers) -- I'm sorry. I lost my point here. Non-GAAP diluted earnings per share is expected to be in the range of 54 to $0.56 per share using a projected fully diluted share count of approximately 47 to 48 million shares and applying an effective tax rate of approximately 28% for the full year. Our fiscal year 2008 in a guidance represents an increase over both current revenue and EBIT consensus estimates. I would also like to point out that there is a difference between the current consensus tax rate for fiscal year 2008 and our anticipated pro forma tax rate which I just referenced as 28%. We are expecting FY 2008 non-GAAP gross margins to be between 85.5% and 85.7%. We are also expecting non-GAAP operating margins to be between 17% and 17.5%. Using the midpoint of our guidance, this represents EBIT growth of approximately 50% year-over-year.

We see some improvement coming from the sales and marketing line, as well as the G&A line. And with regards to our R&D spending, we will continue to invest and innovate as we have done in the past.

The non-GAAP guidance for fiscal year 2008 excludes approximately $0.14 to $0.16 per share related to the effects of stock-based compensation under FAS 123R, which is net of non-GAAP income tax expense of approximately $0.06 per share.

That concludes my prepared remarks, and with that, let me turn it back over to Bob for some more comments. Bob?

Thank you, Lou. Now I want to spend a few minutes talking about where CommVault goes next. CommVault has introduced new products in the e-mail archiving, continuous data protection, remote office and capacity management segments. We are working on our global distribution and providing segment offerings of our product line to address both the SMB, as well as the enterprise marketplaces. We are working with strategic partner to deliver data management solutions to the marketplace beyond data protection. We see growth opportunities in many areas from our core data protection solutions across e-mail archiving, (indiscernible) office and continuous data protection and now to data classification and content indexing.

Let's talk about e-mail archiving. We are on our second release of our e-mail archiving products with our third release in development. Industry analysts are confirming what we're experiencing in the market, and that is that customers are looking for second generation products that overcome the limitations of scale, congestion, search and retrieval response time in a production environment. Slowdowns of first generation products are due to some of these limitations. CommVault is spending the necessary resources to ensure that we become a major player in the segment.

Let's talk about data classification and context indexing. Customers are just starting to understand the value and benefit of data classification and content indexing and how it provides better management of data and real business benefits beyond reducing the cost of IT operations. We have won a number of large deals in the last several months from very large customers who believe our products and strategy for classification and content indexing best delivers on those value propositions. Our competitors are still trying to address the area with a software portfolio tied to our hardware and software. Conversely we believe the best solution is a unified software platform that can expand and to embrace these capabilities.

Let's talk about our next release. Consistent with our track record, we continue to develop highly innovative products and have high value for our customers. We're meeting our internal product development targets for our next generation technologies, and we will be making further announcements when it is appropriate.

In summary, we will continue to invest heavily into distribution and develop and in order to sustain our track rate of growth and innovation into FY 2008 and beyond. We are on target to reach our internal long-term operating goal of $500 million of revenue plans within the next several years. This is an internal plan that we laid out last year, and we track ourselves against it. We're doing well against this plan and are confident in achieving this plan in the future. We are confident in achieving our FY 2007 and FY 2008 guidance. We continue to have increased visibility into our guidance, especially with the current quarter's increase in deferred revenue.

As I said in our last earnings call, we will always maintain disciplined and issuing guidance. We are confident in our ability to achieve our growth rate and profitability objectives and are optimistic in our ability to continue to expand our available markets.

This concludes our prepared remarks. I would like to everyone know that our next earnings call will be in May. We will announce the specific date as we get closer. We will now open the call to questions.

(OPERATOR INSTRUCTIONS). Tom Curlin, RBC Capital Markets.

Congratulations. Do you feel like you benefited at all in the quarter from Symantec's issues with their CRM system? It seemed like we saw a lot of that in the channel during the quarter, and I just wonder if you factor that into your thinking, or if you think it impacted deal flow or win rate at all during the quarter?

We heard rumors to that effect in the last month or so of the quarter, and I polled the field guys, and it did not seem to impact our deals. In other words, the deals that were in our funnel were the ones that closed, and we did not see that I can tell any deals that came in because Symantec customers could not get their orders processed.

All right. And then on a somewhat different topic, from a go-to-market perspective with Hitachi, do you think you need to invest at all in i guess some co-selling efforts, maybe some expertise that can, if you will, sell along side them to some degree out of the marketplace as you try to drive into enterprise, or do you feel like they have everything they need right now from a resource perspective?

Well, I guess the answer is in certain segments of the market, in certain regions, Hitachi and CommVault can be very effective in closing large enterprise deals. I have mentioned before it is not consistent across all (indiscernible) at this point. The only comment I would make is both companies are investing kind of a lot of money in resource to increase our consistency across the globe right now.

Is that just training I guess, making sure that their guys have really all the tools and have been through at least all of the requisite --?

It is more complex than that, and I don't want to comment on the specifics. But there is clear action between Hitachi and ourselves to increase our productivity across -- globally as we go after these large enterprise accounts.

Okay. And then finally, on the Dell side of the house, we have seen some I guess new bundling efforts on the part of Symantec with Dell. Any sign of that in the field or in what you have seen at Dell? How do you think about that going forward?

As far as I know, most of those bundling efforts have been on the S&P side of Dell and not on the OEM side. So to date we have not seen that impact our OEM revenue, and our SMP revenues were strong during the quarter. And they clearly Symantec is putting a lot of effort and competing with us in that channel. But, at this point anyway, it has not seemed to have affected our revenue growth in that channel.

All right. Thank you and congratulations on that nice large deal entry.

Ed Maguire, Merrill Lynch.

To follow up on your mix of large deals, was there any characteristic of the larger mix in deals in terms of products or concentration in any of the regions?

No, well, typically most of our large deals are domestically based, but we saw our large deal funnel certainly as global. You know, our visibility of these deals, as I mentioned before, is definitely increasing quarter on quarter. We are clearly having success in closing these deals. They are all baked into our guidance. I mean if anything, we seem to be having more success in the enterprise as time goes on, and our ability to compete for these larger enterprise deals.

I noticed during the quarter you had some promotions around the new changes in the civil procedure I guess legal hold support requirements. Could you talk about what you may be doing there and whether that might be generating demand for some of your newer offerings?

Well, I will make a comment, and Al Bunte is here. He may want to jump in on this. But clearly as a Company we have made a lot of investments on the product side, our services and support side and our go-to-market capabilities in that segment. Internally we are obviously seeing some really strong growth in that segment as a result of that.

In addition to that, as we get more experience in that area of the market, as I mentioned, we have another generation of product coming out based on our increased knowledge of that segment with an objective as we always have to be absolutely the best-in-class supplier of our value proposition in that segment of the market. It is a high priority for us. We are making the necessary investments to succeed there, and we tracked some very solid success. We are hitting our internal growth rate targets for FY '07 and have established certainly solid targets for FY '08 in that segment of the market.

Sarah Friar, Goldman Sachs.

Just on the upcoming product pipeline, could you give us a little bit more granularity on what new products or product upgrades we should be expecting to see over the next couple of quarters?

I would like to comment on it, but I cannot, and when I can, I will.

I figured I would give it a try.

Yes, I mean we're still extremely excited about it. We are on -- as I mentioned in my summary, we're certainly meeting our internal objectives and our internal development objectives in bringing these innovations to market, and as soon as we can talk about it, we certainly will talk about it.

Got it. And then I think you got asked it a little bit before, but outside of core backup and recovery, what are the areas you see strongest growth in? I presume it is archiving and replication, but anymore color there would be great.

It is remote office, archiving and the continuous data protection part of the market and what people would call HSM or what we call data migration.

Okay. And do you feel that we will start to see Galaxy as a percentage of total start to tick down here? I think it has stayed about flat on a quarter to quarter basis?

Our objectives are, if you follow us on a year-over-year basis over the last couple of years, just follow our trends, our objectives are to significantly increase the non-Galaxy portion of our business in FY '08.

Got it. And then just finally, Lou, for you, on the model I know you are giving yearly guidance, but can you give us any sense on your seasonality in terms of as we go from Q4 to Q1, have you gotten big enough now that you would see a more typical kind of softer Q1 seasonality of probably down sequentially, or are you still high enough growth that maybe you kick on through that for now?

Well, we are not going to go to quarterly.

But just kind of very big picture kind of.

Well, the big picture -- typically Q1 has always been a tough quarter for us typically because typical software company for the industry for that matter. But I think we are getting to the point where we are big enough that to give you the impact of that is not as great. But we have obviously factored that into our guidance, and we continue to see, as Bob said, we continue to see strength on a worldwide basis. So you may not see as much of that as you have perhaps in our numbers from two or three years ago, but clearly Q1 is a quarter that most software companies struggle to hit a little bit. So we factor that into our guidance for the year.

Okay, that was helpful. And then just finally, on the license services split, it has been sitting around I think 55% license and 45% service. Is that a way for us to model go forward, or is there anything that would shift that around?

I think I said it was 56/44 is the way we kind of see it. I mean could that change a .5 point to 1 point in either direction? It is possible. But the best insight I have right now is that we should be somewhere around 56/44 -- (multiple speakers) for '08.

Tim Klasell, Thomas Weisel Partners.

Congratulations in there as well. First question on you mentioned the Dell partnerships and the Hitachi, how about network appliance? I know that is fairly new, but how is that progressing?

As we mentioned in prior quarters, the reseller deal we have with them is we're not expecting a lot of revenue from that. What we can comment on is that there is a lot of activity between CommVault and NetApp in the field. There is very good dialogue between the companies at the corporate level, and we would expect that relationship to become more significant over time.

Okay. Good. And then the $800,000 deal, how should we expect that to come off the balance sheet? Will they be linear over a year? Three years? Can you give us some color there?

Well, you know how (indiscernible) works. When it is revenue, it will be revenue.

The answer I would give it is not going to come off slowly. It is going to come off -- it is either going to stay there or it is going to be there or come off 100% is the way it will work.

Okay. And any color on when you hit the revenue recognition milestone?

No, no comment on that.

Okay, good. And then finally, you mentioned the pipeline. Obviously some of that is the deal we have got on the balance sheet right now, but is it the volume of deals you are seeing or better closure rates or a combination thereof?

Our pipeline is bigger, visibility deals currently in the quarter is bigger, and visibility to larger deals is bigger.

Okay. Good. And then finally, we have got to sort of push a little bit around Symantec/Veritas as a weakness. It seems like they are compensating their salesforce now much more aggressively to sign two and three-year maintenance contracts. And does that concern you at all as far us trying to do competitive displacements, or does that (technical difficulty)-- a change from what you have seen prior?

Well, I guess the A answer there is, if we are in the deal, we can compete in spite of that. If we have visibility to a deal, our value proposition usually prevails. Where it certainly will help them is when we're not there and people are in a static mode, it will help them retain accounts.

Okay. Good enough. Fair enough. Congratulations, again, guys.

Dan Renouard, Robert W. Baird.

I'm wondering if you could give us a little more detail into your investment in sales and marketing? This quarter you were up slightly in terms of your people and headcount. Is it purely on the people side that you are talking, and maybe you could give us some detail there, or is it more than just people in terms of your investments?

Well, it is certainly what we would call feet on the street. I'm making sure we have enough additions to our salesforce and channels to make sure we hit our numbers for FY '08. It also includes, as you will see, as we start to launch some of our next generation technologies and increase spending in our outbound go-to-market as it relates to that release.

Those are the two major areas. There are others, but those are the two major areas.

Phil Winslow, Credit Suisse.

Most of my questions have been answered, but just coming back to the Symantec comments, obviously we have heard about turnover on the Symantec salesforce and executives. I'm just wondering if you have been able to capture any of those executives that have been turning over there?

The answer is yes. We don't comment on specifics, but yes, we have hired some Symantec people.

Great. And then also, when you do look at some of the new product sets outside of Galaxy, I am wondering if you can comment on where you are sort of seeing the most traction? Are you starting to see the greatest pickup on the e-mail archiving side, etc.?

Well, certainly HSM file archiving is very strong for us, has been. The e-mail archiving in and of itself is we're opening a door to that segment, but that, on a percentage growth standpoint, has been really high. Our CDR product just came out in June. It has had for a new product solid traction. So that whole remote office, not just (indiscernible) replication, it involves our whole replication capabilities as well. Our guys are putting solutions together for that marketplace. So those are here. E-mail archiving, your HSM migration, file archiving people call it, remote office have been the biggest growth segments for us.

(OPERATOR INSTRUCTIONS). Brian Freed, Morgan Keegan.

When you look at your deal pipeline, can you talk real briefly about what the average length of your sales cycle is and give us some sense as to how much visibility you have into your fiscal '08 guidance?

The pipeline visibility, you have extremely good visibility from, let's say, quarter to quarter. You have a reasonably good visibility to the following quarter after that. When you start getting out to three or four quarters out front in terms of specific deal flow, you don't have that kind of granular visibility. What we do have is things we can comment on is that on an aggregate basis, two-thirds of our revenue comes from our installed base, license revenue.

So we know what that number typically is and how fast that is growing. We have a pretty good solid fix on what our professional services visibility is going forward. Our maintenance revenue stream is type in attach rate, and we've had really good visibility to that year-over-year. So you start to add all that up, and you have a pretty good idea of what your growth rate is. And then if you look at what I call feet on the street, when we put -- when we go into new geographies or add salespeople, if we have good leadership and capable reps, we have a real good idea what the productivity of those teams are going to be over time, and we plot those. So, in the aggregate, when we put these models together, we have real solid confidence in our belief to hit numbers here over time. (multiple speakers)

And the second piece, can you talk a little bit about the average length of your sales cycle, particularly for new customers, and if you have seen any material shift in that over the last couple of quarters?

Well, on your really large deals, your seven-figure deals, they will typically be longer than a small deal. But I would say that our -- I mean this is purely qualitative -- it seems like that our sales cycle is either where it has typically been or getting a little bit better.

Okay.

As we go out in time. It is not getting worse. Let's put it that way.

Brent Bracelin, Pacific Crest Securities.

Bob, in your opening remarks you talked about virtualization as one of the growth drivers for the business. Could you expand on that a little bit? I guess if you look at the virtualization trends, you are really talking about consolidating the number of server units out there. I would assume that would actually decrease the opportunity as far as the number of servers that you would actually load backup software on top of. Is it do you have a higher attachment rate in those environments? Could you maybe compare, contrast how you look at virtualization, how that helps your business, and then competitively how that would also impact Symantec/Veritas business given that they have a much larger installed base?

Well, clearly, and Al can chine in on this, we worked much more efficiently and effectively with VMware than our competitors do, for example. So when you have a big server consolidation project and they are using product like VMware for the virtualization software, we are able to put -- bring -- solve more complex problems in those deployments than our competitors can a lot easier.

In essence, do you force a migration there, or do you have any stats on your attach rate to kind of virtualized environments relative to non-virtualized environments?

I'm not sure that we can answer that. I mean clearly in our product designs and everything else, understanding how those clusters work and how we deploy with them, we fully have some pretty significant advantages. The architecture is much more flexible than our competitor's architecture in setting up these systems. Al, you may want to jump in.

Yes, I would add a couple of things to the general question. One is, on a macro basis, I think it offers us an opportunity because it usually indicates that a customer is looking to do something fairly broad-based with their IT infrastructure, and it offers us an opportunity for them to look at doing something different from a data management standpoint.

Two, just the fact that it is running on physically less servers does not alleviate the general management problem. There tends to be lots and lots of virtual nodes out there as you know.

And then lastly, the point I think Bob was trying to make, is we have some very robust solution tied to virtual nodes, particularly as we virtualize media agents or data movers in what we call the proxy host environment where you're essentially moving the backup or data movement job off that physical host, and that has proven to be really, really effective, and it tends to be differentiated as well.

Okay. Great. That is helpful. Thank you.

Gabe Lowy, Unterberg Brokerage.

Can you just comment a little bit about what you're seeing in the government channel, particularly at the state and local level?

Well, typically that is a large segment for us. We have got some strong partners there, including Dell. So the growth of the government channel globally has been very strong. I mean it is not just the US. Certainly there is enough money in those segments right now, and we have been successful in penetrating whether it is school districts or universities. We have had really solid growth quarter on quarter, and it is pretty consistent solid quarter on quarter growth. Over the last five quarters or so, it has been I would say consistently high.

Thank you very much. Congratulations.

That is all the questions we have. I will turn the conference back over to our speakers for additional and closing remarks.

That concludes our conference for today. Thank you very much for attending. Thank you.

That does conclude today's conference. We thank you for your participation.