Commvault Systems Inc (CVLT) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the CommVault fiscal first-quarter 2008 earnings call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. At this time, for opening remarks and introductions, I would like to turn the call 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 first quarter of fiscal 2008 results today.

Before we begin, I would like to remind everyone that statements made during this call, including in the question-and-answer session at the end of the call that relate to future results and projections, are forward-looking statements within the meaning 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, which are discussed in our SEC filings and in the cautionary statements 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.

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. A reconciliation between the non-GAAP and GAAP measures can be found on a 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 our CEO, Bob Hammer.

Thanks, Michael. Good afternoon, everyone. I would like to welcome everybody to our fiscal first quarter of 2008 earnings call. We had a good first quarter as we continue to make progress executing on our business plans. This included the recent launch of our next generation software release, the Simpana 7.0 software suite.

Also during the quarter, we successfully completed a follow-on offering of our common stock which is sold primarily by early stage investors. All the Credit Suisse DLJ Merchant Banking shares were sold during the offering and the Credit Suisse [crowd] shares were reduced. As a result, existing share overhang was significantly reduced.

For the quarter, we achieved record revenues of just under $41 million, up 31% on a year-over-year basis versus $33.5 million in fiscal Q1 2007. Software revenue grew on a year-over-year basis by 28% while our services business grew 35% year-over-year.

For the quarter, non-GAAP operating income or EBIT was 6.2 million, up 46% year-over-year versus EBIT of $4.3 million for the same period a year ago. Non-GAAP net income was just under $5 million for the quarter and non-GAAP earnings per share was $0.11 for the quarter. As usual, we will provide more details on the quarterly financial results along with our fiscal 2008 guidance later on in the call.

Turning now to deal stats, distribution channels remain strong with contributions from our direct sales, OEM partners, resellers and systems integrators. We added 371 new customers in the quarter with a majority of those additions coming internationally. As usual, these statistics do not include a large number of small orders from OEM customers who have registered through the Internet. Our customer base now totals approximately 6500 customers.

In the first quarter of fiscal 2008, we generated approximately 20% of our sale for revenue from deals over 100,000 compared with 34% of software revenue generated from deals over 100,000 in the fourth quarter of fiscal 2007. For fiscal Q1 2008, sales of data protection products represented approximately 85% of software revenue.

There are two main reasons for the low number of non docket products in Q1 versus Q4 2007. First, we had a larger percentage of Dell OEM business this quarter, which has a heavier concentration of data protection revenue. And second, we had a lower percentage of deals over $100,000 this quarter. Deals over $100,000 generally carry a higher percentage of non backup software than our smaller deals. We continue to anticipate that about a third of our software revenues in the short and medium-term could come from deals greater than $100,000.

Moving on to reportable geographies, geographically, the United States operations generated 60% of our total revenues in the quarter with operations in the rest of the world generating the remaining 37%. A portion of revenue generated outside the U.S. was higher than we'd expect due to higher-than-expected sales in EMEA, solid performance from Mexico and Asia and Asia Pacific and contributions from our new market, including China, East Europe and the Middle East. We now expect this percentage to be about 65/35% for fiscal 2008.

Indirect, we're going to turn to our indirect channel. As I have done in our previous earnings calls, I want to spend a few minutes addressing our indirect relationships. Let me begin by talking about Dell.

We had a strong quarter with sales to Dell, [coupled] sales both through our OEM and SMP reseller relationships with Dell accounted for approximately 22% of revenues for the first quarter of fiscal 2008 with a breakout being 8% OEM and 14% SMP. We continue to see strength throughout the multiple sales segments within Dell and throughout the world. We continue to work closely with Dell to simplify storage management and drive a lower total cost of ownership. As we have previously stated, our objective is to help Dell satisfy their customers with a scalable low integrated product portfolio that sells real customer paying points and drives a lower TCO. We're planning to launch 7.0 through Dell in the near future. Our products align with their SMP expansion strategy as well as their enterprise acquisition strategy.

We're seeing significant traction globally across all lines of business and storage hardware. Tractions range from small single server deals to large enterprise deals, where we simplify the management of complex heterogeneous hardware and software environments. We continue to make progress in discussions with Dell regarding broadening our relationships with our innovative solutions.

Turning now to HDS, our partnership and business with Hitachi Data Systems continues to develop momentum around their solutions focused as well as their increased midsize business presence. We continue to see interest in the Windows application and the archiving spaces as customer switch to Microsoft 2007, and work to manage their compliance requirements. International sales remain strong and our Americas pipeline is growing. We're planning to sell our Simpana 7.0 products suite to HD in the near future.

Let's talk about Arrow. As we announced last call, we signed a wide-ranging distribution agreement with Arrow that became effective in fiscal Q1 2008, for this, our first full quarter, which contains revenue impact from Arrow. Although it is still early, we are quite happy with the progress of the relationship. Expanding our channel strategy with an experienced and efficient distribution partner like Arrow is the key part of our growth strategy. The move to Arrow significantly increases the amount of resources focused on our reseller channel to ensure that we continue to strengthen and broaden this share of distribution. Thus far it appears to be working. We recently amended the Arrow agreement to allow Arrow to sell our products into the federal government marketplace.

Let's talk about our new relationship with Bull. Back in May we announced the signing of a multi-year OEM agreement with Bull that will enable Bull to market and sell Bull branded versions of CommVault's full Simpana software suite to assist with channels worldwide. CommVault's software products will be sold by Bull under the name Calypso. Bull will position CommVault as its preferred data management partner. Bull is taking a very structured approach and is investing in the necessary resources to make those products a success in the market. We expect revenue from this product [ship] to start in our Q3 fiscal 2008 quarter.

Now I want to spend a few minutes speaking about Simpana and our product mix. The objective of Simpana 7.0, which builds on and significantly expands Kinetix platform was to increase our competitive differentiation in the data management related markets as well as provide the foundation for the shift to information management solutions. CommVault Simpana 7.0 software suite will redefine the way companies can store, manage, and discover enterprise information across all tiers of storage. The largest release in CommVault's history, Simpana is built off of the same base as our existing products and contains major enhancements to all of our software suite products.

In regard to information management, we are providing our customers with the ability to access multiple data sources with a single query from a powerful Web-based interface. This will enable them to simply create and manage value-added information from their stores of secondary data which previously was either impossible or very difficult and costly. Simpana 7.0 provides major enhancements to our data protection, archiving, and replication products and delivers new features that are non-backup related, including single instancing, advanced archiving, enterprise-wide search and discovery, and high-performance content indexing and data classification. While we are extremely excited about Simpana 7.0 from a set of new product features, we are as excited about the positive impact Simpana 7.0 can have on our coordinated protection business since we believe Simpana 7.0 will provide efficiencies to the management of data that no competitor can match. I will go into further detail about Simpana 7.0 later in the call.

In conjunction with a Simpana release, we have taken very specific actions to help ensure that our products are adopted on a broader basis and we increase our non data protection product sales. The majority of these actions have been taken to improve our ability to increase deal size as a means of increasing revenues as well as average selling prices as we see a much higher percentage of non-backup products in our larger deals.

In addition, we're investing in sales overlay teams and non-backup related products in order to accelerate sales of these products. We expect as a result of our recent actions that we will continue to make significant progress expanding our market positions of both backup and non-backup products in fiscal 2008 and expect the percentage of non-data protection product sales to increase as a percent of total revenue over time. I will now turn the call over to Lou Miceli, who will provide more details about our quarterly results. Lou?

Thanks, Bob and good afternoon, everyone. I will cover the financial highlights for the first quarter of fiscal year 2008, which ended on June 30th. As a reminder, I will be referring to non-GAAP results. As with prior calls, my references to non-GAAP results take into consideration three adjustments -- the exclusion of stock-based compensation, the exclusion of excess FICA expenses due to stock option exercises, and an implied income tax rate of 28%. A full reconciliation of GAAP results to non-GAAP results can be found on Table 4 to our press release.

For the quarter, CommVault's total revenues were just under $44 million, and increased 31% year over year and 3% sequentially. Software revenues increased 28% year over year and 2% sequentially and services revenues increased 35% year over year and 5% sequentially. In summary, revenue growth was in line with our projections as Q1 is historically our most challenging quarter.

In addition, the split of software revenue between existing customers and new customers was in line with our historical trends. Approximately two-thirds of software revenue for the quarter came from the installed base with the rest coming from new customers. Also, our attach rates and renewal rates for maintenance contracts are consistent with historical levels and we continue to see growth in services revenue. Software revenue generated through direct channels was approximately 24% of total software revenue. This is down from 33% in the prior-year quarter and down from 32% in the fourth quarter of FY 2007. The reason for this shift is that we experienced a lower percentage of deals greater than 100,000 from our direct sales organization. Additionally, this quarter was the first full quarter of sales activity through Arrow and we attribute the high volume of transactions through the Arrow channel to be a positive sign that this distribution tier is off to a solid start.

We anticipate that in Q2, the percentage of deals over 100,000 will increase and the mix of revenue from direct channels will return to more historical levels. Interestingly, the number of deals over 100,000 in Q1 was slightly higher than Q4 while the percentage of software revenue was lower.

And the final point on the revenue mix for the quarter is that 55% of the revenue was software and 45% services. We have a strong services business, which is evident from the deferred revenue amounts on the balance sheet. We anticipate that the mix of software to services will be in the ratio of 55% to 45% give or take a percentage point or 2 for the remainder of FY 2008.

Gross margins were 85.8% for the quarter, which was the same as the prior-year quarter and in line with our expectations. Total operating expenses were $30.8 million for the quarter. Sales and marketing expenses increased $5.6 million or 38% over the prior-year quarter. Approximately two-thirds of this increase was related to employee compensation, which includes the additions of new sales-related personnel as well as related sales expenses. The rest of the increase was due to higher marketing expenses tied to the Simpana product launch along with higher T&E.

Our total worldwide headcount increased by 56 people from 727 at the end of March to 783 at the end of June. The headcount increases were primarily in sales and R&D with most of the R&D hires in India. As Bob indicated on our last quarter's call, we have stepped up our spending in distribution and marketing in order to meet our growth targets for fiscal year 2008. We have added additional sales representatives, major account representatives, field technical personnel, marketing and field domain-specific technology specialists early in fiscal 2008 in order to increase distribution leverage much earlier in this fiscal year than in prior years.

This is a major reason why the operating margin has declined quarter over quarter. However, the decline is consistent with our historical trends as we traditionally invest in Q1 in order to achieve our financial objectives for the fiscal year.

R&D spending increased by about $900,000 in the quarter or 17% over the prior-year period. The increase was primarily due to higher employee compensation resulting from higher headcount and an increase in legal expenses associated with patent registrations for our intellectual property.

G&A expenses increased by $400,000 in the quarter, which is 9% over the prior-year period. The majority of this increase is due to higher compliance and insurance costs associated with being a public company along with higher headcount, partially offset by lower legal fees.

Non-GAAP operating margins were 14.1% for the quarter, resulting in non-GAAP operating income of $6.2 million. This represents EBIT growth of approximately 46% year over year. The non-GAAP net income for the quarter was approximately $5 million and non-GAAP EPS was $0.11 per share based on a diluted weighted average share count of approximately 45 million shares.

I would like to point out that our Q1 2007 earnings of $0.12 per share was based on a diluted share count of 38 million shares and a tax rate of only 1%, which makes the comparison to the current-year quarter earnings of $0.11 per share not meaningful.

Moving to the balance sheet and cash-flow statement, as of June 30th, our cash balance was $70.5 million, up approximately 8.5% from $65 million as of March 31, 2007. Cash flow from operations was approximately $5.8 million in Q1 2008 compared to $6.7 million in Q1 2007.

Free cash flow, which we define as cash flow from operations less capital expenditures, came in at $4.6 million for the current quarter. This is down year over year due to changes in working capital, mainly due to slightly higher accounts receivable balances caused by a higher percentage of international and indirect revenues over the prior year.

Our DSO was 50 days, which is within the range of our historic average and the same level as in the prior-year quarter. 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 $4.1 million or approximately 10% sequentially over the prior quarter. As a reminder, deferred revenue is comprised of mostly 12 months maintenance contracts and professional services. Again, we believe this increase is an indication of our strong services business.

CapEx was approximately $1.2 million in the first quarter. Our current estimate for fiscal year 2008 remains between $4 million and $4.5 million.

As I stated earlier, for the presentation of non-GAAP numbers, we applied a 28% effective tax rate. For fiscal 2008, we are estimating the GAAP tax rate will be in the range of approximately 32 to 34%. The Company is currently implementing tax planning measures that are expected to reduce the long-term terminal rate within a range of 28% to 32% over the next few years. As previously stated, we believe a ramped approach towards our long-term rate is appropriate. For fiscal 2008, we will measure ourselves through a non-GAAP pro forma tax rate of 28% in order to properly reflect the gradual increase to our long-term terminal rate over the next few years. Our estimate for the actual cash tax rate for fiscal year 2008 is in the mid to high single digit range based on current assumption. This is mostly for state taxes, federal alternative minimum taxes and for taxes in locations around the world where we have used up all of our NOLs.

In the U.S., we believe we have sufficient net operating losses and tax credits to offset taxable income for the next two to three fiscal years. Consequently, our cash tax rate should continue to be substantially lower than both the GAAP and non-GAAP tax rates.

Now let me address guidance. We will continue to present non-GAAP numbers on a forward-looking basis. The non-GAAP numbers will contain the same financial adjustments for stock options and reflect the pro forma tax rate of 28%. For the 12 months ending March 31, 2008, revenue is expected to be in the range of $191 million to $193 million. Non-GAAP diluted earnings per share is expected to be in the range of $0.55 to $0.57 per share using a projected fully diluted share count of approximately 46 to 47 million shares and applying a pro forma tax rate of 28% for the full year.

We are expecting fiscal year 2008 non-GAAP gross margins to be between 85.5% and 85.7%. We are also expecting non-GAAP operating margins to be between 17.2% and 17.7%. We believe that we can continue to improve operating margin 2 to 300 basis points a year over the next few years. Our long-term operating margin goal is in the low to mid-20s. We believe we can achieve this while continuing to make the necessary investments in sales and R&D. The non-GAAP EPS guidance excludes approximately $0.13 to $0.15 per share related to the effects of stock-based compensation expense under FAS 123R, which is net of non-GAAP income tax expense of approximately $0.05 per share.

That concludes my prepared remarks. Let me turn the call over to Al Bunte, our Chief Operating Officer. Al?

Thank you, Lou. I'm going to spend some time talking about our new product release before turning the call back over to Bob for his concluding remarks.

The largest software release in our history, the Simpana 7.0 Suite, provides major enhancements to our data protection archiving and replication solutions. As Bob has previously stated, we have thousands of customers and some of our best product innovations come from customer suggestions. We've incorporated over 300 customer suggested enhancements to this release. Further, there are 30 major architectural additions, 40 new platforms and applications supported and another 120 innovative new features. In connection with this new release, we filed over 50 patent applications in the U.S. alone and expect additional applications to be filed in the future.

The Simpana 7.0 continue to build on the core value proposition that has driven our success today. As a reminder, we have a single platform with a suite of licensable software modules, all sharing a single code base and common set of services. Building on the success of our unique singular approach to data management, this release enhances the way companies move, store, manage, and discover information across all tiers of storage by bringing together data management and enterprise-wide search and discovery. Along with this release, we have taken the opportunity to rebrand our software, which we now call Simpana.

There are five areas of enhancements with Simpana 7.0 that I would like to highlight briefly. Number one, in the data protection area. We believe our data protection solutions continue to be the most feature-rich, scalable and manageable with the lowest TCO in the industry. Simpana 7.0 offers integrated data protection solutions that support recent end users technology, refresh strategies around 64-bit computing architectures and the adoption of next generation applications, such as Microsoft's Office SharePoint Server, Exchange 2007 and Sequel server. Also we see a growing use of server virtualization technologies, such as VMware and Solaris zones.

In 7.0, we have introduced software modules and agents that cover and are well integrated with each of these technologies. This provides unique data protection software solutions for these industry-wide technology upgrade cycles.

Among many other new features for data protection, we have also enhanced our role-based security scheme further with the integration of Microsoft's Active Directory. The addition of our new Data Classification-enabled Smart Client technology represents a major improvement on how data is managed. This exclusive technology significantly reduces the time it takes to perform backup and archiving jobs by performing scans in real-time and tracking changes on an ongoing basis. With today's enterprise users moving terabytes of data every night, our new Data Classification-enabled Smart Client technology can have a very big impact on meeting these challenging operational windows.

Our continuous data protection solutions cover not only Windows, but now have been extended to cover UNIX and Linux platforms, which primarily addresses data protection needs for remote or branch offices.

The second area of enhancement that we'll talk about is archiving. With this release, CommVault is one of the few vendors in the industry to offer archiving products for space management and compliance across Windows, UNIX, and Linux file systems. Our archive products cover exchange [indominto] mail, share point content management and [NAS] environments such as network appliance. Our comprehensive solutions that includes the ability to, in a single search, view all documents, files, mail, attachments, and objects across all supported platforms and applications. Results can then be filtered for items related to a specific user, legal discovery action, copy or keyword.

The third area we will talk about is Single Instance Store or SIS. Simpana 7.0 changes the rules governing data protection and archiving to disk with the introduction of our Single Instance Store or SIS. With our SIS, matches are not affected by any differences in filenames, metadata or attributes. This method ensures that exact digital duplicates can be matched and eliminated across data sets, applications, clients, and OS platforms. Our SIS capability is especially helpful for eliminating duplicate files, mail, documents, across backup cycles, across archive copies or even consolidating [APE] copies.

Single instancing can be applied in line or as a secondary process against backup and archive data and is totally portable across disk hardware and network connections, giving users tremendous flexibility and cost advantages versus expensive proprietary data silos. Our Single Instancing yields measurable operational benefits allowing customers to retain backup and archives on disks for longer periods at less cost.

The fourth area is enterprise-wide Search and Discovery. A new secure Search and Discovery architecture provides business users direct access to their data across their secondary and primary copies and across unstructured and semi-structured formats. By giving end users easy, simple access to data, our software can improve business productivity and competitiveness. The powerful CommVault search Web-based interface allows search, sort, select, and retrieve of corporate information from online storage, archive repositories and backup data copies. The Web interface also includes features that address specific operational needs of business compliance and legal discovery [feats].

The last area or fifth area is post-processing architectural advantages. With all of this new technology at users' fingertips, controlling the operational sequence of these resource intensive processes is crucial to effective deployment. With Simpana 7.0, we've added post-processing capabilities so that customers can apply, again, resource-intensive advanced data management processes such as encryption, single instancing, content indexing, and disaster recovery copies during the post-processing phase, minimizing the impact on production systems and backup windows.

In conclusion, fulfilling users' desire for a single or data or information centric view is only possible if the traditional divisions between data management applications like backup, archive, and search, are removed. CommVault offers compelling advantages to our users because of our unique singular architectural platform. More than ever, information is the lifeblood that drives today's business, no matter the size or industry. Instant access to information derived from corporate data is critical for making better business decisions. CommVault Simpana 7.0 software suite is as decisive step in this direction and promises to transform the way customers access, leverage, and interact with corporate data.

I would now like to turn the call back over to Bob for his concluding remarks.

Thanks very much, Al. In summary, we have improved our already solid competitive capabilities by significantly strengthening and broadening both our product lines and distribution. More specifically, as a result of the introduction of Simpana 7.0, we've improved the competitive differentiation for our current product lines, add a new product like single instancing and added functionality which will enable us to build new businesses around information management products and services.

Second, we broadened and strengthened our distribution with the addition of new distribution partners like Arrow and Bull and by making major additional investments in our direct sales to field and engineering team. We believe these actions will enable us to sustain or improve our six-year track record of revenue and earnings growth. With that, I would like to turn the call back to Michael, who will open it up for Q&A.

Thanks, Bob. Before we open the lines for your questions, I would like to highlight a few upcoming Investor Relations events. Bob will be speaking at the 2007 Pacific Crest Technology Leadership Forum in Vail, Colorado on August 7 at 5 PM Eastern.

In addition, he will be speaking at the 2007 with American Technology Conference hosted by RBC Capital Markets in San Francisco on August 9th at 11:30 AM Eastern time. His presentations will be available live and will also be archived for replay on our website at, www.CommVault.com in the Investor Relations section.

Finally, we will be hosting our first annual Stockholders Meeting on Wednesday, August 29th at 1 PM Eastern time in Eatontown, New Jersey. Details and a live webcast will be available on the Investor Relations section of our website.

Can we open up the lines for questions, please?

(OPERATOR INSTRUCTIONS). Ed Maguire, Merrill Lynch.

A question about your full-year revenue expectations. You are maintaining your prior guidance for the year and given that there was some upside at least to our estimates, this quarter, how should we think about the linearity of the quarters?

Ed, obviously we had a strong Q1 and we're up and very optimistic about the year, but as usual, we're just being prudent. One, we have a major new release hitting the market, which initially looks like it's exceptionally well-received, but we want to get more hard data on that. And secondly, there's some macro issues in the market that we want to understand better, such as [Net Apps] recent release today and we thought our -- the prudent thing to do was just leave them where they are. But certainly the fundamentals of the business look very good.

Okay, and as you are planning for the adoption of the new platform among customers, what are your expectations for customers to really to adopt the product? Are you -- have you anticipated there might be any pause in spending patterns as they evaluate some of the new features?

We didn't anticipate that, but you never know until you actually see what the actual results are. Right now, what we're seeing, Ed, is I'll call it very enthusiastic response from our installed base, more than usual. People wanting to install 7.0 a lot faster than we would normally see. And second, on some of the newer accounts, we're seeing a pretty good uptick in major deals as a result of that. And as you know, we've been kind of locked down in terms of communicating to the market now for almost three months, so the market reaction to this has been extremely favorable.

So right now we're feeling really good about it, but let's see how all this translates into revenue growth and profitability over the next couple of quarters. In addition to that, I think everybody knows is that we have not factored in a lot of Simpana impact to the Company until later on in the fiscal year and I reckon we're feeling pretty good about it.

Great, thank you.

Tom Curlin, RBC.

Good afternoon. Bob, have you seen or -- do you guys sense any of, kind of the weakness in large enterprise U.S. out there or mostly just commenting on what we've seen out of other vendors and taking that into account?

Yes, clearly we saw some of our larger deals move from Q1 to Q2 more than we would have anticipated. And still, by the way, we were able to achieve a really strong quarter because we have a very not only balanced distribution strategy, but we have a balanced product strategy, so we have a lot of ways of driving revenue growth here.

Now, that being said, we're seeing and it's just early and we're seeing a pretty good uptick in large deal size activity right now, but we need to see how that translates into -- how quickly these deals close and everything else. But clearly we're seeing an upturn and clearly we saw some of those deals flip from Q1 to Q2, so what we're trying to understand is -- what's going on -- what's the impact on the macro environment? What's the impact of our call it our Q4, Q1 kind of phenomenon? What's the impact of the fact that we weren't able to disclose a massive amount of new technology for three months; we were kind of locked down in terms of communication; and the impact of this release. So we want to get hard data on all of those factors before we make a final judgment, but the tenor around CommVault right now is quite positive and we have to see how that translates.

You guys ramped Arrow as a two-tier distribution partner in the quarter. Any time that happens, you would expect to hear some partners at least resisting change and we saw a little bit of that in our checks this quarter. How would you gauge the sentiment of some of your channel partners who are now going through Arrow and how do you think that process is? Do you think things are exactly where they need to be or a little bit of growing pains as you ramp that up, that approach?

From a Company point of view, we're really happy because Arrow had a very positive result in the fact that the administration burden of order fulfillment, credit, rev rec, from a productivity standpoint, was extremely positive to the Company. The ability to drive the education of our channel with 7.0 is going to provide us a lot of leverage to provide these partners with a lot more education and faster than we possibly could have provided.

We've seen in the press some of the channel partners not being as happy because they're working through another partner, but I can say from a Company perspective, we are -- it's been extremely positive first-quarter result. And that's a pervasive feeling around the Company. So we're feeling really good about it.

All right, thank you.

One of the factors here, we just gave them our government channel, which is an indication of how strongly we feel about -- and positively, how strong we feel about that relationship.

Okay, thanks very much.

Derek Bingham, Goldman Sachs.

Thanks. Congratulations on the quarter. On -- some of these large deals that might have slipped, was that happening principally in the U.S.?

Yes. Yes, principally -- definitely, principally in the U.S.

Got it. And then on the investment side, do you feel like what you were spending in the June quarter was -- relative to your plan -- was that about in line with what you had planned coming into the quarter?

It was in line with our plan. Yes.

And then looking forward, particular I guess on the sales and marketing side, anything that you would guide us to kind of anomalous in the quarter? Should that pull back a little bit sequentially in September or would that continue to build sequentially?

From a growth rate standpoint, it will moderate. But we will -- so the big upturn in growth in spending, the 38% occurred in Q1. So that will moderate in the next couple of -- at least couple of quarters. What we will look at going forward is just the trends on 7.0. I can tell you if we see the trend we're seeing now continue, we may increase that later on in the fiscal year to drive additional revenues in FY '09. So right now, we have -- there's a real positive tone to all this and we just -- we will monitor it. But our objective is to drive long-term revenue and earnings growth of this Company and if we see an opportunity to do that, we're going to make the necessary investments to achieve our long-term objectives here.

Okay. And I just have one more if I could. How difficult is it for customers to make the Simpana upgrade? Are there really long trial periods? When should that revenue start kicking in as customers trial?

Our upgrade process relative to anybody else on the planet is relatively simple. So the issue is more of our control release and how we manage our release process to make sure we can provide services on -- make sure everything goes smoothly. But we've spent a lot of time and effort technically to make sure that the upgrade cycle for these releases is, on a relative basis, very, very easy. If you look at us versus other competitors in the market, we are order of magnitude easier to upgrade than our competitors. In fact, we believe it's easier for a new customer to upgrade to Simpana than it will be for some of these new releases that have just been announced in the market.

So are we talking about just a matter of weeks or months or what's the right way to think about it? (multiple speakers)

If you are upgrading -- if you are a major global account, it could take you weeks. But for most customers, we're talking about a day. Al can jump in here, but this is a pretty seamless automated upgrade process that can, for many customers, can be completed within a day.

That's accurate, Bob.

Tim Klasell, Thomas Weisel Partners.

I'd like to throw in my congratulations there on a fine quarter. First question, just a housekeeping one, your deferred revenues performed very admirably this quarter. Was there anything different as far as the maintenance programs or any changes out there?

No changes in the maintenance. It's just the reflection of our strong maintenance business. Again, we have very, very high renewal rates. You will see from time to time, some quarters slightly higher than others. This happened to be one of those quarters where we had a little bit higher renewals in terms of when they came due, but clearly we have a strong services business, very satisfied customers and the attach rates and renewal rates are very, very high.

There's another factor coming into play here, Tim, that we're just starting to get a handle on. Our liability rates in the market on some of these big accounts are coming out extremely high. We had a major customer in New England that had an outside service come in on their reliability rates for backup. The number came in north of 99%. Unheard of. We had another customer -- and Al, give me the stats of this customer just in terms of numbers.

Over the month of May, it was about 5 pedabytes of data moved, or something like 400,000 jobs. They're moving it off 6000 servers and for backup success rate, we were north of 95%.

These are kind of astounding kind of rates. This gives you a real good perspective on the reliability of the core platform against all of these products and on Simpana 7.0, we just built on that. So you could expect that trend to continue. So it's, as Lou said, you got happy customers, real good execution internally in terms of process on maintenance renewals and then this reliability factor is helping us out as well.

Terrific. And then just real quickly, on the sales force buildout, on the last call, you guys were talking about building out in North America a little more aggressively maybe than the international opportunity. Are you rethinking that right now particularly since your guidance was sort of more [normal] like, a 65/35% split now? Are you going to be putting more resources internationally?

We said we were going to do that and we did. And the reason we did that, Tim, is that the U.S. growth on our sales and services teams, that growth had lagged behind what we had done in international the prior 12 months. So we wanted to make sure that we made those investments to get them up to the levels that we needed to be in order to hit our little bit longer-term revenue growth requirements. We accomplished that objective. So now, you'll see our investments be a little bit more balanced both domestically and internationally over the next couple of quarters.

Okay, great. And then finally on the 7.0 release, congratulations on that. How should we think about the adoption cycle, particularly for the non-backup products? Will your customers have to migrate over to 7.0 and then you can start concentrating on upselling them to the non-backup products? Or do you think that will happen simultaneously?

Well the newer backup products like single instancing and some of these advanced data protection features and some of the advanced things we're doing as far as information management, you've got to upgrade 7.0. But again, what we said is we made it very, very simple and the issue is not going to be customers wanting to upgrade because we are seeing a -- more customers want to upgrade than we would prefer, meaning we like to use services early in the upgrade cycle just to make sure that we haven't missed anything in our test cycles. But I'll mention, by the way, we tested 7.0 much, much longer than we normally do. So this thing has gone through a very, very rigorous test cycle and it came out really solid. So we're feeling pretty good about it and we may actually release it more broadly earlier, but I don't think we are going to have a problem upgrading our installed base. They want it. These customers are kind of surprised at how broad and deep others really saw us. They're really excited about it.

And if I could sneak one more in here then. Would it be logical to assume that it's going to go with your direct sales force first and then over time, to the channel and if that's the case, can you give us sort of a timeframe?

Yes, the answer is correct. And we're seeing a very -- this is a high-class problem. We're seeing a very strong uptake in our channel partners, so we're trying to manage that as well right now. The thing caught fire pretty early. I would say like we said in the past, in the very reasonably near future, we will open this up to our channel partners.

Heather O'Loughlin, America's Growth Capital.

Hi, good afternoon. Thank you for a fine quarter and for taking my call. I'm curious about your expectations for the e-mail archiving market -- what you think the growth is there for the Company and your estimated share.

I will take it in a broad scope and I will let Al. One, this has been an area of focus for us, Heather, and we did two things. One, about six months ago, we brought in a -- this is globally -- a world-class team of archiving experts to overlay our sales teams. And secondly, the technology that we brought in to 7.0 is a really significant increase from where we were. So now, we're world-class both technically and from a position from a sales standpoint. We are clearly seeing a very, very large funnel build in this area. So not dealing with the macro issues, from the micro [comparable] standpoint, we're seeing a lot of activity here.

As far as the broader market stats, I don't have them handy. I don't know if Al can answer that.

I don't either. I don't know, Heather, for sure, right off the top of my head. But I think -- they remain robust as you know, and they're growing faster than some of the core data protection segments, of course. But as Bob said, we think we will really make a dent in that business in a hurry.

I think the other thing I would add besides what Bob said in terms of the future richness and the capabilities there is the coverage we're putting into that space, meaning archiving products for notes and share point, et cetera. We think will open up a lot of market opportunity to us there as well.

I'll just raise a good point there. We have significantly broadened the scope of our platform coverage of that archiving data product as well.

Who do you think -- I think it's an excellent point too. Just through the traditional market, who do you think you are likely to gain share from? Or is it going to be mostly green field opportunities in your opinion?

Well I think certainly the largest competitor in the market is Semantic. So I think we will (technical difficulty).

Okay.

I think we will do well there.

But there tends to be a lot of green field opportunities more so in the archiving space than some of our other segments. So.

Okay. Thank you.

Aaron Schwartz, J.P. Morgan.

Good afternoon. I had a question about the linearity of the sales hires. I know you talked about front-end loading those in the year. Can you talk a little bit about the ramp to full productivity there? And then also, the overlay sales team, should we think of that as specialized sales teams around some of the newer areas?

The first question takes two to three quarters typically, Aaron, to get a team in the area of productivity that we want and maybe four quarters to get fully productive.

As far as the overlay sales [in gist] what we're specifically talking about, the first global team we put in place was in the whole area of archiving space management. So that's your traditional archiving, compliance and traditional HSM markets is where the first very comprehensive teams were put in place but now we're starting to add others.

Okay.

And we're going to build the Company that way as we move forward, as we get into information management. Certainly the whole de-duplication area, we've got a very, very strong, compelling set of technologies coming in that are in 7.0 in the area of de-duplication or single instancing and you'll start to see some emphasis there as well.

Okay, that's helpful. And understanding you don't give quarterly guidance, maybe directionally you could help us out with regards to license revenue in the second quarter given the seasonality of September and the fact that Simpana, the SP 1 release won't be out probably for -- until the September, October timeframe is my understanding?

You are correct on the SP 1 assumption. That would be a reasonable assumption, consistent with what we've done historically. And so your other question is what are our expectations for Q2?

Yes, directionally license given the SP 1 release coming up and also the seasonality of the September period.

Without giving a number, we would assume it would go up.

Okay. That's helpful. Thank you very much for taking my questions.

Brent Bracelin, Pacific Crest Securities.

Thank you. A couple of follow-ups here. On the large deal that slipped out of Q1 into Q2, have any of those closed yet this quarter?

Yes.

Helpful. Second question really has to do more with kind of the U.S. enterprise spend. Obviously, you saw a couple of large deals that slipped, but also put up a pretty impressive number. NetApp is talking about a 12% year decline within their top U.S. kind of corporate enterprise customers. Could you talk a little bit about perhaps just the trends you saw in the month of June? Was it a weak close, a strong close? And then could you also kind of maybe just give us a little color on the pipeline of your business relative to kind of some of NetApp's comments here on what appears to be a softening environment for their products?

Clearly, Brent, we have heard from a number of people that the enterprise spend across the industry from the data that the analysts have been acquiring here in the last month or so is indicating a downturn in spend. We clearly indicated that some of our larger deals in June moved, which indicates a weakening there, but these deals haven't gone away.

Secondly, and contrary to that we're seeing now a pretty significant uptick in pipeline build in larger deals. So that's contrary to the industry trend. So as I said earlier, trying to sort out how much of it was industry, how much of it was the fact that we've been kind of locked down on being able to communicate what 7.0 was for three months, how much of it was tied to now that we've release it we're seeing an uptick, it's just hard to say. I don't think we have enough data. But clearly, we're seeing a pretty positive strong uptick in funnel at the moment. And that we can say clearly. Now we've got to see how that translates.

Exactly. Well at least that's helpful color for us on your business.

And then my last question really has to do with the Dell [momentum]. I hopped on the call late, unfortunately. What was Dell's percent of revenue or contribution in the quarter? It sounded like it was up and there is momentum there. Could you talk a little bit about what the drivers around Dell are? Was it kind of a one-quarter blip?

Clearly, we also saw Dell contribution at EMC being very strong. What's your best guess of kind of what's driving that momentum and B, can it be sustained?

Number one, it was 22%, up from historical call it 18, 19%. So it was very strong. Now, it also was 22% a year ago in Q1. But we had a very, very solid Dell quarter across the board globally. So I would say that one, the Dell engine is working really well.

So if you look at it, Dell, in the aggregate, I would say expect strong results from Dell. Now, we're going through a product transition and as I mentioned earlier, they're not going to get 7.0 for a while. And that's going to cause some dislocation, primarily in the coming OEM side because we can sell 7.0 to the SMP side but not through OEMs and we know that a number of OEM customers want 7.0 now. So you'll see some shift in the Q2 quarter as we transition to 7.0. That will cause some anomaly there in terms of the mix between OEM and SMP. But in general, our Dell business is not only strong, it's very strong. And as I mentioned in my earnings script, we have a number of discussions with Dell to actually broaden our business with them with some pretty innovative ideas and those discussions are going well.

Great. So it sounds like outside of just kind of a product transition here in the short run, the momentum you're seeing at Dell, you would expect that to be sustainable if not improve longer-term based on some of your initiatives to kind of broaden the scope of that relationship.

Absolutely.

Okay, great. Thank you. Very helpful.

Denny Fish, JMP Securities.

Thank you. Just two quick questions. One is, I know there's been a lot of talk about NetApp's results, but if you look back historically, have you ever really seen a correlation between your business and say NetApp or EMC's disk business?

No. We haven't, Denny, but we're definitely going up into the enterprise. And as we move to these larger enterprise deals, we may see a stronger correlation than we have in the past. Now, we are a small company. We're still gaining a lot of market share and that will offset most of that, but it could. That's what we're saying. We are seeing a contra trend internally here inside the -- we think 5 to 7.0 and some of our other initiatives here. But I think we need a little bit more data. But I think in general, I would say your assumption is correct, but as we get bigger and we get to enterprise, we may see some of that.

Okay, great. And my last question is as we look at Simpana, a lot of very interesting stuff in there. Could you sort of look at some of the key features in the release, can you stack rank them based on sort of most -- what you expect to be the most impactful new features -- the least impactful sort of given some of your early feedback from the channel or from customers that have actually had a chance to play with the product?

Yes. I can give a perspective I think, but I will say this is impactful across the board. This is a big deal here.

Number one, in just data protection, we have added a lot of technology here and you could go back to the script and just in terms of how simple things like backup is done. On this whole area of smart client and pre-scanning data before you move it and store it; and that pre-scan meta data stays in place and is updated in real-time so you don't have to go back to the disk files and update the scans. That has massive benefit to users.

The simplification of what we have done, the reporting of what we've done -- relative to anything that is out there or any vision that we have seen from anybody, we have distanced ourselves again from competition. So this is a core market. We're going to be a much tougher competitor; we were tough before. We're going to be much tougher there.

Clearly, things like de-duplication single instancing, that's a big deal. We've got a very compelling solution there and you know there's a whole lot of need out there for that and we're seeing -- already seeing an uptake, [pack], let's say for that product.

Archiving, it has been a focus of ours and we've made a big dent in the whole area of archiving technology. So if you take those three and then you add our ability to manage things like exchange 2000 from the new share point of release, we're doing things in that market segment and with 64-bit computing and in the server virtualization area, we're just doing things that other competitors can't do any near as well. So we're taking advantage of big trends in the market that are going to be really helpful for us. So.

And then information management is longer term. But those ones I just mentioned are -- every one of those have significance. Data protection, archiving single instancing and the whole management of the new Microsoft set of releases are big deals.

Okay, great. Thank you.

Phil Winslow, Credit Suisse.

Most of my questions have been answered, but just wondering if you can give me a sense of those deals that did slip, were they focused on any particular industry vertical? Then also just from a competitive standpoint, any change from your larger competitors from a pricing perspective or just anything you're noticing out there in the market?

Phil, on the account that moved, they're in the U.S., we are talking about, it was pretty broad, across segments. So there wasn't any pattern to it. And it may have been -- we'll see. It's -- right now we're seeing kind of the opposite of that. But the answer was no pattern to that.

And on pricing, I think we said before, our major competitors, when we're in the deal, get very aggressive and so it's up to us and we've consistently sold on our [TCO] and value proposition and that is the major factor, but the competitors getting the most aggressive on price is Symantec.

The rest of those competitors in the market in the core business basically don't put a lot of competitive pressure on us.

Great. Thanks, guys.

It does appear we have no further questions in our queue at this time. Mr. Picariello, I would like to turn the call back over to you for any further comments or closing remarks.

Thank you for listening in and your continued interest in CommVault.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We would like to thank everyone for their participation in today's call. Have a great rest of your day.